Aldermore Group PLC
Annual Report and
Accounts 2016
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Aldermore Group PLC Annual Report and Accounts 2016
Introduction
Aldermore provides specialist
banking and underwriting
expertise to help customers seek
and seize opportunities in their
professional and personal lives.
Strategic report
Corporate governance
Financial statements
Business overview
Financial highlights
Chairman’s statement
Market overview
Our business model
Chief Executive Officer’s review
Chief Financial Officer’s review
Business review
Asset Finance
Invoice Finance
SME Commercial Mortgages
Buy-to-Let Mortgages
Residential Mortgages
Central Functions
Risk overview and culture
Principal risks
Emerging risks
Corporate responsibility
4
5
6
8
10
12
16
20
22
24
26
28
30
32
33
34
36
Corporate governance
Chairman’s introduction
Board of Directors
Executive Committee
Corporate governance structure
The Board - roles and processes
Relations with shareholders
Corporate Governance and Nomination
Committee Report
Audit Committee Report
Risk Committee Report
Remuneration Report
Directors’ Report
Risk management
The Group’s approach to risk
Risk governance and oversight
Stress testing
Principal risks
39
40
42
44
45
46
58
60
62
70
74
100
107
110
111
112
Statement of Directors’ responsibilities
Independent auditor’s report
Consolidated financial statements
Notes to the consolidated
financial statements
The Company financial statements
141
142
148
153
199
Notes to the Company financial statements
202
Appendices
Glossary
Shareholder information
206
210
@AldermoreBank
AldermoreBank
company/aldermore-bank-plc
AldermoreBank
For more information on our business visit
www.aldermore.co.uk
1
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Welcome to our 2016 Annual
Report to Shareholders.
It has been another year of
remarkable achievement
for Aldermore…”
Phillip Monks OBE, Chief Executive Officer
2
Aldermore Group PLC Annual Report and Accounts 2016
Making giant leaps in the
banking industry
Aldermore has come a
long way since launching
in 2009, with a vision
to provide banking as
it should be. We've had
some great success, but
the journey has only
just begun...
2009
Aldermore launches, aiming to
deliver “Banking as it should be”
for UK businesses and savers
2010
Aldermore establishes
a residential mortgage
business, providing
a refreshing alternative
to traditional
high-street banks
2012
Aldermore now
home to over £2bn of
personal savings
Lending to Small and
Medium Enterprises
(SMEs) reaches £1bn
Aldermore extends
offering by launching a
business savings franchise
Aldermore makes a profit
for the first time, just 3
years after launching
Strategic report 3
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
2015
2013
Aldermore becomes
the first UK bank to
allow customers
to rate and review
products online
Unedited feedback
continues to be
published on our
website today
Aldermore lists on the
London Stock Exchange
and enters the FTSE 250
leading share index, as we
exceed £6bn of lending
to UK homeowners,
landlords and businesses
2016
2016 was another remarkable year
for Aldermore. Despite the economic
uncertainty in the UK we continued to
deliver value to each of our stakeholders.
With a growing customer base that rate
us highly, record financial performance, an
employee summit and more value given
back to our local communities, we are proud
of our achievements and confident of much
more to come.
We have also redesigned our brand purpose
– to help people seek and seize opportunities
– launching a new visual identity, which
has been designed to capture the bold and
enterprising spirit of our customers.
£7.5bn
loans to customers
£6.7bn
customer deposits
18.0%
underlying return
on equity
11.5%
common equity
tier 1 ratio
4
Aldermore Group PLC Annual Report and Accounts 2016
Strategic report
Business overview
We operate as a specialist
player in large markets…
Market size1 £bn and estimated market share %
Asset Finance
Mortgages
… we are diversified
across both lending and
funding portfolios…
Asset Finance
Invoice Finance
SME Commercial Mortgages
Buy-to-Let
Residential Mortgages
%
21
2
12
45
20
Retail deposits
SME deposits
Corporate deposits
Government schemes
RMBS
Other wholesale
%
62
22
3
10
2
1
… we operate well-secured
lending and savings
portfolios across
a broad customer base…
… and generate strong
risk-adjusted returns
for shareholders.
c£30bn
c£290bn
Lending portfolio £bn
Funding base £bn
£7.5bn
£7.7bn
Customer numbers
100k
130k
160k
195k
220k
2012
2013
2014
2015
2016
Underlying2 return on equity %
1
12
15
21
18
2012
2013
2014
2015
2016
5
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Strategic report
Financial highlights
2016 was another year
of considerable financial
progress for Aldermore,
including record profits
and an underlying2 return
on equity of 18%.”
Net loans £bn
Customer deposits £bn
2.1
3.4
4.8
6.1
7.5
2.2
3.5
4.5
5.7
6.7
+22%
y-o-y
+16%
y-o-y
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
How much our customers have
borrowed from us...
…How much our savers have
deposited with us
Net interest margin %
Underlying2 cost/income ratio %
2.2
3.0
3.4
3.6
3.5
90
66
60
51
45
James Mack,
Chief Financial Officer
Read more about the financial
performance on pages 16-30.
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
The rate of income we earn from lending
less the rate we pay on savings
45p of operating costs are incurred
to generate each £1 of income
Reported profit before tax £m
Reported earnings per share p
0.3
25.7
50.3
94.7
128.7
0.5
10.0
13.0
22.7
25.2
+36%
y-o-y
+11%
y-o-y
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
The overall profit we generated
as a business, before paying tax
Profits after tax and AT1 payment
attributable to each share in the business
1 Source: Council of Mortgage Lenders, De Montfort University, FLA, Aldermore estimates.
2 Underlying: Excluding goodwill impairment of £4.1m (pre and post tax) in 2016.
Excluding IPO related costs in 2015 of £4.1m pre-tax and £3.4m post tax.
6
Aldermore Group PLC Annual Report and Accounts 2016
Chairman’s
statement
As your Interim Chairman, I am
honoured to be presenting our 2016
Annual Report, which highlights
another year of excellent progress
against our strategic objectives.”
Danuta Gray,
Interim Chairman
Another year of
substantial progress
During the year the Group has
continued executing on its strategy
to deliver ‘banking as it should be’ to
more customers and generating strong,
sustainable returns for shareholders.
Earnings per share have increased
by 11% to 25.2p, generating an
underlying return on average equity
of 18%. These are excellent results in
competitive markets and a testament
to the dedication of colleagues across
the Group.
Resilience in an uncertain
operating environment
As well as being a year of considerable
progress for Aldermore, 2016 has
been a year of change and uncertainty
for the banking industry as a whole,
with evolving regulation, political
developments and their corresponding
impacts on the global economy.
In particular, the UK’s referendum
on EU membership and vote to leave
introduced considerable volatility to
financial markets, which impacted
the share price of many companies,
including Aldermore and other
specialist lenders, as shown in the
chart opposite. Following the vote,
Aldermore’s business model has
remained resilient, demonstrated by
our financial results and partly reflected
in the share price performance
during the second half of the year.
There remains much uncertainty
regarding the precise nature and timing
of Britain’s exit from the EU. However,
the Board remains confident that the
business can continue to respond to the
opportunities and threats this presents
and continue to successfully deliver
against our strategic objectives.
Strategic report 7
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Commitment to strong
Governance
The Board’s responsibility to provide
strong and effective governance
remains paramount. Throughout 2016
we were fully compliant with the
Corporate Governance Code 2014
and having overseen the Board
effectiveness review in my capacity
as Senior Independent Director, I have
every confidence in the continued
strength and cumulative experience
of the Board.
I would like to take this opportunity to
welcome Chris Patrick to the Board
and to thank Peter Cartwright and Neil
Cochrane for their services as Non-
Executive Directors. Both Peter and
Neil made valuable contributions to the
Aldermore Board, as representatives
of our Principal Shareholders, AnaCap
Financial Partners LLP.
On behalf of the Board I would also like
to extend particular gratitude to Glyn
Jones, who has served as Chairman
of the Aldermore Board since March
2014. Glyn played an instrumental
role in Aldermore’s significant growth
and transition to a listed company and
leaves behind a strong, experienced and
dedicated Board.
We are progressing in our search
for a successor for Glyn and are
confident we will secure a strong
replacement to oversee Aldermore’s
continuing progress.
Our communities
We remain committed to investing in
our communities, whether that is within
Aldermore through development of the
team; our local communities through
volunteering and fundraising; or the
broader UK economy through lending to
businesses, homeowners and landlords.
We are also committed to strong
corporate citizenship.
We support the drive to create greater
accountability and transparency
throughout the banking sector and
have worked to ensure compliance
with the FCAs Senior Management
Regime from March 2016, as well as
joining the Banking Standards Board in
the year. We are also proud signatories
of the Women in Finance Charter and
are committed to both developing
greater female representation in
senior positions across the Group and
promoting the advantages of diversity
more broadly across the business.
More on our role in our communities can
be found in our Corporate Responsibility
Section on pages 36–38.
Outlook
The Board is committed to supporting
the substantial progress Aldermore
is making in operational development
and financial performance, as well
as managing the challenges that
this presents.
The EU referendum introduced greater
uncertainty. However, the UK economy
has remained resilient to date.
Your Board remains confident that
Aldermore can continue to grow within
existing risk appetite generating strong,
sustainable returns for shareholders.
Danuta Gray,
Interim Chairman
Aldermore, FTSE 250 and FTSE 350 12 month, indexed share price performance
120
100
80
60
40
JAN
2016
FEB
2016
MAR
2016
APR
2016
MAY
2016
JUN
2016
JUL
2016
AUG
2016
SEP
2016
OCT
2016
NOV
2016
DEC
2016
––– Aldermore
––– FTSE 250
––– FTSE 350 Banks
Share price performance from 04/1/2016 to 30/12/2016, indexed to 100.
8
Aldermore Group PLC Annual Report and Accounts 2016
Strategic report
Market overview
Macro-economy
Aldermore is focused solely in the UK, so what happens
in the economy here matters to us. For example,
the pricing of loans and savings products are often
impacted by the base rate set by the Bank of England
and confidence in economic growth can impact on a
demand for homes or funding for business investment.
This year
2016 was an eventful year for the macro-economy,
with the UK’s decision to leave the EU being a
significant source of volatility. This caused many
economists to initially downgrade their expectations
of UK GDP growth before subsequently revising
them upwards as the economy proved resilient to the
political uncertainty. The Bank of England also reacted
to the risk to the economy from the referendum by
lowering the base rate to 0.25% and extending their
quantitative easing programme with the introduction
of the Term Funding Scheme (TFS).
Key impact
The lowering of the Bank of England base rate was
largely neutral to Aldermore as we passed on the
impact through both sides of our balance sheet,
while the likelihood of any material changes to Bank
of England rates in the near future remains small.
The TFS has provided a benefit, as we can use it to fund
new lending growth into the UK economy at a lower
interest expense.
Despite the volatility in financial markets, customer
outlook remains broadly positive with Aldermore’s
SME Future Attitudes report indicating that four
out of five SMEs are confident about their business
performance in 2017.
Legal and regulation
Given its importance to the economy, banking is
a highly regulated market and can be affected by
changes in legislation. In the UK, the PRA, and the FCA
are the primary bodies which regulate the banking
industry, ensuring effective prudential management
and fair conduct, respectively. Together these bodies
ensure that local and European law are effectively
applied to the UK banking industry.
This year
A number of new laws and items of regulation, which
directly impacted the banking market, were introduced
or announced during 2016. The main themes of changes
impacting Aldermore concerned the buy-to- let (BTL)
property market, taxation and capital requirements.
In the BTL market, new laws introduced by the
Government included a higher rate of stamp duty
payable from April 2016 and a reduction in mortgage
interest tax deductibility for landlords phasing in from
April 2017. The PRA announced changes to affordability
testing effective from January 2017 and revised
underwriting requirements for landlords with four
or more properties effective from September 2017.
2016 also saw the introduction of the 8% banking tax
surcharge announced in 2015 and further consultation
on capital requirements and risk-weightings by the
Basel Committee on Banking Standards.
Key impact
Aldermore has a comprehensive BTL offering, serving
many types of customer from individual property
owners through to incorporated professional landlords.
Demand has remained strong throughout 2016, as
reflected in the record levels of origination. In 2017,
the forthcoming regulatory changes may result in a
shift towards more professional investors, favouring
specialist lenders, such as Aldermore. Developments in
capital requirements are yet to be finalised, however
Aldermore is taking steps to mitigate impacts, discussed
further in our Emerging Risk Section on pages 34–35.
9
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Competition
Since the global financial crisis in 2009 – when
Aldermore was founded - ensuring healthy competition
and fair customer outcomes in the UK banking market
has been in sharp focus for both the regulator and the
Competition and Markets Authority. In the aftermath
of the crisis many banks stopped serving groups of
customers, particularly certain small and medium sized
businesses and first-time homebuyers, which provided
an opportunity for Aldermore to grow through serving
these unmet needs.
This year
Aldermore’s primary markets are mortgages and
business finance. Although these are competitive
markets, Aldermore is recognised by brokers and
customers for its ‘can do’ approach and occupies
leading positions in several of its chosen business
areas. Within the asset finance market, we continue
to see consolidation in the broker channel and expect
competition to increase as new lenders attempt to
build a presence.
The residential mortgages market remains highly
competitive and concentrated amongst the large high
street banks. In this market, Aldermore serves credit-
worthy niches, including the self employed and first-
time buyers, where it has taken particular advantage of
Government schemes. In BTL Aldermore has continued
to benefit from market growth and is well positioned
to benefit from the increased professionalisation of
the market.
Key impact
Throughout 2016 Aldermore has continued to grow and
maintain attractive margins in each of our key markets,
as demonstrated by record levels of origination and
robust net interest margins. We are confident that
we can continue to meet the challenge presented by
competitors and continue to deliver profitable and
sustainable growth within our prudent risk appetite.
Customer behaviour
The traditional banking model of large branch networks
and standardised single-channel service is outdated.
Customers and intermediaries are increasingly
demanding online or digital servicing as well as
greater flexibility in savings and borrowing products.
The response has been the emergence and growth of
new entrants like Aldermore.
This year
Aldermore has established a track record of agility in
deploying resources to serve unmet customer demand
through specialist underwriting. In particular during
2016, Aldermore was able to respond with agility to a
surge in BTL mortgage demand early in the year, ahead
of changes to Stamp-Duty Land Tax, and again in the
fourth quarter. Additionally, we have developed our
brand and since the year end, launched our new visual
identity which has been designed to capture the bold
and enterprising spirit of our customers as we help
them to seek and seize opportunities.
Key impact
By deploying specialist underwriting expertise
Aldermore is able to serve the needs of customers,
such as complex portfolio landlords that other
traditional volume-focused banks can’t. This deep
expertise and operational agility has enabled us to
continue growing and helping more customers to
seek and seize opportunities in their professional and
personal lives. We continue to invest in improving our
digital propositions and servicing to customers and
brokers as is reflected in the high levels of customer
advocacy we received in 2016.
10
Aldermore Group PLC Annual Report and Accounts 2016
Strategic report
Our business model
Our foundations
inform our
business model
We differentiate
across the
value chain
We are a specialist lender
and underwriter focused
in select markets
Our DNA; to be reliable,
expert, dynamic and
straightforward informs
everything that we do
We are modern, scalable
and completely focused
in the UK
Strong and effective Governance provides oversight and direction
Read more about our governance on page 39
Our expertise in risk management helps secure the sustainability of our business
Read more about our risks on page 32
1
2
3
4
5
Exceptional service in
distribution
We go above and
beyond to add
value to our broker
relationships, which
represent c80%
of our distribution,
whether through
speed of service
or our training
academies. We also
have simple direct
propositions to
support customers
Technology enabled
specialist
underwriting
Our human
underwriters
understand that not
all customers look the
same and use their
experience to make
safe underwriting
decisions rather than
adopting a “computer
says yes or no”
attitude
Award winning
savings franchise
Our savings franchise
is cutting-edge.
Giving retail and
business customers
the flexibility to
choose their own
deposit terms and the
security of knowing
they will always get
a competitive return
without having to
shop around
Excellence in credit
risk and portfolio
management
We are experts in
understanding the
risks associated with
lending. We have a
prudent risk appetite
and have built a
highly diversified
business across our
chosen markets and
within portfolios,
ensuring low levels of
impairment
Prudent capital and
liquidity management
Having built the Bank
in the aftermath of
the financial crisis,
we understand
the importance of
maintaining a robust
capital position and
maintaining sufficient
cash reserves at all
times
Origination £bn
Net lending £bn
Deposits £bn
Cost of risk1 bps
Total capital ratio %
2.4
2.6
3.2
4.8
6.1
7.5
4.5
5.7
6.7
23
19
23
14.8
15.1
15.6
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
And generate
superior returns
Business
Finance
Deposits
Wholesale
Financial statements start
on page 140
Mortgages
illustrative
We make loans to
customers that
generate interest
and fee income
We pay interest
on customer
deposits and
other sources
of funding
Our income is
the balance of
these two
If a customer
were unable to
make their loan
repayments,
we would incur
an impairment
Operating
expenses are
incurred in
running the bank
What remains
is profit -
after we pay
our taxes
1 see page 15 for a definition of cost of risk
11
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Aldermore provides specialist banking and underwriting
expertise to help customers seek and seize opportunities in their
professional and personal lives.
We operate in carefully selected areas of the business finance
and mortgage markets, chosen for their size, attractive returns
and strong collateral* characteristics.
Our DNA is built around our customers and helping them to
seize opportunities. Whether serving one of our broker partners
or a customer that comes to us directly, we use modern systems to
support our specialist underwriting experts in making quick and
informed lending decisions be it for a first home, a company car, an
office, or a portfolio of rental properties.
We take our commitment to underwriting expertise and great
customer service to generate strong, sustainable returns for our
shareholders. To us, this is simply banking as it should be.”
* Collateral is what we call the ‘asset’ we lend against,
for example a home is used as collateral for a mortgage.
Read more about our business model in action…
Read more about
Asset Finance
on page 20
Read more about
Residential Mortgages
on page 28
Read more about
Savings on page 30
12
Aldermore Group PLC Annual Report and Accounts 2016
Chief Executive Officer’s
review
2016 was another great year for
Aldermore, with more customers
than ever choosing us to serve their
needs and profitability at record highs.
As we move forward on our journey,
I am confident that we can continue to
build on this momentum, helping more
customers to seize opportunities.”
Phillip Monks OBE,
Chief Executive Officer
Banking as it should be
The key drivers of our performance
in 2016 are rooted in our purpose.
Since the Bank was founded in 2009,
we have sought to challenge the status
quo and empower more people across
Britain to seek and seize opportunities
in their professional and personal lives
by providing ‘banking as it should be’.
In doing so, we are addressing a market
opportunity that is as real today as
it was in the aftermath of the global
financial crisis. In fact, as the market
has matured, companies and individuals
have increasingly recognised that a
different kind of banking experience is
both possible and available.
As a specialist bank, we don’t compete
head on with the traditional banks in
their main markets. We go beyond
their one-size fits all approach by
employing specialist underwriters
to understand each individual, and
by making sure we offer a service
that works for them. We operate in
carefully selected segments where
we have the necessary experience
and expertise to deliver strong and
sustainable risk-adjusted returns
through responsible lending. We benefit
from a modern infrastructure and
an efficient distribution model, using
an approved network of specialist
intermediaries and, increasingly, direct
relationships with customers online or
by telephone, without the need for a
costly branch network.
A record year
It is with great pride that we are
reporting another record year for
Aldermore, demonstrating continued
progress on the journey we described
at IPO. I am particularly pleased that
we were able to deliver such a strong
performance despite the uncertainty
presented by the UK’s referendum on
EU membership. While the full political
and economic implications of this
Strategic report 13
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
decision are as yet unknown, the UK
economy has remained resilient to date,
and we continue to closely monitor our
operating environment for any change.
Throughout the year, the Group
has performed well and customer
confidence remained high. We ended
the year with strong growth, a robust
credit performance and a healthy
pipeline, giving us confidence that we
are well positioned for further success.
Continuing commitment
to UK businesses,
homeowners, landlords
and savers
Net loans to customers increased by
£1.3bn, or 22% to £7.5bn at the end of
2016, driven by record levels of organic
origination. This record performance
was seen across both Business Finance
and Mortgages, where, respectively,
£1bn and £2bn of new customer loans
were provided.
In Business Finance, we focus in both
the asset finance and invoice finance
markets. In Asset Finance we have
leveraged our efficient broker-led
distribution model to build a market
leading position in this channel.
Our specialist underwriting advantage
in transport, plant and machinery, and
other areas of expertise, enabled us
to grow net lending by 7% to £1.6bn
during 2016.
Across our Mortgages franchise
we grew lending by 24% to £5.7bn.
This was led by our broad customer
offering in Buy-to-Let (BTL) which
enabled us to grow BTL lending by
38% to £3.3bn. In SME Commercial
Mortgages, where we have particular
expertise in underwriting multi-let
investment properties, lending grew
by 12% to £930m. In our Residential
Mortgages business we are committed
to truly understanding our customers’
circumstances which, with our focus on
creditworthy segments of the market,
enabled us to grow lending by 7% to
£1.5bn.
Loan growth continues to be primarily
funded by our award-winning deposit
franchise. The performance of our
savings business is driven by our
straightforward and transparent
proposition and our promise, that
savers get “great returns effortlessly”.
Our dynamic online franchise enables
customers to tailor products to their
needs and our transparent approach
means we don’t use teaser rates.
This approach drove an increase in
deposits of 16% to £6.7bn in 2016.
Business customers provide both
c30% of this balance and a high level
of advocacy, with 97% of customers
surveyed saying they would
recommend Aldermore to others.
Profit before tax up by over
a third
Reported profit before tax rose 36%
to a record high of £129m, driven
by continued benefits from our
growing franchises, a healthy net
interest margin of 3.5% and further
improvement in operational leverage
with the cost to income ratio falling to
below 45%. Our management of risk
remains robust as demonstrated in a
cost of risk of just 0.23%, and less than
0.5% of our loans by value being classed
as non-performing.
Enhanced balance sheet
strength and strong
shareholder returns
2016 was also an important year in
further strengthening our balance
sheet. While our fully loaded CRD IV
CET1 ratio reduced by 0.3% to 11.5%
over 2016, we reached the point of
capital self-sufficiency in the second
half of the year when our ratio rose
by 0.5%. This increase was driven by
record levels of profitability and was in
line with our guidance at IPO. We expect
our CET1 capital ratio to continue rising
in the coming years, as we deliver
strong, sustainable earnings.
Overall, the Group generated underlying
earnings per share of 26.4p and an
underlying return on equity of 18%, or
20% prior to the impact of the 8% bank
tax surcharge introduced in 2016.
Strengthening the team
The excellent progress seen in 2016 is
the result of the experience and effort
that everyone at Aldermore puts into
supporting customers on a daily basis
and for this I extend gratitude to all my
colleagues across the Group.
During the year I was delighted to
welcome three new members to the
Executive team. Christine Palmer
joined us as Chief Risk Officer, Dana
Cuffe joined as Chief Operating
Officer and Rob Divall joined as the
Group HR Director. All of my new
Executive colleagues have tremendous
experience in their fields and it is a real
testament to the business and the
progress we have made that we can
continue to attract such high calibre
executives, who share our vision
and can help successfully drive us
forward. I also express my gratitude
to our outgoing Executive team
members Steve Barry, Vicki Harris,
Ali Humphries and Paul Myers for all
that they contributed during their time
with Aldermore.
Strategic priorities
As we seek to further enhance the
sustainability of returns, our strategic
priorities will continue to be delivering
further growth, increasing efficiency
and maintaining our robust approach to
risk management.
Read on for more on our strategic
priorities and progress in 2016.
14
Aldermore Group PLC Annual Report and Accounts 2016
Strategic report – Chief Executive Officer’s review
Our strategy – supporting strong
and sustainable returns
Strategic objective
Our progress in 2016
Customer-driven:
Helping more customers to seek
and seize opportunities
We will continue helping more customers across
Britain to seek and seize opportunities, whether
that’s growing their business, buying their first
home or securing a fair return on their savings.
Our focus remains on serving diverse pools of
customer demand and adjacent markets, where
we can operate as an agile, service-focused
specialist player in large markets, providing us with
multiple levers for growth.
Simply delivered:
Developing our scalable,
effective and efficient
operating model
Aldermore benefits from modern, scalable
systems and an efficient online broker-led
distribution model, as opposed to a costly branch
network. We continue to invest in key capabilities
and technology, optimising our operating model
to support the delivery of growth with enhanced
levels of service, capability and efficiency.
Securely managed:
Maintaining a diverse and
low-risk business model
As specialist underwriters, our ability to
understand our customers’ circumstances and
the value of underlying assets is a source of
competitive advantage. Growth is supported and
controlled by a consistent risk appetite and robust
risk management framework, which drives our
prudent approach across all areas of the Group.
• 2016 was a record year for originations with over £3bn lent across Business Finance and
Mortgages. Total customer numbers also reached an all-time high at over 220k, while our
customer advocacy continued to improve as NPS grew from +29 to +43
• We received further recognition for our service, products and expertise in 2016, winning
awards across all of our franchises, including ‘Leasing and Asset Finance Provider of the
Year’ (NACFB), ‘Best Specialist Mortgage Lender’ (Your Mortgage) and ‘Best Business
Savings Provider’ (Moneynet)
• Our market-leading breadth of offering in Buy-to-Let helped us support more landlords
than ever, as we grew customer numbers by 25% to c20k, originating over £1.2bn of
loans, despite the increased market complexity
• We continued to serve specialist segments of the residential mortgage market and
invested in enhancing our propositions, including those for the self-employed and first
time buyers
• We also invested in developing our retention strategy in Mortgages, providing greater
choice and support for customers looking for their next product
• We generated greater operational leverage in the business, bringing the underlying cost
to income ratio below 45%
• As well as introducing new Executives we also bolstered the wider teams during 2016,
strengthening expertise across the Group including, a new Head of Enterprise Risk, Chief
Information Officer and Chief Data Officer
• We progressed a number of improvement initiatives over the year, including enhanced
digital capability, process simplification, platform upgrades and a refresh of our brand and
customer segmentation
• Our credit quality remained well within our appetite as we incurred a cost of risk of 23bps
and maintained non-performing loans below 0.5% of our portfolio
• We continue to originate in line with centrally controlled underwriting standards, including
stress testing affordability, before going on to re-score the portfolio on a monthly basis
• We made a number of enhancements to our credit risk models through our on-going
work to become IFRS9 compliant ahead of the January 2018 implementation date
15
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Key performance indicators
Customer NPS
Number of customers
Loan origination £bn
+23
+29
+43
161k
195k
223k
2.4
2.6
3.2
2014
2015
2016
2014
2015
2016
2014
2015
2016
Definition
A net measure of customer
advocates and detractors.
Performance
Aldermore continues to
improve the NPS score
enhancing the approach in
2016. 2014 is bank-wide.
Read more on page 36
Definition
The number of customers
selecting Aldermore for their
savings or borrowing needs.
Performance
Customer numbers
continue to grow, as we help
more people to seek and
seize opportunities.
Definition
The value of new loans we
have made to customers.
Performance
Loan growth continues
across both Business Finance
and Mortgages, driven by
organic origination.
Underlying cost/income
ratio %
60
45
51
Employee engagement %
Reported profit before tax £m
71
50.3
94.7
128.7
New for 2016
2014
2015
2016
2016
2014
2015
2016
Definition
A measure of efficiency
calculated as underlying1
expenses as a proportion of
net income.
Definition
A measure of staff satisfaction
and engagement with
their role, leadership and
business strategy.
Definition
Profit before tax (PBT)
gives an overall measure
of the performance of the
business model.
Performance
The cost income ratio continues
to decline as we achieve
greater operating leverage.
Performance
Introduced in 2016 through our
Big Conversation read more on
page 37.
Performance
PBT has increased markedly
and is a record for Aldermore.
Cost of risk bps
Non-performing loans %
CET 1 ratio %
23
19
23
0.43
0.45
0.47
10.4
11.8
11.5
2014
2015
2016
2014
2015
2016
2014
2015
2016
Definition
Impairment losses as a
percentage of average
net loans over the period.
An indicator of credit
risk performance.
Performance
Impairments remained low
during 2016 reflecting robust
credit management and
benign credit conditions.
Definition
Non-performing loans (NPL) is
defined as individually impaired
loans over total gross loans.
Performance
NPL remained low reflecting
the positive environment for
our customers and robust
approach to risk management.
Definition
The CET1 ratio represents the
core equity in the business as
a proportion of risk-weighted
assets and is a measure of
capital strength.
Performance
CET1 remains robust, with
growth in the second half
of 2016.
1 Underlying expenses includes; administrative expense, including levies but excluding one-off IPO costs and
goodwill impairment expense.
Outlook for 2017 and beyond
As we deliver on the first priority of our
strategy, we expect to grow our loan book
by between 10% and 15% in 2017 with further
growth thereafter and the portfolio mix
remaining broadly stable. The exact pace of
growth will be dependent on our ability to
grow within our prudent risk appetite, while
delivering strong and sustainable returns.
We will also continue to invest in efficiency,
and enhanced operating leverage in order
to deliver on our second strategic priority.
This, combined with our planned growth,
is consistent with the cost to income ratio
declining below 40% over the medium term.
In line with our third strategic priority, we will
retain a prudent approach to risk across the
bank over 2017 and beyond to support the
sustainability of earnings
We are delighted with the Group’s
performance in 2016 and remain positive on
our outlook notwithstanding the economic
uncertainty and potential changes to
regulatory capital requirements. The Board will
therefore continue to consider the payment of
dividends while taking into account the growth
opportunities available, anticipated changes
in capital requirements, and once the Group’s
CET 1 ratio is above 12%.
In conclusion…
I’m delighted that our record performance
in 2016 continues to demonstrate delivery
against our business plan and targets
and I would like to thank our customers,
colleagues and shareholders for their
continued support.
We have clear strategic priorities to further
create and unlock value across the business,
as we continue to serve and delight our
customers and generate strong and
sustainable returns for our shareholders.
The strategic report on pages 2 to 38 was
approved by the Board and signed on its
behalf by:
Phillip Monks OBE,
Chief Executive Officer
16
Aldermore Group PLC Annual Report and Accounts 2016
Chief Financial Officer’s
review
I am pleased to be reporting on another
strong set of financial results. I am
confident that we can continue to
grow and continue delivering strong,
sustainable returns for shareholders.”
James Mack,
Chief Financial Officer
Balance sheet – key items
Net loans
Cash and investments
Other assets
Total assets
Customer deposits
Wholesale funding
Other liabilities
Total liabilities
Ordinary shareholders’ equity
AT1 capital
Equity
2016
£m
7,477.3
848.1
55.8
8,381.2
6,673.7
982.2
99.3
2015
£m
6,144.8
805.6
58.1
7,008.5
5,742.0
635.8
97.1
7,755.2
6,474.9
552.0
74.0
626.0
459.6
74.0
533.6
Total liabilities and equity
8,381.2
7,008.5
Key metrics
Net loan growth (£m)
Loan to deposit ratio (%)
Liquid assets / deposits (%)
Fully loaded CRD IV CET1 capital ratio (%)
1,333
112%
13%
11.5%
1,344
107%
14%
11.8%
%
change
22
5
(4)
20
16
54
2
20
20
0
17
20
0
5
(1)
(0.3)
Loans to customers up
22% with originations
at record levels
2016 loan growth was driven by record
levels of origination across both our
Business Finance and Mortgages
divisions at over £1bn and £2bn
respectively, as we continue to build
our diversified portfolio. This record
level of originations was partly offset
by £1.8bn of redemptions in the year.
This level of redemptions represents
almost a third of the loan portfolio at the
start of the year, and an 83% increase
on redemptions in 2015, reflecting the
growing maturity of the business.
Net loans to customers reached
£7.5bn (31 December 2015: £6.1bn),
as the number of customers grew
by 17% to over 80,000 with more UK
businesses, homeowners and landlords
choosing Aldermore to serve their
borrowing needs.
Business Finance up 15%
to £1.7bn
Asset Finance grew by 17% to £1,573m
as our expertise in a broad range of
asset classes allowed us to maintain
our market leading position in the
broker-channel and grow our wholesale
proposition by 60%.
Invoice Finance continued to focus on
returns, moving toward larger invoice
discounting for small businesses
and structured finance, and away
from lower value factoring business.
This was reflected in a 4% decline in
loans to £154m, whilst segmental
profits increased by over 50%.
Mortgages up 24% to £5.7bn
SME Commercial Mortgages saw a
growing proportion of customers
engaging with us directly, reflecting our
reputation for expertise and service.
This contributed to loan growth of
12% to £930m, despite tightening
our appetite for development-based
lending following the EU referendum.
Strategic report 17
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
In Buy-to-Let, our broad customer
offering enabled us to grow lending by
38% to £3,326m. This strong growth
also reflects our operational agility,
as we took advantage of the market
spikes in the first quarter, ahead of
the introduction of an increase in
stamp duty, and in the fourth quarter
when we successfully took share in an
active market.
In Residential Mortgages, our
approach to understanding each of our
customers’ circumstances enabled
us to grow lending by 7% to £1,494m.
This growth was driven by £466m of
originations which, more than offset a
high level of redemptions on Help to Buy
mortgages written two years ago when
Aldermore was the first to market with
the product.
Deposit-led funding model,
with balances rising 16%
Our funding strategy remains
deposit-led whilst, we actively
manage wholesale sources, such
as Government and central bank
schemes, to provide diversification and
drive an efficient cost of funds. As at
31 December 2016, our loan to deposit
ratio was in line with management
expectations at 112% (31 December
2015: 107%).
Our dynamic and innovative online
savings franchise, which provides
award-winning savings products to
c140,000 customers grew by 16% to
£6.7bn (31 December 2015: £5.7bn)
benefitting from strong rates of
retention at c70%. SME deposits of
£1.6bn (31 December 2015: £1.4bn)
and our Corporate deposits of £260m
(31 December 2015: £156m) now
represent almost a third of all deposits.
Wholesale funding increased by 54%
to £982m (31 December 2015: £636m)
and predominantly consists of on-
balance sheet funding via repurchase
agreements of Funding for Lending
Scheme (FLS) Treasury Bills, drawings
through the Term Funding Scheme
(TFS) and our Residential Mortgage
Backed Securitisation (RMBS).
As at the end of 2016, under the Bank
of England’s SME lending extension
of FLS, the Group had on-balance
sheet funding of £355m. We were
also the first bank to utilise the Bank
of England’s newly launched TFS,
with £396m of funding having been
accessed by the end of 2016.
The outstanding balance on our
RMBS as at 31 December 2016
stood at £131m (31 December
2015: £194m). This reduction reflects
the capital repayments on the
underlying mortgages.
Other wholesale funding predominantly
consists of Tier 2 debt capital of £100m
(31 December 2015: £38m). In October
2016, £60m subordinated loan notes
were successfully issued adding to our
existing Tier 2 Notes which were issued
in 2012 and have an option to call in
May 2017.
Profits up demonstrating
continued strong returns
Profit before tax for the year increased
by 36% to £128.7m (2015: £94.7m) as
we maintain healthy margins across
a larger loan book. Excluding £4.1m
for both the goodwill impairment in
2016 and the 2015 pre-tax IPO related
costs, the underlying profit before
tax increased by 34% to £132.8m
(2015: £98.8m).
The tax charge for the year increased
by 115% to £35.2m (2015: £16.4m).
This increase reflects the Group’s
increased profitability as well as the
introduction of the 8% bank corporation
tax surcharge on taxable profits
above £25m from 1 January 2016.
The effective tax rate of 27% in 2016
(2015: 17%) comprises the standard
20% corporate tax rate plus the 8%
surcharge. Statutory profit after tax
therefore increased by 19% to £93.5m
(2015: £78.3m).
The return on equity generated in
the period was 17.2%, or 18.0% on an
underlying basis, and was in line with
our commitment to delivering returns in
the high teens. The 2016 basic earnings
per share was 25.2p, on both a basic and
fully diluted basis.
Income statement – key items
Net interest income
Other income
Operating income
Underlying expenses
Impairments
Underlying profit before tax
IPO costs
Goodwill impairment
Statutory profit before tax
Tax
Profit after tax
2016
£m
239.4
28.1
267.5
(119.2)
(15.5)
132.8
0.0
(4.1)
128.7
(35.2)
93.5
2015
£m
198.9
25.8
224.7
(115.5)
(10.4)
98.8
(4.1)
0.0
94.7
(16.4)
78.3
%
change
20
9
19
(3)
(49)
34
-
-
36
(115)
19
18
Aldermore Group PLC Annual Report and Accounts 2016
Chief Financial Officer’s review
continued
Operating income
increases 19%
During 2016 interest income grew by
19% to £358.2m driven by continuing
net loan growth. The Group’s average
gross yield fell slightly to 5.3%
(2015: 5.5%), primarily as a result
of the lower rate environment and
competition in Asset Finance and a
change in mix with the comparatively
lower yielding BTL portfolio growing at
a faster pace than other portfolios.
Interest expense increased by 17%
to £118.8m as we funded our lending
growth. We also continued to benefit
from diversified funding and access
to lower cost Government schemes,
reducing our average cost of funds to
1.7% (2015: 1.9%).
As a result, the Group’s net interest
income increased by 20% to £239.4m
(2015: £198.9m) while, as expected, the
net interest margin remained broadly
stable at 3.5% (2015: 3.6%). Net fee
and other operating income rose by
12% reflecting a higher volume of
property valuations as a result of new
mortgage lending.
Growth in operating
expenses controlled to
a 3% rise
Operating expenses were well
controlled, increasing by 3% to
£123.3m (2015: £119.6m), in line with
management expectations. Within this,
administrative expenses rose by 5%
to £113.1m (2015: £107.9m), primarily
reflecting the recruitment of colleagues
to further support growth and enhance
risk management.
Provisions of £0.8m in 2016 were 65%
lower than in 2015, due to the payment
of the capital element of the Financial
Services Compensation Scheme (FSCS)
levy having now been completed by
the banking industry. Depreciation and
amortisation was consistent with last
year at £5.3m (2015: £5.3m).
