TIDMNBSR
RNS Number : 0425I
Newcastle Building Society
02 August 2023
Chief Executive's Review
Stubborn inflation and the rising cost of living present ongoing
and difficult challenges for our customers, communities and the
wider North East region, whilst the unpredictability of wider
market conditions continues to create a complex trading
environment.
We believe that during these difficult times, the potential
difference we can make as a customer-owned, purpose-led, community
focused business is more significant than ever. Our response as the
North East's biggest building society has been to find ways to
better serve our Members through value, quality, consistency and
choice, and to support all customers wherever we can, taking into
account individual circumstances, whilst offering additional help
for those in need.
During such a difficult period, I am proud that by continuing to
make a positive impact in the communities we serve, offering
consistently good value for borrowers and savers, and attracting
new Members to the Society, we've been able to deliver another
robust set of results, with continued growth through the first half
of the year, all whilst being present in and actively contributing
to our communities.
Performance
I am pleased to announce that even against the troubled economic
backdrop, the Society's strong performance in the first half of
2023, continues to demonstrate our resilience and core strength of
the underlying operating model.
The underlying financial performance remains strong with
increased profitability. Group profit before tax was GBP16.2m for
the period ended 30 June 2023, compared to GBP14.2m for the period
ended 30 June 2022. In addition to these strong financial results,
we continue to operate with appropriate levels of capital and
liquidity. Please see the business review section for further
details of our half yearly financial performance.
Key highlights for the six months to 30 June 2023 include :
-- Profit before taxation of GBP16.2m (Half year 2022: GBP14.2m);
-- Underlying operating profit of GBP15.0m (Half year 2022:
GBP14.2m), see the business review for further information;
-- Good value for savers, increasing rates on our variable rate
savings book on five different occasions during the first half of
the year, offering an average savings rate of 2.49% across the
first five months of the year which is 0.62% higher than the market
average, equating to GBP11m more interest for our Members [source:
CACI];
-- Grown our savings balances by GBP458m from GBP4.2bn at
December 2022 to GBP4.7bn at 30 June 2023;
-- Good value for borrowers, with a Standard Variable Rate (SVR)
for mortgages at the end of June of 5.19% against a market average
of 7.63%, saving our Members almost GBP336k in interest payments
for the month alone;
-- Gross mortgage lending was GBP660m (Half year 2022: GBP448m),
and net core residential lending of GBP408m (Half year 2022:
GBP181m);
-- Maintained the highest levels of customer service, with
customer satisfaction scores of 95% (Half year 2022: 95%);
-- Continued to offer all Members additional support through
Helping Hand, a unique service delivered with Citizens Advice
Gateshead helping customers address a range of problems and access
quick advice and support;
-- Announced support for the Mortgage Charter, which introduces
extra measures of support for those experiencing mortgage payment
difficulties;
-- Gained approval for the merger with Manchester Building
Society by way of a transfer of Manchester's engagements to
Newcastle, with the merger taking effect on July 1(st) ;
-- Donated GBP179,000 to the Newcastle Building Society
Community Fund at the Community Foundation to support ongoing
donations to charities across the region. Grants were made from the
Fund to 27 charities tackling issues in debt management,
employability, food poverty, and the environment;
-- Supported our communities with more than 650 days of
colleague volunteering, helping a range of good causes;
-- Created nearly 150 new jobs, supporting the region through
new and high quality employment opportunities; and
-- Engaged with over 350 members at our listening events across
the region, and grew our Connected Communities network to more than
700.
Powered by Purpose - Supporting Members
Our Purpose, 'Connecting our communities with a better financial
future', continues to be at the heart of all that we do, guiding
our organisation and shaping our decision-making. The alignment
between the delivery of purpose for our principal stakeholders, our
Members, and the successful delivery of our business model has led
us to say that the Society is 'Powered by Purpose'.
The many challenges in recent months of rising cost of living,
increasing interest rates for borrowers, continued uncertainty at a
global level from the impact of issues such as the war in Ukraine
and climate change have emphasised still further our responsibility
to our Members, our communities, and our wider stakeholders.
We have experienced multiple increases in bank base rate in the
first half of 2023, which in turn has led markets to respond,
driving rapid increases in fixed rate mortgage pricing and an
upward trend in variable rate savings and mortgages. We are mindful
of the need to find a fair, equitable and consistent approach in
balancing increases in variable savings and variable mortgage
rates, for all of our customers, including those who may have
closed products or relatively low balances. We have therefore
continued to increase the rates applied to all our savings
products, not just our headline rates.
We continue to offer good value to borrowers. Our Standard
Variable Rate (SVR) for mortgages at the end of June of 5.19%
against a market average of 7.63%, saving our Members almost
GBP336k in interest payments for the month alone.
We continue to encourage savers and promote positive savings
habits through good value and high quality service. In the first
four months of 2023, we paid an average savings rate 0.64% higher
than the market average equating to GBP27m more interest for our
Members.
Our subsidiary Newcastle Strategic Solutions, which manages
savings accounts for providers across the UK, plays an important
role in providing essential capital for the wider Society through
the profits it generates. It remains one of the region's leading
fintech businesses and has played a pivotal role in bringing new
savings banks to market and supporting their continued growth.
The Solutions business has had another extremely busy period
helping clients respond to the rapidly evolving market conditions,
with focus continuing to be on new product offerings and swifter
routes to market. Funds under management have grown by 4.9% over
the first 6 months of the year as clients and their customers look
to take opportunities to grow their savings books following the
Bank of England rate changes.
As a reflection of the continuing success of the business, it is
encouraging to report that Solutions has signed a new 5 year
contract renewal with one of its key clients and expects to
announce similar renewals through the second half of the year. The
business has a healthy pipeline of new clients with strong interest
in its services from a variety of noteworthy prospects.
As a Member-owned organisation, increasing Member value drives
our plans and growth ambitions. A vital part of that planning is
shaped by Members and I'd like to acknowledge and thank everyone
who takes time to engage with the Society, whether through surveys,
customer feedback or attendance at events.
This feedback includes participation in our satisfaction
surveys, and I'm pleased to report that customer satisfaction
remains high at 95% (2022: 95%). For the seventh consecutive year
we were thrilled to be named Best Regional Building Society at the
What Mortgage Awards, as voted for by What Mortgage readers. This
level of consistent recognition reflects the commitment to customer
service demonstrated at all levels of the organisation.
The input and encouragement we receive is critical in
understanding how we continue to shape the strategy for the benefit
of Members in a way that accurately reflects the views and needs of
our communities.
I was delighted by the interest in the series of Member
engagement events we hosted during the Spring, and grateful that
more than 350 Members took the time to join us to share their
passion for the Society and provide valuable insight as we aim to
deliver on our Purpose. Our 'Connected Communities' Member
discussion portal continues to help provide meaningful feedback,
including insight on savings habits, product needs, customer
understanding and help in shaping our Diversity, Equity and
Inclusion strategy. The community is now 700 members strong and we
celebrated its second birthday by donating GBP2 on behalf of each
member to food poverty charities.
Given the ongoing impact of inflation, energy bills and rising
living costs, one way we provide support to all Members is through
our continued partnership with Citizens Advice Gateshead. The
Helping Hand service provides free, independent and rapid access to
advice and information on a wide range of topics and issues, as
well as emergency financial support for those struggling with the
cost of living.
For mortgage customers coming to the end of a fixed rate period,
the increase in interest rates can be a cause of great concern. We
always encourage customers who are worried about their mortgage
payments to speak to us as soon as possible to discuss the tailored
support we can provide. We were also amongst the first group of
lenders to sign up to the Government's Mortgage Charter, which
provides an additional layer of support and reassurance for people
concerned about their mortgage repayment.
We continue to invest in the Society, bringing new capability
and growing our colleague cohort. Following completion of the legal
and regulatory processes, the merger with Manchester Building
Society was confirmed with a completion date of July 1(st) , which
means the accounts of Manchester Building Society are not
consolidated into these financial statements but will be included
in our full year reporting.
We see the coming together as an opportunity to explore how we
might breathe new life into the Manchester Building Society brand.
We will be inviting Members who were Manchester Building Society
savers and borrowers to tell us about what will be important to
them as we consider any plans for the future of the Manchester
Building Society brand in Greater Manchester and the wider North
West region.
