TIDMNBSR
RNS Number : 8891T
Newcastle Building Society
27 July 2022
Announcement of half-year results for the six months ended 30
June 2022
During the first half of 2022, our lives and work returned to a
more normal pattern as we all learned to live with the continued
presence of Covid-19, but with the increased confidence derived
from the results of the ongoing vaccine rollout. Whilst we are
aware the pandemic is not over and remain alert to the long term
impacts of the virus, it was a welcome sight to see more customers
return to our high streets, more face-to-face contact in our
branches and our colleagues return to our new primary head office
at Cobalt Park.
For those returning to the office, we have adopted a hybrid
working approach, with the majority of full time colleagues
spending two days in our head office environment and three days
working from home. This new pattern of working means that for the
first time in two years, colleagues have been able to work together
in the office and experience some of the benefits that come from
face-to-face collaboration and collective learning.
However, the first half of the year has also brought a new set
of challenges - political upheaval in UK Government, the rising
cost of living and price inflation exacerbated by the outbreak of
conflict in Ukraine and the expectation that these uncertain
economic conditions will continue for some time to come. These
challenges not only impact the Society but more importantly our
colleagues and Members. For many the rising cost of living and its
impact on the value of savings and the cost of mortgages are real
concerns. Against this backdrop our purpose-led strategy appears
more relevant than ever to our customers and our communities and we
remain more determined than ever to deliver a successful,
innovative and growing business that can make genuine, positive
differences in supporting the people we serve.
The decision by the Bank of England to raise the base rate of
interest has stimulated savings rates upwards. While increased
rates have been welcomed by savers, they cannot keep pace with
current inflation and cost of living pressures mean that customers
have less money to set aside for savings and some are using savings
balances to cover rising or unexpected household bills.
These same savings challenges mean that for first-time buyers it
is harder than ever to raise a deposit and the continued housing
supply shortage means that house price growth continues, albeit at
a slower rate. Those that are able to get a foot on the property
ladder face the challenge of a rising rate environment so we're
seeing an increased demand for longer term fixed rate periods to
help borrowers attain mortgage repayment certainty in the face of
wider economic uncertainty.
Against this backdrop, we have sought to maintain a fair balance
between our savings and mortgage rates and to continue to do all we
can to help make house purchases a realistic prospect for those
seeking to get on to the property ladder and support those who are
looking to save or plan their finances.
We have sustained a strong financial performance, including
growth in our underlying operating profit compared to the same
period last year. Profit before taxation was GBP14.2m (GBP15.9m at
Half Year 2021). We have also maintained our ongoing investment in
our infrastructure and commitment to our high streets and
communities as we continue to focus on our purpose of, 'connecting
our communities with a better financial future'.
Highlights of the first half of 2022*:
-- Profit before taxation of GBP14.2m (Half year 2021: GBP15.9m);
-- Underlying operating profit of GBP14.2m (Half year 2021:
GBP13.3m), see note 15 for further details;
-- Gross mortgage lending was GBP448m (Half year 2021: GBP483m);
-- Net core residential lending for the first half of the year
was GBP181m (Half year 2021: GBP220m);
-- Mortgage arrears remain at low levels with 0.38% of mortgages
in arrears by 3 months or more (Full year 2021: 0.42%);
-- Capital ratios remain robust. Including unverified profits
Total Capital Ratio (Solvency) stands at 14.4% (Full year 2021:
14.6%), Common Equity Tier 1 Ratio at 13.3% (Full year 2021: 13.3%)
and Leverage Ratio at 4.5% (Full year 2021: 4.5%). Excluding
unverified profits the Total Capital Ratio is 13.7%, Common Equity
Tier 1 ratio is 12.5% and Leverage Ratio is 4.3%;
-- Robust Liquidity with Liquidity as a percentage of shares,
deposits and liabilities of 20.8% (Full year 2021: 21.4%);
-- Customer Net Promoter Score was +81 (+82 for Full year 2021);
-- Delivered GBP182,000 in community funding (Half year 2021:
GBP111,000), including community grants from the Newcastle Building
Society Community Fund at the Community Foundation totaling
GBP60,000 (Half year 2021: GBP65,000). Grants were awarded to 22
different charities, with a particular focus on employability,
social isolation, food poverty, homelessness, debt management, and
cancer care;
-- Opened a brand new community branch in Knaresborough on 18(th) July 2022;
-- Shared plans for a ground breaking pilot which aims to
introduce OneBanks multi-bank transaction terminals in two
branches;
-- Launched a new employability partnership with armed forces
charity Walking With The Wounded;
-- Celebrated the official opening of NUCASTLE powered by
Newcastle Building Society, a new community hub and home of
Newcastle United Foundation;
-- Award su ccess in 2022 so far:
o North East Business Awards - Tyneside and Northumberland
Company of the Year;
o North East Business Awards - Tyneside and Northumberland
Apprenticeships, Skills and Training;
o CIPD North East of England HR&D Awards 2022 - Excellence
and Positive Impact;
o Mortgage Finance Gazette Awards 2022 - Mortgage Product
Innovation;
o Two clients supported by Newcastle Strategic Solutions were
successful at the Moneyfacts Awards 2022; and
o Shortlisted for Third Sector Business Charity Awards 2022 -
Charity Partnerships - Banks and Financial Services for our work
with Newcastle United Foundation.
* Please refer to the Strategic Report and Glossary of the 2021
Annual Report and Accounts for information on definitions or
explanations of the performance metrics detailed.
Strategy and Purpose
Faced with a new set of challenges, we continue to manage the
Society under the guidance of our purpose statement - 'Connecting
our communities with a better financial future'. Our purpose serves
to help us navigate uncertainty, giving us the assurance of focus
in an uncertain world.
Our purpose means we remain focused on providing good value
products and excellent service to our customers, and retaining a
presence on our high streets. We are proud of our role as an
employer and supporter of undiscovered talent, and we're
increasingly conscious of our responsibility to be a sustainable
organisation and to care for the environment. Support for our
communities extends to those with the greatest need and in the
areas where we can contribute to making positive change. We're
making progress with our Equality, Diversity and Inclusion
ambitions, working with partners to ensure opportunities are open
to everyone.
New Challenges
Against an uncertain macroeconomic background we continue to
support customers by providing a great level of service and
offering products at consistently good value.
In February we were one of the first savings providers to
respond to the Bank of England's decision to increase the base rate
of interest, passing on the rise to the majority of variable rate
savings products. In the first half of the year, all of our
variable rate savings book has benefitted from an increased product
rate to some degree. Helping people to save is a key part of our
purpose and we continue to offer significantly better than UK
average savings interest rates.
House prices across the UK continue to increase and although the
rate of growth appears to be slowing, any rise makes it even more
difficult for homebuyers to save for a deposit. To support those
looking to achieve the dream of home ownership, especially first
time buyers or those with a low deposit, we've continued and
extended our participation in two innovative mortgage products:
Deposit Unlock and First Homes.
Deposit Unlock is a completely new to market, new-build mortgage
product which provides an option for those with a small deposit to
realise their dream of owning a new-build home. A year after we
helped develop and launch the scheme, we remain the largest lender
under the initiative which is now operating nationally through 21
participating developers. 73% of applications under Deposit Unlock
have been from first time buyers, which shows that the initiative
is helping in exactly the way it was designed and we expect
interest in the scheme to continue to grow, especially when Help to
Buy comes to an end.
The Government-led 'First Homes' scheme helps local first-time
buyers - many of whom could be key workers such as NHS staff and
veterans - onto the property ladder by offering homes at a discount
of at least 30% compared to the market price. We continue to
provide our full support to the scheme, having funded more than one
third of national completions in the first half of 2022. In a
challenging market for first time buyers these types of schemes are
hugely valuable and show the importance of our continued pursuit of
innovation in the mortgage space.
In addition to these innovative schemes, we continue to evolve
our mortgage offer to help address some of the challenges faced by
borrowers. This includes new longer-term fixed rate products and
the expansion of our Joint Mortgage Sole Proprietor product range
which is designed to support first time buyers onto the property
ladder by using the income of a family member to increase borrowing
capacity.
Our customer satisfaction score at the half year point is 96%
and our net promoter score (NPS), which measures the loyalty of our
customer relationships is +81 (NPS scores range from -100 to
+100).