Given their material and one-off nature,
costs related to our IPO in 2015 and the
impairment of goodwill related to our
Invoice Finance business in 2016 are
removed from our financial metrics
to provide an ‘underlying’ view of our
performance. This resulted in our cost
to income ratio on an underlying basis
declining by six percentage points to
45% (2015: 51%).
Capital position
Common equity Tier capital
Additional Tier 1 capital
Tier 2 capital
Total capital
2016
£m
525.8
74.0
113.1
712.9
Risk Weighted Assets (RWAs)
4,576.1
2015
£m
435.6
74.0
48.6
558.2
3,693.0
Fully loaded CRD IV capital ratios (%)
CET1 ratio (%)
Total capital ratio (%)
Leverage ratio (%)
11.5%
15.6%
7.0%
11.8%
15.1%
7.2%
%
change
21
0
133
28
24
(0.3)%
0.5%
(0.2)%
Loan impairments rise
while cost of risk remains
low at 23bps
We maintain a robust approach to risk
management and this, combined with
a relatively benign credit environment,
has resulted in our cost of risk
remaining low and below expectations
at 0.23%. Impairments increased by
49% to £15.5m (2015: £10.4m), within
which our collective charge grew by
31% to £4.7m (2015: £3.6m) reflecting
the growth of the loan book and a
further degree of caution, reflecting
increased economic uncertainty
following the UK’s vote to leave the
EU. Individual impairments of £10.8m
were 58% higher than 2015 due to
2016 having seen impairments taken
in relation to a relatively small number
of exposures, while these had been
abnormally low in 2015.
A robust capital position
The Group maintains a strong capital
position and after becoming capital
generative in the second half of 2016
closed the year with a fully loaded
CRD IV total capital ratio of 15.6%
(31 December 2015: 15.1%) and a CET1
ratio of 11.5% (31 December 2015: 11.8%).
These movements reflect the profit
after tax of £93.5m offset by growth
in Risk Weighted Assets (RWAs) of
£883m and the post-tax AT1 coupon
of £6.6m, payable annually in April.
The total capital ratio also benefits from
the issuance of £60m Tier 2 Notes in
October 2016.
Strategic report 19
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
RWAs increased by 24% reflecting
loan growth of 22% and the increase
in the Basic Indicator Approach (BIA)
Operational Risk charge which is
updated in the first quarter each
year based on the average of the last
three years’ net operating income.
The Group’s leverage ratio at 7.0%
(31 December 2015: 7.2%) remains
significantly above forthcoming
regulatory minimums.
As of 1 January 2017, Aldermore’s
total CET1 requirements under normal
operating conditions, which include PRA
ICG and Pillar 2B requirements as well as
the phased in CRD IV buffers are higher
than the 7% AT1 conversion level.
We are on track with enhancements
to our credit risk models through our
work to become IFRS9 compliant for
January 2018 when the new accounting
standard is introduced. This takes us
closer to the sophistication required for
an Internal Ratings-Based approach
(IRB) to capital which may help to
mitigate the risk of future changes in
capital requirements. We will continue
to monitor the cost and benefits
associated to moving to IRB, as the
regulatory changes and timeframes for
implementation become clear.
Capital resilient under stress
We periodically test the Group’s
resilience to severe but plausible
adverse scenarios. This process
supports calibration of our stress
loss buffer, ensuring we are able to
withstand an economic downturn
over our five year planning horizon.
The outcome of this process is a key
input into other Group processes,
including the setting of our risk
appetite, the assessment of our capital
adequacy, and our assessment of risk-
adjusted returns.
In 2016 , this process included the
supervisory H2 2016 Annual Cyclical
Scenario in addition to Aldermore’s
internal scenario. This scenario includes;
a rapid fall in property prices, with
residential property values declining
by 32% and commercial by 42%; an
economic downturn with a cumulative
4.3% reduction in GDP; unemployment
rising to almost 10%; the BoE base
rate falling to 0%; and inflation running
at 3.4%.
Under this severe scenario, higher
impairments including the effect
of changes to IFRS9, operational
risk losses and other detrimental
factors would reduce our projected
CET1. However, at its lowest point
post Management actions, the CET1
ratio is expected to be around 8.5%,
remaining above the 7% level at which
our AT1 security converts to equity and
significantly above our current CET1
PRA requirement and CRDIV buffers at
1 January 2017.
Outlook
The process of Britain’s exit from the
EU may result in economic growth
deviating from current forecasts, but
for 2017 there is unlikely to be any
material impact. Our economic base-
case upon which we set our outlook
for the coming years includes the
expectation that;
• house prices will continue to
rise gradually,
• unemployment remains below 6%,
• the Bank of England base rate
remains below 1%, and
• UK GDP growth increases to
around 2%.
Returns will continue to be delivered
through a combination of focused loan
growth, margin stability, and robust
control of expenses and impairments.
Specifically we expect;
• 10 – 15% net loan growth in 2017, with
a broadly stable net interest margin,
around 3.5% .
•
In 2017, we expect an incremental
increase in costs of between
£15m and £20m driven by
ongoing investment, which
includes mandatory projects and
strengthening of our teams.
• Despite these additional costs, we
expect to deliver increased efficiency
and operating leverage consistent
with the cost to income ratio declining
below 40% over the medium term.
• We also plan to maintain the credit
quality of the book such that we
would expect to incur a cost of risk of
between 25 and 35bps per year over
the medium term. Further information
on effect of changes to IFRS9 will
be provided closer to the January
2018 implementation.
James Mack,
Chief Financial Officer
20
Aldermore Group PLC Annual Report and Accounts 2016
Asset Finance
2016 highlights
• Net lending to customers up
by 17% to £1.6bn
• Customer numbers up 17%
to c50k
• Organic origination of c£1bn,
of which c30% was direct
• Broker’s Leasing and Asset
Finance Provider of the Year
(NACFB)
Net interest income
Net fees and other income
Operating income
Administrative expenses
Impairment losses
Segmental profit
Net loans to customers
Organic origination
• Segment result up 15%
Gross interest income yield (%)
to £45.1m
Net interest margin (%)
Cost of risk (%)
Asset Finance predominantly supports
capital investment in business critical
assets. Leveraging our depth and
breadth of expertise, we finance a
wide array of assets such as plant
and machinery, commercial vehicles,
technology, office equipment, and
cars. This flexibility enables us to meet
the needs of customers of all sizes
across key industries. In addition, we
offer wholesale and block discounting
facilities to smaller finance companies
and brokerages enabling them to
extend credit directly to SMEs.
Performance
Net loans to customers were up by over
£200m to £1.6bn, an increase of 17%
driven by organic origination of £1bn;
extending our Asset Finance franchise
to c50k small UK businesses.
We maintain a leadership position in
the competitive broker-introduced
market, supporting a range of customer
segments across a significant number
of asset classes. We have also
expanded our wholesale proposition,
up c60% year-on-year. Net interest
income was up 15% in the year to
£59.4m, with NIM down slightly to
4.1%, driven by changes in mix and
tenure, including the expansion of our
wholesale channel.
Impairments remained low at £5.6m
(2015: £4.8m), with the cost of risk
remaining broadly flat at 38bps,
reflecting the high quality book backed
by high-levels of tangible collateral.
The overall segmental profit increased
15% to £45.1m (2015: £39.3m).
Market and strategy
The asset finance market was worth
c£29bn of gross originations in
2016, growing by 7% year-on-year.
Aldermore operates as a leader within
the £5bn broker segment (which grew
9%) providing both straightforward
forms of asset finance in addition to
complex and structured deals which
play to our specialist underwriting
advantage. We are also increasing our
share of smaller transactional deals
and ‘soft assets’, which grew 15% year
on year.
Consolidating our leadership in the
broker market will be driven by our
on-going investment programme in
digital capability, aimed at enhancing
our service offering by making it
simpler for brokers to deal with us,
especially in less complex cases.
This capability can then be leveraged
into new market adjacencies, including
the £9bn vendor finance market.
2016
£m
59.4
4.2
63.6
(12.9)
(5.6)
45.1
2015
£m
51.8
4.3
56.1
(12.0)
(4.8)
39.3
1,573.4
994.2
1,346.7
893.0
6.0
4.1
0.38
6.3
4.3
0.40
Movement
%
15
(2)
13
(8)
(17)
15
17
11
(0.3)
(0.2)
(0.02)
The market is likely to remain
competitive in 2017, driven by new
entrants and consolidation in the
broker channel, and we expect to see
a continued trend toward wholesale
deals. However, customer demand
remains robust, with Aldermore well-
positioned as market leaders to take
our natural share of a growing market.
Strategic report 21
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Banking for the bold
Flexible finance
ECS Engineering Services Ltd (ECS), a
leading engineering company in Huthwaite
near Mansfield, put in place the means to
grow its business with the purchase of
a new metal plate machine. The machine
was funded by Aldermore and arranged
by Newark-based finance broker
FUNDINGROUND Ltd.
The new Peddinghaus plate machine
replaced an older unit, enabling ECS
to increase production capacity and
provide greater efficiency and flexibility
in their use of materials. This ultimately
allows the company to deliver improved
products to existing clients and to take on
new orders.
Aldermore worked closely with the
broker to understand ECS Engineering’s
requirements to ensure that the finance
facility was structured appropriately and
that the asset was delivered promptly.
We urgently required the new plate
machine to improve versatility,
efficiency and quality. We were really
grateful for both FUNDINGROUND’s
proactive approach and Aldermore’s
flexibility and speed of delivery.”
Neil Smith, Technical Director at ECS Engineering
22
Aldermore Group PLC Annual Report and Accounts 2016
Invoice Finance
2016 highlights
• Refocused strategy
delivering results
• Segmental result up 56% to £7.0m
• Administrative expenses
down 29%
• Net lending down slightly to
£154m
Invoice Finance provides working
capital solutions for UK SMEs, ranging
from vanilla invoice discounting
and full-service factoring to more
tailored customer solutions requiring
Aldermore’s in-house expertise.
Performance
Performance trends in Invoice Finance
have shown significant improvement as
a result of our strategy to consolidate
and focus on larger discounting facilities
to small businesses, demonstrated by a
56% increase in segmental profit.
Invoice Finance has a relatively short
lifecycle compared to the Group’s other
portfolios, whilst net lending declined
slightly by 4% in 2016 to end the year at
£154.1m (2015: £160.8m), 19% growth
in originations reflects our continuing
focus toward invoice discounting and
structured finance and away from lower
value factoring business.
Net interest income
Net fees and other income
Operating income
Administrative expenses
Impairment losses
Segmental profit
Net loans to customers
Organic origination
Net revenue margin (%)
Net interest margin (%)
Cost of risk (%)
Fee income of £14.2m declined by
£1.0m as we refocused and managed
down customer numbers, reducing
overall operating income by 7% to
£19.0m. Administrative expenses were
reduced by almost a third, reflecting
management action to increase
efficiency and focus the customer base
whilst broadly maintaining overall net
lending balances.
Impairments remain low, increasing
by £0.2m to £1.7m, with a cost of risk
at 108bps.
2016
£m
4.8
14.2
19.0
(10.3)
(1.7)
7.0
154.1
41.7
12.1
3.0
1.08
2015
£m
5.3
15.2
20.5
(14.5)
(1.5)
4.5
160.8
35.1
12.0
3.1
0.88
Movement
%
(9)
(7)
(7)
29
(13)
56
(4)
19
0.1
(0.1)
(0.20)
Market and strategy
The Invoice Finance business continues
to offer a vital working capital solution
for Britain’s small businesses and
provides a valuable contribution to
the Group, as well as the potential for
further opportunities for lending to
small businesses. Aldermore remains
a small player with less than 1% of the
£21bn market.
We will continue to deploy a focused
strategy, targeting key clients through
enhanced sales capability, where we
can develop relationships and support
client growth. As we grow the client
base and net lending, we will continue
to drive efficiencies in the operating
structure and enhance profitability.
Strategic report 23
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Banking for the bold
Sitting pretty
Caldeira Limited, the UK’s leading cushion
manufacturer, prides itself on delivering
quality combined with excellent value to
its many retail clients around the world.
The company has received a host of
accolades, including being named among
Richard Branson’s Sunday Times/Virgin
Atlantic Fast Track 100 companies, and since
starting in Liverpool in 1991 has expanded
into China and the USA.
Caldeira wanted to continue the growth
and development of its three divisions and
to expand its customer base. Like Caldeira,
Aldermore prides itself on delivering quality
service and value to businesses across the
UK and was able to understand Caldeira’s
business and unlock valuable working
capital with a £1.25m invoice finance facility,
enabling the company to continue to build its
reputation as a market leader in a highly-
competitive global industry.
Aldermore has a reputation as a
great alternative to the high street
lenders and I’ve been impressed by
what I’ve seen so far, especially from
the business development team. I’m
looking forward to Caldeira’s next
stage of growth and to developing our
business worldwide.”
Tony Caldeira, Founder and Managing Director,
Caldeira Limited
24
Aldermore Group PLC Annual Report and Accounts 2016
SME Commercial Mortgages
2016 highlights
• Net lending to customers up by
12% to £0.9bn
• Customer numbers up 26%
to c.2,000
• Organic origination of £435m
• Direct origination around 25%
• Segment result up 44% to £40.7m
Our SME Commercial Mortgages
business provides mortgages for
investment in shops, warehouses,
industrial units and offices or for
residential Property Development (PD)
distributed via financial intermediaries
or directly to customers.
Performance
In 2016, we grew net loans to customers
by 12% to £930m (2015: £829m) driven
by robust organic origination partially
offset by increased redemptions.
Approximately 75% of originations
were introduced via specialist
brokers, with whom we have strong
relationships. A further c25% engaged
with us directly, as we continue to see a
growing volume of repeat business.
Net interest income
Net fees and other income
Operating income
Administrative expenses
Impairment losses
Segmental profit
Net loans to customers
Organic origination
Gross interest income yield (%)
Net interest margin (%)
Cost of risk (%)
The net interest margin increased
slightly by 21bps to 5.2% which,
combined with momentum in loan
growth, has driven a 33% increase
in operating income to £46.7m
(2015: £35.0m). The reduction in
operating expenses over the year
reflects our focus on improving
operating leverage as well as the
greater allocation of operational
resources to other Mortgages
segments in 2016 to support growth.
Despite impairments in 2016 including
greater prudence in collective
provisioning, they remained low at
£2.9m (2015: £2.0m), reflecting the
low levels of arrears and continued
relatively benign credit environment.
The book remains backed by high
quality tangible collateral with indexed
loan to value, excluding PD, of 62%
(2015: 63%). Our PD business had
£229m of loans outstanding at the year
end, with a loan to gross development
of 58%. In total, the segmental profit
for SME Commercial Mortgages
increased by 44% to £40.7m in 2016
(2015: £28.2m).
2016
£m
45.4
1.3
46.7
(3.1)
(2.9)
40.7
929.9
435.1
6.6
5.2
0.33
2015
£m
34.2
0.8
35.0
(4.8)
(2.0)
28.2
829.2
427.6
6.5
5.0
0.29
Movement
%
33
63
33
35
(45)
44
12
2
0.1
0.2
(0.04)
Market and Strategy
The commercial mortgage market was
worth c£43bn in originations during
2016, of which Aldermore represented
less than 1%, focused on multi-let
commercial investment property
loans and property development to
experienced regional developers.
Aldermore differentiates itself through
its specialist underwriting capability
and strong service proposition,
enabling us to generate strong margins.
Our commercial underwriters work
closely with customers and our
approved panel of c1k specialist brokers
to understand the property use, the
tenant covenant and the local market
dynamics to underwrite effectively,
and earn a premium.
The segments in which we operate
are expected to remain competitive.
However, we will continue to deploy
our specialist underwriting advantage
in our core niches. Specialist brokers
will continue to be our priority route
through which we serve our customers
but we will also seek to continue to
expand our direct origination capability.
Strategic report 25
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Banking for the bold
Building for
the future
Jamie Barnett and Nicki Cadwallander, joint
owners of Worcester Properties Ltd, have a
long-standing relationship with Aldermore
going back five years. Specialising in student
properties, Jamie and Nicki were initially
introduced to Aldermore through a broker.
From starting with one house, Worcester
Properties Ltd is now the largest single
provider of student accommodation in
Worcester and is involved in larger new
builds for students.
During 2016, Aldermore assisted with two
Worcester Properties loans, both units
planned for further development. One was
the previously disused Butlers Gym in
Worcester. The gym is now being converted
into a 48 bed student house of multiple
occupation property. Once completed, it will
be refinanced and let out to students on an
annual basis.
Separately, a new development finance
deal has been agreed for a 70-room facility
to service Warwick University. The end
value of the property is expected to be
almost triple the purchase price once the
development is completed.
We regard Aldermore as a partner or
colleague rather than just a lender.
We have a great relationship with
them, and we always have Aldermore
in mind when we approach new deals.”
Jamie Barnett and Nicki Cadwallader,
Worcester Properties Ltd
26
Aldermore Group PLC Annual Report and Accounts 2016
Buy-to-Let
Net interest income
Net fees and other income
Operating income
Administrative expenses
Impairment losses
Segmental profit
Net loans to customers
Organic origination
Gross interest income yield (%)
Net interest margin (%)
Cost of risk (%)
A modest increase in the cost of risk
to 12bps is in line with expectations
and remains low. The increase is
partly driven by increased prudence in
collective provisioning as we extended
emergence periods by three months to
reflect increased economic uncertainty.
The quality of the book remains robust,
with average loan balances of just
£170k across the portfolio and an
indexed LTV of 63%. The segmental
result demonstrated excellent
progress, growing by 26% to £83.1m
(2015: £66.0m).
Market and strategy
The BTL market was worth c£41bn in
2016, representing c14% of the overall
mortgage market. Aldermore is a
mainstream player in BTL and took a
c3.2% market share of originations in
the year but with an overall market
share of c1% in this market, we have
clear headroom for growth.
2016
£m
90.4
6.8
97.2
(10.7)
(3.4)
83.1
3,326.0
1,289.2
4.7
3.1
0.12
2015
£m
73.3
3.0
76.3
(9.0)
(1.3)
66.0
2,417.9
673.1
5.0
3.3
0.06
Movement
%
23
127
27
(19)
(162)
26
38
92
(0.3)
(0.2)
(0.06)
Our proposition offers market-leading
breadth of offering for all landlords
but our clear differentiation is at the
specialist end of the market, with
professional landlords (more than three
properties) who represent c60% of our
portfolio. Our distribution strategy is
primarily broker-led but with a growing
proportion of customers, 20% in 2016,
engaging with us directly. We have a
diverse geographic footprint but a bias
towards the strong rental markets in
Greater London and the South East.
The fundamentals supporting
demand in the BTL market remain
strong. There remains a shortage of
housing stock and new housebuilding
continues to lag Government targets.
Whilst regulatory changes to personal
tax relief, underwriting and affordability
testing are expected to reduce the
overall rate of market growth, we
expect to benefit from the increased
professionalisation of demand and
to continue outgrowing the market,
building on our small market share.
2016 highlights
• Net lending to customers up by
38% to £3.3bn
• Customer numbers up 25%
to c20k
• Organic origination of £1.3bn
• Direct origination of c20%
• Consolidation of operations in
one centre of excellence
• Segment result up 26% to £83.1m
Buy-to-Let (BTL) provides a
comprehensive proposition catering for
both individual and corporate landlords,
simple to complex properties, including
HMOs, and from a single property
investment to large portfolios.
Performance
We significantly outperformed the
market in 2016, growing net loans
by 38% to £3.3bn, driven by a 92%
increase in organic origination to
£1.3bn. This strong growth also reflects
our operational agility, as we took
advantage of the market spikes in the
first quarter, ahead of the introduction
of an increase in stamp duty, and in the
fourth quarter when we successfully
took share in an active market.
Strong lending growth and a broadly
stable net interest margin drove
a 23% increase in net interest
income to £90.4m (2015: £73.3m).
Operating income was up 27% to
£97.2m, with fee income benefitting
from record application numbers, as
we grew our customer base by 25%
to c20k.
The £1.7m increase in administrative
expenses is driven by an increased
allocation of operational resources
to support the strong loan growth
delivered in the year.
Strategic report 27
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Banking for the bold
Banking on
your terms
Shoaib Cheema is an experienced
landlord with a buy-to-let portfolio of five
properties, but a first-time Aldermore
customer. He first met one of our
representatives at a London property show,
and decided to approach us directly for a
five-year fixed rate limited-edition deal.
“I approached Aldermore primarily as I found
their product range interesting and very
attractive when compared to the other
rates available on the market at the time.”
With the uncertainty caused by the EU
referendum vote, Mr Cheema was looking
for a deal to provide him with longer-
term security, and chose Aldermore’s
five-year fixed product to give him just
that. Our specialist team was able to take
Mr Cheema’s application through to offer in
just 17 working days.
Dealing with Aldermore was very pleasant
and the process was very smooth. I found
Aldermore very responsive, professional
and precise. They placed a much higher
emphasis on providing help to the
customer compared to other lenders.”
Shoaib Cheema,
Buy-to-let investor and satisfied customer
28
Aldermore Group PLC Annual Report and Accounts 2016
Residential Mortgages
2016 highlights
• Net lending to customers up by
7% to £1.5bn
• Customer numbers up 8% to c11k
• Organic origination of £0.5bn
• ‘Best Specialist Mortgage
Lender’ – Your Mortgage
• Investment in customer
proposition and retention
• Segment result up 12% to £45.1m
Net interest income
Net fees and other income
Operating income
Administrative expenses
Impairment losses
Segmental profit
Net loans to customers
Organic origination
Gross interest income yield (%)
Net interest margin (%)
Cost of risk (%)
Residential Mortgages serves
creditworthy first-time buyers, the
self-employed and professionals, who
often fall outside the automated and
inflexible lending criteria of some of the
mainstream providers.
Performance
The Residential Mortgages portfolio
grew by 7% in 2016 to £1.5bn
(2015: £1.4bn), driving net interest
income up by 13%. This growth was
driven by £466.0m of originations
which were lower than in 2015
(2015: £582m) due to a greater focus
on buy-to-let in 2016. Originations in
2016 were partly offset by redemptions
increasing to £365.6m (2015: £171.8m)
which was weighted to the second half
of the year due to the maturity of the
high yielding first cohort of Help to Buy
mortgages written in mid-2014.
The net interest margin reduced by
c30bps to 3.4% (2015: 3.7%), driven
by a number of factors, including the
reduction in the base rate and the
redemption of high-yielding first cohort
of Help to Buy customers.
The reduction in operating expenses
over the year reflects our focus on
improving operating leverage as well as
the allocation of operational resources
between Mortgages segments to
support loan growth, which is based
on origination activity and net loan
balances. Despite increased prudence
in collective provisioning, impairments
remained low at £1.9m (2015: £0.8m),
reflecting the relatively low levels of
arrears and continued benign credit
environment. The overall segmental
profit increased 12% to £45.1m
(2015: £40.1m).
Market and strategy
The residential mortgage market was
worth c£205bn in originations during
2016, of which Aldermore represented
just 0.2%, focused on specialist sub-
segments, including first time buyers,
the self-employed and professionals.
We are differentiated through our use
of specialist underwriting capabilities
which complement modern credit
rating engines. Our system-driven
approach automatically completes
basic checks, creates a case file, and
highlights areas for further review
enabling our human underwriting
team to make better informed credit
decisions, with greater efficiency.
The mortgages platform, operated
across all three mortgage segments,
underwent an upgrade during 2016,
driven by requirements from the
Mortgage Credit Directive but also
2016
£m
49.6
1.9
51.5
(4.5)
(1.9)
45.1
1,493.9
466.0
5.3
3.4
0.13
2015
£m
43.8
2.2
46.0
(5.1)
(0.8)
40.1
1,390.2
582.3
5.6
3.7
0.07
Movement
%
13
(14)
12
12
(138)
12
7
(20)
(0.3)
(0.3)
(0.06)
providing an opportunity for us to
enhance system functionality, including
the development of a product switching
portal, which will enable future growth
in our target segments going forward.
Aldermore operates as a small
player in specific niches and we are
confident that we can continue organic
origination-led growth within the large
residential market. Specifically, the
Mortgage Indemnity Guarantee (MIG)
product that we introduced to follow-
on from the Government’s Help to Buy
Mortgage Guarantee scheme, and a
package of measures to enhance our
proposition and service to the self-
employed market are expected to drive
increased origination activity.
Strategic report 29
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Banking for the bold
Seeing the wood
for the trees
Darren Herrington owns and runs his
own business, Somerset Forestry, which
provides tree surgery and all aspects of tree
care. Somerset Forestry has posted strong
profits over the past few years and Darren
was looking to move from his flat into a
three-bedroom terraced home with his wife
and two children.
The mortgage on his flat was with a major
high street lender, and as a long-time
customer, he went to them first. However,
during the application process Darren
found that the high street bank didn’t fully
understand his accounts or his business.
Focusing on growing his business, Darren
had been paying himself only what he
needed to get by and investing the rest
in new machinery and equipment, some
of which he had financed with Aldermore.
He approached us about taking out a
mortgage for his new home and our
specialist underwriters were able to review
his accounts and approve his application.
With the high street banks, all they look
at is what you earn and what you pay in
tax. Aldermore was different, the team
understands how a self-employed business
works… Everything went very smoothly.”
Darren Herrington, Business (and home) owner
30
Aldermore Group PLC Annual Report and Accounts 2016
Central functions
Savings, Treasury and
Support Functions
2016 highlights
• Total deposits up by 16%
to £6.7bn
• SME deposits up by 18% to £1.6bn
• Corporate deposits up by 66%
to £260m
• Customer numbers up by 12%
to c134k
• Highly recommended by
customers (Retail 93%,
Business 97%)
Central Functions includes the Group’s
Treasury function and Savings division,
as well as common costs which are not
directly attributable to the operating
segments. Common costs include
central support function costs such as
Finance, IT, Legal and Compliance, Risk
and Human Resources.
Performance
Net interest income includes the
interest expense relating to the Tier
2 Notes and part of the income or
expense arising from derivatives held
at fair value in hedging relationships,
neither of which are recharged
to segments.
Net fees and other income
predominantly includes the net
expense or income from derivatives
not currently recognised as being
in hedging relationships and other
financial instruments at fair value
through profit or loss and gains
on disposals of available for sale
debt securities.
Central administrative expenses,
increased by 11% to £81.8m (2015: £74.2m)
driven by the recruitment of colleagues as
we invested to further support growth and
risk management.
Net interest income
Net fees and other income
Operating income
Administrative expenses
IPO-related costs
Impairment of Invoice Finance goodwill
Segmental loss
2016
£m
(10.2)
(0.3)
(10.5)
(77.7)
-
(4.1)
(92.3)
2015
£m
(9.5)
0.3
(9.2)
(70.1)
(4.1)
-
(83.4)
Movement
%
(7)
(200)
(14)
(11)
-
-
(11)
We continue to focus on small
businesses where insight and research
demonstrates a clear customer
demand and market opportunity.
Inflationary pressures in the economy
suggest that we may have reached
the bottom of the interest rate cycle
and base rate movements are more
likely to be upwards. This, together with
increases in the annual ISA allowance
(to £20k) and FSCS deposit protection
limit (to £85k), means the outlook for
savings customers is positive.
At the end of 2015, we held goodwill
of £4.1m related to the acquisition of
Absolute Invoice Finance (Holdings)
Limited which was supported using
a Fair Value less Cost of Disposal
methodology. During 2016, as a result
of the general fall in market values of
financial services businesses following
the EU referendum, management
concluded the goodwill balance
was fully impaired and a charge of
£4.1m has been recognised in the
income statement.
The segmental result was a charge of
£92.3m (2015: charge of £83.4m).
Savings market and strategy
The market for savings in 2016
continued to be dominated by a
backdrop of low and falling interest
rates from a lower base rate and
reduced competition for deposit
funding in response to Bank of England
funding schemes. In particular, the
SME savings market remains highly
attractive given the opportunity for
non-traditional providers to offer
a demonstrably better customer
proposition – both in terms of rate
and experience.
Strategic report 31
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Risk management, internal
control and viability reporting
Assessment of principal risks
As described further in the risk
management section, the Board is
responsible for determining the nature
and extent of the principal risks it
is willing to take in order to achieve
its strategic objectives. The Board
is also ultimately responsible for
maintaining sound risk management
and internal control systems. In line
with requirements of the UK Corporate
Governance Code, published by
the Financial Reporting Council in
September 2014 (the “Code”), the
Directors have performed a robust
assessment of the principal risks facing
the Group, including those that would
threaten its business model, future
performance, solvency or liquidity.
The principal risks are further described
on page 33 and the current emerging
risks are described on pages 34 and 35.
Risk management and
internal controls
The Board monitors the Group’s risk
management and internal control
systems. A review of the effectiveness
of the systems has been performed
incorporating all material controls,
including financial, operational and
compliance controls.
The Group’s risk management and
internal control systems are designed
to identify, manage, monitor and report
on risks to which the Group is exposed.
It can therefore only provide reasonable
but not absolute assurance against the
risk of material misstatement or loss.
Further details of the processes and
procedures for managing and mitigating
these risks are provided in the risk
management section from page 106.
The effectiveness of the internal controls
was regularly reviewed by the Board, Audit
Committee and Risk Committee during
the year. This involved receiving reports
from management including reports from
Finance, Risk, Compliance, Group Internal
Audit and the business lines. The Audit
Committee also receives reports on
internal controls from the Group’s external
auditor. Where recommendations
are identified for improvements to
controls these are monitored by Group
Internal Audit who report the progress
made in implementing them to the
Audit Committee.
Based on the review performed during
the year, and the monitoring and
oversight activities performed, the Audit
Committee, in conjunction with the Risk
Committee, concluded that the Group’s
risk management and internal control
systems were effective. The Audit
Committee recommended a statement to
this effect to the Board.
Based on this assessment, the Board are
satisfied with the effectiveness of the
Group’s risk management and internal
control systems.
Viability
In accordance with provision C.2.2
of the Code, the Directors have
assessed the prospects of the Group
over a three-year time horizon to
31 December 2019.
The Directors concluded that a three-
year time horizon is an appropriate
length of time to use to perform the
assessment, mainly because financial
forecasts have a greater level of
certainty over three years. The Board
monitors a longer term strategic plan
which extends over the three-year
horizon. This longer term strategic plan
provides less certainty of outcome, but
provides a robust planning tool against
which strategic decisions can be made.
In the assessment of the viability of the
Group, the Directors considered each
of the principal risks set out on page
33 of the strategic report. In addition,
the assessment has been performed
with reference to the Group’s current
position and strategy.
In making this assessment the
Directors have considered a wide range
of information relating to present and
future conditions, including the current
state of the balance sheet, future
projections of profitability, cash flows
and capital resources. The Directors
have also considered the implications of
the UK referendum on EU membership.
The information considered includes a
wide range of stress testing which is
performed as part of both the ICAAP
and ILAAP processes as further
described in the Risk Management
Section from page 106.
Based on the above assessment, the
Directors have concluded that there is a
reasonable expectation that the Group
will be able to continue in operation and
meet its liabilities as they fall due over
the period to 31 December 2019.
32
Aldermore Group PLC Annual Report and Accounts 2016
Risk overview
and culture
Our approach to risk
Effective risk management is a
core component of the Group and is
embedded throughout the organisation.
The Board and senior management
ensure that a strong risk culture is at
the heart of everything we do, with a
clearly defined risk appetite.
Risk Management
Framework
The Risk Management Framework
outlines the process by which we
identify, manage, monitor and report
risks to which the Group is exposed.
The framework is supported by
supplemental frameworks, policies,
processes and procedures which
ensure that the Group’s risks are
managed appropriately and within
the Board sanctioned risk appetite.
More detail is provided on page 108.
Principal risks:
Principal risks are the primary risks
that the business faces, which could
impact the delivery of our strategy.
Read more about those risks and how
they are managed opposite and in detail
on page 112.
Emerging risks:
Emerging risks are those risks that
have been identified on the horizon,
which may have an impact on our future
performance, compromise our existing
strategy or threaten our business
model. These risks are discussed on
pages 34–35.
Legal and Regulatory risks:
We operate within the context of the
UK legal and regulatory environment
(as well as European law adopted
and supported by UK regulators).
The Legal and Compliance functions
ensure that we are aware of both
current and upcoming legal or
regulatory requirements.
Risk principles and risk culture
Risk culture
Strong ris
k g
t
n
e
k manag e m
nd contr o l
a
Ris
Franchise
preservation
D
e
fi
n
e
d
ri
s
k a
ppetite
e
p
s i g
d
I n
o v e r
o
v
e
r
n
a
n
c
e
k
e
g
n
e n dent ris
alle
h t and ch
Franchise preservation
The protection of our reputation and franchise
is paramount. Everything we do is guided by
the principle of putting the customer at the
centre of what we do. It informs our business
strategy, the way in which we do business, and
the manner in which we treat our customers and
other stakeholders.
Risk culture
The Board ensures that the Group actively
embraces a strong risk culture, where all staff are
accountable for the risks they take. The Board
leads in setting the risk appetite and ensuring
that the Risk Management Framework is fully
embedded with a strong focus on the adherence
to risk appetite in all metrics. Staff performance
management and reward practices all have key
risk inputs, and a focus on risk management in
their design. The Group aims for employees to be
risk aware, and to strike the right balance between
delivering on objectives, individual accountability,
and maintaining a safe and secure business
adhering to risk appetite
Strong risk governance:
Risk is managed using the three lines of defence
principle – separating risk origination from risk
oversight and risk assurance. Governance is
provided through a formal committee process,
including the Board Risk and Audit Committees.
Defined risk appetite
A clearly defined Risk Appetite Framework is in
place which allows the setting of detailed risk
appetite and reporting metrics for principal risks.
Independent risk oversight and challenge
Risk is the risk oversight and challenge function,
independent of the businesses and functions, with
a reporting line to the Board Risk Committee. It is
the basis of the second line of defence.
Risk management and control
Risks are identified, managed, monitored and
reported against pre-determined risk appetite
where appropriate. All are subject to governance
and controls. Responsibility for the identification,
assessment, measurement, monitoring and
management of the risks rests with the first line of
defence, being the business units and functions.
Strategic report
33
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Principal risks
Key:
Up
Stable
Down
Principal risk
Mitigation
Commentary
Credit Risk
The risk that customers
are unable to make their
loan repayments.
Capital and Liquidity Risk
The risk that we fail to hold
sufficient or appropriate
reserves to support growth,
meet regulatory requirements,
or repay obligations as they
fall due.
Market Risk
The risk that market
movements adversely impact
the Group.
• Focus lending where we have specific expertise
• Limit concentration of lending by size, geography
and sector
• Obtain appropriate level of security cover and perform
affordability testing at origination
• Embed clear lending policies in each business area
• Regularly review performance against risk appetite
• Stress test the portfolio to test resilience
• Monthly monitoring of capital adequacy against
targets and forecasts
• Maintenance of a liquidity buffer based on
stressed requirements
• Daily monitoring of liquidity buffer
• Stress testing and sensitivity analysis of both capital
and liquidity
• Maintenance and annual review of the Contingency
Funding Plan
• Ongoing review, analysis and impact assessment of
regulatory changes
• We do not seek to take or expose the Group to market
risk and we do not carry out proprietary trading
• We match interest rate structures of assets and
liabilities to create a natural hedge where possible
• Unmatched interest rate exposures are hedged with
derivative ‘Swap’ contracts
Group cost of risk remains low
at 23bps (2015: 19bps) reflecting
the maturation of the book and a
move to less benign conditions.
The heightened uncertainty
for the UK economy following
the referendum vote, and the
implementation of the result,
has increased the possibility of
higher future credit losses.
The Group’s capital remains
stable and well above regulatory
minimum requirements.
We successfully raised
additional £60m Tier 2 capital
in October 2016.
The Group’s liquidity position
remains stable.
The Group’s approach remains
prudent and underlying risks
remain unchanged.
Operational Risk
The risk of loss due to failure in
processes, systems or human
error, including outsourcing.
• Embed and ensure all staff understand and follow the
Operational Risk Management Framework
• Analysis of Risk Event Reporting and follow-up actions
• Monitoring of the operational risk profile, and risk
The Group continues to invest
in its IT infrastructure including
Cyber controls and resilience.
Compliance, Conduct and
Financial Crime Risk
The risk of sanctions or
financial loss as a result
of a failure to comply with
applicable laws, including anti-
money laundering and the risk
of causing unfair outcomes or
detriment to customers.
Reputational Risk
Failure to meet the
expectations and standards
of our customers,
investors, regulators or
other counterparties.
event reporting
• Continuing to invest in information security and cyber
controls following our Cyber strategy
Implementation of a Third Party Supplier Framework
•
• The Group provides simple and transparent products
and operates solely in the UK market.
• Provide and monitor against clear policy frameworks,
including Conduct Risk and Product Governance
• Continued investment in staff training and awareness
• Horizon scanning and impact assessment of potential
regulatory change
• All governance committees have reputational risk
considerations as a key part of their remit
• Group Corporate Affairs monitors reputational risk,
under the executive direction of the Group CEO
• All employees are made aware of their responsibilities
under the Bank’s Reputational Risk Policy
• Maintenance of open and transparent relationships
with regulators and other key stakeholders
Whilst the financial services
sector remains subject to
increasing regulation and
scrutiny we believe our risks
remain unchanged from the
prior year.
We believe the risks remain
unchanged from the prior year.
34
Aldermore Group PLC Annual Report and Accounts 2016
Emerging risks
Themes
Risk
Regulatory change/intervention
Basel Committee on
Banking Supervision.
December 2015 Second
consultation on Revisions
to the Standardised
Approach for Credit
Risk proposals
IFRS 9
Buy-To-Let Mortgages
Tax Changes
and revised PRA
Underwriting Standards
In December 2015 the BCBS issued a second consultative document, (Revisions to the Standardised
Approach for Credit Risk) containing, amongst others, proposals to increase the capital treatment
of buy-to-let and commercial real estate lending. If these proposals were implemented as outlined,
the capital requirements for these market segments would increase significantly and require the
execution of management actions to mitigate their impact.