Accessible financial services
The growing pressure on household budgets also increases the
importance of accessible face-to-face financial services, support,
and advice in our communities. At a time when the use of cash has
been growing and people need the quick support and reassurance that
can only be achieved by visiting a branch, it is concerning to see
that banks continue to announce branch closures.
Our commitment to our high streets and the provision of
face-to-face financial services has not waivered and we're leading
innovation in branches through our programme of co-location and our
continued pilot with OneBanx, trialing their multi-bank kiosk in
two of our locations.
The trend for bank branch closures shows little sign of
reversing and continues to damage communities across the UK.
Members have made clear to me how much they value the provision of
accessible in-person financial services and how much they want
their branch to stay.
I'm always happy to reassure Members that our branch network
will remain open for business and remind customers of the
investment we're making to create a modern and sustainable network,
which includes plans to enhance and expand our branch presence.
Providing accessible financial services is not just about
maintaining our presence on high streets and in our communities.
It's vital that we continue to explore news way to improve the
digital experience and make dealing with us as inclusive as
possible, giving Members a choice how to manage their money.
Earlier this year we improved the accessibility of our website by
adding a range of tools, including on-screen reading aids,
customisable styling, as well as live translation and interpreting
features.
The enhancement of the user experience was also top of the
agenda when we proudly hosted a TechNExt fringe event at our Cobalt
Head Office. Supported by Newcastle Strategic Solutions, TechNExt
is a new event on the North East tech and digital calendar,
providing new opportunities for regional collaboration within this
growing sector. Our involvement helps ensure that we remain at the
forefront of fintech innovation for the benefit of our clients and
their customers.
In a period of such economic uncertainty, continuing to provide
access to personalised financial advice remains vitally important,
especially considering the potential implications around the
Personal Savings Allowance, Personal Tax Allowances and the
Inheritance Tax threshold.
Our financial advice subsidiary, Newcastle Financial Advisers
Limited (NFAL), which provides regulated financial advice across
our communities and locations has continued to deliver strong
performance and customer advocacy over the course of the first half
of 2023.
The need and demand for accessible advice, both face to face and
where required via video, remains strong with over 3,400 customer
advice appointments delivered over the first half of the year and
over GBP54m invested on behalf of our customers. The team again
achieved Top Rated firm status from VouchedFor, the UK's leading
review site for financial advisers, for the second year in
succession. We have now received over 1,700 feedback reviews with
an overall rating of 4.8/5. Achieving this recognition requires
excellent customer feedback by continuing to deliver on our purpose
and commitments, and providing real value and benefit to our
customers.
Our role in the region
We see part of our role in the region as providing direct help
for the issues many people face today, such as food poverty,
homelessness, and debt management, whilst helping to find
longer-term answers to the social and economic health of the
region. We can play our part through the creation of employment
opportunities and by helping to address the skills gap that exists
between those looking for work and the requirement of employers,
especially those recruiting more specialised roles. As that skills
gap grows, so do challenges around unemployment, child poverty and
food insecurity, and it is an issue of utmost importance that
employers and education providers must work together to
address.
One of the ways we aim to promote social mobility and accelerate
under-utilised talent in the region is through our skills
partnerships with Newcastle United Foundation and The Prince's
Trust. Through these relationships we're able to unlock employment
opportunities for young people from a range of backgrounds and our
Early Talent programme continues to make good progress on our
ambitions to fill 50% of new entry level roles through
apprenticeships by 2025.
We continue to work with Walking With The Wounded, exploring
opportunities to help veterans and their families access employment
and career development opportunities.
In addition to employability, the grant-giving programme from
the Newcastle Building Society Community Fund at the Community
Foundation continues to focus support on the key themes of food
poverty, debt management, homelessness, and the environment. These
are areas where we feel funding will have the greatest impact in
our communities and in March we announced record support for local
charities with the largest ever single allocation of small grants
from the Newcastle Building Society Community Fund. In all, 27
charities received a total of GBP91,931. We donated GBP179,000 to
the Community Foundation to support the ongoing programme of grant
making from the Newcastle Building Society Community Fund.
We also supported those impacted by the tragic earthquakes in
Syria and Turkey, with a donation of GBP20,000 to the Disasters
Emergency Committee, helping to provide urgent aid to DEC
charities.
Another way we support our communities is through colleague
volunteering and it has been rewarding to see the variety of
volunteering opportunities that colleagues have undertaken so far
this year. Since January, more than 650 days have been spent
volunteering, including conservation, sports coaching, fundraising,
and trusteeships.
In the first half of 2023, we continued to work on actions
aligned with our climate ambitions and targets, so that we can make
the biggest impact for our Members whilst improving the carbon
footprint of our business. One of our early successes has been the
creation of a Carbon Literacy Programme, which is designed to
upskill and educate colleagues so that critical business areas have
a clearer understanding of types of changes they can make to
contribute to the bigger goals.
Six colleagues have completed Carbon Literacy training and are
now accredited trainers, and we plan to roll out training over the
coming months to more colleagues. Our Internal Environment
Taskforce has grown in numbers over the last six months, focused on
driving operational change. In June we hosted our first Earth Week,
a week-long series of activities for colleagues to increase
awareness and knowledge around the impact that climate change has
both globally and from a personal perspective.
Although our Cobalt Head Office is powered by 100% hydro
renewable electricity, we are actively exploring additional options
to further reduce our carbon footprint, such as switching our fleet
of vehicles to electric, and how we can continue to improve the
energy efficiency of our working environments.
A great place to work
As the organisation continues to grow, so does our investment in
colleagues and the colleague experience as we aim to make the
Society a great place to work. Since the start of 2023, the total
number of colleagues has increased from just under 1,500 to over
1,630. A further 44 colleagues joined from Manchester following the
merger on July 1(st) .
With such growth in colleague numbers, we were pleased to
receive re-accreditation as Investors in People Platinum, which
demonstrates our investment in colleagues and their opportunities
to develop meaningful careers. The Society is one of a handful of
employers with Platinum status, which has only been awarded to the
top 6% of firms assessed under the scheme and was first received by
the Society in 2020.
In February we joined nearly 1,000 other employers in the UK by
signing up to the Race at Work Charter, which makes visible our
commitment to improve equal opportunities for people from
ethnically diverse backgrounds. This follows our decision in 2020
to adopt the Women in Finance Charter, which has already helped
deliver positive impact across our business. In March we marked
International Women's Day with a series of events through our Women
in Leadership Network, helping to recognise the progress we've made
and highlighting our plans and ambitions to do much more.
Another colleague-led network which has helped the organisation
move forward this year is the LGBTQ+ Network, supporting colleagues
and helping to create an inclusive work environment. This includes
our biggest-ever programme of activity in celebration of Pride.
In addition to helping Members, the Helping Hand service
delivered by Citizens Advice Gateshead is also available for
colleagues who need additional support, and we're a proud real
Living Wage employer. Our employee net promoter score (eNPS) which
measures how likely our colleagues are to recommend the Society as
a place to work has increased from +58 at the end of 2022 to +63 at
the end of June 2023, putting us in the top 5% of the finance
sector of our provider's client database.
Summary
In a challenging period, the Society has performed well and
continued to deliver for Members and our communities. Our growing
business remains resilient and we have demonstrated the positive
difference we can make for all our stakeholders. Despite the
uncertain economic outlook, we are well positioned to meet our
further growth ambitions and look forward to continued progress in
the second half of the year.
Finally, I'd like to thank Members for their ongoing input and
encouragement, as well as each and every colleague for their hard
work and continued commitment to the Group and the delivery of our
Purpose.
Andrew Haigh
Chief Executive
1 August 2023
Business review
Our financial performance
Newcastle Building Society is the largest building society based
in the North East of England with assets of GBP5.9 billion (2022:
GBP5.3 billion). Profitability is one of the key performance
measures the Board monitors closely. The Society seeks to make
sufficient profit in order to invest in and grow the business for
the benefit of its current and future Members.