With our communities facing such economic uncertainty, it is
hard to think of a time when access to professional financial
advice has been more important. Our financial advice subsidiary,
Newcastle Financial Advisers, which provides access to face to face
advice on the high street, has delivered a strong performance so
far in 2022. The subsidiary's team of advisers recently achieved
2022 Top Rated Firm status from VoucherFor, the UK's leading review
site for Financial Advisers. Achieving this recognition requires
exemplary client feedback and the demonstration of a clear
commitment to transparency, meaning advisers consistently invite
all clients to review them.
An overall VouchedFor rating of 4.8/5 from more than 1,100
client reviews demonstrates the high standard of advice we're
providing on high streets right across our region.
Grants through the Newcastle Building Society Community Fund at
the Community Foundation Tyne & Wear and Northumberland have
continued to make a real difference across our region. In May,
GBP60,000 of grant funding was awarded to 22 different charities,
with a particular focus on employability, social isolation, food
poverty, homelessness, debt management, and cancer care. A further
GBP15,000 was awarded to seven different charities to fund
community events celebrating the Queen's Platinum Jubilee with a
focus on tackling social isolation.
In April we also made a donation of GBP25,000 to the Disaster
Emergency Committee (DEC) to help those impacted by the conflict in
Ukraine. DEC charities and their local partners are on the ground
in Ukraine and neighbouring countries, providing food, water,
shelter and medical assistance.
At the same time, the Society is also committed to support
colleagues who choose to open their home to a refugee through the
Homes for Ukraine scheme. As well as providing an additional two
days' paid leave, the Society will provide colleagues with a grant
of GBP500 to help with settling in costs.
For many colleagues, the return to a more normal working pattern
has provided new opportunities to volunteer their time to local
causes and to take part in a range of fundraising activities.
Colleague volunteering is an important way we connect with, and
offer support to, our communities and at the half year point,
colleagues have delivered more than 300 days of volunteering.
Colleague fundraising efforts have continued to contribute to the
Newcastle Building Society Community Fund and raised money for
several other local charities and good causes.
Innovation
We have continued to deliver our multi-million pound branch
investment programme and in January completed the major
refurbishment of our branch in Bishop Auckland.
We're committed to providing a face-to-face service on our high
streets, but remain aware of the challenges and ongoing changes
facing many town centre traders and businesses. So although our
newly refurbished high street location in Bishop Auckland might
have a more traditional appearance of a branch, we're continuing to
rethink what a building society branch might look and feel
like.
In March we announced plans to open a new branch in
Knaresborough, working in partnership with North Yorkshire County
Council and Harrogate Borough Council to establish a branch within
the library building. Knaresborough is a town which has been left
without a bank following a succession of bank branch closures.
Our new branch within Knaresborough library is modelled on our
successful Yarm library branch, and is our fourth North Yorkshire
branch, alongside our community partnership branch in Hawes
Community Office, our Yarm library branch and our branch in
Stokesley. We're looking forward to offering a warm welcome to
customers in our new Knaresborough branch in the second half of the
year.
Furthermore, we continue to work closely with North Tyneside
Council on proposals to open yet another new branch in Tynemouth
library.
In April we announced plans to work on a ground breaking pilot
which aims to introduce multi-bank transaction terminals in two
branches, alongside our existing services. The terminals provide
access to all banks on the Open Banking network, meaning customers
of all the major UK banks will be able to use OneBanks to withdraw
cash, deposit notes and coins, move funds and pay bills. We are
proud to be the first in the mainstream financial services industry
to propose the provision of OneBanks terminals within a branch in
order to provide people with convenient access to cash withdrawals
and deposits when their bank branch is no longer local or
convenient.
We continue to look for new ways to use technology to support
in-person service, including the introduction of a facility on our
website to book video appointments with our financial advisers.
Our subsidiary Newcastle Strategic Solutions serves the Group's
technology needs and is the UK's leading provider of outsourced
savings management services to other banks and building societies,
delivering ongoing investment into our savings app and website.
Newcastle Strategic Solutions has successfully extended the
partnership with one of its major clients in the first half of
2022, and are hopeful that other similar announcements will follow
in the second half of the year. Clients once again featured
prominently in savings industry related honours with Newcastle
Strategic Solutions' offering underpinning awards for savings
products and customer service.
New products and services continue to be rolled out to both new
and existing clients, business savings and app capabilities being
two noteworthy examples. The Company sustains a strategic programme
of investment in digital products, data security and re-platforming
that will underpin future growth of the business.
Building employability through collaboration
Nurturing talent from within our region, enabling our young
people to realise their potential and develop skills and then
retaining those skills through the provision of great jobs and
meaningful career pathways is good for our Society, good for our
Members and good for our region. In addition to community grants to
local charities working to tackle issues around employability, one
of the ways we are making a difference is by working in
collaboration with selected partners to create opportunities for
talented people in our communities who may not otherwise get a
chance.
In March, we launched a new five-year partnership with the armed
forces charity Walking With The Wounded, including an annual
donation of GBP25,000 to support their employability programme. The
charity delivers award-winning employment, mental health, care
coordination and volunteering programmes in collaboration with the
NHS to help those who served, and their families, get back on their
feet. Working in collaboration with Walking With The Wounded we
will create new veteran employment opportunities across the Group
and aim to recruit at least five veterans this year.
The partnership builds on our commitments as a gold level
signatory to the Armed Forces Covenant, which is our guarantee to
support those who serve or have served in the armed forces, and
their families. This includes offering flexibility in working hours
and leave around deployment and offering support to colleagues who
are members of the Reserve forces.
Our GBP1.1m partnership with Newcastle United Foundation reached
a significant milestone in March with the official opening of the
charity's new home, NUCASTLE powered by Newcastle Building Society.
As well as being the Foundation's city centre HQ, the facility is a
community hub for sports, education and wellbeing and is on track
to receive more than 100,000 visitors in its first year. We
continue to support the Foundation's flagship project NU Futures,
by contributing to workplace readiness workshops at schools in the
region. We also hosted a bespoke week of work experience with the
Foundation which resulted in five young people accepting offers to
join the Society as customer service apprentices.
Colleagues also work with Newcastle United Foundation to engage
with schools in our region, and already in 2022 we've visited 17
different schools delivering joint financial education workshops to
help pupils begin to build an understanding of money matters.
We continue our comprehensive programme of work with The
Prince's Trust, at the heart of which is our support for their Team
programme, supported by our colleagues' contribution to the
programme through mentoring, supported work experience and work
shadowing. Thanks to our partnerships with Newcastle United
Foundation and The Prince's Trust we have now recruited ten
apprentices through their employability programmes.
Investing in our future
Colleagues who join the Society as apprentices become part of
our thriving early talent programme, which sits at the heart of our
strategic plan to build a future proof workforce and strives to
create an inclusive environment for development, active and
pragmatic experiences that translate learning into real life
application. We're a Top 100 employer with RateMyApprenticeship,
the UK's leading job resource for young people seeking
apprenticeships, which is a demonstration of our investment in
colleagues at all levels of the organisation.
That investment includes the appointment of an Education and
Partnership Advisor, a newly created role and the re-purposing of
25% of entry-level roles to apprenticeships for our key
partners.
The wellbeing of colleagues is vital to the success of our
business. Our eNPS, which measures our employee net promoter score,
or how likely our colleagues are to recommend Newcastle Building
Society is in the top 25% of the global finance sector at +52,
according to benchmark data from our survey provider.
And we were thrilled when our investment and commitment around
Early Talent was recognised at the North East Business Awards where
we received the award for Apprenticeships, Training and Skills for
the Northumberland and Tyneside area. This was followed by success
at the CIPD North East of England awards where we received the
award for Excellence and Positive Impact.
We're investing in the support we provide to colleagues and
through our partnership with Newcastle United Foundation became a
business champion of the 'Be A Game Changer' initiative earlier
this year. 'Be A Game Changer' is the Foundation's mental health
awareness campaign that uses the topic of football to encourage
everyone to talk openly about mental health. Colleagues will
benefit from a bespoke package of support including wellbeing
workshops and opportunities to get more active. The initiative
strengthens the existing support provided to Society colleagues
through regular initiatives and an active network of Mental Health
First Aiders.
Colleague turnover is an important reflection of the success of
our colleague agenda. The Group colleague turnover rate was 16.34%
for the half year ended 30 June 2022, in comparison to 15.5% for
the year ended 2021 and 9.98% for the half year ended 2021. This is
a reflection of national trends and the challenging recruitment
market that we are experiencing now the labour market has picked up
post the Covid-19 pandemic.