New reporting requirements under IFRS 9 introduce forward looking credit loss models which will lead
to changes in the timing of impairment recognition. The requirement, which comes in to effect from
1 January 2018, requires the development of new risk models. The risk is that the Group is unable to
deliver these before new regulation takes effect.
Potentially adverse impact on buy-to-let market of changes to UK tax regime and failure to comply
with expectations of the regulator set out in PRA Supervisory Statement on buy-to-let Underwriting
Standards issued in September 2016.
Economic and political environment
The UK’s decision to leave
the European Union
Heightened economic and political risks following the UK’s decision to leave the European Union. As a
UK focused Group, we are sheltered from the more direct impacts of the Referendum, such as access
to European markets but we are exposed to the wider economic impacts. To date we have seen no
direct impact on either the lending or deposit sides of our business.
International economic
and political environment
The geopolitical environment presents risks to global markets, including the impact of a new
administration in the USA, deflationary concerns in the EU and continued political risks in Russia and
the Middle East.
Exposure to real estate
We have a substantial lending exposure to the residential, buy-to-let, and commercial property
sectors. Any property value falls, or increase in unemployment may lead to a rising number of defaults.
Interest rate environment
The low interest rate environment, introduced to stimulate growth following the financial crisis,
has persisted for longer than first expected. If interest rates are increased, or growth slows,
unemployment may rise and loan servicing costs may increase, which could cause an increase in
credit losses.
Competitive environment
New entrants and
increased competition
Technology risk
Cyber-crime
The competitive landscape contains risks from new entrants, increased competition from incumbent
lenders and disruptive products/software solutions potentially affecting both lending and deposit
taking activities. The effect of this could result in lower volume, higher customer attrition and/or lower
net interest margins.
Cyber-crime is a significant threat in our increasingly interconnected world and exposes all businesses
and in particular financial services companies to financial as well as reputational damage.
Cyber threats continue to evolve as demonstrated by high-profile cases. The increased size of the
Group, and growing customer base, increases the profile of the Group to would-be cyber attackers.
We conducted an impact assessment of the proposed changes,
The IFRS9 work on credit models (see Emerging Risks
followed by scenario analysis including feasible management actions.
IFRS9) takes us closer to the sophistication required for
The Bank also undertook a feasibility study on transitioning from
Standardised to an Internal Ratings Based (IRB) approach to capital.
This included a gap analysis against current regulatory requirements
and has informed our thinking into possible responses, including
the possibility of applying for regulatory approval to operate in an
IRB environment.
an IRB approach to capital which may help to mitigate the
risk of future changes in capital requirements. We will
continue to monitor the cost and benefits associated to
moving to IRB, as the regulatory changes and timeframes
for implementation become clear.
We assessed the impact of IFRS 9 and have initiated a project plan
We are on track with enhancements to our credit
to ensure compliance with the new standard ahead of its proposed
risk models and expect to be IFRS9 compliant ahead
implementation date of 1 January 2018.
of January 2018 when the new accounting standard
is introduced.
Continued monitoring of Buy-to-Let business levels.
Amendment to Buy-to-Let affordability calculation (interest cover
ratio and stress rate) in December 2016 to meet expectations in
PRA’s supervisory statement.
Further review of PRA’s expectations in terms of portfolio
landlords and use of personal income in affordability
calculation, with expectation that all changes to
approach considered necessary will be introduced by the
30 September 2017 deadline
The Group incorporated these risks in stress testing conducted
during 2016.
The Group will continue to monitor the situation and will
decide on an appropriate response, based on internal
scenario planning, as the situation develops.
We have monitored these risks, and the UK economy has remained
The medium-term outlook is unclear and there remains
robust in the face of these domestic and global headwinds. As a UK-
a possibility that material international events could
focused business we have not felt any adverse consequences across
adversely affect the UK, in addition to any EU exit impacts.
our trading franchise.
These could act as a drag on the UK economy and affect
the sectors to which we lend. We aim to manage these
risks by maintaining a well-diversified product base, and
remaining firmly focused on the UK.
The Group continued to monitor and manage the performance of our
The risks are expected to remain unchanged in 2017.
real estate backed lending, and identified no significant change in
performance in 2016.
We also continued to enforce our underwriting criteria, which
includes affordability testing at the point of origination.
We conducted specific stress testing on our loan portfolio and
maintained strict underwriting criteria, which includes stressing
affordability rates at interest rates above those being paid today.
We will continue to monitor the external environment and
respond to any interest rate rises as appropriate.
The risk of competition has been incorporated in our forward planning
We will continue to monitor the external environment and
process and the external market is monitored on a consistent basis.
adapt accordingly.
During 2015, and continuing into 2016, we strengthened our defences
This remains a key risk area and the Group will continue to
against cyber-crime.
invest in ongoing security improvements.
We have a cyber risk response plan, which involves working with our
technology partners, and ensures that there is a practical response
and appropriate escalation.
System failure/
outsourcing
The Group has a number of major outsource partners and critical supplier relationships who are key
elements of the overall supply chain. The failure of one of these key partners could significantly impact
the Group’s operations and reputation.
The Group has controls in place in relation to sourcing and onboarding
Continued focus during 2017 as the updated framework is
suppliers. In 2016, work was begun to further enhance the supplier
implemented across the supplier estate.
management framework.
Strategic report
Regulatory change/intervention
Basel Committee on
Banking Supervision.
December 2015 Second
consultation on Revisions
to the Standardised
Approach for Credit
Risk proposals
IFRS 9
Buy-To-Let Mortgages
Tax Changes
and revised PRA
Underwriting Standards
In December 2015 the BCBS issued a second consultative document, (Revisions to the Standardised
Approach for Credit Risk) containing, amongst others, proposals to increase the capital treatment
of buy-to-let and commercial real estate lending. If these proposals were implemented as outlined,
the capital requirements for these market segments would increase significantly and require the
execution of management actions to mitigate their impact.
New reporting requirements under IFRS 9 introduce forward looking credit loss models which will lead
to changes in the timing of impairment recognition. The requirement, which comes in to effect from
1 January 2018, requires the development of new risk models. The risk is that the Group is unable to
deliver these before new regulation takes effect.
Potentially adverse impact on buy-to-let market of changes to UK tax regime and failure to comply
with expectations of the regulator set out in PRA Supervisory Statement on buy-to-let Underwriting
Standards issued in September 2016.
Economic and political environment
The UK’s decision to leave
the European Union
Heightened economic and political risks following the UK’s decision to leave the European Union. As a
UK focused Group, we are sheltered from the more direct impacts of the Referendum, such as access
to European markets but we are exposed to the wider economic impacts. To date we have seen no
direct impact on either the lending or deposit sides of our business.
International economic
and political environment
The geopolitical environment presents risks to global markets, including the impact of a new
administration in the USA, deflationary concerns in the EU and continued political risks in Russia and
the Middle East.
Exposure to real estate
We have a substantial lending exposure to the residential, buy-to-let, and commercial property
sectors. Any property value falls, or increase in unemployment may lead to a rising number of defaults.
35
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
What we did in 2016
What we expect in 2017 and Direction
Key:
Up
Stable
Down
Likelihood
change from
last year
We conducted an impact assessment of the proposed changes,
followed by scenario analysis including feasible management actions.
The Bank also undertook a feasibility study on transitioning from
Standardised to an Internal Ratings Based (IRB) approach to capital.
This included a gap analysis against current regulatory requirements
and has informed our thinking into possible responses, including
the possibility of applying for regulatory approval to operate in an
IRB environment.
The IFRS9 work on credit models (see Emerging Risks
IFRS9) takes us closer to the sophistication required for
an IRB approach to capital which may help to mitigate the
risk of future changes in capital requirements. We will
continue to monitor the cost and benefits associated to
moving to IRB, as the regulatory changes and timeframes
for implementation become clear.
We assessed the impact of IFRS 9 and have initiated a project plan
to ensure compliance with the new standard ahead of its proposed
implementation date of 1 January 2018.
We are on track with enhancements to our credit
risk models and expect to be IFRS9 compliant ahead
of January 2018 when the new accounting standard
is introduced.
Continued monitoring of Buy-to-Let business levels.
Amendment to Buy-to-Let affordability calculation (interest cover
ratio and stress rate) in December 2016 to meet expectations in
PRA’s supervisory statement.
Further review of PRA’s expectations in terms of portfolio
landlords and use of personal income in affordability
calculation, with expectation that all changes to
approach considered necessary will be introduced by the
30 September 2017 deadline
The Group incorporated these risks in stress testing conducted
during 2016.
The Group will continue to monitor the situation and will
decide on an appropriate response, based on internal
scenario planning, as the situation develops.
We have monitored these risks, and the UK economy has remained
robust in the face of these domestic and global headwinds. As a UK-
focused business we have not felt any adverse consequences across
our trading franchise.
The Group continued to monitor and manage the performance of our
real estate backed lending, and identified no significant change in
performance in 2016.
We also continued to enforce our underwriting criteria, which
includes affordability testing at the point of origination.
The medium-term outlook is unclear and there remains
a possibility that material international events could
adversely affect the UK, in addition to any EU exit impacts.
These could act as a drag on the UK economy and affect
the sectors to which we lend. We aim to manage these
risks by maintaining a well-diversified product base, and
remaining firmly focused on the UK.
The risks are expected to remain unchanged in 2017.
Interest rate environment
The low interest rate environment, introduced to stimulate growth following the financial crisis,
has persisted for longer than first expected. If interest rates are increased, or growth slows,
unemployment may rise and loan servicing costs may increase, which could cause an increase in
We conducted specific stress testing on our loan portfolio and
maintained strict underwriting criteria, which includes stressing
affordability rates at interest rates above those being paid today.
We will continue to monitor the external environment and
respond to any interest rate rises as appropriate.
Competitive environment
credit losses.
Technology risk
Cyber-crime
New entrants and
increased competition
The competitive landscape contains risks from new entrants, increased competition from incumbent
lenders and disruptive products/software solutions potentially affecting both lending and deposit
taking activities. The effect of this could result in lower volume, higher customer attrition and/or lower
net interest margins.
The risk of competition has been incorporated in our forward planning
process and the external market is monitored on a consistent basis.
We will continue to monitor the external environment and
adapt accordingly.
Cyber-crime is a significant threat in our increasingly interconnected world and exposes all businesses
and in particular financial services companies to financial as well as reputational damage.
Cyber threats continue to evolve as demonstrated by high-profile cases. The increased size of the
Group, and growing customer base, increases the profile of the Group to would-be cyber attackers.
During 2015, and continuing into 2016, we strengthened our defences
against cyber-crime.
We have a cyber risk response plan, which involves working with our
technology partners, and ensures that there is a practical response
and appropriate escalation.
This remains a key risk area and the Group will continue to
invest in ongoing security improvements.
System failure/
outsourcing
The Group has a number of major outsource partners and critical supplier relationships who are key
elements of the overall supply chain. The failure of one of these key partners could significantly impact
the Group’s operations and reputation.
The Group has controls in place in relation to sourcing and onboarding
suppliers. In 2016, work was begun to further enhance the supplier
management framework.
Continued focus during 2017 as the updated framework is
implemented across the supplier estate.
36
Aldermore Group PLC Annual Report and Accounts 2016
Corporate responsibility
Our overriding principle is to support the people of Britain in their professional and personal lives.
We do this by acting responsibly, giving back and taking a collaborative approach with our
stakeholders. We believe that a business cannot deliver sustainable long-term returns without
considering its wider impact on society.
Our customers
More customers than ever before bank with Aldermore. At the end of 2016, we served over 220k customers, an increase of
14% compared to the end of 2015.
Listening to feedback
Putting customers first
Acting responsibly
1. We listen to our customers and
take on board their feedback
2. We run the business in the interest
of customers
3. We are sensitive to every
customer’s situation
• Received an average score of 4.5
• Actively manage our cash flow to ensure
• Consider each customer as an individual
out of 5 through our online Ratings &
Reviews service
• 94% of customers said that they
would recommend Aldermore
that we can repay our depositors
rather than taking a one-size-fits all approach
• Employ a combination of manual and
automated underwriting to ensure we
are lending responsibly
• Treat vulnerable customers sensitively,
providing a flexible, tailored service to
meet their needs
• Launched our Voice of the Customer
programme to enable us to collect real-
time customer feedback and respond to it
• Ensure that our customers understand
terms and conditions, including lock-
in periods
• Ethos of treating customers fairly
underpinning all of our policies
and processes
What we did during the year and how our approach supported our business:
• We actively use customer feedback that we receive through our online Ratings &
Reviews service to improve our offering. During 2016, we received an average rating
of 4.5 out of 5 and 94% of customers who posted feedback on our website
said they would recommend us.
Case study
Supporting
first time
buyers
•
In 2016, we launched our Voice of the Customer programme to enable us to collect customer
feedback in real-time. As part of this programme, we enhanced our methodology for
measuring NPS, enabling us to gain a deeper understanding of how our customers and
brokers feel about our service and providing insights to help us improve. Our overall
customer NPS increased from +29 in 2015 to +43 in 2016 driven by our competitive interest
rates, security and flexible lending criteria.
Customer numbers
2016
2015
222,917
195,061
Customer Net Promoter Score (NPS)
+43
+29
Average Ratings & Reviews score
4.5 out of 5
4.6 out of 5
Industry awards
New lending to small and medium-sized
enterprises
13
25
£1.47bn
£1.36bn
%
change
14
N/A
N/A
(48)
8
First time buyers are critical to the effective
functioning of the housing market.
During 2016, we helped 1,403 first time
buyers to take their first step onto the
property ladder.
Aldermore has been an enthusiastic
supporter of the Government’s Help to
Buy scheme for several years. We were
one of the first lenders to take part in the
scheme and the first to allow borrowers to
remortgage onto Help to Buy products.
We were also one of the first organisations
to offer the Help to Buy: ISA. We continue
to provide this product, incentivising more
people to save and enabling first time buyers
to build a deposit towards their first home.
Strategic report 37
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Our people
It is thanks to our people that we are able to offer a superior service to our customers. During 2016 we placed a great deal of focus on
our culture, including how we encourage diversity in our workplace, engage our colleagues and drive expertise throughout Aldermore.
Promoting diversity
Engaging our people
Building expertise
1. We are committed to diversity in
2. We include our people in the future
the workplace
of our business
• Committed to equal opportunities for all
our people, irrespective of gender, race,
colour, age, disability, sexual orientation
or marital or civil partner status
• Amongst first banks to sign up to HM
Treasury’s Women in Finance Charter
• Maintained our employee gender split
at around 50/50
• Launched the Big Conversation, our new
approach to engaging with our people
• Held our 2016 Employee Summit to allow all
colleagues to hear from and interact with
our Executive team
• Ran our first extended wellbeing
programme, encouraging our people to
look after themselves at work and at home
3. We support the professional
development of our people
• Supported future leaders through our
‘Next Generation Leaders’ and ‘Aspiring
Managers’ programmes
• First round of graduations from our
Project Academy programme, which
has been designed to improve project
management capability across the Bank
What we did during the year and how our approach supported our business:
• We signed up to HM Treasury’s Women in Finance Charter, which aims to increase female
representation in senior management roles in the financial sector, committing to increasing
the proportion of female senior managers at Aldermore to 30% by 2020 and to maintaining
our gender split at around 50/50.
• To support our commitment to greater female representation, we launched the Women@
Aldermore network which brings in senior women from outside the business to provide
advice and insight to our female employees about how to progress their careers.
•
In October, we held our 2016 Employee Summit allowing all of our people to come together
in one place to network, hear from our Executive team and discuss the future of the
Bank. Following the event, 91% of employees said that they were proud to be part of the
Aldermore journey.
Employees
Number of employees *
Number of female employees *
Percentage of female employees
Number of senior managers *
Number of female senior managers *
Percentage of female senior managers
Percentage of employees who say
they feel proud to be a part of the
Aldermore journey
Percentage of new joiners who came
through our Refer a Friend scheme
* Employee numbers as at 31 December 2016
2016
900
408
45%
26
5
19%
91%
23%
2015
816
383
47%
32
6
19%
90%
18%
%
change
10
7
(2ppt)
(19)
(17)
-
1ppt
5ppt
Case study
Facilitating
a Big
Conversation
Effective two-way communication is vital in
engaging our people and we place a great deal
of emphasis on listening to employees.
At our 2016 Employee Summit we launched
‘The Big Conversation’, our new approach
to engaging with our people which saw us
gather their views on how we can enable an
improved ongoing connection to Aldermore
and better deliver on our strategic objectives.
After the summit we invited over 300
employees to sessions across our offices
to provide their ideas and contributions.
These sessions were complemented by a
business-wide pulse survey, giving every
employee a chance to contribute.
The Big Conversation has been our most in-
depth discussion with employees ever, giving
us a deeper understanding of our culture.
38
Aldermore Group PLC Annual Report and Accounts 2016
Corporate responsibility
continued
Our communities and environment
The SMEs, landlords, homeowners and savers that we support, in turn support the communities in which they live and work.
We understand that we have a responsibility to give back to these communities.
Leading the industry
Giving back
Reducing our impact
1. We play our part as a responsible
2. We give back to the communities
3. We are committed to reducing our
member of the banking community
where we operate
environmental impact
• Actively involved with industry bodies
including the BBA, FLA, ABFA, CML
and IMLA
• Raised £26,739 for the Batten Disease
Family Association (BDFA), our charity
of the year
• Became a member of the Banking
• Our people spent 525 hours
Standards Board
volunteering for local charities and
other non-profit organisations
• Our total greenhouse gas emissions
during 2016 were 525tCO2e
• Our total greenhouse gas emissions per
employee were 0.59tCO2e
What we did during the year and how our approach supported our business:
•
In November 2016, Aldermore joined the Banking Standards Board, an independently led
body that promotes high standards of behaviour and competence across the UK banking
industry. As a member, we are playing our part in ensuring that the industry is trusted and
viewed as having a positive impact on the communities in which we operate.
Case study
Supporting broker
education
• A significant part of our fundraising efforts go towards our charity of the year, which is
chosen through a Bank-wide employee ballot. In 2016, our colleagues chose the Batten
Disease Family Association (BDFA) as our charity of the year. Our charity of the year for
2017 is Sands, the stillbirth and neonatal death charity.
• We piloted a volunteering programme with Employee Volunteering, the non-profit
organisation. This saw our employees spending over 525 hours helping charities and other
non-profit organisations local to our offices.
Communities
Amount raised for Charity of the Year
Amount matched by Bank through
£ for £ scheme
Number of hours volunteered by
our colleagues
2016
2015
£26,739
£19,399
£10,420
£9,488
%
change
38
10
525 Not reported
N/A
Environment*
Total greenhouse gas (GHG) emissions (tCO2e)
Total greenhouse gas (GHG) emissions per
employee (tCO2e)
2016
525
0.59
2015
721
0.85
%
change
(27)
(31)
* Further details about our greenhouse gas emissions can be found in the Directors’ Report on page 105.
Much of our success is down to our
broker partners so we recognise the
need to support the development of the
next generation. 2016 marked the third
year of our asset finance broker training
programme, which sees us running
workshops for emerging talent at our asset
finance broker partners.
Sessions are delivered at Aldermore offices
by independent trainers with in-depth
industry knowledge. In 2016, modules
included principles of asset finance,
regulation and sales skills.
During 2016, we held four separate
courses attended by over 120 brokers.
Since launching the programme, around 280
young brokers have benefitted from the
workshops which have equipped them with
the expertise they need to be successful in
their chosen field.
Aldermore has come a long way. We have built a bank from scratch and delivered impressive growth. However, the journey
towards truly fulfilling our responsibilities to our customers, people and wider stakeholders has only just begun.
While we are judged on our ability to meet our financial objectives, the way in which we achieve these is equally important.
We are heading in the right direction. We are involving our customers and employees in every step of the journey and
building the foundations so that we can continue our strong progress over the coming years.
Strategic report 39
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Corporate
governance
Chairman’s introduction
Board of Directors
Executive Committee
Corporate governance structure
The Board - roles and processes
Relations with shareholders
Corporate Governance and Nomination Committee Report
Audit Committee Report
Risk Committee Report
Remuneration Report
Directors' Report
40
42
44
45
46
58
60
62
70
74
100
40
Aldermore Group PLC Annual Report and Accounts 2016
Chairman’s introduction
2016 has been a year of consolidation
and evolution as we have strived to build
on a strong governance framework
that we established in preparation
for our listing.”
Danuta Gray,
Interim Chairman
UK Corporate Governance Code 2014 (“the Code”) – statement of compliance
The Board is committed to the highest standards of corporate governance and confirms that, during the year under review,
the Group has complied with the requirements of the Code, which sets out principles relating to the good governance of
companies. Following the resignation of Glyn Jones as Chairman with effect from 6 February 2017, and the subsequent
appointment of Danuta Gray as Interim Chairman, Danuta Gray is currently not discharging her role as Senior Independent
Director. These responsibilities will be resumed on appointment of a new Chairman.
The Code is available at www.frc.org.uk
This corporate governance report describes how the Board has applied the principles of the Code and provides a clear and
comprehensive description of the Group’s governance arrangements.
Corporate governance 41
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Dear Shareholder
As your Interim Chairman, I am
delighted to introduce our corporate
governance report for the year ended
31 December 2016.
Firstly, as I highlighted in my statement
on page 7, on behalf of the Board I
would like to offer our sincere thanks
to Glyn Jones who decided to step
down from the Board on 6 February
2017 to enable him to focus on his
new role as Chairman of Old Mutual
Wealth. Since joining the Group in
March 2014, Glyn chaired the Board
through a significant period of growth
and change for the Company as it
successfully completed its IPO in
March 2015. Prior to the Company’s
listing, Glyn played a pivotal role in
setting the foundations for our current
governance framework, which has
provided a robust environment for
the Group to deliver on its strategic
and financial objectives within its
risk appetite. He has left a strong,
experienced and dedicated Board of
Directors to lead the Group through
the next stage of its development,
and we remain committed to building
on these foundations. An external
agency has been appointed to help
with the process of selecting Glyn’s
successor which is being managed
through the Corporate Governance
and Nomination Committee in line
with our agreed Chairman Succession
Framework. We are making good
progress with the search and look
forward to announcing a replacement in
due course. Further information about
the search process is set out in the
Corporate Governance and Nomination
Committee Report on page 60.
In terms of other Board changes, we
welcomed Chris Patrick as a Non-
Executive Director in November 2016
when he replaced Neil Cochrane as
the representative of our Principal
Shareholders. Neil stepped down as a
Director in October 2016 subsequent
to him resigning from AnaCap.
Peter Cartwright also resigned in April
2016 as a shareholder-representative
Director due to time commitments.
We would like to extend our gratitude
to both of them for their significant
contribution during their respective
tenures. The Principal Shareholders
retain the right to a second seat on
the Board but currently have one
representative only.
Following the IPO, 2016 has been a
year of consolidation and evolution
as we have strived to build on the
strong governance framework that
we established in preparation for our
listing. The following pages describe
how we comply with the main principles
of the Code, how the Board operates,
and the key areas of focus for both the
Board and its Committees during the
year. Whilst it is difficult to narrow down
our activities across the year to a few
highlights, the strengthening of our Risk
Management Framework overseen by
the Risk Committee; the broadening of
the financial performance measures
within the balanced scorecard for
the annual bonus scheme, such that
they are more aligned to our KPIs; and
the comprehensive tender process
for the external auditor led by the
Audit Committee, are all examples of
areas where our Committees have
supported the Board in developing our
governance arrangements.
The Board recognises that one of
the keys to the Group’s long-term
success is the development of a healthy
corporate culture. As we continue to
execute on our strategy, the Group’s
size and complexity will continue to
increase, and the Board is cognisant
that the Group’s culture has to evolve
alongside this. Culture starts at the
top, and the Board and the Executive
Committee together have to drive the
values and behaviours that support our
brand. During the year, the Executive
Committee initiated a new programme
of ‘Big Conversation’ discussions with
our employees regarding the kind of
company they want Aldermore to be.
A dashboard of cultural metrics has
also been developed, and the Board will
continue to receive regular updates on
these initiatives as they progress.
The Board strongly supports the
principle of diversity, of which gender
is one important aspect, and we were
therefore delighted to support the
Group signing up to the Women in
Finance Charter to promote wider
female representation in senior
management roles in finance. The Board
has committed to a target of 30% for
our female senior managers by 2020,
and to maintaining our gender split at
around 50/50. In respect of possible
targets at Board level, we have not
established a measurable target for
gender representation but remain
committed to increasing all aspects
of diversity. As set out in our Board
Diversity Policy, Director appointments
are subject to a formal, rigorous and
transparent procedure and are made on
merit against a defined job specification
and criteria. We will continue to monitor
whether it is appropriate to set a
Board target in the future taking into
account developments arising from
the Hampton – Alexander Review and
seeking the views of the new Chairman
when appointed.
Danuta Gray,
Interim Chairman
42
Aldermore Group PLC Annual Report and Accounts 2016
Board of Directors
Chairman
Danuta Gray
Interim Chairman
Appointed:
September 2014
Board Committee membership:
C*
R
Relevant skills, strengths and experience:
Danuta brings significant leadership experience
to the Board, having spent nine years as
CEO of Telefónica O2 in Ireland. Her career in
telecommunications spans 26 years, during which
time she held numerous senior roles at BT Group
PLC, gaining experience in marketing, customer
service, communications, technology and sales,
and leading and implementing change. She has also
served as a Non-Executive Director of Irish Life &
Permanent PLC and Aer Lingus Group PLC.
Principal external appointments:
• Non-Executive Director of Direct Line
Insurance Group PLC
• Non-Executive Director and Chairman of the
Remuneration Committee of Old Mutual PLC
• Non-Executive Director and Chairman of the
Remuneration Committee of PageGroup PLC
• Member of the Defence Board of the Ministry
of Defence
Non-Executive Directors
John Hitchins
Independent
Non-Executive Director
Appointed:
May 2014
Board Committee membership:
A*
R
Relevant skills, strengths and experience:
John has extensive financial and audit experience
having previously been a senior banking partner
at PricewaterhouseCoopers LLP, specialising in
bank auditing and advisory services for clients
including Lloyds Banking Group PLC, the Bank of
England, Bank of Ireland (UK) PLC, Barclays PLC
and JP Morgan Chase. From 2001 to 2010, John
was PwC’s banking industry leader and from
2010 until his retirement led the PwC network’s
global IFRS technical group. John has also carried
out a wide variety of advisory work for other
banks and on behalf of the regulators covering
corporate governance, high-level controls and
other regulatory issues.
Principal external appointments:
• Trustee and member of the Governing Council
of the Centre for the Study of Financial
Innovation, a not-for-profit City-based
think tank
• Deputy Chairman of the Financial Reporting
Review Panel
Executive Directors
Phillip Monks OBE
Chief Executive Officer
Appointed:
May 2009
James Mack
Chief Financial Officer
Appointed:
September 20131
Relevant skills, strengths and experience:
Phillip is the founding CEO of Aldermore and has
a long-standing track record in championing
small and medium-sized businesses and British
economic growth. His banking career spans more
than three decades, which includes establishing
and serving as CEO of Europe Arab Bank PLC and
over 20 years at Barclays PLC where he held a
variety of senior corporate and private banking
roles, including CEO of Gerrard Investment
Management Limited, Managing Director of
Barclays Corporate Banking in London, the
Midlands and South East, and Head of Barclays
Private Bank in Geneva. In June 2016, Phillip was
awarded an OBE for his services to banking.
Principal external appointments:
• Member of the FCA Smaller Business
Practitioner Panel
Relevant skills, strengths and experience:
James brings significant financial experience
to the Board, having spent six years at Skipton
Building Society in capital markets, finance and
audit, where he was instrumental in leading
the merger with Scarborough Building Society.
James began his career with KPMG LLP where he
spent 11 years in the firm’s financial services audit
practice and he has also been Acting CFO of the
Co-operative Banking Group Limited.
Principal external appointments:
• None
1 Appointed as a Director of Aldermore Bank PLC
in June 2013.
Chris Patrick
Non-Executive Director
Appointed:
November 2016
Robert Sharpe
Independent
Non-Executive Director
Appointed:
June 2015
Board Committee membership:
C R
Relevant skills, strengths and experience:
Chris brings over 25 years of financial services
experience to the Board. He has been a Partner
at AnaCap Financial Partners LLP since 2009
and heads the Risk and Liability Management
Team, which assists the AnaCap Funds in funding,
liquidity management, and monitoring key
credit and market risks relating to their portfolio
investments. Prior to joining AnaCap, Chris
spent 10 years at Lehman Brothers International
and prior to that, he held roles at Credit Suisse
First Boston, Nomura International and
Goldman Sachs.
Principal external appointments:
• Partner and Head of Risk and Liability
Management at AnaCap Financial
Partners LLP
• Member of the Supervisory Board of
Credoma a.s.
• Director of Equa Holdings Limited
Board Committee membership:
A R
Relevant skills, strengths and experience:
Robert has over 35 years’ experience in the
banking sector, with a strong focus on mortgage
lending. His previous executive roles include
Group Operations Director and then CEO of
Portman Building Society, where he led the
merger with Nationwide Building Society, and
CEO, Mortgages at Bank of Ireland (UK) PLC.
In 2008, he joined West Bromwich Building
Society as CEO to chart and implement its rescue
plan. Robert is an experienced Non-Executive
Director with previous appointments including
United Arab Bank PJSC, National Bank of Oman
SAOG and George Wimpey PLC.
Principal external appointments:
• Chairman of Al Rayan Bank PLC
• Chairman of Bank of Ireland (UK) PLC
• Executive Chairman of Stonehaven UK Limited
• Chairman of Honeycomb Investment
Trust PLC
Corporate governance
43
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Non-Executive Directors continued
Key
A Member of the Audit Committee
C Member of the Corporate Governance
and Nomination Committee
R Member of the Remuneration Committee
R Member of the Risk Committee
*
Denotes Committee Chair
Peter Shaw
Independent
Non-Executive Director
Appointed:
September 2014
R*
Board Committee membership:
A C R
Relevant skills, strengths and experience:
Peter brings over 30 years’ financial services
experience having spent most of his career at
The Royal Bank of Scotland PLC and National
Westminster Bank PLC where he worked across
a number of business areas including retail,
SME, private banking, corporate banking, HR
and risk. Peter spent many years in senior risk
management roles including COO of the risk
function at Group Head Office in the UK and
CRO for various group businesses within RBS
NatWest. In addition, Peter served as Interim CRO
at the Co-operative Banking Group Limited.
Principal external appointments:
• Non-Executive Director and Chairman of the
Risk Committee of Bank of Ireland (UK) PLC
• Non-Executive Director of Willis Limited
Chris Stamper
Independent
Non-Executive Director
Appointed:
February 20142
Board Committee membership:
A R
Relevant skills, strengths and experience:
Chris has 35 years’ experience in the asset
finance arena, most latterly as Director
and CEO of ING Lease (UK) Limited. He is a
founding Governor of the Leasing Foundation
and was Director of the Finance and Leasing
Association and a former Chairman of their
Asset Finance Division. Prior to this, Chris held
senior management roles at Abbey National
PLC, where he was responsible for five business
units focused on the SME market, and was the
Managing Director of Lombard Sales Finance
where he spent 21 years.
Principal external appointments:
• None
2 Appointed as a Director of Aldermore Bank PLC in
May 2013.
Company Secretary
Rachel Spencer
Company Secretary
Appointed:
February 2015
Relevant experience:
Rachel has over 25 years’ listed company
experience. She was the Deputy Company
Secretary at Invensys PLC from 1999 until 2014
on the conclusion of its acquisition by Schneider
Electric SA. She was previously with BTR PLC
having joined as a trainee chartered secretary.
She is a Fellow of the Institute of Chartered
Secretaries and Administrators.
Responsibilities:
Rachel acts as secretary to the Board and
its Committees and is accountable to the
Board (through the Chairman) on all corporate
governance matters.
Board membership changes during the
year and to the date of this report:
• Peter Cartwright resigned as a
Non-Executive Director with effect
from 18 April 2016.
• Neil Cochrane resigned as a
Non-Executive Director with effect
from 14 October 2016.
• Chris Patrick was appointed as a
Non-Executive Director on
21 November 2016.
• Glyn Jones resigned as Chairman with
effect from 6 February 2017.
• Danuta Gray was appointed as Interim
Chairman with effect from 7 February
2017. Danuta held the role of Senior
Independent Director throughout 2016
and will resume this position on the
appointment of a new Chairman.
Cathy Turner
Independent
Non-Executive Director
Appointed:
May 2014
R*
Board Committee membership:
C
Relevant skills, strengths and experience:
Cathy has held a number of banking roles during
her career, including Chief Administrative
Officer at Lloyds Banking Group PLC and Group
HR Director at Barclays PLC, where she was
responsible for HR, strategy, corporate affairs,
brand and marketing. She was also Director of
Investor Relations at Barclays for four years.
Formerly, Cathy worked in consultancy with
Deloitte & Touche LLP, Ernst & Young LLP
and Watson Wyatt Worldwide, Inc managing
client relationships with a particular focus on
compensation and benefits.
Principal external appointments:
• Non-Executive Director and Chairman of the
Remuneration Committee of Countrywide PLC
• Non-Executive Director and Chairman of
the Remuneration Committee of Old Mutual
Wealth Management Limited
• Partner of Manchester Square Partners LLP
• Trustee of the Gurkha Welfare Trust
• Honorary Fellow of UNICEF UK
44
Aldermore Group PLC Annual Report and Accounts 2016
Executive Committee
Phillip Monks, Chief Executive Officer, and James Mack, Chief Financial Officer, are both members of the Group’s Executive
Committee. Their biographies can be found on page 42.
Dana Cuffe
Chief Operating Officer
Joined the Group:
May 2016
Relevant skills, strengths and experience:
Dana has over 30 years’ experience in financial
services and, prior to joining Aldermore, served
as Senior Vice President and Chief Information
Officer for RenaissanceRe Holdings Limited
in Bermuda and was Head of Operations in
Ireland. Prior to that, he spent three years as
Chief Information Officer of Egg PLC, taking the
organisation through an IPO and growing the
customer base to over three million. Dana has
also held senior IT positions in the UK, US and
Australia with Credit Suisse First Boston, Global
Asset Management, Citibank N.A. and Bank
of America.
Responsibilities:
Dana is responsible for Technology, Group
Services and Operations, Strategy, Strategic
Propositions, Marketing and Digital.
Carl D’Ammassa
Group Managing Director –
Business Finance
Joined the Group:
October 2013
Rob Divall
Group HR Director
Joined the Group:
September 2016
Relevant skills, strengths and experience:
Carl has spent a number of years in the asset
finance industry. Having started his financial
services career at GE Capital, he held various
financial, operational and general management
positions in GE’s Equipment Finance, Equipment
Services and Restructuring divisions, including
the post of CEO of the vehicle rental, plant hire
and key leasing businesses. Prior to joining
Aldermore, he was the Managing Director of
Hitachi Capital Business Finance. Throughout his
career, Carl has gained experience in challenging
turnaround and transformational situations
leading significant sales, operational and
process improvements.
Responsibilities:
Carl is responsible for the management of the
Group’s lending activity through the Business
Finance Division, which comprises the Asset
Finance and Invoice Finance business lines.
Relevant skills, strengths and experience:
Rob joined Aldermore from the Board of
AdviserPlus Business Solutions Limited, a leading
provider of HR managed services, where he led
strategy and product development and played
a key commercial role in the growth of the
company through to its eventual acquisition goal.
Prior to this, Rob held a variety of HR leadership
positions in his eight years with Lloyds Banking
Group PLC. Before Lloyds, he worked with
Accenture PLC leading change programmes
within the HR outsourcing division, having started
the first decade of his career in retail where he
held a number of senior HR and commercial
roles in The Big Food Group PLC and Boots the
Chemists Limited.
Responsibilities:
Rob is responsible for the Group HR function and
the delivery of the people elements of the Group’s
strategy and performance.
Charles Haresnape1
Group Managing Director –
Mortgages
Joined the Group:
January 2011
Relevant skills, strengths and experience:
Charles has a deep knowledge of the mortgages
industry, having worked for a number of
household names in the banking and building
society sectors, including Nationwide Building
Society and HBOS PLC. Charles was Senior
Executive, Mortgage Sales and Acquisitions
at Nationwide Building Society and Managing
Director, Intermediary Mortgages at HBOS PLC.
In addition, he has previously held roles within The
Royal Bank of Scotland Group PLC where he was
responsible for intermediary mortgage lending,
and NatWest’s branch mortgage sales force.
Prior to joining Aldermore, Charles was Group
Mortgage Services Director at Connells Limited,
one of the UK’s largest estate agency groups.
Responsibilities:
Charles is responsible for the management of the
Mortgages Division, which comprises Residential
Mortgages, Commercial Mortgages and Buy-to-
Let business lines.
1 Charles is leaving the Group in 2017. A search is
underway for his replacement.
Christine Palmer
Chief Risk Officer
Joined the Group:
April 2016
Relevant skills, strengths and experience:
Christine has over 28 years’ experience in
risk management, corporate and commercial
banking, having held roles at ING Bank N.V.,
where she spent eight years across London and
Amsterdam, Ernst & Young LLP and The Royal
Bank of Scotland Group PLC. Her career at RBS
spanned almost 14 years, during which time
she held a number of senior positions in the Risk
function including divisional chief risk officer and
senior credit risk roles. She was most recently
Global Head of Operational Risk and Director of
Risk, Services.
Responsibilities:
Christine is responsible for Risk across the Group
which includes credit, operational, compliance,
conduct and financial crime risk, as well as capital
and liquidity risks.