Summary Group Income Statement Unaudited Unaudited Audited
6 months to 6 months to 12 months to
30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
------------ ------------ -------------
Net interest income 40.1 35.4 75.4
Other income and charges 25.0 21.9 45.4
Fair value gains less losses 3.2 (3.4) (1.1)
------------ ------------ -------------
Total operating income 68.3 53.9 119.7
Administration expenses and depreciation (50.5) (40.0) (89.2)
------------ ------------ -------------
Operating profit before impairments and provisions 17.8 13.9 30.5
Impairments and provisions (charges) / reversals (1.6) 0.3 1.2
Profit before taxation 16.2 14.2 31.7
------------ ------------ -------------
The Group's 2023 half yearly financial results demonstrate the
core strength of the Group's underlying operating model. Group
profit before taxation was GBP16.2m for the six months ended 30
June 2023 compared to GBP14.2m for the first half of 2022.
Operating profit before impairment and provisions is considered
an important reflection of the operating strength of the Group's
business and increased by GBP3.9m to GBP17.8m from GBP13.9m at half
year 2022.
The Board reviewed and was satisfied that the alternative
performance measure of underlying operating profit, which is
reported alongside the operating profit before impairment and
provisions measure, gives a clearer view of the underlying
performance of the business for our Members.
Underlying operating profit of the Group is determined by
removing income or expenses arising from events or transactions
distinct from the core activities of the Group which do not
represent the Group's true performance. The following table
provides a reconciliation of operating profit before impairment and
provisions to underlying operating profits:
Underlying Operating Profit 30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
---------- ---------- ----------
Operating profit before impairment and provisions 17.8 13.9 30.5
(Gains) / loss in fair value of equity release mortgages (3.0) 0.5 2.2
Hedge ineffectiveness on accounting hedges 0.3 (2.1) (8.8)
Revaluation of investments (0.1) 2.0 2.1
Gains crystallised on sale of assets - (0.1) (0.1)
Transactional costs 1.1 - 0.8
Gains on loan modifications (1.1) - -
---------- ---------- ----------
Underlying operating profit 15.0 14.2 26.7
---------- ---------- ----------
Underlying operating profit before impairment and provisions for
the six months to 30 June 2023 was GBP15.0m (30 June 2022:
GBP14.2m, 31 December 2022 GBP26.7m), a reduction of GBP2.8m to
reported operating profit before impairment and provisions (30 June
2022: increase of GBP0.3m). The key non-underlying adjustments in
the half year include the gains in the fair value of the equity
release mortgage book of GBP3.0m (Half year 2022: loss of GBP0.5m),
gains on loan modifications of GBP1.1m (Half year 2022: GBPnil) and
GBP1.1m in merger related transactions costs (Half year 2022:
GBPnil).
Segmental information is available in note 9 and details the
Member business and Solutions business segments.
Net interest income
Net interest income was GBP40.1m (Half year 2022: GBP35.4m, 31
December 2022: GBP75.4m) and our net interest margin remained
unchanged at 1.45% at 30 June 2023 (30 June 2022: 1.45% and 31
December 2022: 1.48%). The increase in net interest income was thus
driven by the growth of the Society's lending book.
The impact of changing rates on the Society is mitigated by
hedging our exposure to interest rate risks using interest rate
swaps. This significantly reduces the impact of changes in market
interest rates on net interest income, ensuring that existing
lending remains profitable when interest rates rise.
Interest rate swaps are held at fair value and therefore the
value of the swap changes when market interest rates move. As a
result of changing interest rates, net derivative values of the
interest rate swaps have increased by GBP48.4m in the 6 months
period to June 2023. This was largely offset by reductions in the
Society's hedge adjustments and the value of mortgages held at fair
value, resulting in a net gain of GBP2.7m. Additional information
on derivative and fair value movements is provided in notes 10 and
11 to the financial information.
Other income and charges
Other income and charges, which includes income from Newcastle
Strategic Solutions and Newcastle Financial Advisers, were GBP25.0m
for the six months ended 30 June 2023 compared to GBP21.9m for the
first half of 2022. Newcastle Strategic Solutions continued to see
growth in its underlying business in the first half of 2023 as
balances under management continue to increase and existing clients
are adding new services to their savings proposition. Newcastle
Financial Advisers delivered a strong performance over the first
half of the year with regulated sales and funds invested both
outperforming original targets.
Administration expenses and depreciation
Administration expenses and depreciation increased by GBP10.5m
from GBP40.0m in half year 2022 to GBP50.5m at the end of June
2023. Both increases related to the investment in colleagues and IT
infrastructure and are in line with expectations. 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 reduced to
73.9% for the half year to June 2023 (30 June 2022: 74.2%, 31
December 2022: 75.0%).
Impairments and provisions
Impairment charges on loans and advances to customers were
GBP1.1m for the half year to June 2023 (30 June 2022: write-back of
GBP0.5m, 31 December 2022: write-back of GBP1.6m). During 2023, we
have seen further commercial redemptions which have reduced
provisions in respect to our legacy books by GBP0.7m since December
2022. Provisions against residential and buy to let mortgages have
increased in 2023 as a result of the macro economic environment.
The fall in UK house prices and the on-going cost of living
pressure in the UK are key drivers in the increase in provisions on
residential and buy to let mortgages of GBP1.5m during the 6 months
to June 2023, alongside the growth of the mortgage book. The
write-back in 2022 relates primarily to the legacy book following
continuation of our strategy to wind down the book whilst
provisions on residential and buy to let mortgages remained flat.
Other provisions increased by GBP0.5m (30 June 2022: GBP0.2m, 31
December 2022: GBP0.4m) during the period.
Balance Sheet
A consolidated balance sheet is set out below with key balance
sheet items discussed in further detail within this report.
Summary Balance sheet Unaudited Unaudited Audited
30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
---------- ---------- ----------
Assets
Liquid assets 1,144.1 950.9 959.7
Derivatives and hedged risk adjustments 43.9 53.3 29.5
Loans and advances to customers 4,619.5 3,870.5 4,259.5
Other assets 63.0 64.3 63.8
---------- ---------- ----------
Total assets 5,870.5 4,939.0 5,312.5
---------- ---------- ----------
Liabilities
Shares 4,678.8 3,908.6 4,220.8
Deposits and debt securities 846.2 665.0 752.9
Derivatives and hedged risk adjustments 42.0 91.0 52.8
Other liabilities 16.8 18.8 20.1
Capital and reserves 286.7 255.6 265.9
---------- ---------- ----------
Total liabilities and equity 5,870.5 4,939.0 5,312.5
---------- ---------- ----------
Liquid assets
We continue to manage our liquidity levels efficiently and
comfortably within our regulatory limits. 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.
Liquid assets as a percentage of Shares, Deposits and
Liabilities at 30 June 2023 were 20.7% (30 Jun 2022: 20.8%, 31
December 2022: 19.3%). 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 2023 was 191% (30 Jun
2022: 222%, 31 December 2022: 189%), comfortably in excess of the
minimum regulatory limit of 100%.
Shares, deposits and debt securities
The Society is predominantly funded by retail savings with
wholesale funding used to provide a diversified funding source. The
Society manages its funding levels, mix and duration carefully to
ensure it has the required resources in place to meet its liquidity
and lending targets.
Retail savings balances increased by GBP458m during the first
half of 2023 to GBP4.7bn (31 December 2022: GBP4.2bn). Wholesale
funding, including drawdown on Bank of England Funding Schemes,
increased by GBP93m during the first half of the year to GBP846m
(31 December 2022: GBP753m).
The ratio of shares and deposits to wholesale balances has moved
to 85%/15% at 30 June 2023, from 85%/15% and 83%/17% at December
2022 and June 2022 respectively. Insured deposits (balances that
are covered by the Financial Services Compensation Scheme) make up
94% of the Society's retail savings as at 30 June 23 (31 December
2022: 94%).
The Society currently utilises the Bank of England term funding
scheme which is due to be repaid in 2024, and the Society has
sufficient funding available to replace those funds when they fall
due. The scheme makes up 72% (December 2022: 75%) of the wholesale
funding mix with the remainder being made up with unsecured
wholesale funding and funding collateral.
Loans and advances to customers
The net increase in loans and advances to customers after
provisions was GBP360m for the first half of the year, which
includes a GBP45m reduction in our exposure to the legacy lending
book (Half year 2022: GBP52m), resulting in loans and advances to
customers of GBP4.6bn at 30 June 2023 (31 December 2022: GBP4.3bn).