Financial Performance
The first half of 2022 has seen the external environment
continue to be unpredictable and increasingly challenging, with the
pandemic still evident in our way of life, we now are facing
unprecedented high inflation and a potential cost of living crisis.
However the Society's underlying business continues to be sound
leading to strong profitability, robust capital, and good levels of
liquidity. This is all supported with diversified income from our
subsidiaries, Newcastle Strategic Solutions and Newcastle Financial
Advisers.
The Group is reporting a strong financial performance for the
first half of the year, with profitability (operating profit and
profit before taxation) slightly lower than that reported for the
first half of 2021. On an underlying operating profit basis we have
seen an increase of GBP0.9m to GBP14.2m for the first half of the
year in comparison to half year 2021, please see note 15 for
further details.
The first half of 2022 has seen total operating income increase
by 14% to GBP53.9m, however we have seen a higher increase in our
cost base (administration expenses and depreciation and
amortisation) of 23% to GBP40.0m.
We continue to invest in our business and in particular our
colleagues and IT infrastructure. We are actively growing our
colleague base and capability by recruiting new colleagues across
the business. Investment in information technology continues and we
concluded our rollout of colleague computing equipment earlier this
year, providing all colleagues with a standard set of IT equipment
to be able to work within a hybrid model.
In line with other sectors of the UK, macro political and
economic influences have brought financial headwinds, particularly
from increasing costs and tightened labour markets.
The high inflationary pressures that are being felt in our own
households are also impacting our day to day business operations,
which together with our ongoing programme of investment into
technology and infrastructure, have seen our costs increase across
our business activities. Like every household in the country we
also incur the unprecedented increase in energy costs for our
branches and head office properties.
Similar to other organisations, the recruitment market we are
experiencing is being driven by candidates. Pair this with the new
opportunities hybrid working offers to mobility of roles where we
are seeing colleagues leaving to move to organisations outside our
region, meaning that the external job market and therefore
recruitment is very challenging. Whilst we recognise these
challenges are there we actively look to transform them into
opportunities for us to benefit from. All of these pressures are
not expected to reverse over the foreseeable future.
Profitability
Group profit before taxation was GBP14.2m for the six months
ended 30 June 2022 compared to GBP15.9m for the first half of 2021.
Operating profit before impairment and provisions decreased
slightly by GBP0.8m to GBP13.9m from GBP14.7m at half year 2021.
Key underlying adjustments of GBP0.3m (Half year 2021: (GBP1.4m))
resulted in operating profit on an underlying basis of GBP14.2m
(Half year 2021: GBP13.3m).
Net interest income was GBP35.4m (Half year 2021: GBP28.2m) and
our net interest margin increased to 1.45% at 30 June 2022 (30 June
2021: 1.17% and 31 December 2021: 1.21%), both increases driven by
rising market interest rates.
Other income and charges, which includes income from Newcastle
Strategic Solutions and Newcastle Financial Advisers, were GBP21.9m
for the six months ended 30 June 2022 compared to GBP20.4m for the
first half of 2021. Solutions continued to see growth in its
underlying business in the first half of 2022 as well as existing
clients adding new services to their savings proposition, which
included mobile app and new savings products. Newcastle Financial
Advisers delivered a strong performance over the first half of the
year with regulated sales and funds invested both outperforming
original targets.
The Board considers the cost to income ratio to be a simple
measure of financial progress against internal targets and the
return achieved on investment in the business. Our cost to income
ratio increased to 74.2% (30 June 2021: 68.9%) and management
expenses (comprising administration expenses and depreciation)
increased by GBP7.5m from GBP32.5m to GBP40.0m. Both increases
related to the investment in colleagues and IT infrastructure are
in line with expectations.
Loans and Advances to Customers
The net increase in loans and advances to customers after
provisions was GBP76m for the first half of the year, resulting in
loans and advances to customers of GBP3.9bn at 30 June 2022 (31
December 2021: GBP3.8bn). Gross lending for the first half of the
year was GBP448m (First half of 2021: GBP483m). The net change
across the whole of our lending for the first half of 2022 was
GBP106m (First half of 2021: GBP191m), which includes a GBP52m
reduction in our exposure to the legacy lending book (First half of
2021: GBP29m). The Society's core residential mortgage book grew by
GBP181m during the first half of 2022 (First half of 2021:
GBP220m).
Credit Risk
Impairment write-backs on loans and advances to customers were
GBP0.5m (30 June 2021: write-back of GBP1.2m). The write-back of
GBP0.5m relates primarily to the legacy residential book.
The Group's credit risk in relation to its core residential
mortgage portfolios is closely correlated with significant rises in
unemployment rates and falls in property values. Provisions against
residential exposures are based on the Society's provisioning model
that considers a range of economic scenarios. Due to the extremely
uncertain economic environment we continue to monitor the
situation, in particular in relation to the cost of living and
inflation pressures as we have not yet seen any affordability
stress play out.
The percentage of mortgages in arrears by 3 months or more
remain at low levels at 0.38% (0.43%: 30 June 2021 and 0.42%: 31
December 2021). There were no properties in possession at the half
year ended 30 June 2021 (30 June 2021: 2).
Liquidity
We continue to manage our liquidity levels efficiently and
comfortably within our regulatory limits. Liquid assets as a
percentage of Shares, Deposits and Liabilities at 30 June 2022 were
20.8% (31 Dec 21: 21.4%). This is in excess of the Society's
minimum operating level. The Liquidity Coverage Ratio (LCR)
measures unencumbered high quality liquid assets as a percentage of
net cash outflows over a 30 day stress period. The LCR at 30 June
2022 was 222% (31 Dec 21: 202%), comfortably in excess of the
minimum regulatory limit of 100%. The quality of liquidity
continues to be excellent, comprising assets held in cash or that
can easily be converted to cash through treasury markets (repo) or
via the various Bank of England liquidity schemes.
Funding
The Society is predominantly funded by retail savings with
wholesale funding used to provide a diversified funding source,
Retail savings balances increased by GBP177m during the first half
of 2022 to GBP3.9bn (31 December 2021: 3.7bn). Wholesale funding,
including drawdown on Bank of England Funding Schemes, decreased by
GBP81m during the first half of the year to GBP665m (31 December
2021: GBP747m).
Capital
Capital ratios remain robust. Including unverified profits,
total Capital Ratio (Solvency) remained at 14.4% (31 December 2021:
14.6%) and Common Equity Tier 1 ratio was 13.3% (31 December 2021:
13.3%). The Society's Basel III leverage ratio (transitional basis)
was 4.5% at 30 June 2022 (31 December 2021: 4.5%). Excluding
unverified profits the Total Capital Ratio is 13.7%, Common Equity
Tier 1 ratio is 12.5% and Leverage Ratio is 4.3%.
Summary and look ahead
In a challenging period, the Society has performed remarkably
well and I am pleased with the continued momentum across all areas
of the business. We are all living through a period of unparalleled
uncertainty and change but with our purpose to 'connect our
communities with a better financial future' as our guide, we have
delivered a strong first half of 2022. This can be attributed to
our unique strategic approach within and for our region, with each
aspect of our business contributing and complementing each other to
create a robust business model for the long term.
Through our partnerships we are delivering sustainable positive
community impact, focusing on the areas which we believe will make
the biggest difference for the people in our region as they face
fresh challenges and deal with the same economic uncertainty.
We will need to remain careful, cautious and thoughtful, as we
face into a period of rising inflation, increased cost of living
for our customers and the uncertainty at home and abroad impacting
our economy. However, we also remain full of ambition and I believe
the Society's plan for continued innovation, growth, and investment
will help us find a path during the months and years ahead and we
will strive to make as much progress as we can to deliver on our
purpose for the benefit of the customers and communities we
serve.