Executive Committee responsibilities
The role of the Executive Committee is
to assist the Chief Executive Officer in
the performance of his duties relating to
the day-to-day operation of the Group,
including the:
• development and implementation of
strategy, operational plans, policies,
procedures and budgets
• monitoring of operating and
financial performance
• prioritisation and allocation of resources
• monitoring of competitive forces in each
area of operation
• design and embedding of the Risk
Management Framework
• monitoring of adherence to risk
appetite statements
• assessment and control of principal
risks within the Group
Corporate governance 45
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Corporate governance
structure
Board and
Committee structure
The Board has delegated a number
of its responsibilities to Board
Committees, which utilise the expertise
and experience of their members to
examine subjects in detail and make
recommendations to the Board where
required. This delegation allows the
Board to focus more of its time on
strategic and other broader matters.
The Chairs of the Board Committees
provide the Board with a verbal update
on matters discussed at each meeting,
and Board Committee minutes are
made available to the whole Board
through a secure online system.
In addition to the Board Committees
noted on the diagram below, the
Board has established two further
standing committees:
• The General Purpose Committee,
comprising the two Executive
Directors, for the purpose of
approving routine business matters
such as powers of attorney, changes
to bank mandates and the execution
of agreements which have already
been approved in principle by
the Board.
• The Disclosure Committee,
comprising the two Executive
Directors and the General Counsel,
for the purpose of maintaining
procedures, systems and
controls for the identification and
disclosure of market and price
sensitive information.
All Board Committees have written
terms of reference (available on the
Company's investor website) which set
out their authority, and the minutes of
all meetings of these Committees are
made available to the Board.
Governance structure and delegated authorities
Aldermore Group PLC Board
Corporate Governance
and
Nomination Committee
Aldermore Bank PLC Board
Responsibility for the day-to-day
management of the Group is delegated
to the CEO, who has established a
structure of two executive commit-
tees, supported by a number of
sub-committees, which oversee the
execution of the strategy agreed by the
Board, and performance and risk issues.
The executive committees and their
sub-committees each have their own
terms of reference.
Aldermore Bank PLC (“the Bank”)
The Bank is a wholly owned operating
subsidiary of the Company and it
transacts the Group’s banking business.
It is authorised by the PRA and regulated
by the FCA and the PRA. The Board of the
Bank mirrors that of the Company and
comprises the same Directors. The Bank
Board holds separate Board meetings
immediately following the meetings of
the Company’s Board.
Audit
Committee
Risk
Committee
Remuneration
Committee
CEO
Executive
Committee
Executive Risk
Committee
46
Aldermore Group PLC Annual Report and Accounts 2016
The Board – roles and processes
The Board
The Board is collectively responsible to
shareholders for promoting the long-
term success of the Group by directing
and supervising the Group’s affairs
to create sustainable shareholder
value. In setting the Group’s strategy
and related risk appetite, it also takes
account of its obligations to other
stakeholders including customers,
employees, suppliers and the
community in which it operates, as well
as the regulatory obligations of the
Bank, its principal banking subsidiary.
The Chairman leads the Board in its
role to provide executive management
with entrepreneurial direction, whilst
the day-to-day management of the
Group and operational matters are
delegated to the CEO. The separation
of duties between the Chairman and
CEO is formally documented. The CEO
is supported by his senior management
team (the “Executive Committee”).
Further details about the Executive
Committee can be found on page 44,
whilst further information about the
role and responsibilities of each Board
member can be found on the next page.
The Board’s principal duties are
set out in a formal schedule of
matters reserved for its decision, as
summarised on page 48. This schedule
is reviewed annually and is available at
www.investors.aldermore.co.uk
The Group Corporate Governance
Framework, which is reviewed annually
by the Board, sets out in detail the way
the Group is governed.
Board structure
(as at 1 March 2017)
Interim Chairman
Executive Directors
Independent
Non-Executive
Directors
Non-Executive
Directors
%
11
22
56
11
Danuta Gray1
Interim Chairman
James Mack
Chief Financial Officer
Phillip Monks
Chief Executive Officer
Cathy Turner
Independent
Non-Executive
Director
Clear
understanding
of the role of
the Board
Well-organised
meetings
Common
vision
Chris Patrick
Non-Executive
Director
Open and
transparent
debate
Boardroom
culture and
dynamic
Diversity
of Board
membership
High ethical
standards
No dominant
personalities
No "no-go"
areas
Chris Stamper
Independent
Non-Executive
Director
John Hitchins
Independent
Non-Executive
Director
Peter Shaw
Independent
Non-Executive
Director
Robert Sharpe
Independent
Non-Executive
Director
1 Danuta Gray acted as Senior Independent Director throughout 2016. She was appointed as Interim Chairman
with effect from 7 February 2017 pending the appointment of a new Chairman.
Gender split of Directors
(as at 1 March 2017)
Female
Male
%
22
78
Non-Executive Director tenure
(as at 1 March 2017)
0–1 year
1–2 years
2–3 years
3–4 years
%
14
14
58
14
Corporate governance 47
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Chairman
Chief Executive
Officer
Chief Financial
Officer
Senior
Independent
Director
• Leads the Board and ensures its effectiveness in all areas
• Sets the Board’s agenda, with support from the CEO and the Company Secretary
• Promotes the highest standards of corporate governance throughout the Group
• Facilitates the effective contribution of Non-Executive Directors and a constructive
relationship between Executive Directors and Non-Executive Directors
• Ensures that Directors receive timely and relevant information to support sound
decision-making
• Responsible for induction, training and development of Directors
• Leads the development of the Group’s culture
• Ensures effective communication with shareholders
• Responsible for the day-to-day management of the Group within the delegated
authority and risk appetite approved by the Board
• Recommends the Group’s strategy and leads the executive management team in the
execution of the strategy approved by the Board
• Ensures the Group’s culture is embedded in the business
• Leads the relationship with institutional shareholders and ensures that timely and
accurate information is disclosed to the market as appropriate
• Manages the Group’s financial affairs and supports the CEO in the management of
the business
• Specifically manages statutory, monthly performance and regulatory reporting; and
balance sheet and liquidity management
• Acts as a sounding board for other Non-Executive Directors and the Chairman
• Chairs the Corporate Governance and Nomination Committee when it is considering
succession to the role of Chairman of the Board
• Conducts the Chairman’s annual performance evaluation, feeding in views from the
Non-Executive Directors
• Attends meetings with major shareholders to understand their key issues and
concerns, and is available to shareholders if they have concerns which contact through
the normal channels has failed to resolve or is inappropriate
Non-Executive
Directors1
• Provide independent and constructive challenge of the Executive Directors, including
to help develop proposals on strategy
• Scrutinise the delivery of the strategy within the risk and control framework set by
Company
Secretary
the Board
• Satisfy themselves on the integrity of financial reporting and the robustness of
systems and controls
• Determine Executive Director remuneration
• Provides key support and acts as a first point of contact for the Chairman and Non-
Executive Directors
• Facilitates effective information flows between the Board and its Committees, and
between executive management and the Board
• Keeps the Board updated on developments in corporate governance
• Facilitates induction of new Non-Executive Directors and training
• Acts as Secretary to the Board and Board Committees
1 This includes one Non-Executive Director proposed by the Principal Shareholders under the Relationship Agreement.
48
Aldermore Group PLC Annual Report and Accounts 2016
The Board – roles and processes
continued
Board meetings
The Board held nine scheduled Board
meetings, one strategy workshop and
four additional ad hoc Board meetings
in 2016. Two of the ad hoc meetings
were called in order to analyse the
Q3 forecast in greater detail in light
of the uncertain economic outlook
following the UK vote to leave the
European Union, whilst other matters
discussed at the ad hoc meetings
included a substantial new contract and
the appointment of the new external
auditor following a tender process.
Attendance at scheduled Board and
Committee meetings is set out below.
There are occasions when a Director
may be unable to participate in a
meeting and, if this is the case, they are
encouraged to provide comments to
the Chairman on key items of business
in advance of the relevant meeting, so
that their views can be shared at the
meeting and their opinions taken into
account during discussions.
In addition to the meeting programme,
Directors meet informally during the
year enabling them to discuss sensitive
and key matters in more depth.
Both the Board and its Committees
have a rolling annual programme which
aligns to the schedule of matters
reserved for the Board and the terms
of reference of each Committee.
The agendas and time allocation for
Board meetings are put together by
the Chairman, assisted by the CEO
and Company Secretary, based on the
annual programme, actions arising
from previous meetings and key
business priorities. A similar process
is followed with the Chair of each
Board Committee. The Board and
Committee agendas include a closed
session at the end of meetings from
time to time to enable the Chairman/
Committee Chair to meet privately with
the Non-Executive Directors without
management present.
2016 Board and Committee attendance at scheduled meetings
Attendance
Danuta Gray
Glyn Jones
Phillip Monks
James Mack
Peter Cartwright1
Neil Cochrane2
John Hitchins
Chris Patrick3
Robert Sharpe
Peter Shaw
Chris Stamper
Cathy Turner
Board
9/9
9/9
9/9
8/94
3/3
6/7
9/9
1/1
9/9
9/9
8/97
9/9
Corporate
Governance and
Nomination
Committee
Audit
Committee
Risk
Committee
Remuneration
Committee
2/2
2/2
–
–
1/1
0/06
–
0/0
–
2/2
–
2/2
–
–
–
–
–
–
7/7
–
7/7
7/7
7/7
–
–
–
–
–
2/25
3/36
7/7
0/0
7/7
7/7
6/77
–
4/4
4/4
–
–
–
–
–
–
–
4/4
–
4/4
1 Resigned on 18 April 2016. 2 Resigned on 14 October 2016. 3 Appointed on 21 November 2016. 4 Unable
to attend as representing the CEO at a PRA seminar. 5 Includes meetings attended by Neil Cochrane in his
capacity as alternate to Peter Cartwright. 6 Appointed as a member on 10 May 2016, and ceased to be a
member on 14 October 2016. 7 Absence due to long-standing holiday arrangements.
The Board monitors the performance
of the Group against the approved
strategy and annual business plan, and
within the agreed risk appetite, through
the following regular reports:
• An update from the CEO
on market, customer and
strategic developments.
• A business performance report which
gives a holistic view of the Group’s
performance, and includes:
–
–
–
–
a report from the CFO on
the financial results of the
Group as a whole, as well as an
investor relations update and
review of various prudential
regulatory matters;
a briefing from the Chief Risk
Officer on key emerging
risks, risk appetite and
regulatory developments;
an update from the Chief
Operating Officer on IT, operational
and transformation matters, and
strategic change projects; and
reports from the Managing
Directors of the businesses on the
business performance and related
key issues, and an overview of the
competitive landscape.
Key matters reserved for the Board
• Strategy
• Corporate and capital structure
• Financial reporting and controls
•
Internal controls and risk management
• Material contracts
• Board membership and other
appointments
• Remuneration policy
• Corporate governance matters
Corporate governance 49
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Strategy sessions
The Board is responsible for
establishing the Group’s strategy
and plays a key role in challenging
management in developing the
strategic plan and objectives.
Two Board strategy workshops are
generally held every year where the
CEO, with members of his Executive
Committee, present their views of the
market and proposed plans, including
new initiatives, to be probed and tested
by the Non-Executive Directors.
The range of experience and expertise
that the Non-Executive Directors
are able to bring to the debate, along
with their independent oversight, is
key to building a sustainable strategy.
The focus of discussions is not only
on how the strategy should evolve,
but also on ensuring that the Group
has the appropriate resources, skills
and competencies to deliver the
chosen strategy.
However, given the rapidly changing
market and regulatory environment in
which the Group operates, the strategy
has to be subject to continuous
review and, as such, the executive
management provides the Board
with regular updates on key strategic
initiatives as they progress.
Time spent in 2016
Business
performance
Financial matters and
investor relations
Governance
IT and operations
Regulatory matters
Risk management
Strategy
Other
%
19
20
13
10
4
9
20
5
Key topics discussed
at Board and strategy
meetings in 2016
Key:
Reviewed
Approved
Topic
Activity
Action
Business
performance
Financial
matters
and investor
relations
• Regular reports from the CEO, CFO and other members of the
executive team (as detailed on page 48)
• Deep-dive into the Group’s funding strategy
• Publicly released financial results, including going concern and viability
statements and dividend policy
• Quarterly forecasts
• 2017 annual budget
•
Issuance of Tier 2 Loan Notes
Governance
• Changes to the Board and composition of the Board Committees
• Annual Report and Accounts and Notice of AGM, as well as related
matters such as the annual reappointment of both the Directors and
the external auditor and the Directors' Remuneration Policy
• Outcome of the annual review of the effectiveness of the Board and
progress against key actions
• Changes to the Group Corporate Governance Framework
• Annual review of disclosure controls and procedures
• Appointment of the new external auditor with effect from the 2017 AGM
• 2017 annual programme
IT and
operations
• New contracts outside of the CEO's delegated authority
• Property strategy and an amendment to a property lease
• Key insurance renewals, including Cyber and Directors’ and Officers'
Regulatory
matters
• Updates on the implementation of new regulatory initiatives including
the Senior Managers and Certification Regime, EU Market Abuse
Regulation and the Slavery Act
Risk
management
• Potential impact of future regulatory changes such as changes to
credit risk weights
• Outcome of the processes to confirm that the Group has adequate
capital and liquidity
• Regular reports from the CRO on key emerging risks, risk appetite and
regulatory developments
• Annual review of the Reputational Risk Policy
• Changes to the Risk Appetite Framework and associated risk metrics
• 2016 risk strategy
• Annual review of the effectiveness of systems of risk management
and internal controls
Strategy
• Quarterly presentations by the Company’s joint brokers
• Strategic review of the Group’s brand
• Updates on strategic initiatives agreed in 2015 and new strategic
initiatives, including updates on digital matters
Other
• Updates on culture and 2015 Best Companies results
50
Aldermore Group PLC Annual Report and Accounts 2016
The Board – roles and processes
continued
Appointments
The Corporate Governance and
Nomination Committee (the
“Nomination Committee”) is responsible
for making recommendations to the
Board regarding the appointment of
new Directors.
One new appointment was made
to the Board in 2016 (Chris Patrick),
whilst the Nomination Committee also
oversaw changes to the composition
of the Board Committees which arose
following the resignations of Peter
Cartwright and Neil Cochrane. Chris,
Peter and Neil were all appointed to
the Board in accordance with the
Relationship Agreement between the
Group and its Principal Shareholders
(further information can be found
on page 59). Under the Relationship
Agreement, the Principal Shareholders
are entitled to appoint up to two
Board Directors and a member
Chris Patrick's induction programme
of each of the Risk Committee
and the Nomination Committee.
Consequently, when Peter stepped
down from the Board in April 2016, the
Nomination Committee considered
and recommended to the Board that
Neil replace Peter as a member of
these Committees in line with the
wishes of the Principal Shareholders.
Following Neil’s resignation from the
Board in October 2016, the Principal
Shareholders informed the Company
of their intention to appoint Chris
as their sole representative on
the Board and as a member of the
Risk and Nomination Committees.
The Nomination Committee considered
the proposed appointments and agreed
to recommend them to the Board,
subject to the completion of fitness and
propriety tests. As part of this process,
Chris met with each of the Committee
Chairs and the Senior Independent
Director to assess his competence and
capability, whilst various references
were sought and checks completed
in order to verify his educational,
employment, criminal and credit history.
Regulatory approval was not required
for Chris’ appointment.
Induction of Directors
All Directors receive a comprehensive
induction on appointment to
enable their effective contribution
to the Board as early as possible.
Induction programmes are tailored
to the needs of the new Director.
The Chairman discusses requirements
with the new Director, which are
facilitated by the Company Secretary.
The programme will typically include
one-to-one meetings with business
and functional heads; site visits; and
access through the Board portal to
past Board packs and an induction pack
containing relevant Group policies and
procedures. Details of Chris Patrick’s
Business
Divisions
Corporate
Governance
and Legal
IT and
Operations
People and
Culture
Risk and
Regulatory
• Overview of the
•
strategy and vision
• Understanding
of the history of
the businesses
• Management’s views
on the challenges,
opportunities
and competitive
environment
• Understanding of the
financial and cultural
dynamics and the
key risks
• Meeting and engaging
with employees
Introduction to the
Group Corporate
Governance
Framework, including
the matters reserved
for the Board and the
Committee structure
• Overview of Board
processes and
directors’ duties
• Discussion on the
Group’s legal risks
• Overview of the
legal and regulatory
requirements for
listed companies
• Overview of the team
structure and scope of
the COO function
• Discussion on how the
function supports the
Group’s strategic plan
• Overview of the HR
strategic plan and
key priorities for the
HR function
• Board and executive
succession planning
•
Introduction to project
governance processes
within the function
• Overview of the
Group’s remuneration
policy
• Overview of major
transformation
projects, the refresh
of the Group’s brand
and marketing plans
for 2017
• Discussion on setting
and measuring the
Group’s culture
•
Introduction to the
Risk Management
and Risk Appetite
Frameworks
• Overview of the
Senior Managers and
Certification Regime
and how it operates
within the Group
• Understanding
of the market
abuse and inside
information regimes
Corporate governance 51
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Corporate governance
Risk management
Financial statements
Appendices
induction programme, which will be
implemented during 2017, are set out at
the bottom of page 50.
Diversity
The Board embraces the benefits
of diversity in the boardroom and
believes that it generates effective
challenge and decision-making.
It strives for diversity in the broadest
sense – female representation is just
one of the factors that is taken into
account and all Board appointments
are made on merit against a defined
job specification. The Company does
not therefore consider it appropriate
to set a measurable target for
gender representation on its Board.
Female membership of the Board
currently stands at 22%.
The Board adopted a Board Diversity
Policy in November 2015, and the
Nomination Committee has since
reconfirmed that no amendments
to this Policy are required at the
current time. However, the Policy
will be revisited following the
appointment of a new Chairman and
taking into account developments
arising from the Hampton-Alexander
Review. The Policy is available at
www.investors.aldermore.co.uk
knowledge and experience could be
strengthened. These remain relevant
and will be taken into consideration
in any future search for new Non-
Executive Directors.
Skills, knowledge and
experience
As previously mentioned, the Board
values all aspects of diversity and
recognises the benefit of maintaining
a balance of skills, experience
and knowledge. During 2015, the
Nomination Committee oversaw an
exercise to evaluate the skills and
experience on the Board. This was
based on a self-assessment completed
by each Director. The matrix which
was compiled as a result has been kept
under review in 2016. It was updated to
reflect the changes to the composition
of the Board during the year and, as a
result, the Nomination Committee has
been able to satisfy itself that the mix
of skills and experience on the Board is
appropriate to challenge management
and support the Group’s strategy.
At the time of the 2015 review, some
areas were identified where, in the
medium term, the balance of skills,
Self-assessment of skills and experience – % of Directors with at least a good
working knowledge
Listed company experience
Experience of a regulated financial services business (PRA and FCA)
Corporate governance experience
Finance
Savings
Mortgages
Business Finance
Risk
People and Reward
Technology and Operations
78%
89%
100%
89%
78%
78%
56%
89%
67%
56%
52
Aldermore Group PLC Annual Report and Accounts 2016
The Board – roles and processes
continued
Election and re-election
The Code requires that all Directors
retire and offer themselves for
election at the first AGM following their
appointment, and for re-election on an
annual basis thereafter.
Ahead of the re-election of the
Non-Executive Directors being
recommended to shareholders, the
Nomination Committee assesses the
performance, time commitments and
independence of each Non-Executive
Director and makes a recommendation
to the Board in this regard. In addition,
the outcome of the appraisals of the
Executive Directors (as set out on page
56) is considered. These assessments
took place over January and February
2017 and, based on these factors
(described further in the paragraphs
that follow), as well as the balance
of skills, knowledge and experience
on the Board as a whole, the Board
approved the recommendation that
each Director should be proposed
for election/re-election at the 2017
AGM. Further information about the
Directors, including their experience,
is set out on pages 42 and 43.
The Principal Shareholders are classed
as a “controlling shareholder” of the
Company under the Listing Rules.
As a result, the Independent Non-
Executive Directors of the Company
must be elected or re-elected by both
a majority of the votes cast by all of the
Company’s shareholders and a majority
of the votes cast by the Company’s
independent shareholders (being all
of the Company’s shareholders other
than the controlling shareholder). The
outcome of both of these votes will be
announced following the 2017 AGM.
Shareholder-representative
Director
Chris Patrick has been appointed to
the Board to represent the interests of
the Principal Shareholders, and is not
therefore considered to be independent
under the Code. Notwithstanding that
he is not independent, the Nomination
Committee confirmed that it was
satisfied that he should be recommended
for re-election at the 2017 AGM.
Conflicts of interest
The Board has procedures in place to
deal with potential conflicts of interest,
which are governed by both company
law and the Company’s Articles of
Association. All Directors are required
to declare any interests that could
give rise to a conflict of interest with
the Group, either on appointment or
when they arise. Under the Company’s
Articles, the Board is permitted to
authorise such conflicts and to impose
any conditions on that authorisation
that it considers to be necessary, for
example to leave Board meetings
when certain matters are discussed.
All authorisations are recorded in the
Board minutes, and entered into the
Register of Directors’ Conflicts.
The Nomination Committee has
provided guidance to the Board on the
declaration of interests which cannot
reasonably be regarded as likely to give
rise to a conflict of interest. In addition,
the Nomination Committee undertakes
an annual review of the Register of
Directors’ Conflicts to ensure that
there have not been any changes in
circumstances that would require
the Board to revisit any previous
authorisation that it has granted, or its
view of the Directors’ independence.
Director performance
evaluations
Details of the Director performance
evaluation process are set out on page
56. The outcome of the evaluations
concluded that each Director continues
to be effective and to demonstrate
commitment to their role.
Time commitment and
independence
The Nomination Committee reviewed
the time commitment to the Company
demonstrated by each of the Non-
Executive Directors and was satisfied
that this was both in line with the
requirement set out in their letters
of appointment, and sufficient to
discharge their duties. The external
directorships and other commitments
of the Non-Executive Directors were
also taken into account in making
this assessment.
Independence of the Non-Executive
Directors is assessed by the Nomination
Committee on an annual basis against
the criteria set out in the Code, which
require directors to be independent in
character and judgement, and free from
any relationships or circumstances
which could affect that judgement.
Factors taken into account in this
assessment include length of tenure
and any potential conflicts recorded in
the Company’s Register of Directors’
Conflicts. The Nomination Committee
was satisfied that there had not been
any changes in circumstance which
would impact on the previous
assessment that all Non-Executive
Directors, with the exception of the
Director who represents the Principal
Shareholders, were deemed to
be independent.
Separately, on the basis that Danuta
Gray will be acting as Chairman in an
interim capacity for a limited period
only, the Board continue to regard
her as independent.
Corporate governance 53
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Corporate governance
Risk management
Financial statements
Appendices
stepping up in to a more senior role in
due course. The introduction of the
Senior Managers and Certification
Regime during 2016 has also provided
additional impetus to the succession
planning process as individual
development plans are now required
under the regulations.
During the year, the Nomination
Committee considered the prospective
appointment of Robert Sharpe as
Chairman of Bank of Ireland (UK)
PLC. The proposal was considered
from the perspective of any potential
business conflict of interest; time
commitment pressures which would
prevent Robert from discharging
his role with the Company; and the
cross-directorship which would arise
given that Peter Shaw was also a
Director of Bank of Ireland (UK) PLC.
Having taken into account a number
of factors, including the character
and judgement of both individuals, it
was agreed to approve any potential
conflict of interest associated with the
proposed appointment.
Succession planning
Non-Executive Directors
The Nomination Committee reviewed
succession planning for the Non-
Executive Directors during the year.
Whilst acknowledging that succession
planning was key to the sustainability
of the Board, the Nomination
Committee was also cognisant that
the majority of the Non-Executive
Directors had been appointed in 2014
when a Board was formed which would
be suitable to lead the Company in a
public environment. The tenure of these
Directors was therefore less than three
years. During the year, tenure was
discussed with the longest-serving
Non-Executive Director (less than four
years on the Board), who had confirmed
that he had no specific retirement date
in mind. In light of these relatively short
tenures, the Nomination Committee
confirmed that the previously
agreed principles on which future
succession planning should be based
remained appropriate.
Chairman
To ensure that an effective Chairman
was in place at all times to lead the
Board, the Nomination Committee
agreed a Chairman Succession
Framework in 2015. The Framework
outlined the approach that would be
taken when the time came to search for
a new Chairman, and confirmed that the
Senior Independent Director would lead
the process. As a result, following the
resignation of Glyn Jones as Chairman
during the year, the Nomination
Committee was able to act quickly
to put the Framework into action.
Good progress has been made with the
search, and a fuller update is provided
in the Chair’s introductory letter to
the Nomination Committee Report on
page 60.
Executive positions
Succession planning for the Executive
Directors was considered by the
Nomination Committee during the year,
whilst the Executive Committee was
strengthened through the appointment
of three new members.
The Executive Committee has
continued to build on work undertaken
in 2015 to develop a pipeline of potential
successors to executive positions
below Board level. This is an iterative
process which aims to assess (and
regularly re-assess) the current
capabilities and future potential of both
the direct reports of the Executive
Committee and their teams. This
process is key to both the identification
of employees who would benefit from
or require development plans to further
build on their potential, and as a way of
highlighting gaps where consideration
should be given to recruiting potential
successors. As a result, efforts are
being focused on increasing the number
of employees who are moved into roles
that will enable them to broaden their
skills and experience, with a view to
regulatory items. As a result, a programme
of quarterly Board training sessions
supplemented by Committee-specific
training will be finalised for 2017. The ‘Meet
the Board’ and GIA roundtable events will
also continue.
54
Aldermore Group PLC Annual Report and Accounts 2016
The Board – roles and processes
continued
Board support
All Directors have access to the
advice and services of the Company
Secretary, who ensures that Board
procedures are complied with.
In addition, Directors have access to
independent and professional advice at
the Company’s expense.
Information flow to the
Board
The Board’s ability to discharge its
duties is dependent on the quality of the
information that it receives to support
decision-making. Information should
be accurate and clear, and provided on a
timely basis.
Board papers
The Company Secretary takes
responsibility for ensuring that the
Board receives high-quality information
and, to the extent possible, acts as a
gateway to challenge any Board papers
which require additional clarity. All ad
hoc Board papers include an executive
summary in a standard format which
ensures that key information can be
easily identified by the Directors, and
that important points are sign-posted.
The format of the regular business
performance report to the Board is
reviewed regularly in order to ensure
that it continues to provide the Board
with a holistic view of the business as
a whole, and that insight is provided
rather than data.
Resources
A library of useful information has
been made accessible to Directors
through an online portal. This includes
corporate information such as the
business plan, corporate governance
material, regulatory correspondence
and technical updates.
Training and development
Training sessions for Directors on topics
of relevance to the Board are organised
periodically throughout the year to tie in
with Board and Committee meetings.
In 2016, training sessions attended
by the Board included sessions on
the EU Market Abuse Regulation,
and Committee-specific training on
IFRS9 and hedge accounting (Audit
Committee) and developments in
the external market (Remuneration
Committee). An invite to the
Committee-specific training was
extended to all Directors and the
sessions were well attended by non-
members. The training was led by
either senior management or external
advisers. In addition, Directors attended
relevant external training sessions.
The Board values internal development
sessions as an important way of
engaging with key employees and
familiarising themselves with the
business. In order to hear the views of
the wider employees first hand, the
Board has continued with the ‘Meet
the Board’ initiative introduced in 2015.
In addition, the Audit Committee held
a roundtable with members of the
Group Internal Audit (“GIA”) function.
Further information on these events
can be found on the next page.
A training log is maintained by the
Company Secretary for each Director
as evidence of continuous development.
A longlist of potential training sessions
for 2017 is being drafted by the
Company Secretary based on proposals
raised by Directors through the Board
evaluation process. Suggestions from
advisers regarding upcoming areas of
regulatory change will also be sought.
The Company Secretary, the Chairman
and Committee Chairs will discuss
the proposals, which will broadly
cover business-related and technical/
Corporate governance 55
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Corporate governance
Risk management
Financial statements
Appendices
Meeting our employees
As part of internal development, the
Board appreciates the opportunity to
engage directly with employees. Set out
below are two examples of how this has
been achieved.
‘Meet the Board’ – Wilmslow
In 2016, the Directors visited one of
the Group’s key sites in Wilmslow
(where the Mortgages and Financial
Reporting teams are based) as part of
an initiative to enable them to engage
directly with employees across the
business areas and central functions.
This followed two similar events
held during 2015 when the Directors
visited the Group’s Peterborough and
Reading sites. The ‘Meet the Board’
event was held in an informal setting
and was designed to be interactive,
allowing the Directors to gain a deeper
understanding of the business, how it
operates and the challenges that staff
face on a first-hand basis, as well as
providing an insight to colleagues on
the role of the Board. The event also
provided a valuable opportunity for
employees to share their ideas and
suggestions with the Directors and to
put forward questions about the vision
and strategy for Aldermore, in order to
promote transparency and employee
engagement across the Group.
The ‘Meet the Board’ event was well
received by both the Directors and
the participating employees and will
continue in 2017. In particular, the
Directors welcomed the informal format
of the event which was conducive
to stimulating an open debate with
colleagues. The feedback from
employees was equally positive, with
many expressing their appreciation
for the Directors’ interest, time and
engagement, and commenting on the
high quality of the discussions.
“It is excellent when we have Board
meetings away from London as we
get the chance to meet colleagues
and hear what is going on with our
customers. The enthusiasm from staff
was very motivating, and you could
sense the energy and pride in the room.
The questions asked were wide ranging
and all pertinent to our future business
success. I enjoyed chatting to colleagues
over lunch and was pleased to learn
about how, as we grow, we are creating
opportunities for new and different
roles and the ability to learn in current
jobs.” Cathy Turner, Independent Non-
Executive Director
“It was great to see the session
attended by so many people. The
questions asked were really topical
and the Board did a great job at
answering the questions, covering both
the high-level outlook on topics as well
as relating the answers back to people’s
day jobs and the customer outlook.”
Employee from Financial Reporting
“It was great to see and hear from each
of the Board members. I felt that I got
more of an insight as to what is going
on within the wider Group and Financial
Services in general. It is unusual to get
an opportunity to meet and speak with
Board members when working in this
industry so it was great for us to be
able to ask questions and get some
really useful feedback.” Employee from
Residential Mortgages
Group Internal Audit
Roundtable – Reading
In June 2016, a roundtable was held
between members of the Audit
Committee and the GIA team in
response to a recommendation from the
2015 effectiveness review of the GIA
function that it would be beneficial to
enable Directors to have direct dialogue
with the GIA team.
The session was an informal
conversation with no fixed agenda,
providing the GIA team with an
opportunity to introduce themselves to
the Audit Committee members and ask
questions, including probing Directors
for their views on current and horizon
risks, their individual expertise and their
expectations of the GIA team. The GIA
team were also keen to understand the
importance of their role in supporting
the Audit Committee and the
interaction between the GIA Director,
the Audit Committee, the other Board
Committees and the CEO.
“The roundtable was useful for both
the Audit Committee members, who
were able to meet and learn about
the skills within the GIA team, and for
the GIA team who gained an insight
into the Audit Committee’s role and
responsibilities, its members and their
views on key risks within the Group.
The Directors had the opportunity to ask
the GIA team questions about the work
they perform, the challenges faced and
areas where the team would benefit
from Audit Committee support. This has
had a positive cultural impact on the
GIA team who felt that they gained
insight which they had not experienced
in previous roles, as well a unique
opportunity to have their views heard
at Board level. Further, it provided the
team with a greater understanding as to
why particular audits were required and
the value of the GIA reports, as well as
how the Group’s governance structure
operates.” GIA Director
56
Aldermore Group PLC Annual Report and Accounts 2016
The Board – roles and processes
continued
Board and Committee
effectiveness
The Board recognises the benefits
that reviewing the effectiveness of
its own performance and that of its
Committees can bring, and is conscious
that the actions needed to maintain
effectiveness will develop over time
as the Company, the Board and best
practice evolve. Effectiveness is
reviewed on an annual basis, and the
Nomination Committee oversees this
process. In 2016, the Board decided that
the annual review would be conducted
internally. The last external review
was undertaken by Egon Zehnder in
2014 and, in line with the Code, it is
anticipated that an external review will
next take place in respect of 2017.
The 2016 process was agreed by the
Nomination Committee and led by the
Senior Independent Director (now the
Interim Chairman) with support from
the Company Secretary as required.
The evaluation was taken forward by
way of questionnaires which were
issued to all Board and Committee
members, and were supplemented by
one-to-one meetings between each
Director and the Interim Chairman
which aimed to seek more context to
the responses given. The results were
collated and analysed by the Company
Secretary, and the draft output was
discussed with the Interim Chairman
and, in relation to Committees, the
relevant Committee Chairs. Finalised
reports and action plans were
presented and agreed by the Board and
Committees. The output concluded that
the Board and its Committees operated
effectively during 2016. A summary of
the outcomes is set out on the next
page, together with a summary of the
areas for development for 2017 and an
update on the actions arising from the
last effectiveness review. Information on
the Committee reviews can be found in
the reports from the individual
Committees on pages 60 to 73 and
page 90.
The Nomination Committee will
oversee the implementation of the
agreed action plan for the Board and
interim updates will be assessed during
the year. An update on progress against
these actions will be reported in the
2017 Annual Report and Accounts.
Board and Committee
effectiveness process
Detailed questionnaires
completed
One-to-one meetings
Analysis
Discussions with
Interim Chairman and
Committee Chairs
Action plans agreed
Director performance
evaluations
In tandem with the process to review
Board and Committee effectiveness,
a similar process is followed to
evaluate the continued effectiveness
of the performance of the Non-
Executive Directors.
In respect of the year under review,
the Interim Chairman undertook a
performance evaluation for each
Independent Non-Executive Director,
whilst the previous Chairman led the
process for evaluating the performance
of the Interim Chairman (who had
acted as Senior Independent Director
throughout 2016). An evaluation of
the Chairman’s performance would
ordinarily also be undertaken, but
this was not completed in 2016 given
that the Chairman (Glyn Jones) had
already tendered his resignation
when the reviews were commenced.
To support the evaluations, each
Director completed an anonymous
questionnaire to provide an
assessment of the performance
and effectiveness of each of the
Independent Non-Executive Directors.
The Interim Chairman also solicited
verbal feedback from each of the Non-
Executive Directors on an individual
basis. The output from the performance
evaluations is being discussed in
one-to-one sessions between the
Interim Chairman and each Non-
Executive Director, and will identify
any development needs in terms of
ongoing training.
The performance of the Executive
Directors was appraised by the
previous Chairman (in the case of the
CEO) or the CEO (in the case of the
CFO) with input from other Directors.
The outcome of the evaluations
was reviewed by the Remuneration
Committee as part of the process by
which changes to salary and bonus
outcomes were approved.
The evaluations concluded that each
Director continues to be effective,
demonstrates commitment to their
role, and is able to allocate sufficient
time to the Company to discharge their
responsibilities effectively.
Corporate governance 57
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Risk management
Financial statements
Appendices
Overview of Board effectiveness review
2015/16 review
2016/17 review
Update on key development areas in 2016
Key areas of strength
• Overall, the Board is considered to work very effectively, with an
open and positive culture which encourages all to contribute, as
well as challenge and support the executives equally.
•
It is acknowledged that there is a good mixture of subject matter
experts on the Board but who all contribute on business overall to
create a well-balanced team.
• The Chairs of Board Committees are all recognised for their work
throughout the year.
Key development areas in 2017
Chairman
• A key focus in the next year will be the introduction of the new
Chairman and ensuring his/her transition is smooth.
Agendas and management information
• Responsibilities of Committees and Board are to be reviewed to
ensure duties are delegated effectively, agendas are focused on
appropriate matters, and overlap is eliminated.
•
In structuring meetings, continuously balance the Board
agenda between strategic development, risk management and
delivery assurance.
• Presentation of management information in papers to be
reviewed to avoid duplication across Board and Committee
meetings, and to ensure papers are amended to reflect the
different areas of focus by each forum.
Succession planning and induction
• Continue to develop executive succession plans for key roles to
ensure there are robust plans in place, with a dedicated strategy
session to be led by the Group HR Director.
• Monitoring of talent pipeline to continue through the Nomination
Committee.
• Ensure that the induction for new Non-Executive Directors
is refreshed.
Board composition
• Further assessment of the skills and experience on the Board to
be addressed by the new Chairman, noting there may be some
further enhancement of the Board in relation to digital technology.
Continue to embed the recently implemented new template for
Board papers
• Good progress has been made with the use of an agreed Board
paper template to ensure papers focus on key issues and flag
decisions to be made. Management information continues to
be an area for further improvement as detailed below in “Key
development areas in 2017.”
Implement a more structured process to review the effectiveness
of past decisions, and to apply lessons learned
• A structured process for the review of the effectiveness of past
decisions has been introduced which monitors on a six-monthly
basis items approved by the Board, including achievement of key
milestones and evaluation of successes/lessons learned.
Maintain the focus on succession planning
• The approved Chairman Succession Framework served the
Company well as the search process for the new Chairman could
be initiated immediately.
• The Board has overseen the changes which the CEO has made to
strengthen his executive team.
• Succession planning for key executive roles continues to be an
area of focus as detailed below in “Key development areas in 2017.”
Review the ongoing development of the Risk Management
Framework to ensure appropriate behaviour is embedded into
the risk culture
• The Risk Management Framework has continued to evolve, with
risk appetite statements and risk metrics being revised and
refreshed as appropriate.
Develop a comprehensive training programme to meet Directors’
requirements
• A bespoke training programme on key regulatory and legislative
matters was developed.
• Training sessions were held at Board and Committee meetings
during the year, facilitated by external advisers where
appropriate (further information is detailed on page 54).
• A similar approach is being adopted in formulating a training
programme for 2017.
Schedule more informal time for the Board to spend together, and
extend some of the meetings to ensure there is adequate time for
discussion of all agenda items, in particular strategic issues
• A number of dinners following formal meetings were scheduled
to enable Directors to continue discussion of material
agenda items.
• An annual round-up of remuneration-related developments was
organised by the Remuneration Committee which was presented
over dinner by FIT Remuneration Consultants.
• Members have spent informal time with each other and
colleagues in the business through the ‘Meet the Board’ events
(see page 55 for more information).