Gross lending for the first half of the year was GBP660m (Half year
2022: GBP448m). The Society's core residential mortgage book grew
by GBP408m during the first half of 2023 (Half year 2022:
GBP181m).
Credit risk
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 significant change
in credit risk outcomes.
The percentage of mortgages in arrears by 3 months or more
remain at low levels at 0.37% (0.38%: 30 June 2022 and 0.35%: 31
December 2022). There were no properties in possession at the half
year ended 30 June 2023 (30 June 2022 and 31December 2022:
Nil).
Capital
Due to continued strong profitability, total capital resource
increased from GBP259.3m to GBP272.0m in the 6 months to 30 June
2023. In the same period, risk weighted assets increased from
GBP1,910m to GBP2,034m primarily as a result of strong net
lending.
As a result, capital ratios decreased slightly but remained at a
robust level, well in excess of regulatory limits. The merger with
Manchester Building Society on 1 July 2023 had an overall positive
effect on capital ratios.
Total Capital Ratio (Solvency) was 13.4% as at 31 June 2023 (31
December 2022: 13.6%) and Common Equity Tier 1 ratio 12.4% (31
December 2022: 12.5%). The regulatory minimum is 8.0% and 4.5% for
Total Capital Ratio and Common Equity Tier 1 Ratio respectively.
The Society's Basel III leverage ratio (transitional basis) was
4.3% at 30 June 2023 including central bank exposures and 4.8%
excluding central bank exposures (31 December 2022: 4.5% and 4.8%
respectively). The PRA expects UK firms to maintain their leverage
ratio above 3.25%.
In late 2022, the PRA published draft rules for the UK's Basel
3.1 implementation, which resulted in a significant change in how
capital requirements for larger banks and building societies will
be determined from 2025 onwards compared to the current framework.
Based on preliminary work, the Society's capital requirements would
reduce slightly under the Basel 3.1 framework, improving the
Society's capital ratios and headroom to regulatory requirements.
However, the Society will be in scope of the Strong and Simple
framework, a new regulatory framework for smaller firms. The
capital rules for Strong and Simple have not yet been published,
but are expected to be similar to the Basel 3.1 rules. Based on
current regulatory communications, the Society would be able to opt
out of the Strong and Simple framework and adopt Basel 3.1 instead
if this was considered to be overall advantageous.
Key performance indicators
The Board regards key performance indicators (KPIs) as an
important way of monitoring achievement of short-term objectives
and progress against the strategic plan. The KPIs that are reported
to the Board on a monthly basis are detailed below and are
consistent with the prior year.
Please refer to the Strategic Report in the 2022 Annual Report
and Accounts for further details on our Key Performance
Indicators.
Key performance indicators 6 months to 6 months to 12 months to
30 Jun 23 30 Jun 22 31 Dec 22
------------ ------------ -------------
Financial
Sustainable business
Profit before taxation GBP16.2m GBP14.2m GBP31.7m
------------ ------------ -------------
Operating profit before impairment and provisions GBP17.8m GBP13.9m GBP30.5m
------------ ------------ -------------
Underlying operating profit GBP15.0m GBP14.2m GBP26.7m
------------ ------------ -------------
Common Equity Tier 1 ratio 12.4% 13.3% 12.5%
------------ ------------ -------------
Leverage ratio 4.3% 4.5% 4.5%
------------ ------------ -------------
Liquidity coverage ratio 191% 222% 189%
------------ ------------ -------------
Efficiency
Cost to income ratio 74% 74% 75%
------------ ------------ -------------
Lending and saving
Net interest margin 1.45% 1.45% 1.48%
------------ ------------ -------------
Lending
Gross mortgage lending GBP660m GBP448m GBP1,137m
------------ ------------ -------------
Net core residential lending GBP408m GBP181m GBP586m
------------ ------------ -------------
Savings
Savings balances GBP4,679m GBP3,908m GBP4,221m
------------ ------------ -------------
Non-financial measures
Service quality and customer experience
Customer satisfaction 95% 96% 95%
------------ ------------ -------------
Customer engagement score (NPS) +81 +81 +82
------------ ------------ -------------
People, leadership and culture
Colleague turnover 12.9% 16.3% 13.2%
------------ ------------ -------------
Colleague engagement score (eNPS) +63 +52 +58
------------ ------------ -------------
Principal risks and uncertainties
The principal risks and uncertainties faced by the Group are
detailed below. A more detailed explanation of the risks below and
how the Group seeks to mitigate them can be found in the Risk
Management report of the 2022 Annual Report and Accounts.
Category Definition
Capital risk Capital risk is the risk that the Society is or becomes inadequately
capitalised to address
the risks to which it is exposed.
--------------------------------------------------------------------------------
Climate change risk (Emerging risk) Climate change risk recognises the risk associated with adverse climate change
and the impact
on the Group's operations, the impact on borrowers and the decrease in the
value of security
in support of mortgage lending. Climate risk is similarly relevant to
Solutions' clients,
and the Group may be impacted by their exposure. The most tangible financial
risk to the Group
from climate change relates to flooding risk in respect to properties held as
securities for
mortgage loans, and it has therefore been included in the credit risk section.
--------------------------------------------------------------------------------
Conduct risk Conduct risk is the risk of customer detriment arising from the Society's
activities. It is
an operational risk particularly significant to the Society. Examples include
products that
do not perform as customers expected them to, or products being sold to
customers for whom
they are not suitable. Conduct risk and operational risk are closely aligned
where the operational
risk results in customer detriment (e.g. a failure to protect customer data is
an operational
risk which may result in customer detriment).
--------------------------------------------------------------------------------
Credit risk: residential Retail borrowers do not repay the Society and the Society's collateral is
insufficient to
meet the debt obligations. The risk is sensitive to unemployment rates, house
prices, interest
rates and the application of underlying assumptions and data within our credit
loss modelling.
--------------------------------------------------------------------------------
Credit risk: commercial Commercial borrowers do not repay the Society and the Society's collateral is
insufficient
to meet the debt obligations. The risk is sensitive to economic conditions that
can impact
the viability of tenants and commercial real estate values.
--------------------------------------------------------------------------------
Interest rate risk Interest rate risk is the risk that the value of the Society's net assets or
net interest
income falls as a result of a change in interest rates. Basis risk is the risk
that net interest
income falls because of a change in the relationship between two market rates.
--------------------------------------------------------------------------------
Investment credit risk Wholesale counterparties the Society lends to default, or the value of the
investment falls
and the Society is obliged to crystallise that fall in value. This risk arises
in relation
to the treasury investments made by the Group in order to meet liquidity
requirements. The
risk is sensitive to market volatility and credit spreads (both general credit
spreads and
name specific credit spreads).
--------------------------------------------------------------------------------
Liquidity risk Liquidity risk is the risk of loss or failure caused by the Group being unable
to meet its
liabilities or commitments as they fall due, or only being able to do so at
excessive cost.
--------------------------------------------------------------------------------
Macro-economic risk Macro-economic risk is the risk that a deterioration of the economic
environment in the UK
could negatively impact the Group's operations and performance. This includes
the impact of
increased risks, such as credit risk, and market risk (e.g margin compression).
There is a
risk of adverse impact on consumer demand and behaviour. The overall
macro-economic risk gives
rise to uncertainty and reduces the predictability of outcomes. This risk
applies to both
the Society and the services provided to our Newcastle Strategic Solutions
Limited clients
who may also be impacted.
--------------------------------------------------------------------------------
Operational risk Operational risk is the risk of loss, resulting from inadequate or failed
internal processes,
people and systems, or from external events. For the Group this definition
includes legal
risk, strategic risk and reputational risk.
--------------------------------------------------------------------------------
Pension fund obligation risk The Group has funding obligations for a defined benefit scheme, which is closed
to new entrants.
It was closed to future benefit accrual with effect from 30 November 2010.
Pension fund obligation
risk is the risk that the value of the Scheme's assets, together with any
agreed employer
contributions, will be insufficient to cover the projected obligations of the
Scheme over
time. The return on assets, which includes equities and bonds, will vary with
movements in
equity prices and interest rates.