Andrew Haigh
Chief Executive
Forward-looking statements
Certain statements in this half-yearly information are
forward-looking. These statements are made in good faith based on
the information available up to the time of approval of this report
and such statements should be treated with caution due to the
inherent uncertainties, including both economic and business risk
factors, underlying any such forward-looking information. Therefore
actual results may differ materially from those expressed or
implied by these forward-looking statements. The Directors
undertake no obligation to update any forward-looking statements
whether as a result of new information, future events or
otherwise.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Condensed Consolidated Income Statement
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
30 Jun 22 30 Jun 21 31 Dec 21
restated
GBPm GBPm GBPm
Interest receivable and similar income 54.4 40.6 90.8
Interest payable and similar charges (19.0) (12.4) (31.8)
------------ ------------ -------------
Net interest income 35.4 28.2 59.0
Other income and charges 21.9 20.4 42.3
Fair value gains less losses on financial instruments and hedge accounting (3.4) (1.4) (1.8)
------------ ------------ -------------
Total operating income 53.9 47.2 99.5
Administrative expenses (37.3) (30.0) (65.8)
Depreciation and amortisation (2.7) (2.5) (5.2)
Operating profit before impairments and provisions 13.9 14.7 28.5
Impairment reversals on loans and advances to customers 0.5 1.2 2.8
Impairment reversals / (charges) on tangible and intangible assets - 0.1 (2.0)
Provisions for liabilities and charges (0.2) (0.1) (0.2)
------------ ------------ -------------
Profit before taxation 14.2 15.9 29.1
Taxation expense (1.7) (2.3) (5.2)
------------ ------------ -------------
Profit after taxation for the financial period 12.5 13.6 23.9
------------ ------------ -------------
Due to a change in accounting policy at the 2021 year end with
respect to equity release mortgages, the comparatives have been
restated, see note 13.
The notes on pages 14 to 27 form an integral part of this
condensed consolidated half-yearly financial information.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Condensed Consolidated Statement of Comprehensive Income
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
30 Jun 22 30 Jun 21 31 Dec 21
restated
GBPm GBPm GBPm
Profit for the period 12.5 13.6 23.9
------------ ------------ -------------
Other comprehensive (expense) / income
Items that may be reclassified to income statement
Movement on fair value of debt securities through other comprehensive
(expense) / income (1.3) 0.2 (0.2)
Income tax on items that may be reclassified to income statement 0.3 (0.1) 0.3
------------ ------------ -------------
Total items that may be reclassified to income statement (1.0) 0.1 0.1
------------ ------------ -------------
Total other comprehensive (expense) / income (1.0) 0.1 0.1
------------ ------------ -------------
Total comprehensive income for the financial period 11.5 13.7 24.0
------------ ------------ -------------
The notes on pages 14 to 27 form an integral part of this
condensed consolidated half-yearly financial information.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Condensed Consolidated Balance Sheet
Unaudited Unaudited Audited
30 Jun 22 30 Jun 21 31 Dec 21
restated
GBPm GBPm GBPm
ASSETS
Liquid assets 950.9 959.7 956.4
Derivative financial instruments 50.3 2.1 14.5
Loans and advances to customers 3,870.5 3,743.8 3,794.5
Fair value adjustments for hedged risk 3.0 87.4 62.1
Property, plant and equipment 30.9 34.0 31.0
Intangible assets 8.6 7.0 7.5
Other assets 24.8 22.7 28.4
---------- ---------- ----------
TOTAL ASSETS 4,939.0 4,856.7 4,894.4
---------- ---------- ----------
Unaudited Unaudited Audited
30 Jun 22 30 Jun 21 31 Dec 21
restated
GBPm GBPm GBPm
LIABILITIES
Shares 3,908.6 3,771.5 3,731.8
Deposits and debt securities 665.0 664.3 746.7
Derivative financial instruments 91.0 169.5 147.6
Other liabilities 18.8 17.6 24.2
Subscribed capital 20.0 20.0 20.0
Reserves 235.6 213.8 224.1
---------- ---------- ----------
TOTAL LIABILITIES 4,939.0 4,856.7 4,894.4
---------- ---------- ----------
The notes on pages 14 to 27 form an integral part of this
condensed consolidated half-yearly financial information.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Condensed Consolidated Statement of Movement in Members'
Interests
For the 6 months ended 30 June 2022
(unaudited)
Fair Value Total
General through Other
reserve Comprehensive
Income
GBPm GBPm GBPm
At 1 January 2022 222.2 1.9 224.1
Profit for the period 12.5 - 12.5
Net movement in fair value through
other comprehensive income - (1.0) (1.0)
At 30 June 2022 234.7 0.9 235.6
---------- --------------- ---------
For the 6 months ended 30 June 2021
(unaudited)
General Fair Value Total
reserve through Other
Comprehensive
Income
restated restated restated
GBPm GBPm GBPm
At 1 January 2021 - restated 198.3 1.8 200.1
Profit for the period 13.6 - 13.6
Net movement in fair value through
other comprehensive income - 0.1 0.1
At 30 June 2021 211.9 1.9 213.8
---------- --------------- ---------
For the year ended 31 December 2021
(audited)
General Fair Value Total
reserve through Other
Comprehensive
Income
GBPm GBPm GBPm
At 1 January 2021 - restated 198.3 1.8 200.1
Profit for the period 23.9 - 23.9
Net movement in fair value through
other comprehensive income - 0.1 0.1
At 31 December 2021 222.2 1.9 224.1
---------- --------------- ---------
The notes on pages 14 to 27 form an integral part of this
condensed consolidated half-yearly financial information.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Condensed Consolidated Cash Flow Statement
Unaudited Unaudited Audited
6 months 6 months 12 months
to to to
30 Jun 30 Jun 31 Dec
22 21 21
restated
GBPm GBPm GBPm
Net cash flows from operating activities* 92.4 (107.6) (62.6)
Corporation tax paid (2.5) (1.9) (4.4)
Cash inflows / (outflows) from operating
activities 89.9 (109.5) (67.0)
---------- ---------- ----------
Purchases of property, plant and equipment (3.9) (3.0) (7.7)
Sales of property, plant and equipment* 2.4 4.9 4.9
Purchase of investment securities (147.9) (62.4) (106.6)
Sale and maturity of investment securities 50.0 27.0 84.6
---------- ---------- ----------
Net cash flows from investing activities (99.4) (33.5) (24.8)
---------- ---------- ----------
Interest paid on subscribed capital (1.2) (1.2) (2.3)
Payment for finance lease arrangements (0.6) (0.4) (1.2)
---------- ---------- ----------
Net cash flows from financing activities (1.8) (1.6) (3.5)
---------- ---------- ----------
Net decrease in cash and cash equivalents (11.3) (144.6) (95.3)
Cash and cash equivalents at the start
of period 395.0 490.3 490.3
---------- ---------- ----------
Cash and cash equivalents at the
end of the period 383.7 345.7 395.0
---------- ---------- ----------
*GBP4.9m were reclassified from net cash flows from operating
activities to sales of property plant and equipment for the 6
months to 30 June 2021.
The notes on pages 14 to 27 form an integral part of this
condensed consolidated half-yearly financial information.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Notes
1. General information
1.1. The half-yearly financial information set out above, which
was approved by the Board of Directors, does not constitute
accounts within the meaning of the Building Societies Act 1986.
1.2. The financial information for the 12 months to 31 December
2021 has been extracted from the accounts for that year. The
auditors gave an unqualified opinion on the accounts for the 12
months to 31 December, and they have been filed with the Financial
Conduct Authority and the Prudential Regulation Authority.
1.3. The half-yearly financial information for the 6 months to
30 June 2022 and the 6 months to 30 June 2021 is unaudited. The
financial information for the 6 months to 30 June 2021 was issued
without an independent review report for the Group's auditors.
1.4. The announcement is available at www.newcastle.co.uk .
2. Basis of preparation
The condensed consolidated financial information for the
half-year ended 30 June 2022 has been prepared in accordance with
the Disclosure and Transparency Rules of the Financial Conduct
Authority and with IAS 34, 'Interim financial reporting' as
applicable in the United Kingdom. It does not include all the
information required by International Financial Reporting Standards
(IFRSs). The half-yearly financial information should be read in
conjunction with the Group's Annual Report and Accounts for the
year ended 31 December 2021, which have been prepared in accordance
with International Financial Reporting Standards (IFRSs) as
applicable in the United Kingdom.
The Directors are required to satisfy themselves that it is
appropriate to adopt the going concern basis of accounting when
preparing the financial statements in accordance with IAS 1
Presentation of Financial Statements and guidance from the
Financial Reporting Council.