• These events will continue to form part of the Board calendar
in 2017.
58
Aldermore Group PLC Annual Report and Accounts 2016
Relations
with shareholders
Shareholder engagement calendar 2016
January 2016
February 2016
March 2016
May 2016
Preparing materials for
full-year results.
Review of materials for
full-year results.
2015 full-year results presented
to the market, followed by an
investor roadshow led by the
CEO and CFO.
AGM with shareholders led by
the Chairman. Shareholders were
invited to vote on resolutions
of the Company.
Q1 trading update was
presented to the market.
Shareholder analysis
Set out below is analysis of the
Company's shareholder base as at
31 December 2016. The shareholding is
relatively concentrated amongst the
top 10 shareholders, in particular as
the Principal Shareholders hold 40.14%
(discussed in more detail on page 59).
Overall, the top 10 shareholders hold
just under 70% of the total issued
share capital.
The majority of shareholders (86%)
are based in the UK, particularly in the
financial capital of London, with the
remaining investors based primarily
in the United States of America and
in Europe. The primary investment
style of the investor base is growth
focused. This reflects the Group's
growth strategy and an investor
base that understands Aldermore’s
financial objectives.
Investor relations
In 2016, the first full-year results as a
listed company were presented to the
market. A full investor engagement
programme led by the CEO and CFO
was carried out throughout the year
with both holders and prospective
holders. Additionally, a specific
investor roadshow was run in relation
to the £60m Tier 2 Notes issued in
October 2016.
Investor meetings are normally
undertaken by the CEO, CFO and
the Director of Investor Relations.
During the year, over 150 individual
and group investor meetings were
held covering topics such as business
performance, competitive positioning,
strategy and changes in the regulatory
and political environment. The UK’s vote
to leave the European Union in June
2016 was one area of particular focus
with investors in the year.
Geographic
(% shares outstanding)
Leading Shareholders
(% shares outstanding)
UK
Europe
North America
Rest of World
%
86
3
9
2
Shareholder 1
Shareholder 2
Shareholder 3
Shareholder 4
Shareholder 5
Balance
%
40.1
6.3
5.5
4.0
3.7
40.4
Share register analysis as at 30 December 2016.
The Chairman and Senior Independent
Director are also available to attend
meetings with shareholders and
address any significant concerns that
shareholders may have. In particular
during 2016, the Senior Independent
Director (now Interim Chairman), was
available to discuss the resignation of
the Chairman, which was announced
in November 2016.
The Group provides regular updates
on its investor relations website at
www.investors.aldermore.co.uk
including its half-yearly financial
results, reports and presentations,
press releases, regulatory news, share
price data and useful information for
shareholders with regard to managing
their shareholdings.
Information to the Board
The Chairman is responsible for
ensuring effective communication with
shareholders and the Board recognises
the importance of constructively
engaging with its shareholders.
Feedback received from investors is
regularly shared with Board members
through the CFO’s regular business
performance report, which aids broader
discussions on business matters and
other relevant topics.
J.P. Morgan Cazenove and Royal Bank of
Canada (RBC) act as joint brokers to the
Company. They attend Board meetings
on a quarterly basis to provide Directors
with input on market conditions and
investors’ views. Outside of this formal
Corporate governance
59
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Key to activities:
Full-year results
Half-year results
Trading update
AGM
Investor meetings
August 2016
September 2016
November 2016
December 2016
Half-year Results were
presented to the market.
Investor roadshow of half-year
results was led by the CEO
and CFO, following the summer
break. An investor roadshow
was also undertaken ahead of
the issuance of £60m Tier 2 Notes
to the market in October 2016.
Q3 trading update was presented
to the market.
Continued to engage with
current and potential investors,
with over 150 meetings held in
the year.
During the year, the Nomination
Committee, in accordance with its
duties, conducted a review of
compliance with the terms of the
Relationship Agreement and concluded
that the Relationship Agreement
is working effectively and that the
Company is capable of carrying out
its business independently of the
Principal Shareholders.
The Company has adopted procedures
which restrict Directors appointed by
the Principal Shareholders from voting
on matters where there are conflicts
of interest and from using information
obtained through their appointments.
Under the Relationship Agreement,
as the Principal Shareholders still
have an interest in more than 20%
of the Company, they are entitled to
appoint two Non-Executive Directors
to the Board. During the year, Peter
Cartwright and Neil Cochrane stepped
down from the Board on 18 April 2016
and 14 October 2016 respectively.
Currently, Chris Patrick, who was
appointed on 21 November 2016, serves
on the Board as the only Non-Executive
Director appointed by the Principal
Shareholders and will stand for election
by shareholders at the 2017 AGM.
Annual General Meeting
The 2017 AGM will be held at 11.00am on
16 May 2017 at the offices of Linklaters
LLP, 1 Silk Street, London, EC2Y 8HQ.
The Notice of AGM, together with an
explanation of the items of business
to be discussed at the meeting, will
be posted to shareholders and made
available at www.investors.aldermore.
co.uk. A resolution will be proposed at
the 2017 AGM to amend the Company’s
Articles of Association so that future
AGMs may be held electronically.
All members of the Board will be in
attendance at the 2017 AGM which
will provide an opportunity to engage
with shareholders on the key issues
facing the Group and respond to any
questions shareholders may have.
All the Directors will be available after
the meeting to meet shareholders on
an informal basis. Voting at the 2017
AGM will be conducted by a poll and the
results will be announced to the market
and made available on the Group’s
website as soon as practicable following
the meeting.
programme, the views of the brokers
are proactively sought on market
developments including the regulatory
and competitive environment.
During the year, the Board commissioned
an independent perception audit of
a number of the Company’s leading
institutional shareholders and sell-
side analysts. Overall, whilst this
demonstrated that the Company has
a supportive investor base, there are a
number of recommendations to further
enhance communications and investor
relations activity which will be an area of
focus in 2017.
Principal Shareholders
The Principal Shareholders have an
interest in the issued share capital of
40.14% and their relationship with the
Company is governed by a Relationship
Agreement which ensures that:
- the Company is capable of carrying
out its business independently of the
Principal Shareholders;
- transactions and arrangements
with the Principal Shareholders (and
their associates) are at arm’s length
and on normal commercial terms
(subject to the rules on related party
transactions in the Listing Rules); and
- the Principal Shareholders do not
take any action that would have the
effect of preventing the Company
from complying with, or would
circumvent the proper application of,
the Listing Rules.
60
Aldermore Group PLC Annual Report and Accounts 2016
Corporate Governance and
Nomination Committee Report
Nomination Committee at a glance
• The Nomination Committee is
composed of a majority of Independent
Non-Executive Directors in line with
Code requirements and is chaired by
the Company Chairman:
- Danuta Gray (Chair),
Interim Chairman1
- Chris Patrick, Non-Executive
Director
- Peter Shaw, Independent
Non-Executive Director
- Cathy Turner, Independent
Non-Executive Director
• Glyn Jones and Peter Cartwright were
also members of the Nomination
Committee until their resignations
from the Board with effect from
6 February 2017 and 18 April 2016
respectively. Neil Cochrane served
as a member of the Nomination
Committee between 10 May 2016 and
14 October 2016.
• Regular attendees at meetings of the
Nomination Committee include the
CEO and Company Secretary.
• The Nomination Committee’s key
roles are to oversee the Board’s
governance arrangements and to
ensure these are consistent with best
practice standards; and to review the
composition and effectiveness of
the Board to support planning for its
progressive refreshing.
• The Nomination Committee’s
terms of reference are reviewed
annually and are available at
www.investors.aldermore.co.uk
1 Meetings will be chaired by the new Company
Chairman once appointed and Danuta Gray
will remain a member in her capacity as Senior
Independent Director.
SID, I would assume the Chair role on an
interim basis.
Perspectives on a number of external
search agencies were debated by
the Nomination Committee and a
shortlist of agencies invited to pitch.
Based on those discussions and how the
respective agencies would approach our
assignment, Ridgeway Partners was
engaged. In conjunction with Ridgeway
Partners, a detailed specification was
prepared which included the most critical
skills, experience and characteristics
we would look for in the new Chairman.
We are making good progress with the
search and look forward to announcing a
replacement in due course.
Further detail on the key activities that
the Nomination Committee focused on
in 2016 can be found on page 61. We are
cognisant that governance is a dynamic
area and we will continue to monitor and
further embed best practice to ensure
that our governance frameworks support
and underpin the delivery of our strategy.
Whilst the annual effectiveness review
of the Nomination Committee confirmed
that we continue to operate effectively,
an area highlighted for enhancement
relates to succession planning. In light
of this and the need to ensure that we
have adequate succession planning in
respect of Executive Directors and senior
management, and to ensure that we have
the right talent and initiatives to develop
internal executives for execution of
our strategy, we intend to make this a
continued area of focus in 2017.
Danuta Gray,
Chair of Corporate Governance
and Nomination Committee
Dear Shareholder
As a consequence of the resignation
of Glyn Jones, I am now acting as Chair
to the Corporate Governance and
Nomination Committee (the “Nomination
Committee”), and I am therefore pleased
to present this report to you.
Following the resignation of Neil
Cochrane as the representative of our
Principal Shareholders, Chris Patrick
was nominated as his replacement.
With responsibility for reviewing Board
vacancies, the Nomination Committee
considered the appropriateness of
the candidate and was pleased to
recommend the appointment of Chris as
a Non-Executive Director and member
of the Nomination Committee and Risk
Committee in November 2016.
The Nomination Committee (led by
myself as the Senior Independent
Director (“SID”)) has dedicated
considerable time to overseeing the
search to identify Glyn's replacement.
John Hitchins, our Audit Committee
Chair, was also formally invited to
join discussions and form part of the
search process. We were well placed
to initiate the search process quickly
and effectively as, in the prior year, we
had agreed a Chairman Succession
Framework which outlined the agreed
approach that would be adopted
should a replacement ever be needed.
The Framework, which was developed
to ensure that the Company has in place
at all times an effective Chairman to
lead the Board, confirmed that, as the
Corporate governance 61
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Responsibilities of the
Nomination Committee
• To review the Group’s corporate
governance arrangements and
frameworks to ensure that they are
consistent with best practice
• To review the Board’s size, structure
and composition, including the skills,
knowledge, experience and diversity
of the Directors, and that of the
Board Committees
• To lead the process for nominating
candidates to fill Board vacancies as
they arise
• To oversee the annual effectiveness
review of the Board and its Committees
• To oversee compliance with the terms
of the Relationship Agreement with
the Principal Shareholders
• To formulate succession plans for the
Chairman, Non-Executive Directors
and key senior executives
Time spent in 2016
Annual effectiveness
review
Appointment/
reappointment
of Directors
Board composition
Directors’ conflicts
Governance
Succession planning
%
7
7
5
1
10
70
Key topics discussed at
Nomination Committee
meetings in 2016
Key:
Reviewed
Recommended to Board
Approved
Topic
Activity
Action
Annual
effectiveness
review
• Output of the 2015 annual effectiveness review of the Board and the
Nomination Committee, including agreement of action plans
• Update on actions arising from the 2015 annual effectiveness review
Appointment/
reappointment
of Directors
Board
composition
• Process for the 2016 annual effectiveness review of the Board and
its Committees, and Directors’ evaluations
• Annual re-election of Directors and review of their independence
• Appointment of a new shareholder-representative Director
• Review of Board Committee composition following the resignation
of Peter Cartwright and Neil Cochrane as Directors
• Annual review of the structure, size and composition of the Board
and its Committees, including the balance of skills, knowledge,
experience and diversity of the Directors
Directors’
conflicts
• Potential conflicts arising from the proposed appointment of Robert
Sharpe as Chairman of the Bank of Ireland (UK) PLC
• Annual review of the Directors' Conflicts Register
Governance
• Nomination Committee Report to be included in the 2015 Annual
Report and Accounts
• Gap analysis against the PRA supervisory statement – “Corporate
governance: Board responsibilities”
• Compliance with the Relationship Agreement between the
Company and its Principal Shareholders
• Annual programme of agenda items for Nomination Committee
meetings in 2017
Succession
planning
• Succession planning for both Executive and Non-Executive Directors
• Succession planning for the Chairman role and initiation of the
search for a new Chairman, including job specification, selection of
search agency and clarification of regulatory requirements
Committee effectiveness
The Nomination Committee undertook a review of its own effectiveness through
2016 as part of the wider Board and Committee evaluation exercise. The review
took the form of an internal evaluation and was conducted principally by way of a
questionnaire that was issued to all Nomination Committee members.
The review covered various areas including the role and remit of the Nomination
Committee; the effectiveness of the Chair; the appropriateness of information
provided to the Nomination Committee; and the relationship with management.
The Nomination Committee discussed the outcome of the review in early 2017.
The Nomination Committee confirmed that it operated effectively and there were
no significant areas for concern. It also noted that succession planning would remain
a key area of focus in 2017. Further information about the Board and Committee
effectiveness process is set out on pages 56 and 57.
62
Aldermore Group PLC Annual Report and Accounts 2016
Audit Committee Report
Audit Committee at a glance
• The Audit Committee is composed of
four Independent Non-Executive
Directors, in line with Code
requirements:
- John Hitchins (Chair), Independent
Non-Executive Director
- Robert Sharpe, Independent
Non-Executive Director
- Peter Shaw, Independent
Non-Executive Director
- Chris Stamper, Independent
Non-Executive Director
• Regular attendees at the Audit
Committee include the CEO,
CFO, CRO, Group Internal Audit
Director, Group Financial Controller,
representatives from KPMG and the
Company Secretary.
• To comply with Code requirements
that the Audit Committee has at least
one member with recent and relevant
financial experience, the Board is
satisfied that John Hitchins meets
these requirements, being a qualified
chartered accountant with extensive
financial and audit experience.
• The Audit Committee has also
reviewed the new Code requirement
that the Committee as a whole should
have competence relevant to the
sector in which the Company operates,
and has confirmed its compliance with
this statement. See pages 42 and 43
for full biographical details of Audit
Committee members.
• The Audit Committee’s key role is to
review the integrity of the financial
reporting for the Group and to oversee
the effectiveness of the internal
control systems and work of the
internal and external auditors.
• The Audit Committee’s terms
of reference are reviewed
annually and are available at
www.investors.aldermore.co.uk
audit team at KPMG for the support they
have given to the organisation as it has
transitioned into a listed company.
Given the highly regulated environment
that we operate within, I am pleased to
report that the outcome of the annual
evaluation of the Group Internal Audit
("GIA") function demonstrates that
overall the team is operating effectively
and that it continues to evolve in tandem
with the maturity of the organisation.
In line with the Chartered Institute
of Internal Audit ("CIIA") standards,
the Audit Committee has agreed
to commission an external quality
assessment in 2017 to benchmark GIA
activities against best practice and peers.
Ahead of this, during 2016, the function
conducted a self-assessment against
the CIIA published guidance on “Effective
Internal Audit in the Financial Services
Sector” which provided assurance to the
Audit Committee that, on a proportionate
basis, the function complied with all
relevant areas. Further information
about GIA can be found on page 67.
The report sets out the areas the
Audit Committee focused on in 2016.
Many of these will again form areas of
focus for us in 2017 and, in particular,
the Audit Committee will continue to
provide regular oversight to the IFRS9
programme (which was mobilised during
2016) to ensure that the Company
is ready for the implementation
of this standard with effect from
1 January 2018.
John Hitchins,
Chair of Audit Committee
Dear Shareholder
I am pleased to present this report of
the Audit Committee for the year ended
31 December 2016 and I set out below
some key highlights. We continue to
maintain a close relationship with the
Risk Committee as there are topics of
mutual interest, although with different
areas of focus.
The Conduct Committee of the Financial
Reporting Council ("FRC") reviews the
report and accounts of public and large
private companies to determine whether
they comply with the Companies Act
2006 and other reporting requirements.
These reviews are conducted on a “desk
top” basis without access to companies’
detailed records, but nonetheless the
Audit Committee was delighted to
receive a “no issues” letter from the
FRC which confirmed that, based on
their review of the Group’s 2015 Annual
Report and Accounts (our inaugural
report as a listed company), they had no
questions or queries to raise at that time.
Taking into account the framework
set out in the Audit Tendering Policy
(which we adopted in June 2016), the
Audit Committee initiated a project
in the second half of 2016 to design
and execute a tender process for the
external auditor. This was a significant
and comprehensive exercise which
concluded with the Board approving the
Audit Committee’s recommendation that
Deloitte LLP be appointed as our external
auditor for the period commencing
1 January 2017. I would like to extend my
thanks to our audit partner and the wider
Corporate governance 63
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Responsibilities of the Audit Committee
• Monitor the integrity of the financial
statements of the Group, including its
annual reports, half-yearly reports and
quarterly updates
• Challenge the consistency of, and
any changes to, accounting policies
and confirm whether the Group
has complied with and followed
appropriate accounting standards
and made appropriate estimates
and judgements
• Monitor and keep under review
the effectiveness of the Group’s
internal financial controls and internal
control systems
• Assess whether the Group’s financial
reports are fair, balanced and
understandable; the appropriateness
of the adoption of the going concern
basis of accounting; and the statement
that the Directors have a reasonable
expectation that the Group will be able
to continue in operation and meet its
liabilities as they fall due
• Review the adequacy of the Group’s
whistleblowing arrangements
and procedures for detecting
fraud and preventing bribery and
money laundering
• Monitor the remit and effectiveness
of the GIA function, review all
internal audit reports and monitor
management’s responsiveness to the
findings and recommendations
• Oversee the relationship with the
external auditor, including the approval
of audit and non-audit fees and terms
of engagement, annually assessing
their independence and reviewing
their findings
Time spent in 2016
External audit
Financial reporting
Governance
Internal audit
Internal controls
Other
%
16
46
6
17
13
2
Key topics discussed
at Audit Committee
meetings in 2016
Key:
Reviewed
Recommended to Board
Approved
Topic
External
audit
Activity
Action
• External audit control observations, including management's
responses
• External auditor's assessment of their independence
• 2016 audit strategy, terms of engagement and fee proposal
• Effectiveness review and reappointment of the external auditor
• New Audit Tendering Policy
• Audit tender process and recommendation to the Board to appoint a
new external auditor with effect from the 2017 AGM
Financial
reporting
• Financial results, including going concern and viability statements,
and the 2015 Annual Report and Accounts
• Representation letters to the external auditor
• Key judgement areas for the 2016 half-year and full-year results
• Pillar 3 disclosures as at 31 December 2015
• Project to implement IFRS9 (new guidelines for calculating and
reporting provisions) with effect from 1 January 2018
• Regular review of policies, including the Loan Impairment and
Provisioning Policy and Hedge Accounting Policy, and approval of a
new Effective Interest Rate Stance Policy
Governance
• Annual programme of agenda items for Audit Committee meetings
in 2017
Internal
audit
Internal
controls
• Review of the Audit Committee's effectiveness
• Regulatory developments which impact on audit committees
• Annual review of the effectiveness of the GIA function, and
consideration of progress against actions from the previous review
• Output from the review of the GIA function against the CIIA guidance
on “Effective Internal Audit in the Financial Services Sector”
• Annual report from the Money Laundering Reporting Officer
• Annual review of whistleblowing arrangements
• Assessment of the effectiveness of systems of risk management
and internal controls
• Annual review of disclosure controls and procedures, including the
impact of the implementation of the EU Market Abuse Regulation
• Updates on data governance
• Processes for preventing fraudulent financial reporting
• Enhancement of the Business Assurance Framework
In addition, the Audit Committee received regular updates from the GIA function
on audit reports issued and progress against audit recommendations. Non-audit
services and fees were also monitored.
64
Aldermore Group PLC Annual Report and Accounts 2016
Audit Committee Report
continued
Areas of focus
Financial reporting
In respect of financial reporting, the Audit Committee considered the Company’s half-year and annual financial statements and
considered a number of significant issues and areas of judgement (as set out in the table below). The issues are broadly similar
to those looked at in 2015 except deferred tax is no longer considered significant given the substantial reduction in the deferred
tax asset.
Key issues/judgements in financial reporting
Audit Committee review and conclusions
Loan impairment provisions
The calculation of loan impairment
provisions is management’s best estimate
of losses incurred in the Group’s portfolios
at the balance sheet date. It involves
estimates of expected future cash flows
based on both the likelihood of a loan and
advance being written off and the estimated
loss on such a write-off.
At 31 December 2016, the Group held
£14.3m of specific loan impairment
provisions and £13.1m of collective
provisions respectively.
- The Audit Committee reviewed regular reports during the year in relation to
both the collective and individual loan impairment provisions. The collective
impairment model involves a number of significant assumptions. All key
assumptions, including the probability of default and emergence period,
have been considered, challenged and reviewed, including an analysis of the
sensitivity of each key assumption.
- The probability of default is assessed using information obtained from a credit
bureau for comparable borrowers. These probabilities of defaults are then
adjusted (usually downwards) to reflect the nature of the Group’s lending.
The level of adjustment is based on historic internal data.
- Emergence period assumptions are necessary to estimate the time between
the trigger events occurring and loans being identified as impaired. The Group
has limited historical data available and therefore uses market insight to
estimate the emergence period assumptions. As a result of the UK’s decision
to leave the EU, it is widely predicted that the UK economy will experience a
sustained period of economic uncertainty. Whilst it is impossible to predict
the potential impact of this economic uncertainty, a decision was made to
increase the emergence period for the Mortgages segments in June 2016.
This had the impact of increasing the collective impairment by £1.6m.
- The Audit Committee also considered specific cases of individual provisions.
The significant judgements in calculating specific provisions relate to the
estimate of the value of collateral due to the specialised nature of lending in
SME Commercial Mortgages and Asset Finance, coupled with the alternative
exit strategies which can be adopted.
- The Audit Committee agreed management’s judgement was appropriate as
at 31 December 2016. The disclosures relating to loan impairment provisions
are set out in Note 3 and Note 22 to the financial statements on pages 166 to
167 and 177 to 178 respectively.
Corporate governance
65
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Key issues/judgements in financial reporting
Audit Committee review and conclusions
Effective Interest Rate (“EIR”)
The EIR method of accounting for income
recognition requires management to make
a number of assumptions. In particular,
management must make a significant
judgement around the estimation of the
expected life of loan assets across the
Group’s portfolios.
At 31 December 2016, the Group’s balance
sheet includes an EIR asset of £6.8m.
Share-based payments
Share-based payments are material by
nature and determination of the fair value
of share-based payments awarded to
Directors and employees of the Group
requires management to make a number
of judgements.
A total charge of £3.5m in relation to
share-based payments was reflected in the
income statement during the year.
- The EIR method of accounting uses a discounted cash flow model to spread
interest and fee income and expense attributable to loan assets, including
costs and other premium and discounts, over the estimated life of the asset.
- The Audit Committee considered and challenged the key assumptions within
the EIR models. One of the key assumptions relates to the expected life of the
loan asset which is underpinned by judgements made on the likely repayment
profile of the Group’s loan portfolios (both organic and acquired) driven by
expected future customer behaviour. During the year, the Audit Committee
reviewed, challenged and approved an updated governance framework
related to the preparation and ongoing monitoring and enhancement of these
repayment profiles.
- It further reviewed the reassessment of the expected lives as at
31 December 2016, further details of which are given in Note 3 to the
Financial Statements on page 168. The Audit Committee was satisfied that
this reassessment had been prepared in line with the updated governance
framework. After considering sensitivities of key judgements, the Audit
Committee agreed that management’s judgement was appropriate.
- During 2016, further share awards were granted under the existing schemes,
including a modification. The most significant judgement remains the
calculation of the expected volatility of the Company’s share price.
- The Audit Committee considered the accounting for the share plans, including
the methodology used to calculate the fair value of the awards granted and
the key inputs and assumptions used in the valuation models to calculate
the charge.
- The Audit Committee considered sensitivities of key assumptions and was
satisfied with the judgements applied in calculating the fair value of the
awards granted. The disclosures relating to share-based payments are set
out in Note 3 and Note 37 to the financial statements on pages 168 and 186 to
189 respectively.
Goodwill attributable to Invoice Finance
During 2016, the Group impaired goodwill
balances totalling £4.1m attributable to the
Invoice Finance segment.
Accounting standards require an
assessment of goodwill balances for
impairment on at least an annual basis.
- At 1 January 2016, the Invoice Finance goodwill was carried forward using the
Fair Value Less Cost of Disposal ("FVLCD") method of valuation. During 2016,
following the UK's decision to leave the EU, there was a general fall in the
market value of financial services businesses. As a result, at the half year
a decision was taken to impair the goodwill relating to the Invoice Finance
business of £4.1m.
- The disclosures relating to the Invoice Finance goodwill are set out in Note 3
and Note 28 to the financial statements on pages 169 and 182 respectively.
66
Aldermore Group PLC Annual Report and Accounts 2016
Audit Committee Report
continued
Fair, balanced and
understandable
In line with the Code, the overarching
principle for an annual report and
accounts is that the report as a whole
is “fair, balanced and understandable
and should provide the information
necessary for shareholders to
assess the company’s position and
performance, business model and
strategy”. This requirement was at the
forefront of the Audit Committee’s
planning process for the 2016 Annual
Report and Accounts to ensure that it
could provide assurance to the Board
about making this statement.
The process enabling the Audit Committee
to reach this conclusion included:
• The production of the 2016 Annual
Report and Accounts was managed
by the Chief Financial Officer, with
overall governance and co-ordination
provided by a cross-functional team
of senior management.
• This support included input
from Finance, Risk, Company
Secretariat, Investor Relations and
the business lines (including the
Managing Directors).
• There was a robust review process
of inputs into the 2016 Annual Report
and Accounts by all contributors to
ensure disclosures were balanced,
accurate and verified, and further
comprehensive reviews were
conducted by senior management.
• The Company Secretary reviewed
all Board and Committee minutes
to ensure all significant matters
discussed at meetings were
appropriately disclosed in the
2016 Annual Report and Accounts
as required.
• A full review was undertaken by the
external legal advisers to ensure all
disclosure requirements were met, as
well as following best practice.
• A formal review was undertaken by
the Audit Committee of the draft
2016 Annual Report and Accounts in
advance of final sign-off.
• A final review was performed by the
Board of Directors.
In conclusion, the Audit Committee is
satisfied that the 2016 Annual Report
and Accounts meets the “fair, balanced
and understandable” criteria.
Internal controls and risk
management
The Audit Committee is responsible
for reviewing the adequacy and
effectiveness of the Group’s systems of
internal control and risk management.
Details of the risk management
systems in place are provided within
the risk management section from
page 106.
Details of the process performed to
assess the effectiveness of internal
controls are provided on page 31.
On the recommendation of the Audit
Committee and Risk Committee, the
Board concluded that the Group’s
systems of internal control and risk
management were appropriately
designed and operated effectively
during 2016.
Whistleblowing
The Audit Committee reviews the
adequacy and security of the Group’s
whistleblowing arrangements for
its employees and contractors to
raise concerns, in confidence, about
possible wrongdoing in financial
reporting or other matters. Under new
regulation in 2016, the Company was
required to appoint a Whistleblowing
Champion to oversee the effectiveness
of the whistleblowing framework,
and an accountable executive for
establishing policies and procedures on
whistleblowing. The Chair of the Audit
Committee and the Chief Risk Officer
agreed to be appointed to these roles,
and will carry out their responsibilities in
conjunction with the Audit Committee.
During 2016, the Audit Committee
reviewed the Group's whistleblowing
arrangements and it was agreed
that, in order to complement the
processes that were already in place,
an independent third-party provider
would be appointed to operate a
whistleblowing line. Avenues previously
available to an employee for raising a
concern remain in place (i.e. with their
line manager in the first instance or,
where not appropriate, directly with
the Head of Compliance via a dedicated
contact number). Once a report has
been made, an initial assessment is
undertaken in order to decide if an
independent investigation is required.
In respect of the year under review,
a report on whistleblowing was
considered by the Audit Committee
which concluded that there were no
areas of concern which were significant
or demonstrated material weaknesses
in internal controls during the year.
Corporate governance 67
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Group Internal audit
The Group has an independent and
objective GIA function which acts as the
third line of defence. The GIA Director
reports directly to the Audit Committee
Chair and to the CEO for administrative
purposes. The GIA Director meets
with the Audit Committee Chair on a
frequent basis and periodically with
the whole Audit Committee without
management present. In addition, the
Audit Committee held a roundtable
with members of the GIA team during
the year, which allowed the Audit
Committee to delve further into key
areas of focus. See page 55 for more
information about the roundtable event.
The Audit Committee reviews and
approves the GIA Risk Assessment
and Plan of Work (“GIA Plan”) including
the adequacy of resources and skills
available. The GIA Director utilises
specialist knowledge from external
consultants, where appropriate, to
supplement the skills of the GIA team.
The GIA Director monitors changes
to the business and the external
environment throughout the year and
considers whether any changes to the
GIA Plan are needed. Any proposed
changes are reviewed and approved by
the Audit Committee.
The Audit Committee receives regular
reports on progress against the GIA Plan
including reports on individual audits
as well as thematic issues identified.
The Audit Committee also reviews
the effectiveness of management
action plans to remediate GIA findings
and receives reports from GIA on the
progress management has made in
implementing audit recommendations.
The Audit Committee also met the
external auditor once during the year
without management present in order
to discuss their remit and raise any
issues arising from the audit.
Independence
Processes are in place to safeguard the
independence of the external auditor,
including controls around the use of the
external auditor for non-audit services
and the operation of a Policy on the
Employment of Former Employees
of the External Auditor. Details of
the Non-Audit Services Policy are
set out on page 69. In addition, the
external auditor provides the Audit
Committee with further assurance as
to the procedures that it maintains to
preserve objectivity and confirmation
that it remains independent.
Effectiveness
The Audit Committee assesses the
effectiveness of the external auditor
and the external audit process on
an annual basis through a number of
steps, including: i) agreement of their
engagement letter and fees; ii) a review
of the external audit plan, including the
experience of the audit team assigned;
iii) an evaluation of the reports issued
following inspections of KPMG LLP by
the Financial Reporting Council’s Audit
Quality Review team; iv) a review of
the clarity and thoroughness of KPMG
LLP’s written reports and contribution
to Audit Committee discussions;
and v) a review of non-audit fees to
confirm compliance with the Non-Audit
Services Policy. Following its review
of the 2016 external audit process,
the Audit Committee concluded that it
was effective.
To assess the effectiveness of GIA in
respect of 2016, the Audit Committee
performed an internal review which
included obtaining feedback from
members of the Audit Committee, as
well as executive management. It also
had regard to the CIIA guidance on
“Effective Internal Audit in the Financial
Services Sector” (“CIIA Guidance”).
The internal review concluded that
the function was effective overall
noting that, while there were some
areas for further development, these
had already been identified and were
being acted upon by the GIA Director.
During the year, GIA also performed
a self-assessment against both the
CIIA Guidance and internal auditing
standards. The Audit Committee
reviewed the output from this review,
which confirmed that GIA was operating
effectively against the standards.
The Audit Committee has decided that
in 2017 it will commission an external
quality assessment to benchmark
GIA activities against best practice
and peers.
External audit
The Audit Committee is responsible
for overseeing the relationship with
the external auditor, including the
ongoing assessment of the auditor’s
independence. The Audit Committee
makes recommendations to the Board
with regard to the appointment of
the external auditor, and approves
their remuneration and terms
of engagement.
KPMG LLP and its predecessor firm,
KPMG Audit PLC, were appointed as the
Company’s auditor in 2009. The current
audit partner is Mike Peck who has been
in place since 2014.
During 2016, the Audit Committee Chair
met the external auditor on a regular
basis during the year to facilitate
effective and timely communication.
68
Aldermore Group PLC Annual Report and Accounts 2016
Audit Committee Report
continued
Audit tender
During the year, the Audit Committee
approved an Audit Tendering Policy
which confirmed that the external audit
contract would be put out to tender
at least every 10 years, and where
a competitive tender had not been
completed in the last five years, the
Company would confirm when it
proposed to carry out a tender and
the reasons why. This was in line with
both the Code and other regulatory
requirements.
The Audit Committee decided to
commence a tendering process in 2016.
This process culminated in a
recommendation to the Board that
Deloitte LLP should be appointed as the
Company’s auditor with effect from the
2017 AGM. This recommendation was
approved by the Board in December
2016 and the proposed appointment
is included in the 2017 Notice of AGM.
Further detail on the tender process is
provided below.
Audit Committee
effectiveness
The Audit Committee undertook a
review of its own effectiveness through
2016 as part of the wider Board and
Committee evaluation exercise. The
review took the form of an internal
evaluation and was principally conducted
by way of a questionnaire that was issued
to all Audit Committee members.
The review covered various areas
including the role and remit of the
Audit Committee; the effectiveness
of the Chair; the appropriateness of
information provided to the Audit
Committee; and the relationship with
management. The Audit Committee
discussed the outcome of the review
in early 2017. The Audit Committee
confirmed that it operated effectively
and there were no significant areas for
concern. Further information about the
Board and Committee effectiveness
process is set out on pages 56 and 57.
External audit tender process
The tender process was overseen by the Audit Committee, with support from a steering group comprising the Audit Committee Chair, the Risk
Committee Chair, the CFO and the Group Financial Controller. The tender process involved five key stages, which are summarised below:
Stage 1 –
Initial meetings with
the audit firms
Stage 2 –
Issue of formal invitation
to tender
Stage 3 –
Provision of information
to audit firms
Stage 4 –
Meetings with key
individuals and
submission of
final proposals
Stage 5 –
Presentation to the Audit
Committee and outcome
• An invitation to tender
was issued to three
shortlisted firms, along
with a deadline to submit
their intent to tender.
• The firms were also
requested to submit
a non-disclosure
agreement, a declaration
of independence
from the Group and a
supplier questionnaire.
• The Group issued all
shortlisted firms with
relevant information to
provide them with an
overview of the Group’s
history, business and
audit requirements.
• The firms were provided
with the opportunity
to ask clarification
questions to increase
their understanding of
the Group and support
their tenders.
• Intention to tender
was advertised
on the corporate
governance section of
the Group’s Investor
Relations website.
• Five interested firms
(including the incumbent
firm) met with the audit
tender steering group.
• These sessions enabled
the steering group
members to gain insight
into the experience,
qualification and fit
of the proposed audit
teams as well as to
discuss any potential
independence issues.
• The shortlisted firms
met with members of
the executive team, the
Audit Committee Chair
and the GIA Director.
• These meetings were
performed over two
days and provided an
opportunity for the
Group to evaluate the
firms in an informal
setting, and for the
firms to further enhance
their understanding of
the Group.
• Following these
meetings, the firms
had an opportunity to
ask further questions
before submitting their
final proposals.
• All three firms were
asked to present their
audit proposals to the
steering group.
• Based on a careful
assessment against
a comprehensive set
of evaluation criteria,
the Audit Committee
recommended a preferred
firm together with
an alternative.
• After careful
consideration, the
Board accepted the
recommendation from
the Audit Committee
to appoint Deloitte LLP
as the Group’s external
auditor for 2017.
• The appointment of
Deloitte LLP will be
recommended to
shareholders at the
2017 AGM.
Corporate governance 69
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Non-audit services
To ensure the independence of the
external auditor, the Audit Committee
has adopted a formal policy on the
engagement of the auditor to perform
non-audit services.
Under the Non-Audit Services Policy,
the external auditor is prohibited
from undertaking any work that
is considered to threaten its
independence or objectivity in its role.
Prohibited work specifically includes
bookkeeping services, the design and
implementation of financial information
systems, appraisal or valuation
services, actuarial or legal services, and
any other work that would involve the
external auditor in preparing financial
information that is included or disclosed
in the audited financial statements, or in
making judgements or taking decisions
on behalf of management.
The external auditor is permitted to
undertake work in other areas as long
as it is the most suitable supplier of the
service and the terms and conditions
of the engagement, including the level
of the fee, do not impair its objectivity
or independence. Under the Policy,
the Audit Committee pre-approves
the use of the external auditor for
routine non-audit services, such as
profit verifications and country-by-
country reporting.
Agreement to use the external auditor
for non-audit services must be
approved as set out below.
When determining whether the
external auditor is the most
suitable supplier of a particular
service, management and the Audit
Committee take into account the
cost-effectiveness of the service and
the external auditor’s knowledge of
the Group. KPMG LLP has policies and
procedures in place to ensure that
the highest standards of objectivity,
independence and integrity are
maintained, and these comply with
the Auditing Practices Board’s Ethical
Standards for Auditors. The audit
engagement partner must approve
any non-audit services offered to the
Group. This ensures that the objectives
of the proposed engagement are not
inconsistent with the objectives of
the audit; allows the identification and
assessment of any related threats
to KPMG LLP’s objectivity; and
assesses the effectiveness of available
safeguards to eliminate such threats
or reduce them to an acceptable level.
KPMG LLP do not carry out non-
audit services where no satisfactory
safeguards exist.
During the year, the external auditor
was engaged to perform the following
non-audit services:
Non-audit services
Audit-related
assurance services
Corporate finance
services
Taxation compliance
services
Other assurance
services
Other taxation
advisory services
Other services
%
45
6
4
25
11
8
The above services resulted in total
non-audit services being provided of
£0.3m.
In 2016, the ratio of non-audit services
to the external audit fee was 58%.
Further information on the total fees
and non-audit fees paid to the external
auditor is detailed in Note 16 of the
financial statements on page 174.
Service
Service not previously pre-approved
regardless of fee
Any engagement greater than £100k
Pre-approved services between
£20k and £100k
Pre-approved services less than £20k
Approval required
Audit Committee
Audit Committee
CFO
Direct report to the CFO
70
Aldermore Group PLC Annual Report and Accounts 2016
Risk Committee Report
Risk Committee at a glance
• The Risk Committee is composed
of a majority of Independent Non-
Executive Directors, one of whom
chairs the meetings, in line with the
Walker Review recommendations:
- Peter Shaw (Chair), Independent
Non-Executive Director
- John Hitchins, Independent
Non-Executive Director
- Chris Patrick, Non-Executive Director
- Robert Sharpe, Independent
Non-Executive Director
- Chris Stamper, Independent
Non-Executive Director
• Peter Cartwright was also a member
of the Risk Committee until his
resignation from the Board with effect
from 18 April 2016. Neil Cochrane
acted as Peter’s alternate over this
period, and served as a member in his
own right between 10 May 2016 and
14 October 2016.
• Regular attendees at meetings of
the Risk Committee include the
CRO, CEO, CFO, business Managing
Directors, Group Internal Audit
Director, Company Secretary and
representatives from the Group’s
external auditor.