--------------------------------------------------------------------------------
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 23 30 Jun 22 31 Dec 22
Note GBPm GBPm GBPm
Interest receivable and similar income 7 108.0 54.4 130.8
Interest payable and similar charges (67.9) (19.0) (55.4)
------------ ------------ -------------
Net interest income 40.1 35.4 75.4
Other income and charges 25.0 21.9 45.4
Fair value gains less losses on financial instruments and hedge
accounting 10 3.2 (3.4) (1.1)
------------ ------------ -------------
Total operating income 68.3 53.9 119.7
Administrative expenses (47.5) (37.3) (83.5)
Depreciation and amortisation (3.0) (2.7) (5.7)
Operating profit before impairments and provisions 17.8 13.9 30.5
Impairment (charges) / reversals on loans and advances to customers (1.1) 0.5 1.6
Impairment charges on tangible and intangible assets (0.1) - (0.3)
Provisions for liabilities and charges (0.4) (0.2) (0.1)
------------ ------------ -------------
Profit before taxation 16.2 14.2 31.7
Taxation expense 5 (3.9) (1.7) (5.7)
------------ ------------ -------------
Profit after taxation for the financial period 12.3 12.5 26.0
------------ ------------ -------------
The notes on pages 18 to 33 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 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
Profit for the period 12.3 12.5 26.0
------------ ------------ -------------
Other comprehensive income / (expense)
Items that may be reclassified to income statement
Cash flow hedges
Fair value movements recognised in equity 10.3 - (3.7)
Amounts transferred to income statement 0.3 - 0.1
Tax on net amounts recognised in equity (2.7) - 0.9
Financial assets measured at fair value through other comprehensive income
Fair value movements recognised in equity 0.8 (1.3) (2.1)
Amounts transferred to income statement - - 0.1
Income tax on items that may be reclassified to income statement (0.2) 0.3 0.5
------------ ------------ -------------
Total items that may be reclassified to income statement 8.5 (1.0) (4.2)
------------ ------------ -------------
Total other comprehensive income / (expense) 8.5 (1.0) (4.2)
------------ ------------ -------------
Total comprehensive income for the financial period 20.8 11.5 21.8
------------ ------------ -------------
The notes on pages 18 to 33 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 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
ASSETS
Liquid assets 1,144.1 950.9 959.7
Derivative financial instruments 128.6 50.3 90.4
Loans and advances to customers 4,619.5 3,870.5 4,259.5
Fair value adjustments for hedged risk (84.7) 3.0 (60.9)
Property, plant and equipment 27.9 30.9 29.1
Intangible assets 11.8 8.6 10.2
Other assets 23.3 24.8 24.5
---------- ---------- ----------
TOTAL ASSETS 5,870.5 4,939.0 5,312.5
---------- ---------- ----------
Unaudited Unaudited Audited
30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
LIABILITIES AND EQUITY
Shares 4,678.8 3,908.6 4,220.8
Fair value adjustments for hedged risk (0.3) - 0.3
Deposits and debt securities 846.2 665.0 752.9
Derivative financial instruments 42.3 91.0 52.5
Other liabilities 16.8 18.8 20.1
Subscribed capital 20.0 20.0 20.0
Reserves 266.7 235.6 245.9
---------- ---------- ----------
TOTAL LIABILITIES AND EQUITY 5,870.5 4,939.0 5,312.5
---------- ---------- ----------
The notes on pages 18 to 33 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
2023 (Unaudited)
Fair Value through Other Cash flow Hedge Reserve Total
General reserve Comprehensive Income
GBPm GBPm GBPm GBPm
At 1 January 2023 248.2 0.4 (2.7) 245.9
Reclassification* 0.4 (0.4) - -
Profit for the period 12.3 - - 12.3
Net movement in fair value
through other comprehensive
income - 0.6 - 0.6
Net movement in cash flow
hedge reserve - - 7.9 7.9
------------------ ------------------------------- ------------------------ ------
At 30 June 2023 260.9 0.6 5.2 266.7
------------------ ------------------------------- ------------------------ ------
*The reclassification relates to historic tax amounts which have been previously realised
in the income statement.
For the 6 months ended 30 June
2022 (Unaudited)
General reserve Fair Value through Other Cash flow Hedge Reserve Total
Comprehensive Income
GBPm 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)
Net movement in cash flow - - - -
hedge reserve
------------------ ------------------------------- ------------------------ ------
At 30 June 2022 234.7 0.9 - 235.6
------------------ ------------------------------- ------------------------ ------
For the year ended 31 December
2022 (Audited)
General reserve Fair Value through Other Cash flow Hedge Reserve Total
Comprehensive Income
GBPm GBPm GBPm GBPm
At 1 January 2022 222.2 1.9 - 224.1
Profit for the period 26.0 - - 26.0
Net movement in fair value
through other comprehensive
income - (1.5) - (1.5)
Net movement in cash flow
hedge reserve - - (2.7) (2.7)
------------------ ------------------------------- ------------------------ ------
At 31 December 2022 248.2 0.4 (2.7) 245.9
------------------ ------------------------------- ------------------------ ------
The notes on pages 18 to 33 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 to 6 months to 12 months to
Note 30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
Net cash flows from operating activities 15 195.0 92.4 102.6
Corporation tax paid (4.0) (2.5) (4.6)
Cash inflows from operating activities 191.0 89.9 98.0
------------ ------------ -------------
Purchases of property, plant and equipment (1.2) (1.8) (2.1)
Purchase of intangible assets (2.9) (2.1) (5.0)
Sales of property, plant and equipment - 2.4 2.4
Purchase of equity investments - - (0.3)
Purchase of investment securities (132.1) (147.9) (275.1)
Sale and maturity of investment securities 165.2 50.0 229.8
------------ ------------ -------------
Net cash inflows / (outflows) from investing activities 29.0 (99.4) (50.3)
------------ ------------ -------------
Interest paid on subscribed capital (1.2) (1.2) (2.3)
Capital payment for finance lease arrangements (0.6) (0.6) (1.1)
------------ ------------ -------------
Net cash outflows from financing activities (1.8) (1.8) (3.4)
------------ ------------ -------------
Net increase / (decrease) in cash and cash equivalents 218.2 (11.3) 44.3
Cash and cash equivalents at the start of period 15 439.3 395.0 395.0
------------ ------------ -------------
Cash and cash equivalents at the end of the period 15 657.5 383.7 439.3
------------ ------------ -------------
The notes on pages 18 to 33 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
2022 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 2022, 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 2023 and the 6 months to 30 June 2022 is unaudited.
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 2023 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 2022, 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 including different possible scenarios based on possible
internal and external developments and arising risks. Together with
regular stress testing, the Group's forecasts show that the Group
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 Group 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 2022, as described in those financial statements except
for Insurance Contracts. The Group's equity release mortgage assets
were accounted for under IFRS 4, Insurance Contracts which was
replaced by IFRS 17, Insurance Contracts on 1 January 2023.
On transition to IFRS 17, the Group had a choice to transition
to IFRS 17 or re-designate assets under IFRS 9. The Society has
re-designated its equity release mortgage assets as held at fair
value through profit and loss (FVTPL) under IFRS 9, this has not
led to any changes in the carrying amounts of those assets.
For these assets the contractual cash flows are not solely
payments of principal and interest and are therefore classified as
fair value through profit and loss. Assets classified as fair value
through profit and loss are initially recognized at fair value with
any subsequent changes in fair value recognized immediately in the
Income Statement.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
The fair value is the present value of the forecast portfolio
cash flows less the value of the no-negative equity guarantee,
which is calculated using an option pricing model, discounted using
a suitable market rate at the reporting date. Where possible inputs
are market driven or when no market driven data is available, based
on management judgement informed by observable data to the extent
possible. Interest on equity release mortgages is recognised in
accordance with the effective interest rate method, based on
contractual interest rates. Included in the equity release mortgage
assets is a fixed reversion book. For this book, the repayment
amount is determined at completion, but the timing of redemption is
uncertain. Interest on fixed reversion loans is recognized based on
the interest rate implicit in the mortgage contract. Please see
note 12, Equity release mortgages for details.
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,
Equity release mortgages.
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 13, Credit
risk.
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 20,
Retirement benefit obligations 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 2022 Annual Report and Accounts.
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 13, Credit risk for details.