The Directors' going concern review considered the Group's
forecasts, in the context of the Group's current trading position
as well as the UK's current economic conditions. The review takes
into account the Group's principal risks. This includes the
potential effects of global supply chain disruptions and trade
restrictions due to Covid-19, geopolitical tension and conflict in
Ukraine, resulting in exceptionally high inflation and rising
market interest rates in the UK and globally.
Together with regular stress testing, the Group's forecasts show
that the Society will be able to maintain adequate levels of both
liquidity and capital for at least the next 12 months while meeting
all relevant regulatory requirements.
After making enquiries, the Directors are therefore satisfied
that the Society has adequate resources to continue in business for
at least the next 12 months and therefore it is appropriate to
adopt the going concern basis of accounting in preparing the half
yearly financial information. The Directors have concluded that
there are no material uncertainties that may cast significant doubt
upon the Group's ability to continue to apply the going concern
basis of accounting.
3. Accounting policies
The half-yearly financial information has been prepared on the
basis of the accounting policies adopted for the year ended 31
December 2021, as described in those financial statements. The
Group changed accounting policy for equity release mortgage assets
at the 2021 year end, see note 13 for details.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
4. Accounting Estimates and Judgements in Applying Accounting Policies
The Group has to make judgements in applying its accounting
policies, which affect the amounts recognised in the half-yearly
financial information. These judgements are based on management's
best knowledge but the eventual outcome may differ from them. In
addition, estimates and assumptions are made that could affect the
reported amounts of assets and liabilities within the following
year. Whilst there have been no changes to the accounting areas
where the most significant estimates and judgements are applied, an
overview on the impact the changed economic situation has had on
these is provided below.
Estimates
Fair value of the equity release mortgage assets
The valuation of the Group's equity release mortgage assets
depends on a range of assumptions, including the most appropriate
discount rate and property price growth rates and volatility. Key
assumptions and sensitivity analysis are outlined in note 12.
Impairment of Financial Assets
The impairment of mortgage assets is determined by a weighted
average of the expected credit losses of 4 different economic
scenarios. Each scenario is based on a range of assumptions,
included property price growth rates and unemployment rates. The
scenario weightings are based on management's current expectation
about the future probability of each economic scenario. Economic
scenarios and scenario weightings are outlined in note 15.
Pensions
At the year end, management relied on a range of assumptions
including the most appropriate discount rate and mortality rates,
inflation, take up of the Pension Increase Exchange offer and
future salary increases in estimating the value of the pension
scheme. The Board received independent external advice from its
actuarial consultants in arriving at the scheme assumptions which
were outlined together with sensitivity analysis in Note 21 to the
Annual Report and Accounts. Detailed sensitivity analysis and
stress testing was performed at year end which showed that the
probability of the pension surplus becoming a deficit was remote.
As a result, no revaluation of the pension scheme surplus was
performed at the half year.
Judgements
Fair Value of Derivatives and Financial Assets
Fair Values are determined by the three tier valuation hierarchy
as defined within IFRS 7. There have been no significant changes to
valuation methodologies applied since the publication of the
Group's 2021 Annual Report and Accounts, other than the
reclassification of Equity investments from level 2 to level 3. See
note 12 for details.
Impairment of Financial Assets
The modelling of impairment of mortgage assets included a range
of management judgements, including the Society's definition of
default, significant increase in credit risk and the use of post
model adjustments. See note 15 for details.
5. Principal Risks and Uncertainties
The Group's activities expose it to a variety of risks: credit
risk, liquidity risk, market risk (predominantly interest rate and
macro-economic risk), pension fund obligation risk, capital risk,
operational risk, conduct risk and climate change risk. There have
been no changes in the principal risks and uncertainties facing the
Group. Nonetheless, whereas in 2022 there was still significant
uncertainty of how government support of the economy during the
Covid-19 pandemic and its subsequent removal would impact on the
Group's trading environment, this has now resulted in higher
inflation and corresponding increases in the Bank of England's base
rates, as well as other measure of quantitative tightening. The
Group closely monitors the impact these developments have on our
members, in particular the impact of the cost of living on the
affordability of mortgages. This has led to an additional post
model adjustment for affordability being included within our IFRS 9
expected credit losses. The interim condensed consolidated
financial information does not include all risk management
information and disclosures required in the annual accounts, and
should be read in conjunction with the Group's 2021 Annual Report
and Accounts. There have been no material changes to the Group's
risk appetite since publication of the Group's 2021 Annual Report
and Accounts.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
6. Taxation
The effective tax rate is 19.0% (2021:19.0%). The tax charge has
been calculated to approximate to the expected full year tax rate
and includes an adjustment to deferred tax assets, and to current
tax for changes in the enacted corporation tax rate.
7. Related Party Transactions
During the 6 months to 30 June 2022 the Society purchased
GBP6.1m of Business Support Services and Managed IT and Property
Services from Newcastle Strategic Solutions Limited (NSSL), a
wholly owned subsidiary (In the same period in 2021, GBP2.8m was
procured from NSSL). The Society received GBP5.2m from NSSL in the
6 months to 30 June 2022 for the provision of Financial and
Administrative Services. (This compares to GBP4.8m from NSSL for
the same period in 2021).
8. Interest receivable and similar income
Unaudited Unaudited Audited
6 months 6 months 12 months
to to to
30 Jun 30 Jun 31 Dec
22 21 21
restated
GBPm GBPm GBPm
Interest income calculated using effective
interest rate 50.7 41.2 92.0
Interest recognised in respect of
insurance contracts 5.6 6.0 11.9
Net expense on derivatives used for
hedging purposes (1.9) (6.6) (13.1)
---------- ---------- ----------
Total Interest Income 54.4 40.6 90.8
---------- ---------- ----------
9. Revenue from contracts with customers
In accordance with IFRS 8, 'Operating Segments', the Group
reports the following segments; Member business and Solutions
business. When the Group prepares financial information for
management, it disaggregates revenue by segment and service
type.
The table below illustrates the disaggregation of revenue in
scope of IFRS 15, 'Revenue from Contracts with Customers'. Revenue
from contracts with customers generated by the Solutions business
and the Member business is included in "Other income and charges"
within the Segment information note.
Unaudited Unaudited Audited
6 months 6 months 12 months
to to to
30 Jun 30 Jun 31 Dec
22 21 21
GBPm GBPm GBPm
Revenue from contracts with customers
Solutions business:
Savings management services 17.1 16.3 32.6
Savings management project and change
services 0.5 0.4 0.9
IT services 0.3 0.3 0.6
Member business:
Regulated advice services 3.0 2.4 5.4
Third party services 0.7 0.8 0.5
Other services - 0.1 0.1
Total revenue from contracts with
customers 21.6 20.3 40.1
---------- ---------- ----------
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
10. Segment information
The chief operating decision maker has been identified as the
Board of Directors. The Board reviews the Group's internal
reporting in order to assess performance and allocate resources.
Management has determined the operating segments based on these
reports. Following the management approach of IFRS 8, operating
segments are reported in accordance with the internal reporting
provided to the Board of Directors. The operating segments used by
the Group meet the definition of a reportable segment under IFRS
8.
The 'Member business' segment provides mortgage, savings,
investment and insurance products to Members and customers. The
'Solutions business' segment (also referred to as Newcastle
Strategic Solutions Limited (NSSL)) provides business to business
services through people, processes and technology. The Board
assesses performance based on profit before tax after the
allocation of all central costs. Operating profit before
impairments and provisions is also assessed as this provides
information on underlying business performance.
Income and directly attributable costs are allocated to each
segment and support costs are apportioned, based on direct salary
costs and detailed allocations by budget holders.