• The Risk Committee’s key role is to
provide oversight of and advice to the
Board on the current risk exposures
and future risk strategy of the Group,
including the development and
implementation of the Group’s Risk
Management Framework and for
ensuring compliance with the Group’s
approved risk appetite.
• The Risk Committee’s terms
of reference are reviewed
annually and are available at
www.investors.aldermore.co.uk
Further detail on the enhancements
that we have made to the Risk
Management Framework is set
out overleaf, but I would highlight
in particular the progress made on
embedding our Business Assurance
Framework (which tests the controls
within the business divisions and
central functions) to reflect the growing
size, scale and complexity of the
Group; enhancing our stress testing
capabilities; augmenting our lending
policies; and reviewing our buy-to-let
underwriting standards in response
to regulatory changes. We have also
maintained a watching brief over the
impact of the UK’s decision to leave the
EU on our business, both at the time
of the vote and as further detail on the
execution of that decision has emerged.
We will continue to do so as we look
towards our priorities for 2017.
The Risk Committee keeps under
review those risks on the horizon that
could have a material impact on the
Group in the future. These emerging
risks will be an area of focus in
2017, alongside the impact on our
risk appetite of changes in the
external environment.
Peter Shaw,
Chair of Risk Committee
Dear Shareholder
I am pleased to present the report
of the Risk Committee for 2016.
The promotion of a strong risk culture
is a key Board responsibility and the
regular attendance at meetings of the
Risk Committee by other Directors who
are not members reflects the Board’s
desire to set this ‘tone from the top’.
In November 2016, we welcomed
Chris Patrick to the Risk Committee
as the representative of our Principal
Shareholders. Chris brings with him a
wealth of financial and risk management
experience. Peter Cartwright and Neil
Cochrane served as shareholder-
representative members during
the year, and I would like to take this
opportunity to thank them both for
their outstanding contributions to the
Risk Committee during their respective
tenures. Following changes to the CEO’s
executive team, the Risk Committee
is now supported by a new Chief Risk
Officer, Christine Palmer. Joining from
RBS where she held senior risk roles
for the last 13 years, Christine brings
strong leadership to the Risk function.
The Risk Committee has again had an
active agenda in 2016. Our key priority
has been to build on the substantial
investment in the Risk Management
Framework that we oversaw in 2015.
We have continued to evolve and
embed risk frameworks, policies
and procedures, whilst remaining
cognisant of the growth of the
business, the changing economic
outlook and developments in the
regulatory environment.
Corporate governance 71
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Responsibilities of the Risk Committee
• Oversee the Group’s overall
risk appetite, risk tolerance and
risk strategy
• Monitor the risk profile against the
Board-approved risk appetite
• Oversee the development,
implementation and effectiveness
of the overall Risk Management
Framework
• Monitor the effectiveness of the
Group’s risk management and internal
control systems
• Review the stress and scenario
testing of the Group’s strategic and
business plans
• Ensure the adequacy of compliance
with regulatory requirements
(including the ICAAP and ILAAP) and
recommend to the Board for approval
• Review and monitor activities,
independence and effectiveness of the
Risk function, including Compliance
• Review risk-related Group policies for
recommendation to the Board
• Provide advice to the Remuneration
Committee on principles and
deliverables that will ensure that the
determination of remuneration fully
reflects risk performance
Time spent in 2016
Capital and liquidity
management and
stress testing
Governance
Regulatory matters
Risk frameworks
and policies
Risk strategy,
risk profile and
risk appetite
%
17
9
12
18
44
Key topics discussed
at Risk Committee
meetings in 2016
Key:
Reviewed
Recommended to Board
Approved
Topic
Activity
Action
Capital and
liquidity
management
and stress
testing
•
Internal Capital Adequacy Assessment Process ("ICAAP") and the
Internal Liquidity Adequacy Assessment Process ("ILAAP")
•
Issuance of Tier 2 Loan Notes
• Base and stress scenarios for the budget and ICAAP
• Annual review of the Stress Testing Framework
Governance
• Annual review of the Risk Committee’s effectiveness
Regulatory
matters
Risk
frameworks
and policies
Risk strategy,
risk profile and
risk appetite
• Report from the CRO on the assessment of risk performance in
relation to incentive schemes
• Annual programme of agenda items for Risk Committee meetings
in 2017
• Regular monitoring of the PSM action plan
•
Impact on the Mortgages business of the PRA consultation paper on
buy-to-let underwriting standards
• BCBS review of standardised credit risk weights and its impact on
the Group
• Annual review of the Risk Appetite Framework
• Changes to the Operational Risk Management Framework and the
annual review of its effectiveness
• Proposals to introduce a Group Policy Management Framework and
a Group Models Management Framework
• Annual review of policies including the Group Concentration Risk
Policy and Prudential/Treasury Policies
• Annual review of the Reputational Risk Policy
• Embedding of changes to the Business Assurance Framework
• Half-yearly updates on products approved and credit policy changes
• Conduct risk deep-dive
• Annual review of risk strategy
• Adoption of a simplified approach to the monitoring of strategic risks
• Deep-dive into performance against risk appetite in the
Mortgages business
• Review of risks associated with change activity across the Group,
including post implementation reviews
In addition, a report is provided at each meeting from the CRO covering performance
against the risk appetite metrics, escalated items from the businesses and emerging
risks. The Risk Committee also receives regular updates on areas including cyber
security and requests for risks to be accepted.
72
Aldermore Group PLC Annual Report and Accounts 2016
Risk Committee Report
continued
Areas of focus
Details of key matters discussed by
the Risk Committee during the year
are set out on page 71 and further
information about discussion of these
topics at meetings is described below.
In addition, pages 33 to 35 provide a
summary of the principal risks faced by
the Group and key mitigating actions;
and an overview of emerging risks,
along with recent and anticipated future
developments. Further information on
the Group’s approach to risk, including
the associated governance framework
for managing risk, stress testing and a
full analysis of the principal risks are set
out in the risk management section on
pages 106 to 139.
Frameworks
During the year, the Risk Committee
reviewed and updated the Risk
Management Framework (“RMF”) and
Risk Appetite Framework (“RAF”),
with risk appetite statements and risk
metrics being revised and refreshed
as appropriate. Proposals were
approved to implement a Group
Policy Management Framework
(under which policies, processes and
procedures will be governed) and a
Models Management Framework,
thereby strengthening the overarching
RMF. The Stress Testing Framework
was also enhanced, and the Group’s
ICAAP and ILAAP were challenged and
recommended to Board.
Credit risk
The Risk Committee regularly reviews
the credit risk profile of the Group,
with a clear focus on performance
against risk appetite statements
and risk metrics. During the year, the
Risk Committee considered in-depth
reviews of a number of asset classes
including the Mortgages and Buy-To-
Let exposures. A number of policies
were reviewed by the Risk Committee
including the Group Concentration
Risk Policy, changes to portfolio level
policies and the impact of these on
risk appetite.
The current and future impact of
emerging risks on the Group’s credit
risk profile and risk appetite was a
particular area of focus, with follow-up
actions being agreed with management
as required.
Capital and liquidity risk
The Risk Committee monitors capital
and liquidity risk and receives regular
reports on actual and forecast levels in
relation to key RAF metrics.
During the year, the Risk Committee
considered revisions to the Group’s
capital risk appetite and reviewed the
impact of key regulatory developments
including the BCBS proposed revisions
to the standardised approach to credit
risk (expected to be finalised in H1 2017)
and the Bank of England’s approach to
minimum requirement for own funds
and eligible liabilities.
The Risk Committee also reviewed
changes to the approach to the
management of and reporting on
liquidity risks. This was strengthened
by revisions to the Funds Transfer
Pricing Policy (which ensures that the
costs and risks of liquidity are clearly
attributed to business lines) and
changes to core systems and people
capability which have enabled daily
liquidity reporting to be enhanced.
Market risk
Although the Group does not seek to
take market risk, the Risk Committee
reviewed the interest rate risk that
the Group carries as part of the ICAAP
review process.
Operational risk
As part of the continued development
of the systems and controls in place
to support the control environment,
the Risk Committee approved a
revised Operational Risk Management
Framework in early 2016, and a detailed
report on the effectiveness of that
framework in October 2016.
During the year, the Risk Committee
received a number of updates on
operational risk matters, including the
operational risk profile, and on specific
areas of focus including enhancements
to and the implementation of business
assurance (controls) testing and the
risk and control self-assessment
process (by which business areas
maintain a view of their risks and
control effectiveness).
In terms of the operational risk profile,
the Risk Committee received regular
updates on business continuity, disaster
recovery, cyber security and cyber risk
management. Cyber security remains
an important area of focus for the
Group with a number of improvements
delivered during 2016, driven by the
Security Investment Programme.
This has been complemented by an
independent review of the Group’s
security framework, and a revised
cyber strategy for 2017 onwards.
In addition, the Risk Committee
monitored the performance of
key systems and significant
projects, as well as noting material
outsourced arrangements.
Corporate governance 73
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
control frameworks operating across
the Group was undertaken, which took
into account adherence to established
risk appetite limits and triggers, risk
events which have been raised, the
findings from second line oversight
reviews and any unsatisfactory
reviews or material findings by Group
Internal Audit. Consideration was also
given to whether these areas revealed
poor culture or a lack of risk and control
awareness, and also whether actions to
close risk issues were taken seriously
and acted upon in a timely manner.
Risk Committee
effectiveness
The Risk Committee undertook a
review of its own effectiveness
through 2016 as part of the wider
Board and Committee evaluation
exercise. The review took the form
of an internal evaluation and was
principally conducted by way of a
questionnaire that was issued to all Risk
Committee members.
The review covered various areas
including the role and remit of the
Risk Committee; the effectiveness
of the Chair; the appropriateness
of information provided to the Risk
Committee; and the relationship with
management. The Risk Committee
discussed the outcome of the review
in early 2017. The Risk Committee
confirmed that it operated effectively
and there were no significant areas for
concern. Further information about the
Board and Committee effectiveness
process is set out on pages 56 and 57.
Compliance, conduct and
financial crime risk
Conduct risk management continues
to be a key area of focus for the Risk
Committee. In addition to regular
reports on performance against
conduct risk metrics and developments
regarding new and existing products,
a deep-dive was presented to the Risk
Committee which provided an overview
of enhancements to and embedding
of the conduct risk framework, and
emerging themes.
In conjunction with the Audit
Committee, the Risk Committee
reviews the Group’s arrangements for
anti-money laundering on an annual
basis. The effectiveness of the Financial
Crime Risk Framework over 2016 was
also reviewed and the Risk Committee
noted the significant enhancements
made to key policies and procedures
during the year and the strengthening
of capabilities for regular monitoring of
financial crime risk metrics.
Reputational risk
The Risk Committee reviewed and
recommended for Board approval the
Group’s Reputational Risk Policy.
Remuneration matters
The Risk Committee has a duty to
advise the Remuneration Committee
regarding both the design of senior
executive annual and long-term
incentive plans to ensure that
management are not being incentivised
to take undue risks; and any risk
management and control issues that
have arisen that it believes should be
taken into account when determining
executive remuneration payments
under the aforementioned plans.
In 2016, the Risk Committee reviewed
regular reports from the Chief Risk
Officer in relation to these matters.
A full assessment of the risk appetite,
risk management, governance and
74
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report
Statement from the
Remuneration Committee Chair
Dear Shareholder
On behalf of the Board, I am pleased to
present our Directors’ Remuneration
Report (the “Remuneration Report”)
for the year ended 31 December 2016.
In addition to this statement, the report
also includes our “Annual Report on
Remuneration” which covers:
• How the Directors’ Remuneration
Policy (the “Remuneration Policy”)
was implemented in 2016 and how it
will be implemented in 2017
• A report on the key details of the
Remuneration Committee and
its activities
• An appendix which sets out an
extract from our Remuneration
Policy for ease of reference
The Remuneration Policy was approved
by shareholders last year at the 2016
AGM. Votes of 93.68% and 93.93%
were achieved in favour of the approval
of the Remuneration Policy and the
advisory vote on the Annual Report on
Remuneration respectively, and the
Board was pleased with this strong level
of support.
The Remuneration Committee has kept
the Remuneration Policy under review
throughout the year. We are satisfied
that, as an overarching framework,
our Remuneration Policy remains
appropriate and continues to align
remuneration with the long-term
interests of our shareholders. As part
of our ongoing assessment of our plans,
which includes consideration of market
developments, we have identified some
enhancements to the operation of our
annual bonus plan, the Annual Incentive
Plan (“AIP”), which are set out on the
next page.
Performance and reward
outcomes for 2016
2016 was a remarkable year. Whilst we
recognise that the macroeconomic
and regulatory developments globally
impacted sentiment throughout the
year, it was disappointing that the share
price has not performed as strongly as
we had hoped given the fundamentally
strong financial performance that
was achieved.
However, throughout 2016 we
continued to focus our efforts on
serving our customers, prudent growth
in assets and capital accretion, such
that the year finished strongly in terms
of the key financial targets:
• Profit before tax of £128.7m
• Reported return on equity of 17.2%
• Reported cost/income ratio of 46.09%
• Net loan growth of £1.3bn
In determining the pay outcomes for
the financial year, the Remuneration
Committee has given full consideration
to all aspects of performance to ensure
a clear linkage to the results.
In respect of the Executive Directors,
we agreed:
• a zero level of vesting for the
Pre-IPO long-term awards which
were subject to a TSR performance
measure ending 31 December 2016.
These awards have, therefore, lapsed
in full; and
• an AIP award of approximately
79.7% and 80.7% of the maximum
for the CEO and CFO respectively,
in keeping with the strong financial
results, and combined with the
achievement of the non-financial
and personal performance measures
within the AIP balanced scorecard.
Further information on the
performance against relevant targets
can be found on pages 79 to 81.
We are satisfied that, as an
overarching framework,
our Remuneration Policy
remains appropriate
and continues to align
remuneration with the
long-term interests of
our shareholders.”
Cathy Turner
Chair of Remuneration Committee
Content
Statement from the Remuneration
Committee Chair
Annual Report on Remuneration
including:
• A report on the key details of the
Remuneration Committee and its
work in 2016 (pages 90 and 91)
• Appendix: Remuneration Policy
(pages 92 to 99)
Corporate governance 75
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
We have taken the decision to widen
the use of restricted stock for senior
(below Board) executives from 2017
onwards as we believe that this
enhances alignment of the interests
of executives with the share price and,
therefore, with investors, whilst also
reducing overall share usage. We will
review the impact of changes to our
own remuneration structure and
wider market developments in 2017
and beyond.
Following our listing last year, we have
continued to develop our remuneration
practices in line with the approved
Remuneration Policy. We welcome
the views of our shareholders and are
committed to maintaining an open
dialogue.
We hope to receive your ongoing
support at our forthcoming AGM where
I, along with the other members of the
Remuneration Committee, look forward
to answering any questions you may
have on this Remuneration Report
or our approach to remuneration
more generally.
Cathy Turner,
Chair of Remuneration Committee
2017 application of
Remuneration Policy
Executive Directors
Looking ahead to 2017, remuneration
arrangements will remain largely
unchanged from 2016. The Remuneration
Committee agreed that it would be
appropriate to award an increase in
base salary to the Executive Directors
which was consistent with the average
level of increase of 2.5% awarded to
employees across the Group generally.
This increase will take effect from 1 April
2017. No changes are proposed to the
levels of pension contributions (which
we are pleased to report are in line with
those paid to employees in the wider
Group), taxable benefits or the market
adjusted allowance.
In considering the AIP balanced
scorecard for 2017, we have strived
to ensure that bonus outcomes
continue to be based on a framework
that is both transparent and aligned
with shareholder interests. We have
concluded that our approach in this
regard could be strengthened by:
• broadening the financial performance
measures such that they are less
weighted towards a single measure
of profitability and are now more
representative of our core financial
KPIs. The weighting of the financial
performance measures remains
at 50%;
• further emphasising the link between
risk performance and remuneration
outcomes by increasing the
weighting of the risk measures from
15% to 20%. This reflects input from
our regulator, the PRA, for a more
explicit approach to risk adjustment
within scorecards across the industry
as well as our own enterprise-wide
objective of continuing to embed a
robust risk framework; and
• removing the highly qualitative
personal objectives target
completely and increasing the
weighting of the customer and people
elements from 7.5% each to 20% and
10% respectively, reflecting the two
critical enablers driving sustained
performance. Individual performance
will continue to be assessed
through measuring the non-
financial elements against both the
overall achievement and personal
contribution to those measures.
We believe that these modifications will
enable us to provide shareholders with
more transparent disclosures going
forward on how we have assessed
bonus outcomes.
No changes are proposed to either
quantum or performance measures in
respect of awards to be made under
the Performance Share Plan (“PSP”) in
2017, and these will be made on a similar
basis to 2016.
Non-Executive Directors
Following the resignation of Glyn
Jones as Chairman with effect from
6 February 2017, Danuta Gray, our
Senior Independent Director, has
assumed the role of Interim Chairman.
We have agreed that Danuta’s fee will
be raised to the same level as that of the
previous Chairman for the period she
undertakes the interim role, recognising
the increased responsibilities.
Shareholder engagement
We have followed with interest external
developments over the last year
regarding executive remuneration,
and have monitored evolving views
regarding flexible remuneration
structures and the use of restricted
stock. In particular, we have welcomed
the increasing level of support for the
tailoring of remuneration arrangements
to suit each company’s own culture
and strategy.
76
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report
Annual Report on Remuneration
Introduction
This Annual Report on Remuneration details how the Remuneration Policy (as approved by shareholders at the 2016 AGM) was
implemented in 2016, and sets out how the Remuneration Policy will be implemented in 2017.
Executive Directors
Overview of remuneration structure (2016)
01/01/16
31/12/16
31/12/17
31/12/18
31/12/19
31/12/20
31/12/21
Fixed pay
Annual bonus
Performance
Share Plan
Salary
Benefits
Pension
Assessment of
performance
60% of bonus deferred into an award over shares under the
Deferred Share Plan ("DSP") in March 2017, and balance paid in cash1
1/3 released from DSP on the anniversary of the date of grant over
three years
Award granted in March 2016; assessment made on
performance to the end of 2018
1 60% deferred when total variable awards exceed £500k.
At a glance: 2016 total remuneration (£’000)
Executive Directors
Phillip Monks,
Chief Executive Officer
Holding period to March 2021, prior to shares
being released
James Mack,
Chief Financial Officer
Single total remuneration
figure (£’000)
2016
668
(57%)
507
(43%)
1,175
2016
465
(56%)
360
(44%)
825
At a glance: Illustrations for application of the Remuneration Policy in 2017 (£’000)
Executive Directors
Phillip Monks,
Chief Executive Officer
Minimum
688
(100%)
James Mack,
Chief Financial Officer
688
Minimum
483
(100%)
In line with
expectations
688
(55%)
435
(34%)
138
(11%)
1,261
In line with
expectations
483
(55%)
304
(34%)
97
(11%)
Maximum
688
(34%)
652
(32%)
692
(34%)
2,032
Maximum
483
(34%)
457
(32%)
484
(34%)
483
884
1,424
Total fixed pay
Annual bonus 2016
Long-term incentives
Total fixed pay
Annual bonus 2017
Long-term incentives
Corporate governance 77
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Corporate governance
Risk management
Financial statements
Appendices
At a glance: implementation of Remuneration Policy in 2017
Remuneration element
Implementation (for both CEO and CFO unless stated)
Base salary from 1 April 2017
CEO: £525,313
CFO: £367,719
% increase from prior year
2.5%
Benefits
Includes private medical insurance, car allowance and critical illness
insurance
Market adjusted allowance
20% of base salary
Pension
Cash supplement of 8% of base salary
Annual bonus - maximum
opportunity as % of base salary
125%
Annual bonus - financial metrics Profit before tax (15%)
Net interest margin (10%)
Net loan growth (10%)
Return on equity (5%)
Cost/income ratio (5%)
Cost of risk (5%)
Annual bonus - % vesting for
threshold performance
0%
Annual bonus - non-financial
metrics
Risk (20%)
Customer (20%)
People (10%)
Annual bonus - deferred element 60% deferred for up to 3 years1
PSP - maximum opportunity as
% of base salary
135%
PSP - performance measures
Relative TSR (50%) and EPS (50%)
PSP - % vesting for threshold
performance
20%
Share ownership guidelines
200% of base salary
Further information
on implementation
See page 78
See page 78
See page 78
See page 79
See page 79
See page 82
See page 82
See page 82
See page 82
See page 82
See page 83
See page 83
See page 83
See page 88
1 60% deferred when total variable awards exceed £500k.
The chart to the left illustrates the potential outcomes of the Remuneration Policy for Executive Directors based on three
different scenarios. The assumptions on which the scenarios are based are set out below:
Scenario
Minimum
In line with expectations
Assumptions
Consists of base salary, benefits, market adjusted allowance and pension. A single year’s maximum
savings under Sharesave is also assumed.
An on-target bonus under the AIP and a threshold level of vesting under the PSP are achieved. 1
Maximum
Based on the maximum opportunity being achieved.1
1 Excluding share price appreciation and dividends.
Non-Executive Directors
Fees to be paid to the Non-Executive Directors are set out on page 87. The only change to fees in 2017 (effective 1 April 2017) is
an increase in the fee paid to the Chair of the Remuneration Committee (from £15k p.a. to £20k p.a.), which brings this fee into line
with the fees paid to the Chairs of the Audit and Risk Committees.
78
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report
Annual Report on Remuneration
continued
Single total figure table: Executive Directors (audited)
The following table sets out the total remuneration paid to the Executive Directors for the financial years ending 31 December
2016 and 31 December 2015.
Fixed elements
Variable elements
Name
Salary
Taxable
benefits1
Pension
Market
adjusted
allowance2
Subtotal
Annual
bonus3
Long-term
incentives4
Subtotal
Total
2016
£’000
2015
£’000
2016
£’000
2015
£’000
2016
£’000
2015
£’000
2016
£’000
2015
£’000
2016
£’000
2015
£’000
2016
£’000
2015
£’000
2016
£’000
2015
£’000
2016
£’000
2015
£’000
2016
£’000
2015
£’000
Phillip Monks 509 466
22 126
James Mack
357 348
17
44
Total
866 814
39 170
35
24
59
27 102
81 668 700 507 496
0 6,101 507 6,597 1,175 7,297
21
67
43 465 456 360 351
0 721 360 1,072 825 1,528
48 169 124 1,133 1,156 867 847
0 6,822 867 7,669 2,000 8,825
1 “Taxable benefits” comprises the gross value of any benefits paid to the Director, whether in cash or in kind, that are chargeable to UK income tax. Further detail is
provided at the bottom of the page. In addition, the following items have been included under “Taxable benefits”:
- Awards made under the SIP. Consistent with other employees, a one-off award was made under the SIP to both Executive Directors following IPO in recognition
of their contribution to the business. This has been valued at the share price on the date of grant (£2.41) and included in the 2015 figure. These awards vested
immediately on grant and are included in the share interests table on page 88.
- The write-off of loans to Phillip Monks and James Mack of £108,317 and £31,279 respectively in 2015. These loans were made originally to settle the tax payable by
each of the Directors in respect of equity incentives awarded to them prior to the IPO.
- Participation by Phillip Monks and James Mack in the Sharesave Plan. Where the average share price over Q4 in the year of grant is higher than the option price,
participation is included under “Taxable benefits”. On this basis, participation in the 2016 invitation is included above. Further detail can be found on page 85.
2 The “Market adjusted allowance” became payable following IPO.
3 The “Annual bonus” figure represents the value of the total bonus. A proportion of the bonus will be deferred into shares under the DSP. 60% of the bonus earned in
respect of 2016 will be deferred. For 2015, this was at a blended rate based on 15% being deferred into shares for the part of the bonus earned in the period up to IPO, and
60% being deferred into shares for the part of the bonus earned for the period following IPO. See page 79 for detail on the bonus outcome.
4 The Directors held certain shares pre-IPO which converted into ordinary shares on IPO. The reported gains have been calculated on the market value of shares held at
IPO (£1.92) less the actual cost of any shares bought pre-IPO, regardless of whether such shares were acquired as an investment or an incentive, and included in the
2015 figure. As part of the IPO, the Directors were subject to certain lock-up arrangements in respect of their shares, as set out in the IPO Prospectus. The lock-up
in respect of two-thirds of each Director’s holding expired on the first anniversary of the IPO, whilst the remaining one-third expired on the second anniversary of
the IPO.
Fixed pay for Executive Directors
Base salary
The Remuneration Committee considered benchmarking data in respect of the base salaries of the Executive Directors, and
determined that the increases set out in the table below were appropriate. The increases, which will take effect from 1 April 2017,
are in line with the Remuneration Policy and are consistent with the average level of increase of 2.5% awarded to employees in
the Group generally.
Phillip Monks
James Mack
At 1 April 2017
£525,313
£367,719
% increase
2.5%
2.5%
At 1 April 2016
£512,500
£358,750
Taxable benefits
The taxable benefits received by the Executive Directors in 2016 included private medical insurance (family cover), a car
allowance and critical illness insurance.
No changes to taxable benefits are proposed to be made during 2017.
Corporate governance 79
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Financial statements
Appendices
Market adjusted allowance
The market adjusted allowance is calculated as a percentage of base salary. As reported last year, with effect from 1 April 2016
the level paid to the CFO was increased from 15% to 20%, aligning it with that paid to the CEO. Further information on the market
adjusted allowance can be found in the Remuneration Policy table on page 94.
No changes to the market adjusted allowance are proposed in 2017.
Pensions
Pension contributions for the Executive Directors are paid at a rate of 8%, consistent with employees in the Group generally.
This may be paid into a personal pension arrangement or paid as a cash supplement (reduced for the impact of employers’
NICs). Throughout 2016, the CEO chose to receive a cash supplement. Prior to 1 April 2016, a contribution of 6% was paid into a
stakeholder pension for the CFO (maintained at 6% in line with the CFO’s wishes). As reported last year, with effect from 1 April
2016, the CFO elected to be paid a cash supplement of 8% (less employers’ NICs) and he ceased to receive contributions into a
stakeholder pension.
The Company does not intend to make any changes to pension contributions in 2017.
Annual Incentive Plan (“AIP”)
2016 AIP outturn
The AIP is based on a balanced scorecard of financial, non-financial and personal measures. The Remuneration Committee sets
stretching performance targets at the start of the performance period. Whilst the performance of each element is assessed
against the targets at the end of the performance period, the Remuneration Committee also considers total bonus outcomes
within the context of both the Company’s overall performance and personal performance to ensure that they are fair.
The table below sets out the performance measures and outcomes for the 2016 AIP. The maximum bonus opportunity for both
the CEO and the CFO was 125% of base salary. The actual percentage of the maximum bonus awarded was 79.7% for the CEO and
80.7% for the CFO.
2016 AIP: performance assessment
Measures
Financial
Risk
Customer
People
Strategic/personal
Total
Phillip Monks
James Mack
Weighting (%)
Actual (%)
Weighting (%)
Actual (%)
50
15
7.5
7.5
20
100
35.9
11.3
7.5
5
20
79.7
50
15
7.5
7.5
20
36.2
12
7.5
6
19
100
80.7
Based on the assessment of the performance measures above, actual bonuses paid to the Executive Directors are set out below.
60% of the bonus awarded will be deferred into shares and held under the DSP. The deferred element of the bonus will take the
form of a nil-cost option award, which will become exercisable by the Directors in equal amounts over the three years following
the award, subject to continued employment and malus and clawback provisions. The number of shares to be awarded will be
based on the Company’s average share price over the three-day period prior to grant and will be disclosed in the 2017 Annual
Report and Accounts.
Bonuses payable to Executive Directors
Name
Phillip Monks
James Mack
Cash (£)
Shares (£)
Total (£)
Bonus as %
of base salary (as
at 31 December
2016)
202,875
143,915
304,313
215,871
507,188
359,786
99.0
100.3
Bonuses are calculated by multiplying earnings in the financial year by the maximum bonus potential and the percentage bonus awarded.
80
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report
Annual Report on Remuneration
continued
For financial and treasury measures, 0% and 100% of maximum opportunity was available for achievement of threshold and
maximum performances respectively, with a sliding scale being applied between each point and the target level (at which point
two-thirds of the maximum was payable). The financial targets are set out in the table below:
2016 AIP: financial performance measures and outcomes
Threshold
(0% of
maximum)
Performance measures
Target
(66.6% of
maximum)
Maximum
(100%)
Actual
CEO
weighting
CFO
weighting
% of max
achieved
CEO and CFO
Profit before tax
Return on equity (reported)
Cost/income ratio (reported)
Net loan growth
CFO only
£116.7m £123.1m £136.1m £128.7m
15.64%
16.51%
18.25%
17.2%
49.53%
47.28%
42.77%
46.09%
£1,455m £1,536m £1,698m £1,333m
Spread over LIBOR % – Cash
-0.21%
-0.22%
-0.24%
-0.29%
Spread over LIBOR % – Liquidity Asset Buffer
0.040%
0.042%
0.047%
0.49%
Wholesale stock cost of funds %
-0.92%
-0.88%
-0.80%
-0.51%
20%
20%
5%
5%
N/A
N/A
N/A
16%
16%
4%
4%
2.5%
2.5%
5%
81
80
76
0
0
100
100
The Remuneration Committee assesses the non-financial elements by way of both internal, quantifiable targets and a broader
qualitative assessment having sought appropriate input from the Chief Risk Officer, the Group Marketing Director and the Group
HR Director in respect of the risk, customer and people elements respectively. The key performance outcomes which were taken
into account in agreeing the outcomes were as follows:
2016 AIP: non-financial performance measures and outcomes
Performance
metric
Risk
Outcomes
•
A full assessment of the risk appetite, risk management, governance and control frameworks operating
across the Group was undertaken by the Chief Risk Officer and discussed with the Risk Committee
before formal presentation to the Remuneration Committee. This included adherence to established
risk appetite limits and triggers, risk events and findings raised in the course of reviews by second-line
risk teams and the Group Internal Audit function. Consideration was also given to risk culture and risk
awareness.
•
Overall, it was recognised that the risk performance met expectations when measured against existing
risk appetite and metrics, the operating environment and the current maturity of the organisation.
Both the CEO and the CFO (in conjunction with the Executive team) had been strong advocates of
setting the ‘tone from the top’, and a transparent and open culture was promoted. This had manifested
itself in general trends of risk events being raised proactively and in a timely manner; management
responsiveness to risk issues; and, consequently, appropriate resolution.
% of maximum
Phillip
James
Monks
Mack
75% 80%
Customer •
The overarching goal for remuneration purposes was to ‘put the customer at the heart of everything we
do’. This objective was an assessment which included both numeric and more behavioural assessment.
100% 100%
•
•
•
NPS, or Net Promoter Score, is a customer loyalty metric which is widely used across a number
of industries, and is one of the key performance indicators of the Group’s strategic objective to be
customer-driven (see pages 14 and 36 for more information). In 2016, the customer NPS improved by
+14 which was well ahead of the target for the year. The Remuneration Committee also took into account
the CFO’s leadership of the Savings business, where a strong performance resulted in the increase in the
Savings NPS score exceeding the target set for 2016.
The ‘Voice of the Customer’ programme was launched to enable the Group to collect customer feedback
in real time and respond to it. The programme was championed by the Executive Directors.
Other indicators of customer views were also considered, for example customer complaints, which were
maintained within accepted tolerances, and upheld rates, which remained below industry averages.
Corporate governance 81
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Financial statements
Appendices
% of maximum
Phillip
James
Monks
Mack
67% 80%
Performance
metric
People
Outcomes
•
The ‘Big Conversation’ programme was launched, in part to replace the ‘Best Companies to Work For’
survey as the principal means of evaluating employee engagement and to provide more meaningful
insights from people. This has enabled richer feedback to be obtained from employees, with a view to
better connecting culture with strategy.
•
•
•
Employee engagement is a key performance indicator of the Group’s strategic objective to deliver
simply. Whilst the mechanism for measuring employee engagement changed in 2016 in line with the
‘Big Conversation’ approach and was not directly comparable to previous years, the Remuneration
Committee noted that internal engagement surveys had confirmed a strong level of employee
connection to Aldermore.
Senior management succession planning is continuing to evolve and the mapping of current and future
talent requirements has developed further during the year. This translated into the movement of a
number of employees into roles that will enable them to broaden their skills and experience, with a view
to stepping up in to a more senior role in due course. In addition, development plans were formalised for
the senior management team.
Internal management development programmes continue to be promoted, and strong sponsorship and
support from the Executive Committee has been instrumental in the programmes resulting in internal
promotions. During 2016, the CFO sponsored the Group’s main internal development programme
(the ‘Next Generation Leaders’ programme).
The targets for the risk customer and people measures are internal to the Group and commercially sensitive, and are likely to
remain so. They are not, therefore, disclosed.
The Executive Directors’ personal objectives are focused on the delivery of the Group’s strategy and, in the case of the CFO,
the continued evolution of the Finance functions falling within his remit. Following consideration of achievements against the
objectives which were set at the beginning of 2016, the Remuneration Committee’s view was that both the CEO and the CFO had
performed strongly against all of their objectives and confirmed that awards of 100% and 95% of maximum respectively should
be made. Examples of achievements against personal objectives are set out below:
2016 AIP: personal objectives
Phillip
Monks
James
Mack
Achievements
•
A significant year of macroeconomic uncertainty and regulatory developments demanded a more flexible approach to
planning, which has been driven by the CEO. A re-articulation of the Group’s strategy has led to a renewed focus on three
strategic priorities as detailed on page 14.
During the year, the Executive Committee was strengthened through the appointment of three new members who bring
a wealth of experience in their respective fields and who will each help drive the business forward.
The CEO has supported the delivery of key strategic projects. This included upgrades to two of the Group's core customer
platforms.
The CFO oversaw delivery of the project to raise £60m additional Tier 2 capital in October 2016, thereby strengthening
the balance sheet.
A strong performance was delivered across Financial Planning, Financial Control and Capital Management with
improvements made to internal structures and resources to provide improved insight and an enhanced control
environment to support business decisions.
Under the leadership of the CFO, it has been a strong year for the Treasury function. A new asset/liability management
system has been implemented with improved reporting and analysis capabilities to drive business performance in areas
such as cashflow forecasting.
•
•
•
•
•
82
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report
Annual Report on Remuneration
continued
2017 AIP
As set out in the statement from the Remuneration Committee Chair (on page 75), the Remuneration Committee has reviewed
the balanced scorecard of performance measures to apply for the 2017 performance year. Whilst retaining the broad overall
split between financial and non-financial performance measures, some changes to the underlying performance measures and
weightings were agreed and, as a result, the balanced scorecard will be structured as set out below.
A key driver of the changes to the underlying performance metrics is to ensure that they are more representative of our core
KPIs, thereby strengthening the link between pay and performance. The alignment of the performance metrics with our KPIs is
shown below, whilst further information on the KPIs can be found on page 15.
2017 AIP: performance measures (CEO and CFO)
Financial measures
Profit before tax
Net interest margin
Net loan growth
Return on equity
Cost/income ratio
Cost of risk
Non-financial measures
Risk
Customer
People
Core KPI
Profit before tax
Profit before tax
Net loans
CET1 ratio
Cost/income ratio
Cost of risk
–
–
–
Performance weighting
15%
10%
10%
5%
5%
5%
20%
20%
10%
The Remuneration Committee has set stretching financial targets against budget, and has agreed a suite of underlying metrics in
respect of the non-financial performance measures. An evaluation of each Director’s individual performance against the relevant
overarching enterprise-wide objective will also be taken into account in assessing the outturn of the non-financial measures.
The targets are currently commercially sensitive but will be disclosed in the 2017 Annual Report and Accounts on a similar basis to
those for 2016 in this report.
Long-term incentives
PSP: Awards made in 2016
During the year, awards were granted to the Executive Directors under the PSP (in the form of nil-cost options) with a face value
at the time of the award of 135% of base salary. Full details of the awards made are included on page 84.
Half of each award is subject to a relative Total Shareholder Return ("TSR") condition whilst the other half of the award is subject
to the achievement of Earnings Per Share ("EPS") targets. Both performance conditions are measured over performance periods
which end on 31 December 2018. Details of the performance measures and targets are set out on the next page.
Corporate governance 83
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Corporate governance
Risk management
Financial statements
Appendices
2016 PSP: performance measures
Relative TSR
Growth in TSR will be measured against a comparator group comprising the companies making up the FTSE 350 (excluding
Investment Trusts and the Company itself). It is measured from 1 January 2016 (using the Company’s one-month average
immediately prior to 1 January 2016 as the start point) to the end of 2018 (using the Company’s one-month average to
31 December 2018 as the end point). The Remuneration Committee selected relative TSR as a performance measure as it
is a key indicator of returns to investors, thereby aligning interests of the Executive Directors with those of shareholders.
The Remuneration Committee believes that the FTSE 350 is the most appropriate comparator group as it is more reflective of
market performance than a single market grouping or a comparator group of competitors. Details of the targets for relative
TSR are set out below:
Ranking
Below median
Median
% of award which vests
0%
10%
Between median and upper quartile
On a straight line basis between 10% and 50%
Upper quartile or above
50%
EPS
EPS will be measured using adjusted undiluted EPS. The Remuneration Committee selected EPS as a performance measure as
it is a key internal measure of profitability. Details of the targets for EPS are set out below:
Target
Below 30p
30p
Between 30p and 37p
37p or above
% of award which vests
0%
10%
On a straight line basis between 10% and 50%
50%
In order to satisfy itself that the vesting of any awards is appropriate, the Remuneration Committee has set additional underpin
performance conditions which must be met. For both performance measures, the result achieved must appropriately reflect
the performance of the Company taking into account such factors as the Remuneration Committee considers appropriate;
and the result achieved must be consistent with the Company’s risk appetite. Additionally, in respect of TSR, the Remuneration
Committee must be satisfied that the Company’s achieved TSR is reflective of the Company’s underlying financial performance.