Securitised assets
The mortgage assets sold to the Group's securitisation vehicle
in December 2021 have not been de-recognised from the Society's
balance sheet. As the Society continues to be exposed to the risks
and rewards of cash flows associated with the mortgages, they do
not meet the criteria for de-recognition.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
5. Taxation
The effective tax rate for the six months ended 30 June 2023 was
23.5% (six months ended June 2022: 19%, year ended 31 December
2022: 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.
6. Related Party Transactions
During the 6 months to 30 June 2023 the Society purchased
GBP7.9m 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 2022, GBP6.1m was
procured from NSSL). The Society received GBP5.5m from NSSL in the
6 months to 30 June 2023 for the provision of Financial and
Administrative Services. (This compares to GBP5.2m from NSSL for
the same period in 2022).
7. Interest receivable and similar income
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
Interest income on assets held at amortised cost 87.6 50.7 116.6
Interest income on assets held at fair value through profit or loss 5.2 5.6 11.1
Net income/(expense) on derivatives used for hedging purposes 15.2 (1.9) 3.1
------------ ------------ -------------
Total interest receivable and similar income 108.0 54.4 130.8
------------ ------------ -------------
8. 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 to 6 months to 12 months to
30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
Revenue from contracts with customers
Solutions business:
Savings management services 19.6 17.1 35.4
Savings management project and change services 0.3 0.5 0.9
IT services 0.4 0.3 0.7
Member business:
Regulated advice services 3.1 3.0 6.1
Third party services 1.0 0.7 1.4
Other services 0.1 - 0.1
Total revenue from contracts with customers 24.5 21.6 44.6
------------ ------------ -------------
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
9. 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.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
6 months to 30 June 2023 - Unaudited Member Solutions
Business Business Total
GBPm GBPm GBPm
Net interest income / (expense) 40.8 (0.7) 40.1
Other income and (charges) (3.6) 28.6 25.0
Fair value gains less losses on financial instruments and hedge accounting 3.2 - 3.2
Administrative expenses (22.2) (25.3) (47.5)
Depreciation and amortisation (1.1) (1.9) (3.0)
--------- ---------- -------
Operating profit before impairments and provisions 17.1 0.7 17.8
Impairment charges on loans and advances to customers (1.1) - (1.1)
Provisions for liabilities and charges (0.2) (0.2) (0.4)
15.8 0.5 16.3
Impairment charges on tangible and intangible assets (0.1)
Profit before taxation 16.2
Taxation expense (3.9)
-------
Profit after taxation for the financial period 12.3
-------
6 months to 30 June 2022 - Unaudited Member Solutions
Business Business Total
GBPm GBPm GBPm
Net interest income / (expense) 35.9 (0.5) 35.4
Other income and (charges) (2.2) 24.1 21.9
Fair value gains less losses on financial instruments and hedge accounting (3.4) - (3.4)
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
-------
Year to 31 December 2022 - Audited Member Solutions
Business Business Total
GBPm GBPm GBPm
Net interest income / (expense) 76.4 (1.0) 75.4
Other income and (charges) (5.3) 50.7 45.4
Fair value gains less losses on financial instruments and hedge accounting (1.1) - (1.1)
Administrative expenses (38.3) (45.2) (83.5)
Depreciation and amortisation (2.4) (3.3) (5.7)
--------- ---------- -------
Operating profit before impairments and provisions 29.3 1.2 30.5
Impairment reversals on loans and advances to customers 1.6 - 1.6
Provisions for liabilities and charges - (0.1) (0.1)
30.9 1.1 32.0
Impairment charges on tangible and intangible assets (0.3)
-------
Profit before taxation 31.7
Taxation expense (5.7)
Profit after taxation for the financial period 26.0
-------
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
10. Fair value gains less losses on financial instruments and
hedge accounting
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
Fair value movement on loans and advances to customers held at fair value
through profit and
loss (4.8) (31.5) (57.8)
Fair value movement on derivatives financial instruments in economic but
not in accounting
hedge relationships 7.8 31.0 60.1
------------ ------------ -------------
Economically offsetting fair value movements 3.0 (0.5) 2.3
Interest expense on derivatives in economic but not accounting hedge
relationships (0.7) (3.1) (5.6)
Amounts recycled to profit and loss from cashflow hedges (0.3) - (0.1)
Fair value movement on equity instruments 0.1 (1.9) (2.1)
Fair value movement on loan modification 1.1 - -
Gains crystallised on sale of assets held at fair value through other
comprehensive income - - 0.1
Hedge ineffectiveness on accounting hedges - 2.1 4.3
Fair value gains less losses on financial instruments and hedge accounting 3.2 (3.4) (1.1)
------------ ------------ -------------
11. 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 2023.
Level Unaudited Unaudited Audited
30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
Financial assets
Debt securities - Fair value through other comprehensive income 1 400.8 488.0 433.0
Equity investments 1 0.2 0.1 0.1
Derivative financial instruments 2 128.6 50.3 90.4
Fair value adjustments for hedged risk 2 (84.7) 3.0 (60.9)
Equity investments 3 2.1 1.9 2.0
Loans and advances to customers held at fair value 3 157.8 198.1 166.3
Financial liabilities
Derivative financial instruments 2 42.3 91.0 52.5
Fair value adjustments for hedged risk 2 (0.3) - 0.3
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).
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Loans and advances to customers 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 based on interest rates for new equity release
mortgages available at the balance sheet date, adjusted for the
specific characteristics of the Society's portfolio.
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 price growth Analysis of historic long term property price growth
Property price volatility Analysis of historic property price volatility and third party research
At 30 June 2023 the fair value of the mortgage assets held at
fair value was GBP157.8m (Dec 2022: GBP166.3m). 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 +/-1.0% (9.4) / 10.6
Long term property price growth +/-2.0% 3.8 / (2.5)
Sales discount on collateral +/-2.5% (0.7) / 0.7
Property price volatility +/-3.0% (3.0) / 3.0
The following table provides a reconciliation of the equity
release portfolio's opening and closing fair value.
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
As at 1 January 166.3 232.6 232.6
Interest accrued 4.8 5.6 11.1
Redemptions (8.5) (8.6) (19.6)
Changes in property price assumptions - recorded in profit and loss 1.1 - (2.0)
Changes in discount rate - recorded in profit and loss (5.9) (31.5) (55.8)
As at 30 June / 31 December 157.8 198.1 166.3
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Equity investments
The fair value of the Group's investment in Openwork units is
calculated using a model which discounts the future expected cash
flows from the investment. These cash flows relate primarily to the
dividends receivable by the Group. These dividends are then
discounted to their present value, using a discount rate that
estimates the underlying risks associated with an unlisted equity
instrument. The valuation uses a number of inputs which require
estimation, such as future dividend payout ratios, discount rates,
long term dividend growth and the underlying businesses
performance, these estimates are made using listed peers as a
benchmark and other publicly available information.
At 30 June 2023 the fair value of the investments held at fair
value was GBP2.1m (December 2022: GBP2.0m). The sensitivity of this
value to the estimates shown above is as follows:
30 Jun 2023
Assumption Change in assumption (Decrease) / Increase in fair value
GBPm
Discount rate +/- 1% (0.2) / 0.2
Long term dividend growth rate +/- 2% 0.4 / (0.3)
The following table provides a reconciliation of the level 3
Equity investments opening and closing fair value:
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
30 Jun 23 30 Jun 22 31 Dec 22
GBPm GBPm GBPm
As at 1 January 2.0 - -
Transferred to / (from) Level 3 - 3.7 3.7
Units acquired - 0.3 0.3
Changes in fair value recorded in profit and loss 0.1 (2.1) (2.0)
As at June/December 2.1 1.9 2.0
12. Equity release mortgages
The gross mortgage balances and fair value uplift relating to
the equity release mortgage portfolio are as follows:
Unaudited Unaudited Audited
30 Jun 2023 30 Jun 2022 31 Dec 2022
GBPm GBPm GBPm
Gross mortgage balances 156.9 166.1 160.6
Fair value uplift 0.9 32.0 5.7
------------ ------------ ------------
Fair value presented on Balance Sheet 157.8 198.1 166.3
------------ ------------ ------------
The gross mortgage balances above reflect the Group's maximum
pre-collateral exposure to credit risk at the balance sheet date.