A comprehensive cost allocation exercise was carried out in 2022
to reflect increasing technology and support service charges
provided to the Member business. The revised commercial
arrangements have increased other income and charges received by
Solutions from the Member business and decreased the administration
paid by Solutions in 2022. For June 21 and December 21 comparative
purposes Solutions' other income and charges reflecting the cost
allocation exercise would have been GBP21.6m and GBP44.8m,
administration charges of GBP17.0m and GBP37.0m and profit for the
period of GBP2.9m and GBP4.0m for the 6 months to June 2021 and the
year ended 31 December 2021 respectively.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
6 months to 30 June 2022 Member Solutions
Business Business Total
GBPm GBPm GBPm
Net interest income 35.9 (0.5) 35.4
Other income and charges and fair
value gains less losses on financial
instruments and hedge accounting (5.6) 24.1 18.5
Administrative expenses (16.3) (21.0) (37.3)
Depreciation and amortisation (1.2) (1.5) (2.7)
--------- ---------- ---------
Operating profit before impairments
and provisions 12.8 1.1 13.9
Impairment reversals on loans and
advances to customers 0.5 - 0.5
Provisions for liabilities and charges (0.1) (0.1) (0.2)
Profit before taxation 13.2 1.0 14.2
Taxation expense (1.7)
---------
Profit after taxation for the financial
period 12.5
---------
6 months to 30 June 2021 Member Solutions
Business Business Total
restated restated
GBPm GBPm GBPm
Net interest income 28.7 (0.5) 28.2
Other income and charges and fair
value gains less losses on financial
instruments and hedge accounting (0.9) 19.9 19.0
Administrative expenses (12.9) (17.1) (30.0)
Depreciation and amortisation (1.3) (1.2) (2.5)
--------- ---------- ---------
Operating profit before impairments
and provisions 13.6 1.1 14.7
Impairment reversals on loans and
advances to customers 1.2 - 1.2
Provisions for liabilities and charges (0.1) - (0.1)
14.7 1.1 15.8
Impairment reversals on property and
equipment 0.1
---------
Profit before taxation 15.9
Taxation expense (2.3)
---------
Profit after taxation for the financial
period 13.6
---------
Year to 31 December 2021 Member Solutions
Business Business Total
GBPm GBPm GBPm
Net interest income 60.1 (1.1) 59.0
Other income and charges and fair
value gains less losses on financial
instruments and hedge accounting (1.1) 41.6 40.5
Administrative expenses (28.4) (37.4) (65.8)
Depreciation and amortisation (2.6) (2.6) (5.2)
--------- ---------- ---------
Operating profit before impairments
and provisions 28.0 0.5 28.5
Impairment reversals on loans and
advances to customers 2.8 - 2.8
Provisions for liabilities and charges (0.1) (0.1) (0.2)
30.7 0.4 31.1
Impairment charges on property and
equipment (2.0)
---------
Profit before taxation 29.1
Taxation expense (5.2)
Profit after taxation for the financial
period 23.9
---------
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
11. Fair value gains less losses on financial instruments and
hedge accounting
Unaudited Unaudited Audited
6 months 6 months 12 months
to to to
30 Jun 30 Jun 31 Dec
22 21 21
restated
GBPm GBPm GBPm
Fair value movement on loans and advances
to customers held at fair value through
profit and loss (31.5) (15.5) (23.3)
Fair value movement on derivatives
financial instruments in economic
but not in accounting hedge relationships 31.0 18.3 25.4
Interest expense on derivatives in
economic but not accounting hedge
relationships (3.1) (4.3) (8.4)
Fair value movement on Equity instruments (1.9) - 3.4
Gains / (losses) crystallised on sale
of assets held at fair value through
other comprehensive income - - 0.1
Hedge ineffectiveness on accounting
hedges 2.1 (1.1) 1.0
(3.4) (2.6) (1.8)
---------- ---------- ----------
12. Fair value measurement
The following table summarises the fair value measurement basis
used for assets and liabilities held on the Balance Sheet at fair
value at 30 June 2022.
Level Unaudited Unaudited Audited
30 Jun 30 Jun 31 Dec
22 21 21
restated
GBPm GBPm GBPm
Financial assets
Debt securities - Fair value through
other comprehensive income 1 488.0 404.4 390.7
Equity investments 1 0.1 0.2 0.2
Derivative financial instruments 2 50.3 2.1 14.5
Fair value adjustments for hedged
risk 2 3.0 87.4 62.1
Equity instruments* 2 - - 3.7
Equity investments* 3 1.9 0.3 -
Loans and advances to customers
held at fair value 3 198.6 245.7 232.6
Financial liabilities
Derivative financial instruments 2 91.0 169.5 147.6
Level 1: Quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1
that are observable for the asset or liability either directly
(i.e. as price) or indirectly (i.e. derived from prices).
Level 3: Inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
* Equity investments in Openwork LLP were reclassified from
level 3 to level 2 in 2021, as a market for these instruments was
established during the period. Market prices of equity units are
not publicly quoted, but they are observable to members of the LLP.
However, the instruments have subsequently been reclassified back
to level 3 as the market established has proved not to be a
reliable estimate of the value of the equity units due to the
relative lack of buyers compared to sellers at this stage.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Mortgage assets held at fair value
The fair value of the equity release portfolio is calculated
using a model that estimates the future cash flows expected from
the portfolio. The timing of those cash flows are determined with
reference to mortality tables overlaid by expected prepayments. The
model discounts these cash flows to their present value, using a
discount rate that estimates the funding costs and expected return
on equity of an entity that could acquire the portfolio if it was
for sale. The model further calculates a value for the 'no-negative
equity guarantee' provided to the customer using an option pricing
method.
The valuation uses a number of inputs which require estimation,
such as the mortality and prepayment rates, the discount rate,
property price volatility and the haircut applied to individual
sales prices.
The key estimates used in the model and the basis of estimation
are summarized below:
Assumption Basis of estimation
Discount rate Estimated funding costs and expected return
on equity of an entity that could acquire the
portfolio if it was for sale
-----------------------------------------------
Long term property Analysis of historic long term property price
price growth growth
-----------------------------------------------
Property price volatility Analysis of historic property price volatility
and third party research
-----------------------------------------------
At 30 June 2022 the fair value of the mortgage assets held at
fair value was GBP198.6m (2021: GBP232.6m). The sensitivity of this
value to the estimates shown above is as follows:
Assumption Change in assumption (Decrease) / Increase
in fair value
GBPm
Discount rate +/-0.5% (7.0)/7.6
Long term property price +/-1.5% 3.3/(4.5)
growth
Property price volatility +/-3.0% (3.9)/3.2
13. Equity release mortgages
The gross mortgage balances and fair value uplift relating to
the equity release mortgage portfolio are as follows:
30 Jun 2022 30 Jun 2021 31 Dec 2021
restated
GBPm GBPm GBPm
Gross mortgage balances 166.1 174.4 169.1
Fair value uplift 32.0 71.3 63.5
------------ ------------ ------------
Fair value presented on balance sheet 198.1 245.7 232.6
------------ ------------ ------------
The gross mortgage balances above reflect the Group's maximum
pre-collateral exposure to credit risk at 30 June. The Group
typically expects its equity release mortgages to be repaid through
sale of the underlying properties. In all instances, the Group
holds the contractual right to sale proceeds required to repay a
borrower's mortgage at the time of sale. By their nature, equity
release mortgages are not considered to hold a pre-determined
maturity date.
The Group recognises interest income on a per asset basis using
the effective interest rate method. For equity release mortgages,
the effective interest rate is considered to be the contractual
fixed rate of interest detailed in the mortgage contracts. The
gross mortgage balances, as presented above, reflect both the
amortised cost and contractual balance of the Group's equity
release mortgages.
The fair value uplift has decreased by GBP31.5m during the six
months period. The main source of the change in fair value was a
change in market interest rates, which increased by 1.4%. The
Society hedges fair value movements on the equity release portfolio
due to market interest rate movements using interest rate swaps.
The value of these swaps increased by GBP31.0m, resulting in a net
movement of GBP0.5m in the period (see also note 11).
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
14. Insurance contracts: Changes in Accounting Policy
As disclosed in the Group's 2021 Annual Report and Accounts, the
Society has changed its accounting policy in relation to equity
release mortgages. The Group previously accounted for equity
release mortgage assets at amortised cost and changed its
accounting policy to a fair value approach. The change is regarded
to result in more relevant and reliable information to the users of
the accounts and therefore was encouraged under the applicable
accounting standards IFRS 4 and IAS 8. The change in accounting
policy also led to a de-recognition of the hedge adjustment
associated with the equity release portfolio.
The accounting policy change was implemented retrospectively,
that is, relevant comparative balances were restated as if the
Group had always followed a fair value approach. This ensures that
the balances provided as a comparative are prepared on the same
basis as those for the current year.
A reconciliation of the changes is included below and further
details in respect of the change in accounting policy can be found
in Note 35 of the Annual Report and Accounts.
Reconciliation of the Income Statement for the period ended 30
June 2021.