PSP: Pre-IPO Awards vesting outcome
The Pre-IPO Awards granted to the Executive Directors at IPO were subject to a performance period which ended on
31 December 2016. In order to achieve a threshold level of vesting, growth of at least 20% p.a. in absolute TSR was required.
At the end of the performance period, the Remuneration Committee assessed TSR performance over the performance period
and determined that the minimum level of performance had not been met. The Pre-IPO Awards therefore lapsed in full.
PSP: Awards to be made in the current year (2017)
In 2017, the Remuneration Committee intends to make PSP awards to Phillip Monks and James Mack with a face value (at the time
of the award) of 135% of base salary. The awards will be made on the same basis as in 2016.
On that basis, half of the award will be subject to a relative TSR condition with 20% of that part vesting at median versus the
constituents of the FTSE 350 (excluding Investment Trusts and the Company itself) rising to full vesting of that part for upper
quartile performance. The other half of the award will again be subject to an EPS scale with 20% of that part vesting at an EPS of
33p rising to full vesting of that part for an EPS of 41p. In both cases, the same underpins will apply as for the 2016 PSP awards.
84
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report
Annual Report on Remuneration
continued
Scheme interests
The Directors hold the scheme interests noted below:
Executive share plan participation
Type of award
Phillip Monks
PSP Award
(nil-cost option)6
Pre-IPO Award
(conditional
award)
DSP Award
(nil-cost option)6
PSP Award
(nil-cost option)6
James Mack
PSP Award
(nil-cost option)6
Pre-IPO Award
(conditional
award)
DSP Award
(nil-cost option)6
PSP Award
(nil-cost option)6
Date of
grant
No of shares
under award
(01/01/16)1
Granted
during
2016
Vested
during
2016
Lapsed
during
20162
No of
shares
under award
(31/12/16)
% vesting
at
threshold4, 5
Face
value3
Performance
measures
Performance
period ends
Holding
period ends
02/03/15
351,562
02/03/15
684,163
–
–
–
–
351,562
£674,999
10%
50% based on
absolute TSR
50% based
on EPS
31/12/17
02/03/20
– 684,163
– £1,313,593
20%
100% based on
absolute TSR
31/12/16
N/A
21/03/16
– 111,784
–
–
111,784
£254,566
N/A
N/A
N/A
21/03/17,
21/03/18
and 21/03/19
in relation to
tranches of 1/3
of the award
21/03/16
– 296,403
–
–
296,403
£674,999
10%
50% based on
relative TSR
50% based
on EPS
50% based on
absolute TSR
50% based
on EPS
31/12/18
21/03/21
31/12/17
02/03/20
02/03/15
218,750
02/03/15
613,828
–
–
–
–
218,750
£420,000
10%
– 613,828
– £1,178,550
20%
100% based on
absolute TSR
31/12/16
N/A
21/03/16
–
79,179
–
–
79,179
£180,314
N/A
N/A
N/A
21/03/17,
21/03/18
and 21/03/19
in relation to
tranches of 1/3
of the award
21/03/16
– 207,482
–
–
207,482
£472,499
10%
50% based on
relative TSR
50% based
on EPS
31/12/18
21/03/21
1 Shows the maximum number of shares that could be received, before any dividend equivalents, if the awards vested in full.
2 Performance was assessed following the end of the performance period and it was determined that the minimum level of performance had not been achieved.
3 Face value for awards made in 2015 was calculated using the final offer price of the Company’s shares at IPO (192p). For awards made in 2016, the average middle
market quotation over the three-day period 16-18 March 2016 (227.73p) was used to calculate face value. The relevant price was multiplied by the maximum number of
shares that would vest if all performance measures and targets were met in full. Actual value at vesting will depend on actual share price at the time of vesting, and any
dividend equivalents (if any) payable on vested shares.
4 Assumes that either the TSR or EPS performance measure threshold is met in respect of one half of the PSP award, and that the other half of the award lapses.
5 Vesting is also subject to underpin performance conditions. Further detail on performance conditions is provided at page 83.
6 Nil-cost options lapse ten years after the date of grant to the extent not previously exercised.
Corporate governance 85
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
All-employee share plans
Executive Directors are invited to participate in all-employee share plans on the same basis as other Group employees.
The purpose of these plans is to encourage share ownership by employees, thereby allowing them to share in the long-
term success of the Group and align their interests with those of shareholders. The plans are operated within the maximum
participation levels permitted under HMRC regulations from time to time. The Company has established both a Sharesave and a
Share Incentive Plan (“SIP”). Details of the participation by the Executive Directors in the Sharesave Plan are set out below:
Sharesave participation
Type of award
Date of grant
No of shares
under option
Lapsed
during 2016
Balance
(31/12/16)
Option
price (p)
Performance
conditions
Normal
exercise period
Market value at
date of grant (£)1
Phillip Monks
Sharesave (option) 29/10/15
7,142
7,142
–
Sharesave (option) 12/10/16
11,688
James Mack
Sharesave (option) 12/10/16
11,688
–
–
252
154
N/A
N/A
11,688
11,688
154
N/A
01/02/19–
31/07/19
01/12/19–
30/05/20
01/12/19–
30/05/20
18,712
20,279
20,279
1 Share price on the date of grant for the 2015 and 2016 invitations was 262p and 173.5p respectively.
The SIP was used as a vehicle to award free shares to employees following IPO in recognition of their contribution to the business.
Awards of between £200 and £1k were made, based on length of service. The awards vested immediately on grant and are
included in the share interests table on page 88.
Performance graph
This graph compares the Total
Shareholder Return of £100 invested
in the Company’s shares and £100
invested in the FTSE 350 (excluding
Investment Trusts). The comparison
is made between the date of the IPO
and 31 December 2016. This index was
selected as the Company has been a
member of the FTSE 350 since June
2015 and it provides a widely published
and broad equity index.
Total Shareholder Return index
125
120
115
110
105
100
95
90
10 March 2015
31 December 2015
31 December 2016
Aldermore
FTSE 350 excluding Investment Trusts
86
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report
Annual Report on Remuneration
continued
Total remuneration table
The table to the right shows the total
remuneration figure for the CEO in 2015
and 2016. This includes any short-term
and long-term incentives.
CEO remuneration
Single total figure of remuneration (£’000)
Annual bonus (as a % of maximum)
Vested long-term incentives (as a % of maximum)1
2016
1,175
80.7%
0
2015
7,297
87.3%
N/A
1 No PSP awards vested in 2015 or 2016. See footnote 4 to the single total figure table (page 78) for further
detail on gains on shares held pre-IPO.
CEO relative pay
CEO1
Average employee
Median employee
2015/16 % change
Salary Taxable benefits
Annual bonus
9.3%
4.1%
2.6%
3.3% 2
14.1%
0%
2.4%
-4.5%
-4.8%
1 The percentage change in the CEO’s pay reflects the restructuring of the CEO’s remuneration arrangements
at IPO.
2 The percentage change in the CEO’s taxable benefits excludes the one-off write-off of a loan of £108,317
in 2015. The loan was made originally to settle tax payable in respect of equity incentives awarded to Phillip
Monks prior to the IPO.
Relative importance of spend on pay
Total employee remuneration (£m)
Total shareholder distributions (£m)
2016
64.3
0
2015
62.1
0
CEO relative pay
The table to the right shows the
percentage change in the salary,
taxable benefits and annual bonus
of the CEO between 2015 and 2016.
A comparison is provided against the
average percentage change in respect
of the Group’s employees taken as
a whole. A comparison against the
median percentage change is also
provided as this is more reflective of
actual changes in remuneration.
Relative importance of
spend on pay
The table to the right compares the
total remuneration paid in respect of
all employees of the Group in 2015
and 2016, and distributions made to
shareholders in the same years.
No dividend distributions or share
buybacks were made to shareholders
in 2015 or 2016 as the Company applied
all its retained profits to support the
growth of the business.
Corporate governance 87
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Non-Executive Directors
Non-Executive Directors’ fees
The Chairman and Non-Executive Directors are paid a basic fee, whilst the Non-Executive Directors may receive further fees to
reflect Board Committee or additional responsibilities.
The current fee structure was agreed at the time that the Board was put together in preparation for IPO on the basis of a
benchmarking exercise against financial services companies of a similar size. The fees are reviewed by the Board (in the case
of the Non-Executive Directors) and the Remuneration Committee (in the case of the Chairman) on an annual basis. The most
recent review concluded that, with the exception of the fee paid to the Chair of the Remuneration Committee, the fees remained
appropriate, and no increases would be made in 2017. With effect from 1 April 2017, the fee paid to the Chair of the Remuneration
Committee will be brought into line with that paid to the Chairs of the Audit and Risk Committees (£20k p.a.).
Current fees are set out below:
Non-Executive Directors’ Fees
Role
Chairman
Non-Executive Director
Senior Independent Director
Chair of Audit Committee
Chair of Remuneration Committee
Chair of Risk Committee
Membership (other than chairmanship) of the Audit, Remuneration and Risk Committees
Single total figure table: Non-Executive Directors (audited)
The following table sets out the total remuneration paid to the Non-Executive Directors for the financial years ending
31 December 2016 and 31 December 2015.
£ (p.a.)
180,000
65,000
20,000
20,000
15,000
20,000
5,000
Appointment date
(if later than
1 January 2015)
Resignation date
(if earlier than
31 December 2016)
18/04/16
14/10/16
21/11/16
29/06/15
Fees1
Taxable benefits2
Long-term incentives
Total
2016
£’000
180
21
53
90
90
8
75
95
75
80
767
2015
£’000
174
57
53
100
100
-
38
103
85
90
800
2016
£’000
2015
£’000
2016
£’000
-
-
-
1
-
-
-
3
1
-
5
-
-
-
2
-
-
-
4
1
-
7
-
-
-
-
-
-
-
-
-
-
-
2015
£’000
9603
-
-
-
-
-
-
-
-
-
2016
£’000
180
2015
£’000
1,134
21
53
91
90
8
75
98
76
80
57
53
102
100
-
38
107
86
90
960
772
1,767
Glyn Jones
Peter Cartwright4
Neil Cochrane4
Danuta Gray
John Hitchins
Chris Patrick4
Robert Sharpe
Peter Shaw
Chris Stamper
Cathy Turner
Total
1 The fees paid to the Non-Executive Directors relate to the period for which they held office.
2 “Taxable benefits” includes the tax liability due on travel expenses. The figures disclosed in the 2015 Annual Report and Accounts were an estimate of the amount due,
and the 2015 figures above have therefore been restated to reflect actual amounts paid.
3 The gain on Glyn Jones’ personal investment in certain shares prior to IPO has been included within 2015 remuneration under “Long-term incentives” (calculated
at the market value of shares held at IPO (£1.92) less the original cost of his personal investment). Such shares were not part of an incentive subject to any form of
performance hurdles and his only ongoing financial interest in the performance of the Company is as an ordinary shareholder.
4 Peter Cartwright, Neil Cochrane and Chris Patrick were all appointed to represent the Company’s Principal Shareholders, and their fees are paid directly to these
entities. Further information on the relationship with the Principal Shareholders can be found in Note 41 to the financial statements (related parties).
88
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report
Annual Report on Remuneration
continued
Other
Shareholdings
In order to further align the interests of Executive Directors with those of shareholders, the Company has implemented share
ownership guidelines. The guidelines require the Executive Directors to build up a specified level of shareholding (expressed as a
percentage of base salary) within five years of the guidelines being implemented (or within five years of appointment, if later).
The required level of shareholding is 200% of base salary, using the current share price from time to time, for each of the
Executive Directors. Under the guidelines, the Executive Directors are expected to retain all of the ordinary shares vesting under
any of the employee share plans, after any disposals for the payment of applicable taxes and any acquisition costs, until they have
achieved the required level of shareholding. Vested awards not subject to any performance condition (but subject to a holding
period) count as ownership towards the guidelines after deducting the tax which would be due if the shares were released on that
date. The guidelines also prohibit the Executive Directors from hedging (or offering as collateral) any shares which are unvested
or unexercised under any employee share plans, and any shares which count towards meeting the guidelines.
Other shares owned by Executive Directors and their connected persons also count towards the share ownership guidelines.
Both Executive Directors have met the guideline levels.
Details of the Executive Directors’ beneficial interests (and their connected persons) in the Company’s shares as at 31 December
2016 are set out below:
Executive Directors’ shareholdings (audited)
Name
Phillip Monks
James Mack
Shareholding
as at
31 December
2016
Shareholding
as at
31 December
2015
3,462,693
3,462,693
436,659
436,659
Share ownership
guideline
(% of base salary)
Current holding
(% of base salary)1
Share awards/
options (subject
to performance/
service
conditions)2
Options (not
subject to
performance/
service
conditions)2
200%
200%
1,600%
288%
759,749
505,411
11,688
11,688
1 Current holding measured by reference to the middle market quotation of the Company’s share price on 31 December 2016 (236.8p) and as a percentage of base salary
at 31 December 2016.
2 Awards which have not yet vested do not count towards compliance with the share ownership guidelines.
3 There have not been any changes to Directors’ shareholdings between the end of the financial year and the date that this Remuneration Report was signed.
The beneficial interests of the Non-Executive Directors (and their connected persons) in the Company’s shares as at
31 December 2016 is set out below:
Non-Executive Directors’ shareholdings (audited)
Director
Glyn Jones
Peter Cartwright1, 2
Neil Cochrane1, 2
Danuta Gray
John Hitchins
Chris Patrick1
Robert Sharpe
Peter Shaw
Chris Stamper
Cathy Turner
Shareholding
as at
31 December
2016
Shareholding
as at
31 December
2015
881,488
781,488
–
–
–
–
–
–
20,000
20,000
–
–
–
–
–
–
9,500
42,336
9,500
42,336
1 Appointed to act as a Director by the Principal Shareholders, whose interest in the Company’s shares is set out on page 104.
2 Shareholding disclosed as at 31 December 2015 and date of resignation.
3 There have not been any changes to Directors’ shareholdings between the end of the financial year and the date that this Remuneration Report was signed.
Corporate governance 89
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Payments to past Directors and loss of office payments (audited)
There were no payments made during the year to any person who was not a Director of the Company at the time the payment
was made, but had previously been a Director. There were also no payments for loss of office made during the year.
External appointments
The Company’s policy is that Executive Directors may hold one external non-executive directorship, subject to prior approval by
the Company. Neither of the Executive Directors hold any external directorships at the current time.
Employee share trust
The Company has established the Aldermore Group PLC Employees’ Share Trust (the “Trust”), a discretionary share trust, for
the purpose of facilitating the operation of the Company’s share plans. It is the Company’s current intention to satisfy any vested
share awards by the allotment of new shares to the Trust.
Dilution
As noted above, the Company intends to issue new shares to satisfy awards outstanding under employee share plans, and will
implement these arrangements in accordance with the Investment Association Guidelines on dilution. Based on the number
of awards outstanding as at 31 December 2016, the levels of dilution, which are within the dilution limits set by the Investment
Association, are as set out in the table below. For the purpose of these calculations, executive awards granted prior to IPO are
excluded in accordance with the relevant plan rules and as disclosed in the IPO Prospectus.
Dilution
Plan
All share plans
Executive share plans
% of the
Company’s issued
share capital
Investment
Association
dilution limit (%)
1.15%
0.65%
10
5
90
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report
Annual Report on Remuneration
continued
Remuneration Committee
External advisers
In April 2014, the Remuneration
Committee engaged FIT Remuneration
Consultants LLP (“FIT”) for the
provision of independent remuneration
advisory services following a
competitive tender process. FIT does
not provide any other services to
the Group. FIT is a member of the
Remuneration Consultants Group
and adheres to its code of conduct.
The Remuneration Committee reviews
the effectiveness of its adviser on an
annual basis, and remains satisfied that
the advice that it has received from
FIT during the year has been objective
and independent. Total fees paid to FIT
during the year amounted to £126.5k,
which was charged on its normal terms.
Statement of voting at the
Annual General Meeting
The results of the shareholder votes
at the Company’s 2016 AGM on the
Remuneration Policy and the 2015
Annual Report on Remuneration are
as below:
Committee effectiveness
The Remuneration Committee
undertook a review of its own
effectiveness through 2016 as part
of the wider Board and Committee
evaluation exercise. The review took
the form of an internal evaluation and
was conducted principally by way of
a questionnaire that was issued to all
Remuneration Committee members.
The review covered various areas
including the role and remit of the
Remuneration Committee; the
effectiveness of the Chair; the
appropriateness of information
provided to the Remuneration
Committee; and the relationship with
management. The Remuneration
Committee discussed the outcome of
the review in 2017. The Remuneration
Committee confirmed that it operated
effectively and that there were
no significant areas for concern.
Further information about the Board
and Committee effectiveness process
is set out on pages 56 and 57.
Directors' Remuneration Policy
Annual Report on Remuneration
Votes for
Votes against
Votes withheld
93.68%
93.93%
6.32%
6.07%
3,567,454
3,604,881
The Remuneration Committee was pleased with the strong level of support in favour
of these resolutions.
Remuneration Committee at a glance
• The Remuneration Committee
is currently composed of three
Independent Non-Executive Directors
and the Company Chairman, which
meets with Code requirements:
- Cathy Turner (Chair), Independent
Non-Executive Director
- Danuta Gray, Interim Chairman1
- Peter Shaw, Independent
Non-Executive Director
• Glyn Jones was also a member of the
Remuneration Committee throughout
2016 until his resignation as
Company Chairman with effect from
6 February 2017
• Regular attendees at meetings of the
Remuneration Committee include the
CEO, Group HR Director, Company
Secretary and FIT Remuneration
Consultants LLP (who provide
independent remuneration
consultancy services)
• The Remuneration Committee’s
key role is to set the remuneration
policy and individual terms for the
Executive Directors, Chairman
and other members of the senior
management team
• Remuneration for the Non-Executive
Directors is determined by the Board
of Directors
• No person participates in any discussion
relating to their own remuneration
• The Remuneration Committee’s
terms of reference are reviewed
annually and are available at
www.investors.aldermore.co.uk
1 It is anticipated that, once appointed, the new
Company Chairman will join the Committee as
a member. Danuta Gray will remain a member
in her capacity as Senior Independent Director.
Corporate governance 91
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Responsibilities of the
Remuneration Committee
• Setting remuneration policy
for Executive Directors and
senior management, and making
recommendations to the Board on
overall remuneration costs
• Determining individual remuneration
arrangements for the Executive
Directors, senior management and
other staff falling within the remit of
the FCA and PRA Remuneration Codes
(“Identified Staff”)
• Approving the Chairman’s remuneration
• Reviewing pay and bonus allocations
across the wider Group
• Reviewing the design of performance-
related incentive schemes for
recommendation to the Board. Once in
place, agreeing targets and assessing
the outcomes
• Reviewing recruitment and
termination arrangements for
Executive Directors, senior
management and Identified Staff
• Engaging with shareholders on
remuneration-related matters
Time spent in 2016
Governance
Individual
remuneration
arrangements
Performance-related
incentive schemes
Regulatory matters
Remuneration
arrangements in
wider Group
Setting
remuneration policy
%
21
24
29
7
13
6
Key topics discussed at
Remuneration Committee
meetings in 2016
Key:
Reviewed
Recommended to Board
Approved
Topic
Activity
Action
Governance
• Compliance with share ownership guidelines and anti-hedging policy
• Annual programme of items for Remuneration Committee meetings
in 2017
Individual
remuneration
arrangements
Performance
-related
incentive
schemes
Regulatory
matters
Remuneration
arrangements
in wider Group
• Annual review of Remuneration Committee effectiveness
• Annual review of the effectiveness of the Committee's remuneration
adviser
• Annual reporting, including Remuneration Report and Pillar 3 disclosures
• Annual review of the Chairman's remuneration
• Bonus outturn, awards to be made, and fixed pay for all employees falling
within the Remuneration Committee's remit
• 2015 AIP outturn
• Performance measures and targets in relation to awards under the
2016 AIP
• Parameters and quantum of awards to be made under the PSP and RSP
in 2016
• Regular review of performance under performance-related incentive
schemes, including the operation of business incentive plans within
the divisions
• Vesting of the Pre-IPO Awards
•
Impact of EU Market Abuse Regulation on share plan awards and vestings
• Preliminary view of the outcome of reporting under gender pay gap
regulations
• 2016 payouts under the all-employee bonus scheme, and confirmation
of 2017 budget
• 2016 salary review
• 2016 Sharesave invitation
• Review of benefits across the Group
• Renewals of health insurance policies
Setting
remuneration
policy
• Annual review of the Directors' Remuneration Policy
• Guidelines for the application of Remuneration Policy for leavers
In addition, regular reports included updates on changes to Identified Staff, treatment
of joiners and leavers (in accordance with delegated authorities), and consideration of
market and regulatory updates.
The Remuneration Report was approved by the Board of Directors on 1 March 2017
and signed on its behalf by:
Cathy Turner,
Chair of Remuneration Committee
92
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report Appendix
Remuneration Policy
Introduction
For ease of reference, this appendix sets out an extract of our Remuneration Policy, which was approved by shareholders at the
2016 AGM held on 17 May 2016 and took effect from that date. It is intended that the Remuneration Policy will operate until the
2019 AGM unless any significant changes are proposed in the interim. No changes are proposed to the Remuneration Policy this
year, and a shareholder vote on it will not therefore be required at the 2017 AGM.
The full Remuneration Policy, as approved by shareholders, can be found on pages 95 to 103 of the 2015 Annual Report and
Accounts on the Company’s website at www.investors.aldermore.co.uk
The Remuneration Policy is based on the following key principles:
Aligned to the long-term success of the Group
The remuneration framework is structured to align remuneration, and in particular performance-related remuneration, with the
long-term interests of shareholders. Incentive plans should be designed such that they do not encourage excessive risk-taking.
Competitive but not excessive
The Group recognises that its long-term success is closely linked to its ability to attract and retain high-calibre individuals who
can drive the delivery of its business strategy. However, this should be balanced with ensuring that remuneration is appropriate
to the role, responsibilities, experience and performance of the individual, and is not excessive.
Appropriate and balanced proportion of variable pay
Total remuneration should balance both fixed and variable elements, whilst variable pay should be balanced between both short-
term and long-term incentives with an emphasis on achieving sustainable business results.
Simplicity and transparency in the design and communication
The key to an effective remuneration structure is that the link between incentives and performance is clear, well-communicated
and easily understood.
To see how the Remuneration Policy was implemented in 2016, please refer to the Annual Report on Remuneration on
pages 76 to 89.
Corporate governance 93
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Performance
measures
Committee
flexibility
Not
applicable
Base salary
increases will be
awarded at the
Remuneration
Committee’s
discretion, taking
into account the
factors listed
Future policy table
Executive Directors’ fixed pay
Element and purpose Policy and operation
Maximum
Although an annual review of salaries is
normally undertaken, the Remuneration
Committee will not automatically award
an increase
The Remuneration Committee may
freeze salaries with consequently larger
increases as and when an increase is
awarded
Increases will normally be in line with the
average increases for staff
The maximum salary increase which the
Remuneration Committee may award will
not result in the base salary exceeding
110% of median data for an equivalent role
within a comparator group of companies
(the 20 companies listed on the London
Stock Exchange above and below the
Company by market capitalisation)
Typically paid monthly in cash and
reviewed annually
The annual review takes into
account various factors including:
• corporate and
individual performance
• any change in an individual’s
role and responsibilities
• market benchmarking
• average pay increases
awarded across the Group as
a whole
Market benchmarking primarily
takes into account pan-sector
companies of a similar market
capitalisation rather than looking
at companies solely within
the financial services sector.
However, the Remuneration
Committee may also consider
more specific data and uses
all data as a reference point in
considering, in its judgement, the
appropriate level of salary
Base salary
To provide a fair
level of fixed pay
which reflects
the individual’s
experience and
contribution
To attract and
retain the high-
calibre individuals
necessary to deliver
the Group’s strategy
Benefits
To provide market-
competitive benefits
as part of an overall
package which
attracts and retains
Executive Directors
The
Remuneration
Committee
reserves the
discretion to
introduce new
benefits as
appropriate
A range of benefits is provided,
which includes:
• car allowance
• private medical insurance
Benefits will not exceed 15% of an
Executive Director’s base salary on
an annual basis (plus a further 100%
in the case of a Director who has been
relocated)
Not
applicable
(family cover)
life assurance
income protection
•
•
• critical illness insurance
Certain costs relating to
Executive Director relocations
will be met where appropriate
As premiums are not taxable as benefits
in kind, the following caps apply to life
assurance and income protection:
•
life assurance: up to 8 times salary,
although currently capped at 4
times salary
•
income protection: up to 75% of salary
The value of such benefits is outside of
the above cap
The Remuneration Committee will
monitor the costs in practice and ensure
that the overall costs do not increase by
more than it considers appropriate in all
circumstances
94
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report Appendix
Remuneration Policy
continued
Element and purpose Policy and operation
Maximum
Contributions may be paid into
personal pension arrangements
or as a cash supplement (reduced
for the impact of employers’
NICs)
Up to 15% of base salary p.a.
This is higher than was set out in the
IPO Prospectus – although there are no
plans to change pension contributions
currently, this higher cap allows for
suitable flexibility
Pension
To enable Executive
Directors to build
long-term savings
for retirement,
within a market-
competitive package
To attract and
retain high-calibre
individuals
Performance
measures
Committee
flexibility
Not
applicable
Not applicable
Market adjusted
allowance
A fixed monthly allowance,
typically paid in cash
To ensure
appropriate
weighting of
fixed and variable
remuneration within
an overall market-
competitive package
The allowance
ensures that the
gearing of the overall
package remains
appropriate
Paid on the same basis as salary
but will not be taken into account
for the purposes of:
•
incentive pay multiples
• pensions or insured benefits
• shareholding guidelines
• termination or
redundancy payments
Not
applicable
In order to provide a formal cap, the
maximum level of market adjusted
allowance will be limited to 50% of
base salary p.a. for the duration of this
Remuneration Policy. This level is higher
than set out in the IPO Prospectus –
although there is no current intention to
increase the current levels, this ensures
that suitable flexibility is retained
Increases in the
market adjusted
allowance will be
awarded at the
Remuneration
Committee’s
discretion, but
will only be
increased if there
is a meaningful
change in the
appropriate
market
benchmarks
Market adjusted
allowances may
be settled in
shares or other
instruments
Corporate governance 95
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Executive Directors’ variable pay
Element and purpose Policy and operation
Maximum
Performance measures
Committee flexibility
The
maximum
level of AIP
outcomes is
125% of base
salary p.a.
Annual Incentive
Plan (‘‘AIP’’)
To motivate
Executive Directors
and incentivise
delivery of
performance over a
one-year operating
cycle, focusing on the
short- to medium-
term elements of the
Group’s strategic
aims
A proportion of
the annual bonus
is deferred, which
encourages a longer-
term focus and aligns
the interests of the
Executive Directors
with shareholders
A bonus plan which
operates annually.
Performance measures are set
by the Remuneration Committee
at the start of the financial
year. Performance targets are
assessed by the Remuneration
Committee following the year-
end and the AIP outcome is
agreed
At least 40% of the AIP outcome
is deferred into shares under
the Company’s Deferred Share
Plan (“DSP”), whilst at least 60%
of the AIP outcome is deferred
if total variable remuneration
exceeds £500,000 p.a.
The balance is normally paid in
cash
The deferred element is typically
released in tranches of one-
third on the first, second and
third anniversaries of the
award, subject to continued
employment
Shares within the DSP may
accrue dividend equivalents
which may be settled in cash or
shares (and which are excluded
from the limit in the next column)
Both the cash and deferred
elements of the bonus may be
subject to malus and clawback
Performance measures
applied may be financial or
non-financial and corporate,
divisional or individual, and
in such proportions as the
Remuneration Committee
considers appropriate
The AIP outcome is
determined by assessing
each performance measure
on the following basis:
• attaining the threshold
level of performance
produces a nil pay-out
• a sliding scale (not
necessarily straight-line)
is applied between the
threshold and maximum
levels, full pay-out
being achieved for this
latter level
• no more than two-thirds
of maximum is payable for
on-target performance
The Remuneration
Committee must be satisfied
that the result was achieved
consistent with the Group’s
risk appetite
The Remuneration
Committee retains discretion
to adjust performance
measures and targets
during the year to take
account of events outside of
management control which
were unforeseen when the
measures and targets were
originally set
The Remuneration
Committee retains a
standard power to apply its
commercial judgement to
adjust the outcome of the
AIP for any performance
measure (from zero to any
cap) should it consider that to
be appropriate
The Remuneration
Committee reserves the
right to further modify
the operation of the AIP to
comply with developments
in regulatory requirements
and market practice
subject to the overall cap.
Operation of the AIP and DSP
will not, in the Remuneration
Committee’s view, be made
less onerous. In particular,
the Remuneration
Committee may vary the
deferral terms and settle
awards in cash, shares and
other instruments
96
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report Appendix
Remuneration Policy
continued
Element and purpose Policy and operation
Maximum
Performance measures
Committee flexibility
Performance Share
Plan (“PSP”)
To motivate and
incentivise delivery
of sustained
performance over
the long term, and to
promote alignment
with shareholders’
interests
A long-term incentive plan under
which awards are made annually
as either nil-cost options or
conditional awards
Vesting is subject to
performance conditions and
continued employment over a
period of at least three years
After the performance period,
awards are subject to a holding
period of a further two years
Shares within the PSP may
accrue dividend equivalents
which may be settled in cash or
shares (and which are excluded
from the limit in the next column)
Malus and clawback may be
applied to PSP awards
The PSP
allows for
awards over
shares with
an absolute
maximum
value of
200% of
base salary
per financial
year
Where
awards are
not made in
a financial
year due to
regulatory
constraints,
this limit will
be carried
forward
Performance measures
applied may be financial or
non-financial and corporate,
divisional or individual, and
in such proportions as the
Remuneration Committee
considers appropriate
Performance periods will
not be less than (but may be
longer than) three years
No more than 20% of
awards vest for attaining
the threshold level of
performance
The Remuneration
Committee must be satisfied
that the result was achieved
consistent with the Group’s
risk appetite
Awards may be settled in
cash or other instruments
Once set for an award,
performance measures
and targets will generally
remain unaltered unless
events occur which, in the
Remuneration Committee’s
opinion, make it appropriate
to substitute or vary them
Non-Executive Directors
Element and purpose Policy and operation
Maximum
Performance measures
Committee flexibility
Not applicable
Chairman and Non-
Executive Director
fees
To enable the
Company to recruit
and retain, at an
appropriate cost,
Non-Executive
Directors with the
necessary skills
and experience to
oversee the delivery
of the business
strategy
Fees of the Chairman and the
Non-Executive Directors are set
by the Remuneration Committee
and the Board respectively
Fees are structured as:
• basic fee
• additional fees for
chairmanship and membership
of Board Committees
• additional fees for further
responsibilities (e.g.
Senior Independent Director)
Fees are reviewed annually.
Factors taken into account in the
annual review include:
• time commitment
• equivalent benchmarks to
those considered for Executive
Directors with a particular
emphasis on other banks/
financial services businesses
The aggregate
fees (together
with any shares
and/or benefits
including the
reimbursement
of travel and
other expenses,
and an amount
to meet any
tax liability
arising on such
expenses) of the
Chairman and of
Non-Executive
Directors will not
exceed the limit
set out within
the Company’s
Articles of
Association
(currently
£2,000,000 p.a.)
Whilst there is no current
intention to do so, the
Company reserves the right
to:
• pay some or all of the
Chairman’s or Non-
Executive Directors’
fees in shares or
other instruments
• permit the Chairman or
Non-Executive Directors
to participate in any
benefits in kind
• change the basis of paying
fees within the constraints
of the cap
Corporate governance 97
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Recruitment Remuneration Policy
Appointment of Executive Directors
The Remuneration Policy balances the need to have appropriate remuneration levels with the ability to attract high-performing
individuals to the organisation. With this in mind, the starting point for the Remuneration Committee in setting a remuneration
package for a new Executive Director will be to structure a package in accordance with the Remuneration Policy, based on the
individual’s knowledge and experience. Consistent with the DRR Regulations, the caps contained within the Remuneration Policy
for fixed pay do not apply to new recruits, although the Remuneration Committee does not currently envisage exceeding these
caps in practice.
Notwithstanding the general approach set out above, the Remuneration Committee recognises that, when recruiting externally
in particular, it may be necessary to compensate an individual to ensure that they are remunerated effectively. The table
below sets out areas where the Remuneration Committee may exercise its discretion in order to achieve this. This may arise
in particular in relation to bonus and incentive plans given that variable performance-related pay is widely used in the financial
services industry to incentivise senior management.
Appointment of Non-Executive Directors
A new Non-Executive Director would be recruited on terms in accordance with the approved Remuneration Policy at that time.
Recruitment Remuneration Policy – Remuneration Committee discretion
Relocation expenses
For external and internal appointments, certain relocation expenses may be provided and may be paid over more than one financial
year. As set out in the Remuneration Policy, this may be up to a maximum of 100% of base salary p.a. (over and above the general
policy on payment of benefits).
AIP
The AIP will operate as detailed in the Remuneration Policy (including the maximum award levels).
In the year of appointment, at the Remuneration Committee’s discretion, the terms of that year’s AIP and the performance
measures will normally be varied to reflect the part year worked.
For an internal appointment, any award under the AIP in respect of the individual’s prior role may either continue on its original
terms or be adjusted to reflect the new appointment as appropriate.
No element of AIP will be guaranteed, unless in the year of joining a guaranteed element is used as part of a buy-out of awards
forfeited on leaving the previous employer (see below for further detail).
PSP
The PSP will operate as detailed in the Remuneration Policy (including the maximum award levels).
For an internal appointment, in line with the AIP, PSP awards in respect of the individual’s prior role may either continue on its
original terms or be adjusted to reflect the new appointment as appropriate.
Buy-out awards
For external candidates, it may be necessary to make additional awards in connection with the recruitment to buy out awards
forfeited by the individual on leaving a previous employer. Although these are not subject to a formal cap, the Group will not pay
more than is necessary, in the view of the Remuneration Committee, to fairly compensate for awards forfeited on leaving the
previous employer to join the Group and will in all cases seek to deliver any such awards under the terms of the existing AIP and
PSP. In some cases however, it may be necessary to make such buy-out awards on different terms to reflect better the structure
of the awards being bought out.
All buy-outs, whether under the AIP, PSP or otherwise, will take account of the service obligations and performance requirements
for any remuneration relinquished by the individual when leaving their previous employer. The Remuneration Committee will seek
to make buy-outs subject to what are, in its opinion, comparable requirements in respect of service and performance. However,
the Remuneration Committee may choose to relax this requirement in certain cases, for example:
• where the service and/or performance requirements are materially completed, or
•
where such factors are, in the Remuneration Committee’s view, reflected in some other way, such as a significant discount to the
face value of the awards forfeited, or
• where necessary to retain compliance with regulatory requirements, such as CRD IV.
98
Aldermore Group PLC Annual Report and Accounts 2016
Remuneration Report Appendix
Remuneration Policy
continued
Service agreements, payments for loss of office and termination policy
Executive Directors
The terms under which the Executive Directors are appointed are set out in service agreements with the Company. In line with
current market practice, the Executive Directors have rolling service agreements, which may be terminated by the Company
or the individual on 12 months’ notice. The date of each Executive Director’s service agreement is 10 March 2015. Copies of the
service agreements of the Executive Directors are available for inspection at the Company’s registered office. They will also be
available for inspection prior to and during the AGM.
Under the service agreements, the Company may make a payment in lieu of notice to an Executive Director. This will be limited to
the amount of base salary and, potentially, other fixed benefits for the notice period and may be paid in instalments. The Director
is obliged to seek alternative work during this period and the payments may cease or be reduced if the individual finds an
alternative role.
Service agreements may be terminated without notice or payment in lieu of notice under a range of circumstances including
gross misconduct, fraud or dishonesty, and negligence and incompetence. The agreements do not contain change of
control provisions.
The Remuneration Committee is opposed to rewarding failure and, when considering a termination, takes account of all of the
information available to it at the time. This policy applies both to any negotiations linked to notice periods on a termination and any
treatments which the Remuneration Committee may choose to apply under the discretions available to it under the terms of the
AIP, DSP and PSP. The potential treatments on termination under these plans are summarised below.
Plan
Annual
Incentive Plan
(“AIP”)
“Approved leaver” (e.g. death, injury
or disability, redundancy, retirement)
or otherwise at the discretion of the
Remuneration Committee (including on
resignation)
“Unapproved leaver”
(e.g. resignation)
Payment of the award is at the discretion of
the Remuneration Committee.
No awards made for the
year of leaving.
Award usually time pro-rated for the
period of service and released at the end
of the performance period, subject to
assessment of performance conditions.
Termination
by the
Company for
misconduct
No awards
made for
the year of
leaving.
Deferred
Share Plan (“DSP”)
Unvested awards will vest at the original
vesting dates.
However, the Remuneration Committee
retains discretion to accelerate vesting to
the date of cessation.
If leaving before the
employment requirement
date1 all unvested awards
will lapse.
All unvested
awards will
lapse.
If leaving after the
employment requirement
date1, unvested awards will
vest at the original vesting
dates. However, in this
case the Remuneration
Committee retains
discretion to accelerate
vesting to the date of
cessation.
Other exceptional cases (e.g.
change of control, winding up
of the Company)
Payment of the award is at the
discretion of the Remuneration
Committee.
Award usually time pro-rated
subject to satisfaction of
performance conditions, which
are assessed over the period
to the date of the event.
Awards will normally vest
early, but may be exchanged
for a new award over shares
in the acquiring company
in the case of an internal
reorganisation.