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.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
The fair value uplift has reduced by GBP4.8m during the six
month period to 30 June 2023. The main source of the change in fair
value was a change in market interest rates, which increased by
0.6%. 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 GBP7.8m, resulting in
a net movement of GBP3.0m in the period (see also note 10, Fair
value gains less losses on financial instruments and hedge
accounting).
13. Credit risk
Loans and advances to customers consist of the following
balances:
Unaudited Unaudited Audited
Product 30 Jun 2023 30 Jun 2022 31 Dec 2022
GBPm GBPm GBPm
Prime residential 3,795.2 2,955.3 3,377.5
Buy to let 385.6 387.8 396.3
Legacy books:
Legacy buy to let 9.7 23.5 14.0
Commercial 8.4 11.9 10.6
Housing association 253.8 282.7 283.3
Serviced apartments 15.3 17.2 16.6
Policy loans 1.4 1.5 1.5
Equity release mortgages 157.8 198.1 166.3
Provisions (7.7) (7.5) (6.6)
------------ ------------ ------------
Total 4,619.5 3,870.5 4,259.5
------------ ------------ ------------
Loans and advances to customers are accounted for under IFRS 9:
Financial Instruments. This note provides an overview of changes in
credit risk since December 2022 for all books held at amortised
cost.
In line with the trend from the previous year, the Society
continues to grow its prime residential lending, and, in line with
our risk appetite, we continue to see an increase in higher LTV
lending as we optimise our portfolio. The changes in economic
assumptions used to model expected credit losses in addition to
these factors have resulted in an increase in the provision held
against residential lending.
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 2022 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 2022 accounts. However, scenarios have been updated to
reflect the current economic outlook. A summary of each of the
macroeconomic scenarios is as follows:
-- Base scenario - uses as a reference the average HM Treasury
short term forecast for the UK economy over the first two years and
then the Medium term forecasts for 2024 onwards.
-- Upside scenario - uses as a reference the most positive HM
Treasury short and medium term forecasts for the UK economy.
-- Downside scenario - uses the most negative short and medium term HM Treasury forecasts.
-- Stress scenario - uses guidance issued by the Bank of England for stress testing purposes.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
The following table summarises the HPI and unemployment
assumptions used, which are the most significant assumptions to
determine the provision. House price growth is provided as annual
percentage growth or contraction compared to the previous year.
Scenario 2023 2024 2025 2026 2027
-------------------------------- -------- -------- -------- ----- -----
Upside Unemployment 4.3% 4.4% 3.7% 3.6% 3.6%
House price growth (4.0%) 3.8% 3.8% 4.7% 3.5%
------------------------------- -------- -------- -------- ----- -----
Base Unemployment 4.8% 5.5% 5.0% 5.0% 4.8%
House price growth (5.9%) (0.8%) 1.3% 3.6% 3.0%
Downside Unemployment 5.0% 6.2% 5.5% 5.4% 5.4%
House price growth (10.3%) (6.6%) (3.7%) 2.9% 2.5%
Stress Unemployment 4.0% 5.2% 8.5% 8.0% 7.4%
House price growth (3.6%) (14.1%) (16.4%) 4.3% 6.8%
------------------------------- -------- -------- -------- ----- -----
Weighted Unemployment 4.8% 5.6% 5.4% 5.3% 5.2%
House price growth (7.2%) (4.0%) (2.2%) 3.5% 3.2%
------------------------------- -------- -------- -------- ----- -----
Sensitivity
The 30 June 2023 provisions are sensitive to the likelihood
factor applied to the different scenarios. The analysis below
demonstrates the impact of a 100% weighting to each scenario.
Upside Base Downside Severe downside Provision
---------------- ------- ----- --------- ---------------- ----------
Provision GBPm 2.9 3.9 6.2 7.1 5.0
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 GBP0.4m (December 2022: GBP0.5m) has been
recognised.
Affordability
The Society has not seen increases in non-performing loans in
the first half of 2023. 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 indirectly reflects the impact
of high inflation levels by linking increasing or increased base
rates to higher probabilities of default, with higher base rates
being correlated to high inflation. However, there is a lag between
inflation rising and base rate increases, which is not reflected in
the Society's model. In addition, the data used to train the
Society's provisioning model does not include a period of inflation
as high as that in 2022 and 2023 and expected for the remainder of
the year and 2024. To reflect the risk from inflation in 2023 that
is not already accommodated by the model a post model adjustment
for GBP0.8m has been booked (December 2022: GBP0.2m).
Base rate is expected to peak and inflation to return to levels
covered within the model in 2024 and, as result, management have
concluded that the provisioning model will accommodate the issue
then. The adjustment has been determined by classifying borrowers
most at risk from increased mortgage interest rates as stage 2
resulting in higher probabilities of default and recognition of
lifetime expected credit losses.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
IFRS 9 staging and loss provisioning
The impact of IFRS 9's staging and loss provisioning to the
Society's closing 30 June 2023 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 Of which Months in Arrears
Arrears Arrears
< 1 1-3 > 3 < 1 1-3 > 3 < 1 1-3 > 3
GBPm
Prime
residential 3,050.7 - - 695.2 15.8 - 16.6 4.2 12.7 3,795.2
Buy to Let 318.5 - - 63.8 2.0 - 0.5 0.2 0.6 385.6
Total 3,369.2 - - 759.0 17.8 - 17.1 4.4 13.3 4,180.8
-------- -------- ------ ------- -------- ------- ------- -------- -------- --------
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 580.2 - - 2,562.9 174.8 - 1,005.8 93.0 174.5 4,591.2
Buy to Let 134.8 - - 220.5 20.4 - 20.7 6.2 47.4 450.0
Total 715.0 - - 2,783.4 195.2 - 1,026.5 99.2 221.9 5,041.2
---------- -------- ------- ----------- --------- ------ ----------- ------- -------- --------
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 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 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 31 December 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 2,818.7 - - 516.9 14.7 - 14.0 3.0 10.2 3,377.5
Buy to Let 328.7 - - 63.7 1.5 - 0.5 0.2 1.7 396.3
Total 3,147.4 - - 580.6 16.2 - 14.5 3.2 11.9 3,773.8
-------- ------- ------ --------- --------- ------- --------- -------- -------- --------
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 441.2 - - 1,590.4 90.1 - 798.6 21.0 53.9 2,995.2
Buy to Let 131.6 - - 214.3 9.5 - 33.2 0.3 61.0 449.9
Total 572.8 - - 1,804.7 99.6 - 831.8 21.3 114.9 3,445.1
----------- -------- ------- ---------- -------- ------ ---------- -------- --------- --------
Prime residential mortgage book
The Prime residential mortgage book consists of traditional
residential loans. No sub-prime or self-certification lending has
been undertaken.
Loan to valued (indexed) Jun 2023 Jun 2022 Dec 2022
GBPm % GBPm % GBPm %
<70% 2,248.4 59.3 2,104.1 71.2 2,250.0 66.6
70% - <80% 656.1 17.3 513.7 17.3 493.0 14.6
80% - <90% 502.5 13.2 232.9 7.8 405.6 12.0
>90% 388.2 10.2 104.6 3.7 228.9 6.8
-------- ------ -------- ------ -------- ------
3,795.2 100.0 2,955.3 100.0 3,377.5 100.0
-------- ------ -------- ------ -------- ------
The Society continued to experience a low level of possessions
on residential loans and Law of Property Act receiver appointments.
At the end of 2022 the Society had no possession property in
relation to owner occupied loans.
Against past due cases, GBP69.1m (Dec 2022: GBP65.7m, June 2022:
GBP58.0m) collateral is held. No loans that would be past due or
impaired have had their terms renegotiated.
The Society offers a range of forbearance measures to customers
such as payment breaks and reductions, transfers to interest only
products and other support. No loans that would be past due or
impaired have had their terms renegotiated.
The Society granted forbearance against 115 residential loans in
2023 (December 2022: 91), with no alteration made to the
contractual rates of interest and balances totalling GBP11.6m at 30
June 2023 (31 December 2022: GBP7.7m), this did not lead to any
modification gain or loss a result of short-term forbearance
granted. Provisions of GBP0.2m (December 2022: GBP0.1m) are held
against residential mortgages that were granted forbearance during
the year.