As previously Adjustment As restated
stated
GBPm GBPm GBPm
Interest payable and similar charges (16.7) 4.3 (12.4)
Net interest income 23.9 4.3 28.2
Fair value gains less losses on financial
instruments and hedge accounting - (2.6) (2.6)
Total operating income 45.5 1.7 47.2
Impairment charges on loans and advances
to customers 0.9 0.3 1.2
Profit before taxation 13.9 2.0 15.9
Taxation expense (2.3) - (2.3)
Profit after taxation for the financial
period 11.6 2.0 13.6
Total comprehensive income for the
financial period 11.7 2.0 13.7
Reconciliation of the Balance Sheet at 30 June 2021
As previously Adjustment As restated
stated
GBPm GBPm GBPm
Loans and advances to customers 3,669.9 73.9 3,743.8
Fair value adjustments for hedged
risk 168.4 (81.0) 87.4
Other assets 62.0 1.7 63.7
Reserves 219.2 (5.4) 213.8
Reconciliation of the Statement of Movements in Member's
interests
As previously Adjustment As restated
stated
GBPm GBPm GBPm
Total reserves at 1 January 2021 207.5 (7.4) 200.1
Movement in year 11.7 2.0 13.7
Total reserves at 30 June 2021 219.2 (5.4) 213.8
* The adjustments relate exclusively to General Reserves
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
15. Credit risk
Loans afd advances to customers consist of the following
balances:
Product 30 Jun 2022 30 Jun 2021 31 Dec 2021
restated
GBPm GBPm GBPm
Prime residential 2,955.3 2,687.0 2,785.7
Buy to let 387.8 390.0 399.6
Legacy books:
Legacy buy to let 23.5 32.0 27.7
Commercial 11.9 18.1 14.9
Housing association 282.7 363.7 323.4
Serviced apartments 17.2 17.7 17.5
Policy loans 1.5 1.8 1.6
Equity release mortgages 198.1 245.7 232.6
Provisions (7.5) (12.2) (8.5)
------------ ------------ ------------
Total 3,870.5 3,743.8 3,794.5
------------ ------------ ------------
Loans and advances to customers are accounted for under IFRS 9:
Financial Instruments, with the exception of the equity release
portfolio which is accounted for under IFRS 4: Insurance Contracts.
This note provides an overview of changes in credit risk since
December 2021.
The reduction in provisions since the previous half year are
primarily due to redemptions of legacy assets that were subject to
provisions.
Residential and retail Buy To Let portfolios
Under IFRS 9, scenario analysis is used to assess and provide
for expected credit losses. Please see the Group's 2021 Annual
Report and Accounts for details of the Society's methodology of
this assessment.
No changes were made to the provisioning methodology since the
December 2021 accounts. However, scenarios have been updated to
reflect the current economic outlook. The following table
summarises the HPI and unemployment assumptions used, which are the
most significant assumptions to determine the provision. They are
provided as annual percentage growth or contraction compared to the
previous year.
Scenario 2022 2023 2024 2025 2026
-------------------------- ------ -------- -------- -------- -------
House price
Upside Growth 12.7% 3.5% 2.1% 2.6% 3.1%
Unemployment 3.5% 3.5% 3.5% 3.5% 3.5%
------------------------- ------ -------- -------- -------- -------
House price
Base Growth 5.1% 1.1% 0.6% 1.6% 2.6%
Unemployment 4.1% 4.1% 4.0% 3.9% 3.9%
------------------------- ------ -------- -------- -------- -------
House price
Downside Growth - (13.4)% 1.8% 1.5% (1.2)%
Unemployment 5.6% 6.5% 4.8% 4.6% 4.9%
------------------------- ------ -------- -------- -------- -------
House price
Stress Growth - (12.7)% (18.1)% (10.5)% 3.8%
Unemployment 5.6% 8.3% 9.2% 8.6% 7.9%
Post model adjustments
Fire safety and cladding risk
The Society has a small number of loans secured on properties
with unsuitable cladding or other fire safety risks. As the
marketability of such properties is currently uncertain, a post
model adjustment of GBP0.7m (December 2021: GBP0.6m) has been
recognised.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Affordability
We have not seen increases in non-performing loans in the first
half of 2022. However, the high levels of inflation currently
observed may have a negative impact on some borrowers' ability to
service their loans, resulting in higher levels of default. The
Society's provisioning model does not adequately reflect the risk
of inflation, and as a result, as a post model adjustment for
GBP0.1m has been booked to account for this risk (December 2021:
GBPnil). The adjustment has been determined by stressing the base
rate and household income variable in the Society's provisioning
model as a proxy for the reduction in disposable income expected to
result from high inflation levels.
Interest only accounts
Historically, the Society has booked a post model adjustment
against risk of default from interest only accounts that are close
to maturity and where no suitable repayment vehicle is in place
(December 2021: GBP0.1m). This has now been integrated into the
model and as a result, no post model adjustment is required
anymore.
IFRS 9 staging and loss provisioning
The impact of IFRS 9's staging and loss provisioning to the
Society's closing 30 June 2022 balance sheet was as follows
(payment holidays are not considered to be arrears):
IFRS 9 Gross Exposure
Stage 1 Stage 2 Stage 3 Total
Of which Months in Of which Months in Arrears Of which Months in Arrears
Arrears
< 1 1-3 > 3 < 1 1-3 > 3 < 1 1-3 > 3
GBPm
Prime
residential 2,586.2 - - 331.5 12.0 - 11.2 3.3 11.1 2,955.3
Buy to Let 359.1 - - 25.3 0.6 - 1.4 0.1 1.3 387.8
Total 2,945.3 - - 356.8 12.6 12.6 3.4 12.4 3,343.1
--------- ------- ------ --------- --------- ------- --------- -------- --------- --------
Expected Credit Losses
Stage 1 Stage 2 Stage 3 Total
Of which Months in Of which Months in Arrears Of which Months in Arrears
Arrears
< 1 1-3 > 3 < 1 1-3 > 3 < 1 1-3 > 3
GBP000
Prime
residential 472.5 - - 916.9 49.0 - 60.6 11.7 650.8 2,161.5
Buy to Let 602.9 - - 51.6 3.1 - 5.1 - 96.2 758.9
Total 1,075.4 - - 968.5 52.1 - 65.7 11.7 747.0 2,920.4
--------- ------- ------ --------- --------- ------- --------- -------- --------- --------
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
The impact of IFRS 9's staging and loss provisioning to the
Society's closing 30 June 2021 balance sheet was as follows
(payment holidays are not considered to be arrears):
IFRS 9 Gross Exposure
Stage 1 Stage 2 Stage 3 Total
Of which Months in Arrears Of which Months in Arrears Of which Months in Arrears
< 1 1-3 > 3 < 1 1-3 > 3 < 1 1-3 > 3
GBPm
Prime
residential 2,385.0 - - 268.1 9.0 - 11.9 1.4 11.6 2,687.0
Buy to Let 361.1 - - 25.7 1.7 - 0.7 0.2 0.6 390.0
Total 2,746.1 - - 293.8 10.7 - 12.6 1.6 12.2 3,077.0
---------- ------- ------ ----------- --------- ------- ---------- -------- --------- --------
Expected Credit Losses
Stage 1 Stage 2 Stage 3 Total
Of which Months in Arrears Of which Months in Arrears Of which Months in Arrears
< 1 1-3 > 3 < 1 1-3 > 3 < 1 1-3 > 3
GBP000
Prime
residential 438.5 - - 1,169.2 85.0 - 636.1 6.8 190.6 2,526.2
Buy to Let 70.1 - - 173.5 24.9 - 339.1 3.5 3.7 614.8
Total 508.6 - - 1,342.7 109.9 - 975.2 10.3 194.3 3,141.0
---------- -------- ------- ---------- --------- ------ ---------- -------- --------- --------
The impact of IFRS 9's staging and loss provisioning to the
Society's closing 31 December 2021 balance sheet was as follows
(payment holidays are not considered to be arrears):
IFRS 9 Gross Exposure
Stage 1 Stage 2 Stage 3 Total
Of which Months in Arrears Of which Months in Arrears Of which Months in Arrears
< 1 1-3 > 3 < 1 1-3 > 3 < 1 1-3 > 3
GBPm
Prime
residential 2,421.6 - - 319.3 9.7 - 21.2 2.7 11.2 2,785.7
Buy to Let 367.0 - - 27.4 1.0 - 2.6 1.6 - 399.6
Total 2,788.6 - - 346.7 10.7 - 23.8 4.3 11.2 3,185.3
---------- ------- ------ ----------- --------- ------- ---------- -------- --------- --------
Expected Credit Losses
Stage 1 Stage 2 Stage 3 Total
Of which Months in Arrears Of which Months in Arrears Of which Months in Arrears
< 1 1-3 > 3 < 1 1-3 > 3 < 1 1-3 > 3
GBP000
Prime
residential 392.3 - - 969.1 50.7 - 116.9 10.8 1,240.6 2,780.4
Buy to Let 479.4 - - 96.5 14.0 - 25.1 129.4 - 744.4
Total 871.7 - - 1,065.6 64.7 - 142.0 140.2 1,240.6 3,524.8
--------- -------- ------- --------- -------- ------ --------- -------- --------- --------
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Sensitivity
The 30 June 2022 provisions are sensitive to the likelihood
factor applied to the different scenarios. The analysis below
demonstrates the impact of changes to the scenario weightings.