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Gross lending during 2023 has the following LTV's as at 30 June
2023:
Loan to valued (indexed)
GBPm %
<70% 255.3 39.0
70% - <80% 175.6 26.9
80% - <90% 119.8 18.3
>90% 103.8 15.8
------ ------
654.5 100.0
------ ------
Retail buy to let mortgage book
The Retail buy to let mortgage book consists of buy to let
individuals of less than GBP1m
Loan to valued (indexed) Jun 2023 Jun 2022 Dec 2022
GBPm % GBPm % GBPm %
<70% 326.7 84.7 367.1 94.6 363.7 91.8
70% - <80% 51.9 13.4 19.8 5.1 29.7 7.5
80% - <90% 6.8 1.8 0.6 0.2 2.9 0.7
>90% 0.2 0.1 0.3 0.1 - -
------ ------ ------ ------ ------ ------
385.6 100.0 387.8 100.0 396.3 100.0
------ ------ ------ ------ ------ ------
At the end of June 2023 the Society had no BTL possession
properties (December 2022 and June 2022: None), whose exposure was
being managed by a Law of Property Act receiver. Against past due
cases, GBP6.1m (December 2023: GBP6.5m, June 2022: GBP3.4m)
collateral is held. No loans that would be past due or impaired
have had their terms renegotiated.
The Society offers a range of forbearance measures to customers
such as payment breaks and reductions, transfers to interest only
products and other support. There were new or on-going forbearance
measures to retail buy to let customers during 2023. The Society
had granted forbearance against 1 retail BTL loan in 2022. With no
alteration made to the contractual rates of interest and balances
totalling GBP0.3m at 31 December 2022 leading to no modification
gain or loss recorded as a result of short-term forbearance
granted. No provisions are held against BTL mortgages that were
grated forbearance during the year.
Gross lending during 2023 has the following LTV's as at 30 June
2023:
Loan to valued (indexed)
GBPm %
<70% 3.1 55.4
70% - <80% 1.4 25.0
80% - <90% 1.1 19.6
5.6 100.0
----- ------
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Geographical split of lending
The table below provides a breakdown of the geographic
concentration of the Society's mortgage portfolio as at 30 June
2023. The Society's mortgage portfolio is diversified across the
UK.
Prime Residential Buy to Let Total Total
------------------------------- ------------------ ----------- -------- ------
Region GBPm GBPm GBP'm %
------------------------------- ------------------ ----------- -------- ------
Scotland 433.7 4.4 438.1 10.5%
North East 453.1 7.6 460.7 11.0%
Yorkshire and the Humber 328.5 11.3 339.8 8.1%
North West 409.1 13.0 422.1 10.1%
East Midlands 264.7 15.3 280 6.7%
West Midlands 261.8 16.4 278.2 6.7%
Wales 119.6 4.1 123.7 3.0%
East Anglia 316.5 7.0 323.5 7.7%
South West 292.4 22.3 314.7 7.5%
South East (Including London) 908.0 284.2 1,192.2 28.5%
Other 7.8 - 7.8 0.2%
Total 3,795.2 385.6 4,180.8 100.0
Legacy portfolios
The provisioning methodology for Commercial, Legacy Buy to Let,
and Service Apartments exposures follows that outlined in the
Group's 2022 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 Stress
--------------------- ------- ----- --------- -------
Retail 90% 80% 70% 40%
Distribution 120% 100% 90% 80%
Leisure 60% 50% 45% 35%
Residential 103% 94% 86% 73%
Serviced Apartments 106% 85% 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 2023 30 Jun 2022 31 Dec 2022
Exposure Provision Exposure Provision Exposure Provision
GBPm GBPm GBPm GBPm GBPm GBPm
--------- ---------- --------- ---------- --------- ----------
Legacy Buy to Let 9.7 - 23.5 0.7 14.0 -
Commercial 8.4 1.8 11.9 3.2 10.6 2.4
Housing Associations 253.8 - 282.7 - 283.3 -
Serviced Apartments 15.3 0.9 17.2 0.7 16.6 0.8
Policy Loans 1.4 - 1.5 - 1.5 -
--------- ---------- --------- ---------- --------- ----------
Total 288.6 2.7 336.8 4.6 326.0 3.2
--------- ---------- --------- ---------- --------- ----------
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
Sensitivity
The 30 June 2023 provisions are sensitive to the likelihood
factor applied to the different scenarios. The analysis below
demonstrates the impact of a 100% weighting to each scenario.
Upside Base Downside Severe downside Provision
---------------- ------- ----- --------- ---------------- ----------
Provision GBPm 0.8 2.1 3.0 4.7 2.7
As at 30 June 2023, 3 legacy borrowers were in arrears of 3
months or more with exposures of GBP1.1m (June 2022: 2 borrowers,
GBP0.7m, December 2022: 2 borrowers, GBP0.9m). The Society did not
grant forbearance against any legacy loans in the first six months
of 2023 or 2022.
14. Post balance sheet events
On 1 July 2023, the Society merged with the Manchester Building
Society ("MBS") by means of a transfer of engagements under section
42B(3)(b) of the Building Societies Act 1986 on the basis of
resolutions by Manchester and Newcastle Building Societies'
respective Boards. The merger was approved by both Boards on 23
March 2023 and subsequently confirmed by the PRA on 7 June 2023.
MBS offered a range of savings and mortgage products including a
Spanish equity release portfolio.
As MBS' regulatory capital had fallen below regulatory minimum
requirements in 2013, MBS' strategy had been to reduce its risks
and conserve regulatory capital. It was not able to undertake any
further lending. Its Board identified that it was in the best
interests of Members to merge with another building society so it
is able to offer more choice and value to its Members especially
during a period of increasing and volatile interest rates.
The merger enhances the Newcastle Building Society's growth
strategy providing it with greater resilience and additional
capital strength.
Control passed to Newcastle Building Society on 1 July 2023 as
the trade, assets and liabilities were transferred. Given the time
since the transaction, the Society has not yet completed its
identification and valuation of the acquired assets and liabilities
and therefore no disclosures are given in relation to these assets
and liabilities. No consideration was transferred to MBS as part of
the merger and there is no contingent consideration associated with
it. Any transaction related costs have been expensed as incurred
and are included within administrative expenses. Further financial
information relating to MBS is available on its website at
https://www.themanchester.co.uk/Main/FinancialInformation .
NEWCASTLE BUILDING SOCIETY GROUP
HALF-YEARLY FINANCIAL INFORMATION
15. Notes to the Cashflow Statements
Unaudited Unaudited Audited
30 Jun 30 Jun 31 Dec
23 22 22
GBPm GBPm GBPm
Reconciliation of profit before taxation
to net cash inflow
from operating activities
Profit before taxation 16.2 14.2 31.7
Depreciation and amortisation 3.0 2.7 5.7
Interest on subscribed capital 1.2 1.2 2.3
Decrease in derivative financial instruments (38.0) (92.3) (171.0)
Interest payment for finance lease
arrangements (0.1) - (0.1)
Other non-cash movements (1.5) (0.5) (1.1)
---------- ---------- --------
Net cash outflow before changes in
operating assets and liabilities (19.2) (74.7) (132.5)
Increase in loans and advances to customers (358.9) (75.6) (465.0)
Decrease in fair value adjustments
for hedged risk 23.2 59.1 123.3
Decrease in cash collateral pledged 1.8 91.5 83.3
Increase in shares 458.0 176.8 489.0
Increase / (decrease) in amounts due
to other customers and deposits from
banks 93.3 (81.7) 6.2
Decrease in other assets 1.0 1.6 0.4
Decrease in other liabilities (4.2) (4.6) (2.1)
Net cash inflow from operating activities 195.0 92.4 102.6
========== ========== ========
Cash and cash equivalents
Cash and balances with the Bank of
England 645.0 359.7 421.9
Loans and advances to banks repayable
on demand 12.5 24.0 17.4
At 30 June / 31 December 657.5 383.7 439.3
========== ========== ========
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
2022 Annual Report and Accounts, other than Karen Ingham who
retired as a Director on 26 April 2023 and Rory Campbell who joined
the board as a Director on 17 June 2023.
On behalf of the Board
Andrew Haigh
Chief Executive
1 August 2023
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 2023 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 15.
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 2023 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 Society 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
1 August 2023
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