Upside Base Downside Severe downside Provision
GBPm
------------------ ------- ----- --------- ---------------- ----------
Actual weighting 10% 40% 35% 15% 2.9
Sensitivity 1 0% 100% 0% 0% 1.7
Sensitivity 2 0% 0% 100% 0% 3.4
Legacy portfolios
The provisioning methodology for Commercial, Legacy Buy to Let,
and Service Apartments exposures follows that outlined in the
Group's 2021 Annual Report and Accounts. Economic scenarios have
been updated to correspond with the scenarios used for residential
mortgages and the same scenario weightings are used for these books
as are used for the core books above.
The following sector specific discounts and uplifts have been
used, compared to current collateral valuations:
Sector Upside Base Downside Severe
downside
--------------------- ------- ----- --------- ----------
Retail 90% 80% 70% 40%
Leisure 75% 65% 55% 45%
Residential 117% 106% 89% 71%
Distribution 120% 100% 90% 80%
Serviced Apartments 106% 90% 70% 40%
These discounts and uplifts are applied to the latest valuation
of the property serving as collateral.
No losses are expected on exposures to housing associations and
policy loans.
The resulting gross balances and corresponding provisions are as
follows:
Product 30 Jun 2022 30 Jun 2021 31 Dec 2021
Exposure Provision Exposure Provision Exposure Provision
GBPm GBPm GBPm GBPm GBPm GBPm
--------- ---------- --------- ---------- --------- ----------
Legacy Buy to Let 23.5 0.7 32.0 3.6 27.7 1.0
Commercial 11.9 3.2 18.1 4.7 14.9 3.5
Housing Associations 282.7 - 363.7 - 323.4 -
Serviced Apartments 17.2 0.7 17.7 0.8 17.5 0.8
Policy Loans 1.5 - 1.8 - 1.6 -
--------- ---------- --------- ---------- --------- ----------
Total 336.8 4.6 433.3 9.1 385.1 5.3
--------- ---------- --------- ---------- --------- ----------
Sensitivity
The 30 June 2022 provisions are sensitive to the likelihood
factor applied to the different scenarios. The analysis below
demonstrates the impact of changes to the scenario weightings.
Upside Base Downside Severe downside Provision
GBPm
------------------ ------- ----- --------- ---------------- ----------
Actual weighting 10% 40% 35% 15% 4.6
Sensitivity 1 0% 100% 0% 0% 3.3
Sensitivity 2 0% 0% 100% 0% 5.1
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
16. Alternative performance measures
The Board considers the following items in determining the
underlying profit of the Group. They are items defined as income or
expenses that arise from events or transactions that are distinct
from the core activities of the Group and therefore do not
represent the groups true performance.
30 June 22 30 June 21 31 Dec 21
GBPm GBPm GBPm
Operating profit before impairment and provisions 13.9 14.7 28.5
(Gains)/ loss in fair value of equity release mortgages 0.5 (2.8) (2.1)
Hedge ineffectiveness on accounting hedges (2.1) 1.4 (1.0)
Revaluation of investments 2.0 - (3.4)
(Gains)/ loss crystallised on sale of assets (0.1) - (0.1)
Underlying operating profit 14.2 13.3 22.0
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
17. Notes to the Cashflow Statements
30 Jun 30 Jun 31 Dec
22 21 21
GBPm GBPm GBPm
Reconciliation of profit before taxation restated
to net cash inflow
from operating activities
Profit before taxation 14.2 15.9 29.1
Depreciation and amortisation 2.7 2.5 5.2
Interest on subscribed capital 1.2 1.2 2.3
Decrease in derivative financial instruments (92.3) (44.8) (81.2)
Decrease in fair value of mortgage assets
held at fair value 31.5 15.5 23.3
Decrease in other financial liabilities
at fair value through profit or loss 59.1 28.7 54.0
Changes in retirement benefit obligations - - -
Other non-cash movements (0.5) 0.2 (4.1)
-------- --------- --------
Net cash inflow before changes in operating
assets and liabilities 15.9 19.2 28.6
Increase in loans and advances to customers (107.1) (199.2) (244.5)
Decrease in cash collateral pledged 91.5 42.8 79.9
Increase / (decrease) in shares 176.8 (4.8) (44.5)
(Decrease) / increase in amounts due
to other customers and deposits from
banks (81.7) 36.3 118.7
Decrease / (increase) in investments,
other assets, prepayments and accrued
income 1.6 (1.3) (5.9)
(Decrease) / Increase in other liabilities (4.6) (0.6) 5.1
Net cash inflow/(outflow) from operating
activities 92.4 (107.6) (62.6)
======== ========= ========
Cash and cash equivalents
Cash and balances with the Bank of England 359.7 335.7 382.2
Loans and advances to banks repayable
on demand 24.0 10.0 12.8
At 30 June / 31 December 383.7 345.7 395.0
======== ========= ========
Cash and cash equivalents comprise cash in hand, balances with
the Bank of England, loans and advances to banks available on
demand or with original maturities of three months or less and
investment securities with a maturity period of three months or
less i.e. highly liquid assets readily convertible into cash.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Statement of Directors' responsibilities
The Directors confirm that this condensed consolidated
half-yearly financial information has been prepared in accordance
with IAS 34 as applicable in the United Kingdom, and that the
half-yearly management report included in this announcement
includes a true and fair review of the information required by the
Disclosure Guidance and Transparency Rules (DTR 4.2.4, DTR 4.2.7
and DTR 4.2.8).
The Directors of Newcastle Building Society are listed in the
2021 Annual Report and Accounts, other than Ian Ward who retired as
a Director on 27 April 2022.
On behalf of the Board
Andrew Haigh
Chief Executive
26 July 2022
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
INDEPENT REVIEW REPORT TO NEWCASTLE BUILDING SOCIETY
Conclusion
We have been engaged by the Society to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2022 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated statement of
financial position, the condensed consolidated statement of changes
in members' interests, the condensed consolidated statement of cash
flows and related notes 1 to 17.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2022 is not prepared, in all material respects, in accordance
with United Kingdom adopted International Accounting Standard
34.
Basis for Conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410 "Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council for use in the
United Kingdom. A review of interim financial information consists
of making inquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
(UK) and consequently does not enable us to obtain assurance that
we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in note 2, the annual financial statements of the
group will be prepared in accordance with United Kingdom adopted
international accounting standards. The condensed set of financial
statements included in this half-yearly financial report has been
prepared in accordance with United Kingdom adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusion Relating to Going Concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
Conclusion section of this report, nothing has come to our
attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed.
This conclusion is based on the review procedures performed in
accordance with this ISRE (UK), however future events or conditions
may cause the entity to cease to continue as a going concern.
Responsibilities of the directors
In preparing the half-yearly financial report, the directors are
responsible for assessing the group's ability to continue as a
going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the company or to cease
operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial
information
In reviewing the half-yearly financial report, we are
responsible for expressing to the group a conclusion on the
condensed set of financial statement in the half-yearly financial
report. Our conclusion, including our Conclusions Relating to Going
Concern, are based on procedures that are less extensive than audit
procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the company in accordance with
International Standard on Review Engagements (UK) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Financial Reporting Council. Our work
has been undertaken so that we might state to the company those
matters we are required to state to it in an independent review
report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than
the company, for our review work, for this report, or for the
conclusions we have formed.
Deloitte LLP
Statutory Auditor
Manchester, United Kingdom
26 July 2022
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IR GUGDRLUDDGDR
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