Corporate governance 99
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Performance
Share Plan
(“PSP”)
If leaving before the employment
requirement date2, awards will vest at the
original vesting date on a time pro-rated
basis for the period of service and subject
to performance conditions.
If leaving after the employment
requirement date2 but before the end of the
holding period, unvested awards will vest
at the original vesting dates.
Under both scenarios, the Remuneration
Committee retains discretion to accelerate
vesting to the date of cessation.
The Remuneration Committee also has
discretion to reduce or disapply the time
pro-rating.
If leaving before the
employment requirement
date2 all unvested awards
will lapse.
If leaving after the
employment requirement
date2 but before the end
of the holding period,
unvested awards will vest
at the original vesting
dates. However, in this
case the Remuneration
Committee retains
discretion to accelerate
vesting to the date of
cessation.
All unvested
awards will
lapse.
Awards will normally vest
early, but may be exchanged
for a new award over shares
in the acquiring company
in the case of an internal
reorganisation.
The extent to which the award
vests will be determined
by review of performance
conditions and applying time
pro-rating.
The Remuneration Committee
has discretion to reduce or
disapply the time pro-rating.
1 The first, second and third anniversaries of the date of grant (as appropriate).
2 The employment requirement date is the third anniversary of the date of grant.
The Remuneration Committee may also approve payment of amounts in settlement of statutory or contractual claims based on
legal advice and may make payment of an amount in respect of legal, tax and outplacement services as it considers appropriate.
Chairman and Non-Executive Directors
The Non-Executive Directors (including the Chairman) are appointed pursuant to letters of appointment, which set out the terms
of their appointment. The appointment is subject to termination by the Company at any time with three months’ written notice.
Directors are requested, but not obliged, to give three months’ notice. The letters do not provide for compensation for loss of
office. All Non-Executive Directors are subject to annual re-election by shareholders at the AGM, however should the Director
not be re-elected by shareholders their appointment will cease immediately and without compensation.
Copies of the letters of appointment of the Non-Executive Directors are available for inspection at the Company’s registered
office. They will also be available for inspection prior to and during the AGM.
100
Aldermore Group PLC Annual Report and Accounts 2016
Directors’ Report
The Directors present their report and the financial statements of the Group for the year ended 31 December 2016. As permitted
by legislation, some of the matters normally included in the Directors’ Report are included by reference as detailed below.
Requirement
Detail
Where to find further information:
Section
Location
Business review
and future
developments
Information regarding the business review and future
developments, key performance indicators and principal risks are
contained within the strategic report.
Strategic report
Corporate governance
statement
The corporate governance section provides full disclosure of
the Group’s corporate governance arrangements. The Group
has complied fully with the provisions of the UK Corporate
Governance Code 2014 during the year.
Corporate
governance
Pages 16 to 30
(business review
and future
developments)
Page 15 (key
performance
indicators)
Page 33
(principal risks)
Pages 39 to 105
Results
The results for the year are set out in the income statement.
The profit before taxation for the year ended 31 December
2016 was £128.7m (2015: £94.7m). A full review of the financial
performance of the Group is included within the strategic report.
Income
statement
Page 148
Strategic report
Pages 1 to 38
Dividend
The Directors do not propose to recommend a final dividend in
respect of the year ended 31 December 2016.
–
–
Financial instruments
The Group uses financial instruments to manage certain types
of risk, including liquidity and interest rate risk. Details of the
objectives and risk management of these instruments are
contained in the risk management section.
Risk
management
Pages 106 to 139
Post balance sheet
events
There have been no material post balance sheet events.
–
–
Share capital
At 31 December 2016, the Company’s share capital comprised
344,739,584 ordinary shares of £0.10 each.
The Company did not repurchase any of the issued ordinary
shares during the year or up to the date of this report.
The powers of the Directors, including in relation to the
issue or buyback of the Company’s shares, are set out in the
Companies Act 2006 and the Company’s Articles of Association.
The Directors were granted authority to issue and allot shares at
the 2016 AGM. This authority expires at the end of the next AGM
or, if earlier, on 30 June 2017. Shareholders will be asked to renew
the authority to issue and allot shares at the 2017 AGM.
Pages 185 to 186
Note 36 to the
consolidated
financial
statements
Corporate governance 101
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Requirement
Detail
Where to find further information:
Section
Location
Rights and obligations
attaching to shares
There are no restrictions on the transfer of the Company’s
ordinary shares or on the exercise of the voting rights attached to
them, except for:
–
–
• where the Company has exercised its right to suspend their
voting rights or prohibit their transfer following the omission
by their holder or any person interested in them to provide the
Company with information requested by it in accordance with
Part 22 of the Companies Act 2006; or
• where their holder is precluded from exercising voting rights by
the Financial Conduct Authority’s Listing Rules or the City Code
on Takeovers and Mergers.
All the Company’s ordinary shares are fully paid and rank equally
in all respects and there are no special rights with regard to
control of the Company.
Under the Relationship Agreement entered into by the
Principal Shareholders, AnaCap Derby Co-Investment (No.1)
L.P. has agreed for so long as it holds in excess of 4.99% of
the ordinary shares in the Company, that save in limited
circumstances, it shall not exercise any voting rights in respect
of, or sell or transfer (except for a permitted sale or transfer), any
ordinary shares in the Company beneficially owned, directly or
indirectly, by it.
Employees share
scheme rights
Details of how rights of shares in employee share schemes
are exercised when not directly exercisable by employees are
provided in Note 37 to the consolidated financial statements.
Employees
The Group is committed to employment policies, which follow
best practice, based on equal opportunities for all employees,
irrespective of gender, race, colour, age, disability, sexual
orientation or marital or civil partner status. The Group is
committed to ensuring that disabled people are afforded equality
of opportunity in respect to entering and continuing employment
within the Group. This includes all stages from recruitment and
selection, terms and conditions of employment, access to training
and career development.
Information on employee involvement and engagement can be
found in the strategic report.
Page 188
Note 37 to the
consolidated
financial
statements
Strategic report
Pages 15 and 37
Directors
The names and biographical details of the current Directors
who served on the Board and changes to the composition of the
Board that have occurred during 2016 and up to the date of this
report are provided in the corporate governance section and are
incorporated into the Directors’ Report by reference.
Corporate
governance –
Board of Directors
Pages 42 and 43
102
Aldermore Group PLC Annual Report and Accounts 2016
Directors’ Report
continued
Requirement
Detail
Disclosure of
information under
Listing Rule 9.8.4R
Details of any long-term incentive schemes
Agreement with the Principal Shareholders
Contracts of significance
Dividend waivers
Appointment
and retirement
of Directors
Directors’ indemnities
The appointment and retirement of the Directors is governed
by the Company’s Articles of Association, the UK Corporate
Governance Code 2014 and the Companies Act 2006.
The Company’s Articles of Association may only be amended by a
special resolution passed by shareholders at a general meeting.
In accordance with the the UK Corporate Governance Code
2014, all of the Directors will retire and offer themselves for
reappointment or appointment (in the case of Chris Patrick) at the
2017 AGM.
Under the Relationship Agreement, the Principal Shareholders
are entitled for such time as they have: (i) an interest of 20% or
more in the Company, to appoint two Non-Executive Directors;
and (ii) less than a 20% interest but an interest of 10% or more
in the Company, to appoint one Non-Executive Director.
Such appointments are subject to election/re-election at
the AGM.
The Directors who served on the Board during 2016 and up to the
date of this report have benefited from qualifying third-party
indemnity provisions by virtue of deeds of indemnity entered
into by the Directors and the Company. The deeds indemnify the
Directors to the maximum extent permitted by law and by the
Articles of Association of the Company, in respect of liabilities
(and associated costs and expenses) incurred in connection with
the performance of their duties as a Director of the Company
and any associated company, as defined by Section 256 of the
Companies Act 2006.
The Group also maintains Directors’ and Officers’ liability
insurance which provides appropriate cover for legal actions
brought against its Directors.
Where to find further information:
Section
Location
Pages 186 to 189
Note 37 to the
consolidated
financial
statements
Relations with
shareholders
Page 59
Page 192
Page 185 and 186
Page 52
Note 41 to the
consolidated
financial
statements
Note 36 to the
consolidated
financial
statements
Corporate
governance –
election and
re-election
–
–
Corporate governance 103
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Requirement
Detail
Where to find further information:
Section
Location
Significant
agreements
There are no agreements between any Group company and
any of its employees or any Director of any Group company
which provide for compensation to be paid to an employee or a
Director for termination of employment or for loss of office as a
consequence of a takeover of the Company.
–
There are no significant agreements to which the Company is a
party that take effect, alter or terminate upon a change of control
following a takeover bid for the Company.
Political donations
The Group made no political donations during the year.
–
–
–
Research and
development activities
The Group does not undertake formal research and development
activities. However, new products and services are developed
in each of the business lines in the ordinary course of business
in accordance with the Group’s product and pricing governance
framework. Under this framework, all new products, campaigns
and business initiatives are reviewed and approved by the Group’s
Product and Pricing Committee. In addition to new products and
services, the Group also invests in internally generated intangible
assets including computer systems.
Pages 182 and 183
Note 28 to the
consolidated
financial
statements
Emissions reporting
Details relating to required emissions reporting are set out on
page 105.
Directors’ Report
Page 105
Going concern
–
–
The financial statements are prepared on a going concern basis,
as the Directors are satisfied that the Group has the resources to
continue in business for the foreseeable future (which has been
taken as 12 months from the date of approval of the financial
statements). In making this assessment, the Directors have
considered a wide range of information relating to present and
future conditions, including the current state of the balance
sheet, future projections of profitability, cash flows and capital
resources, and the longer term strategy of the business. The
Group’s capital and liquidity plans, including stress tests, have
been reviewed by the Directors. The Group’s forecasts and
projections show that it will be able to operate at adequate levels
of both liquidity and capital for the foreseeable future, including
under a range of stressed scenarios. After making due enquiries,
the Directors believe that the Group has sufficient resources to
continue its activities for the foreseeable future and to continue
its expansion, and the Group has sufficient capital to enable it to
continue to meet its regulatory capital requirements as set out by
the Prudential Regulation Authority.
104
Aldermore Group PLC Annual Report and Accounts 2016
Directors’ Report
continued
Requirement
Detail
Where to find further information:
Section
Location
Disclosure of
information to auditors
Each person who is a Director at the date of this Directors’ Report
confirms that:
–
–
•
•
so far as the Director is aware, there is no relevant audit
information of which the Group’s auditors are unaware; and
he or she has taken all the steps that he or she ought to have
taken as a Director to make himself or herself aware of any
relevant audit information and to establish that the Group’s
auditor is aware of that information. This confirmation is given
and should be interpreted in accordance with the provisions of
the Companies Act 2006.
Auditor
Annual General
Meeting (AGM)
Following a competitive tender process, the Board recommended
that Deloitte LLP be appointed as the Group's auditor with effect
from the 2017 AGM, at which resolutions concerning Deloitte’s
appointment and authorising the Board to set their remuneration
will be proposed.
Audit Committee
Report
Page 68
The AGM will be held at 11.00am on 16 May 2017 at the offices of
Linklaters LLP, 1 Silk Street, London, EC2Y 8HQ. The Notice of
AGM, together with an explanation of the items of business to
be discussed at the meeting, will be posted to shareholders and
made available on the Group’s website.
A resolution will be proposed at the 2017 AGM to amend the
Company’s Articles of Association so that future AGMs may be
held electronically.
Group website
www.investors.
aldermore.co.uk
Substantial
shareholdings
In accordance with the Disclosure and Transparency Rules, the Company (as at the date of this report) has been
notified of the following interests in its ordinary share capital:
Shareholder
As at 31 December 2016
As at 1 March 2017
Ordinary
shares held
% of voting
rights
Nature of
holding
Ordinary
shares held
% of voting
rights
Nature of
holding
AnaCap Financial Partners L.P.1
28,702,806
8.33%
Direct 28,702,806
8.33%
37,964,311
11.01%
Direct 37,964,311
11.01%
Direct
Direct
AnaCap Financial Partners II, L.P.1
AnaCap Derby Co-Investment
(No. 1) L.P.1
AnaCap Derby Co-Investment
(No. 2) L.P.1
38,821,660
11.26%
Direct 38,821,660
11.26%
Direct
32,897,211
9.54%
9.54%
Direct
Direct 32,897,211
Direct
(2.97%) and
qualifying
financial
instruments
Norges Bank
Standard Life Investments
(Holdings) Limited2
10,333,531
3.00%
(0.03%) 10,358,946
3.00%
Direct
18,656,326
5.41%
Indirect 17,696,294
5.13%
Indirect
1 These shareholdings represent the interests of the Principal Shareholders who hold 40.14% of the ordinary shares in the Company.
2 Since 31 December 2016, the Company has been notified that Standard Life Investments (Holdings) Limited decreased its
shareholding on 13 January 2017 to below 5% and increased its shareholding on 27 January 2017 as set out above.
Corporate governance 105
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Emissions reporting
Greenhouse gas emissions
The Group’s greenhouse gas (“GHG”)
emissions for 2016 were 525 tonnes
of carbon dioxide equivalent (tCO2e)
equating to 0.59 tCO2e per employee.
In 2016, the Group established an
energy baseline against which it can
report in future years.
GHG emissions for the Group have
been collated and calculated for all
UK operations where the Group is
responsible for the combustion of fuel
or energy used in the operation of
facilities occupied by the Group.
Reporting period
The reporting period for emissions
corresponds with the Group’s financial
reporting period.
GHG scope of disclosure and
omissions
GHG emissions disclosure will be limited
to Scope 1 and Scope 2 emissions only
as data was not readily available for
Scope 3 emissions. Scope 1 includes fuel
emissions from buildings and company
vehicles and Scope 2 includes our
emissions from electricity. Disclosure of
Scope 3 emissions is voluntary under
the regulations.
Heat and electricity supplied by
landlords to premises occupied by the
Group, where the heat or electricity
is not separately reported or charged
outside of the general building
service charge, has not been included
in this year’s report due to lack of
data. Methods to obtain this data or
reliable methods for estimation will be
investigated and if suitably accurate
data can be obtained, this will be
included in future year’s reports.
GHG data integrity and
calculation method
The data included in this report has
been taken from multiple sources,
namely: utility billed data, existing
internal calculations, existing external
calculations from landlords, and
expense claims in relation to transport
usage. It has not been possible to obtain
some data for the reporting period.
Where this is the case, data has been
estimated either by using data from an
earlier period or extrapolating existing
data. Fuel consumption from vehicles
for business travel was estimated from
expense claim costs.
Conversion factors used in this
report have been taken from the
Department for Business, Energy and
Industrial Strategy’s "Greenhouse Gas
Conversion Factor Repository" and
the report has been compiled in line
with the Department for Environment,
Food & Rural Affairs’ "Environmental
Reporting Guidelines: Including
mandatory greenhouse gas emissions
reporting guidance".
GHG reduction plan
The Group is committed to reducing
GHG emissions. The opportunities
for energy savings identified through
the Group’s ESOS (Energy Saving
Opportunity Scheme) assessment,
completed in January 2016, are
being progressed and implemented
as appropriate.
GHG data verification
All data used for GHG emissions
reporting was compiled and calculated
by JRP Solutions Ltd, an independent
energy specialist.
On behalf of the Board:
GHG emissions summary (tCO2e)
Scope
Scope 1
Scope 2
Total GHG emissions
Average number of employees
Total per employee
Company transport
Electricity
2015
237
484
721
845
0.85
2016
175
350
525
887
0.59
Rachel Spencer,
Company Secretary
1 March 2017
106
Aldermore Group PLC Annual Report and Accounts 2016
Risk
management
The Group’s approach to risk
Risk governance and oversight
Stress testing
Principal risks
107
110
111
112
107
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
The Group’s approach to risk
In this section:
The Group’s approach to risk
107
Risk governance and oversight
110
Stress testing
Principal risks
111
112
All areas of the following report are
covered by the external auditor’s
opinion on page 142, except for the
leverage ratio disclosed on page
128, the risk weighted assets and
associated capital ratios on page 129
and the shaded sections on pages
135 to 139.
Effective risk management plays a key
role in the execution of the Group’s
strategy of supporting UK SMEs,
homeowners, buy-to-let investors
and savers. Risk taking is an inherent
part of banking and, within an effective
risk management framework, we
aim to generate strong sustainable
returns for shareholders. The Board
and senior management seek to ensure
that the risks the Group are taking are
clearly identified, managed, monitored
and reported and that the Group’s
resources are capable of withstanding
both expected and unexpected levels of
risk performance.
The Risk Overview on pages 32 to
35 provides a summary of the risk
management framework within the
Group. It highlights the principal risks
we face, together with emerging risks
and the mitigating actions we are
taking to address these challenges.
This detailed Risk Management Section
provides additional information on
our approach to risk, the associated
governance framework, stress testing
and provides a fuller analysis of the
principal risks.
Risk Strategy
We have clearly defined our risk
management objectives and have
a strategy to deliver them. Our risk
management strategy is to:
•
Identify our principal and
emerging risks
• Define our risk appetite and ensure
that the business plans are consistent
with it
• Ensure that the risk appetite and
business plans are supported by
effective risk controls, technology,
and people capabilities
• Manage the risk profile to ensure that
the business strategy can withstand
a range of adverse conditions
identified in stress testing
• Ensure a sound risk control
environment and risk-aware culture
• Manage risk within the business units
with effective independent oversight
• Construct our compensation
practices to ensure only prudent
risk taking, within our risk appetite,
is rewarded.
108
Aldermore Group PLC Annual Report and Accounts 2016
The Group’s approach to risk
continued
Risk Management Framework
The Risk Management Framework (“RMF”) refers to the process of identifying, managing, monitoring and reporting the risks
to which the Group is exposed. The RMF is supported by supplemental frameworks, policies, processes and procedures.
These combine to ensure that our risks are managed in a manner which is appropriate to the size and nature of the Group’s
operations. They are aligned to regulatory requirements and reflect industry practice, as outlined below. The Group will
continue to develop and increase its range of products to better serve its customers and so grow the business sustainably in a
controlled manner within the overall RMF.
What risks and regulatory
requirements do we face?
How do we manage risks
and compliance given the
business objectives?
How do we provide oversight and
assurance of risk management
and compliance?
Principal Risks
Risk Appetite & Risk Strategy
• Credit Risk
• Capital & Liquidity Risk
• Market Risk
• Operational Risk
• Compliance, Conduct & Financial
Crime Risk
• Reputational Risk
• Risk appetite statement
• Risk appetite framework
• Risk culture
• Business strategy
Risk Infrastructure
• Governance & committee structure
• 3 lines of defence
• Risk resourcing
• Risk systems
• Reporting & escalation
Emerging Risks
Risk Life Cycle
• Regulatory Change/
Intervention
• Economic & Political
Environment
• Competitive Environment
• Technology Risk
Ide n ti f y
A
s
s
e
s
s
C
o
n
t
r
ol
n itor
M o
• Frameworks
• Policies
• Processes & Procedures
• Segregation of Duties
• Risk Controls &
Self Assessments
• Business Assurance
• Change Management
Legal & Regulatory
Data, Reporting KPIs/KRIs, Limits
Risk Metrics, Limits & Tolerances
Aggregation
Stress testing: ICAAP, ILAAP, RRP
t
h
g
i
s
r
e
v
o
k
s
i
r
–
e
n
i
l
d
n
o
c
e
S
e
c
n
a
r
u
s
s
a
t
n
e
d
n
e
p
e
d
n
i
–
e
n
i
l
d
r
i
h
T
Risk management
109
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Risk Appetite Framework
The Risk Appetite Framework (“RAF”)
is the overarching framework through
which we set individual risk appetites
for each principal risk. It sets out how
we monitor performance against the
risk appetites.
The RAF includes the following
components:
• Overarching Risk Appetite Statement
– this is the primary statement
outlining our approach to risk taking
linked to the pursuit of our business
strategy. This is:
“To run a sustainable, safe and sound
business that conducts its activities
in a prudent and reputable manner,
taking into account the interest of
its customers and also ensuring that
our obligations to key stakeholders
are met.”
• Key risk appetite statements – the
articulation of the type and level
of specific risks (derived from the
principal risks) that we are willing to
accept or tolerate
Risk Appetite Framework
• Risk capacity – the maximum level of
risk we can assume before breaching
constraints determined by regulatory
capital or liquidity needs
at all times, the preservation of our
franchise and reputation and our
desire for controlled and sustainable
profit growth.
Risk culture
The Board ensures that the Group
actively embraces a strong
risk culture where all staff are
accountable for the risks that they
take. Senior management leads
in implementing the risk appetite
and ensuring that the RMF is fully
embedded with a strong focus on the
adherence to risk appetite which is
monitored through reporting metrics.
Staff performance management and
reward practices all have key risk
inputs, and a focus on risk management
in their design.
• Risk metrics, limits and tolerances –
quantitative or qualitative measures
that allocate our aggregate risk
appetite statements to individual
business activities
• Risk profile – the point in time
assessment of our risk exposures
Risk Appetite Statement
The Group’s overarching Risk Appetite
Statement, and detailed individual
metrics define the amount and nature
of risk the Group is willing to accept or
tolerate in pursuit of its strategy and
business objectives. The Board sets the
overall risk appetite of the Group, which
is expressed in detail through Principal
Risk Appetite Statements, individual
metrics and associated limits which are
reviewed on an ongoing basis.
In articulating its risk appetite, the
Group has taken into consideration
the expectations of its stakeholders,
the need for regulatory compliance
Information and Reporting
Oversight and Monitoring
Risk
Strategy
Overarching Risk
Appetite Statement
Individual (Principal)
Risk Appetite Statements
The business strategy provides the context within which the Group outlines its
business objectives and establishes its risk management framework. The risk strategy
is developed to support the business objectives. Together, the business and risk
strategies guide the development of the overarching risk appetite statement.
The overarching risk appetite statement sets the tone for risk management
at the Group. It provides a framework to develop and cascade the
Group’s risk culture and to establish risk policies, controls, and limits in a
consistent manner.
The overarching risk appetite statement is supported by
individual risk appetite statements for all principal risks.
Risk Metrics, Limits and Tolerances
Risk appetite statements are supported by a range
of meaningful and measurable metrics. These metrics
can be quantitative or qualitative in nature and are
subject to triggers, tolerances and limits.
110
Aldermore Group PLC Annual Report and Accounts 2016
Risk governance and oversight
The Board, often via sub-committees,
has responsibility for setting the overall
Risk Appetite, understanding the
principal risks taken by the Group and
setting acceptable limits for these risks
utilising the Risk Appetite Framework.
As part of this responsibility, the Board
reviews and approves the business
strategies, principal risk statements,
supporting frameworks and certain
Group policies. The Board is ultimately
responsible for ensuring that an
adequate and effective system of
internal controls is maintained and
regularly reviewed. The Board Risk
Committee and Board Audit Committee
are the main oversight committees in
this regard.
Three lines of defence
The governance framework adheres
to a ‘three lines of defence’ model
to ensure a clear delineation of
responsibilities between control over
day-to-day operations, risk oversight
and independent assurance of
our activities.
All three lines of defence are
responsible for supporting and
developing a culture of risk-awareness
and for supporting each other to
manage risk effectively for the
Group. In this way, risk management
responsibilities are understood at all
levels, ownership and accountability
are clear, and control and oversight is
maintained throughout the Group.
First line of defence –
Business lines and central
functions
The business lines and central functions
accept or tolerate risks with the aim of
delivering value for the Group. The first
line of defence is accountable for the
controls we have in place to manage
day-to-day operations. They manage
risks within the business and functions
to pre-agreed tolerances or limits.
They identify, manage and monitor
risks through regular reporting and by
escalating issues as necessary.
Second line of defence –
Risk functions
The second line of defence
encompasses the risk management
functions, which are independent of
the businesses and central functions.
The second line supports a structured
approach to risk management by
maintaining and implementing the
RMF, supplemental frameworks and
Group-wide risk policies. The second
line monitor the execution and ongoing
self-assurance testing by the first line
of defence. It also provides independent
oversight and guidance on risks
relevant to our strategy and activities,
maintains an aggregate view of risk,
and monitors performance in relation
to our risk appetite.
Third line of defence –
Internal Audit
Internal Audit provides independent
assurance to the Board via the
Audit Committee that the first
and second lines of defence are
both effective in discharging their
respective responsibilities.
The Group has continued to invest in all
three lines of defence to enhance the
controls around principal risks.
Risk principles and risk culture
Risk culture
Strong ris
k g
t
n
e
k manag e m
nd contr o l
a
Ris
Franchise
preservation
D
e
fi
n
e
d
ri
s
k a
ppetite
e
p
s i g
d
I n
o v e r
o
v
e
r
n
a
n
c
e
k
e
g
n
e n dent ris
alle
h t and ch
Risk management
111
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Stress testing
Stress testing is an important risk
management tool, with specific
approaches documented for the
Group’s key annual assessments
including the Internal Capital Adequacy
Assessment Process (“ICAAP”),
Individual Liquidity Adequacy
Assessment Process (“ILAAP”), the
Recovery and Resolution Plan (“RRP”)
and Reverse Stress Testing (“RST”).
We maintain a Stress Testing
Framework (“STF”) which is updated
on an annual basis, or more frequently
if required, to assist the Board’s
understanding of the key risks,
scenarios and sensitivities that may
adversely impact our financial or
operational position. These support the
development of risk appetite, business
and capital plans by:
• Testing our ability to withstand the
emergence of risks in both ‘normal’
and ‘stressed’ conditions
• Assessing the adequacy of our
financial resources (both capital
and liquidity) and the potential
management actions available
to mitigate the effect of any
adverse events
•
Identifying potential gaps in our
Risk Management Framework such
as potential weaknesses in the
operational controls maintained by
the Group
The STF relies upon and supports the
Capital Planning and Management
policy, the Funding and Liquidity policy
and the Operational and Credit Risk
Frameworks, all of which provide detail
of how the STF has been implemented
within these specific areas.
Stress testing is an integral part of the
Group’s ICAAP assessment. The stress
scenarios developed as part of the
ICAAP are used to size and carry a
stress loss buffer which ensures
that the Group is able to withstand a
range of adverse economic scenarios
over its five year planning horizon.
The ICAAP incorporates all principal
risks impacting capital and is the result
of active cooperation across Finance
(including Treasury), Business areas
and Risk functions. The Chief Financial
Officer (“CFO”) is accountable for the
Group’s ICAAP.
The ILAAP is an assessment of our
liquidity position under normal and
stressed conditions and is used to
inform the Board of the ongoing
assessment and quantification of
liquidity risk and the manner in which it
is managed, monitored, controlled and
mitigated. The CFO is accountable for
the Group’s ILAAP.
The RRP provides an assessment of
our ability to recover financial strength
following or during a period of severe
stress through a formal assessment
of available recovery options. The RRP
specifies the process and governance
for invoking the Recovery Plan and
enabling the selected options to be
activated and mobilised quickly and
effectively. The RRP also provides
regulatory authorities with information
and analysis to enable them to carry
out an orderly resolution if required.
The Chief Risk Officer (“CRO”) is
accountable for the Group’s RRP.
We perform RST to identify and
assess events that could cause our
business model to become unviable.
The outcome of failure is assumed as a
starting point and we work backwards
to determine the type and sequence
of events and vulnerabilities that could
lead to the hypothetical failure of the
business. The key objective of RST is to
enable the early identification of events
that could cause our business plan to
become unviable and to assess the
likelihood of such events crystallising.
Where those tests reveal a risk of
business failure that is unacceptably
high, when considered against our risk
appetite, we will take action to prevent
or mitigate that risk.
Stress testing governance
The Board is responsible for reviewing
and approving the STF, scenarios
for each type of stress testing
and results of the stress testing
analysis on at least an annual basis.
The Board Risk Committee (‘”BRC”)
is responsible for reviewing the STF
annually. The scenarios for each type
of stress test and results of the stress
testing analysis are reviewed and
recommended at the Asset and Liability
Committee (“ALCO”) and Executive
Risk Committee (“ERC”). The BRC
makes recommendations to the Board
for approval of the scenarios to support
the ICAAP, ILAAP and RRP. As the
senior risk committee, BRC provides
independent review and challenge
to stress scenarios, underlying
assumptions and adequacy of proposed
management actions, prior to their
recommendation to the Board.
The primary executive responsible for
the STF is the CRO who is responsible
for ensuring the development and
implementation of a robust STF
and overseeing its implementation.
The CRO is also responsible for ensuring
that the STF is fit for purpose and
adheres to all regulatory requirements
and industry good practices.
Participants from all business units
functions and second line risk are
responsible for providing inputs for the
development of scenarios, underlying
assumptions and relevant management
actions. These areas coordinate with
the CRO and CFO to provide relevant
data for stress testing.
112
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
All areas of the following report are
covered by the external auditor’s
opinion on page 142, except for the
shaded sections on pages 135 to 139.
• Credit risk (read more below)
• Capital and Liquidity risk (read more
on page 127)
• Market risk (read more on page 133)
• Operational risk (read more on
page 135)
• Compliance, Conduct and Financial
Crime risk (read more on page 137)
• Reputational risk (read more on
page 138)
Credit risk
Credit risk is the risk of financial
loss arising from the borrower or a
counterparty failing to meet their
financial obligations to the Group in
accordance with agreed terms.
The risk arises primarily from our
lending activities as a result of a
defaulting mortgage, lease or loan
contracts. Although credit risk arises
from our loan book, it can also arise
from treasury investments and off-
balance sheet activities.
Credit risk appetite – loan book
The credit risk appetites are set based
on expected levels of loss, credit risk
concentration, portfolio composition
and performance characteristics.
We set an overall credit risk appetite
for our lending activities, supported by
specific business line level appetites.
Expected losses are factored into the
budgeting and forecasting process and
reflect our expected view of lending
performance, taking into account
recent performance data and the
prevailing economic environment.
We recognise that actual losses
may differ from forecasted or
budgeted values.
Maximum exposure to credit risk
Included in the statement of financial position:
Cash and balances at central banks
Loans and advances to banks
Debt securities
Derivatives held for risk management
Loans and advances to customers
Other financial assets
Commitments to lend
Gross credit risk exposure
Less: allowance for impairment losses
Net credit risk exposure
Exposure
The table above presents our maximum
exposure to credit risk of financial
instruments on the balance sheet and
commitments to lend before taking into
account any collateral held or other credit
enhancements. The maximum exposure
to credit risk for loans, debt securities,
derivatives and other on balance sheet
financial instruments is the carrying
amount and for loan commitments the
full amount of any commitment to lend
that is irrevocable or is revocable only in
response to material adverse change.
Mitigation
We target UK SMEs, homeowners, and
buy-to-let customers. Credit risk is
managed in accordance with lending
policies, the risk appetite and the RMF.
Lending policies and performance
against risk appetites are reviewed
regularly. We seek to mitigate credit risk
by focusing on business sectors where
we have specific expertise and through
limiting concentrated exposures on
larger loans, certain sectors and other
factors which can represent higher risk.
We also seek to obtain security cover,
and where appropriate, guarantees
from borrowers. Affordability checks on
income versus outgoings are also made
where appropriate to assess a borrower’s
capacity to meet the servicing costs.
Note
2016
£m
2015
£m
116.4
67.2
664.5
12.4
7,504.7
2.9
8,368.1
968.8
9,336.9
(27.4)
9,309.5
105.3
94.2
606.1
6.7
6,165.5
0.4
6,978.2
556.0
7,534.2
(20.7)
7,513.5
19
20
22
42
40
22
Credit risks associated with lending
are managed through the Credit Risk
Management Framework, which
includes the use of detailed lending
policies which outline the approach to
lending, underwriting criteria, credit
mandates, concentration limits and
product terms. We maintain a dynamic
approach to credit management
and aim to take necessary steps if
individual issues are identified or if
credit performance deteriorates,
or is expected to deteriorate, due
to borrower, economic or sector-
specific weaknesses.
Credit risk is assessed through a
combination of due diligence, reviewing
credit reference agency reports,
reviewing financial information, credit
scores and the expert opinion of our
underwriters. A proportionate approach
is taken, ensuring that the highest
risk loans and facilities are subject
to detailed review by experienced
senior underwriters.
This section provides further detail on the
specific areas where we are exposed to
credit risk.
Risk management 113
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Business
description
Management
of credit risk
Asset Finance
• Originates loan and lease contracts to diversified range of
end users
• Exposures range from public sectors organisations to
corporates, SMEs, partnerships, sole traders and directors /
key staff of trading businesses
• Experienced manual underwriting, supported by data driven
•
from risk systems
Information on individuals behind the business
carefully considered
• Financial and credit information obtained from external credit
reference agencies
Invoice Finance
• Provides working capital for SME clients
• May include credit control and collection services for clients
• Experienced manual underwriting
• Review of management, financial and operational strength of
•
client’s business
Information on individuals behind the business
carefully considered
• Financial and credit information obtained from external credit
• Assets acting as security are carefully valued, future resale
reference agencies
values are considered
• Audit and site visits used to track condition and location of
certain assets
Business
Description
Commercial Mortgages and Property Development
SME Commercial Mortgages
• Commercial mortgages to SME businesses either owning or
acquiring business premises
Management
of credit risk
• Commercial mortgages to CRE property investors, typically to
non/partial recourse SPVs secured on mixed retail/residential
investments or smaller value CRE property investments
Property Development
• Residential development loan funding to established
regional developers
SME Commercial Mortgages
•
Independent credit underwriting of all new business origination
(all origination focused on UK domiciled property assets only)
• Loan to Value and Debt Service capacity matrices applied on a
risk based approach
• All facilities supported by independent professional valuation
by the Group’s panel valuers
• Collateral security by way of unsupported personal guarantees
to tie in personal commitment, or corporate guarantees, are
often taken
• Financial covenant protection for CRE commercial loans >£1m
secured by investment portfolio and/or multiple tenants
• Enhanced in life credit risk management and stewardship
for commercial mortgages, on a risk based approach, for all
exposures >£1m
• Early warning signs and back book surveillance, with individual
counterparty cases exhibiting signs of stress/distressed
escalated to Watch List for close and intensive monitoring
and control
Property Development
• Loan to Cost and Loan to Gross Development Value matrices
applied on a risk based approach , underpinned by independent
QS verification of construction costs (including contingency)
and independent professional valuation of completed units
• All developments subject to independent QS monthly progress
monitoring, supplemented by in house engagement and
site visits
• Careful consideration of quality and contractual collectability
•
of underlying receivables acting as security
In-life monitoring, audit and reconciliations performed
to manage risk of fraud and default risk associated with
client failure.
• Significant diversification at invoice level heavily mitigates
concentration risk
Residential Mortgages and Buy-to-Let
Residential Mortgages
• Residential mortgages for owner occupied properties
Buy-to-Let
• Private rental sector residential investment mortgages to
individual, partnership, LLP and Limited Company landlords
Residential Mortgages
•
Independent credit underwriting of all new business
origination (all origination focused on UK domiciled residential
property only)
• Lending at origination restricted to max 85%LTV (except
where additional scheme or insurance guarantee support is
available), no adverse credit history and affordability criteria
Buy-to-Let
•
Independent credit underwriting of all new business
origination (UK domiciled residential investment
property only)
• Loan to Value and Debt Service capacity matrices applied on
a risk based approach
• For capital and interest repayments the underlying rental
income must achieve min 1.0x on a stressed basis
• Face to face interview and property visits for higher value
aggregate BTL mortgages and more complex structures
• Enhanced in life credit risk management and stewardship
for commercial mortgages, on a risk based approach, for all
exposures >£1m
• Early warning signs and back book surveillance, with
individual counterparty cases exhibiting signs of stress/
distressed escalated to Watch List for close and intensive
monitoring and control
114
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
Credit risk portfolio
The following Section provides
analysis of our credit risk portfolio as
at 31 December 2016. The analysis is
segmented between credit risk on loans
and advances to customers and credit
risk on treasury assets. Details of the
methodologies and estimates used
to determine the allowances for loan
impairments are provided in Note 3.
Forbearance
Forbearance is defined as any
concessionary arrangement that is
made for a period of three months
or more where financial difficulty is
present or imminent. It is inevitable that
some borrowers experience financial
difficulties which impact their ability
to meet mortgage or SME finance
obligations as per the contractual
terms. We seek to identify borrowers
who are experiencing financial
difficulties, as well as contacting
borrowers whose loans have gone
into arrears, consulting with them in
order to ascertain the reason for the
difficulties and to establish the best
course of action to bring the account up
to date. In certain circumstances, where
the borrower is experiencing financial
distress, we may use forbearance
measures to assist the borrower.
These are considered on a case-by-
case basis and must result in a fair
outcome. The forbearance measures
are undertaken in order to achieve the
best outcome for both the customer
and the Group by dealing with financial
difficulties and arrears at an early stage.
The most widely used methods of
forbearance are temporarily reduced
monthly payments, loan term
extension, deferral of payment and
a temporary or permanent transfer
to interest only payments to reduce
the borrower’s financial pressures.
Where the arrangement is temporary,
borrowers are expected to resume
normal payments within six months.
Both temporary and permanent
concessions are reported as forborne
for twenty four months following the
end of the concession. In all cases, the
above definitions are subject to no
further concessions being made and
the customers’ compliance with the
new terms.
See page 122 for an analysis of
forbearance measures in place as at
31 December 2016.
The analysis in this Section of the report
excludes the Property Development
portfolio from a number of tables
where it is not relevant (marked with a
footnote). Gross property development
exposure at 31 December 2016 was
£230m (31 December 2015: £184m),
and net exposure was £229m
(31 December 2015: £179m).
Credit risk on loans and advances to
customers
Key terms:
Neither past due nor individually
impaired – Loans that are not
in arrears and where there is no
objective evidence of impairment.
Past due but not individually
impaired – Loans that are in arrears
but have not been individually
assessed as impaired.
Individually impaired1 – Loans which
have been subject to specific credit
risk adjustments (provisions) due to
objective evidence of impairment.
This heading includes cases that are
past due by three months or more,
but where no loss is expected.
Forborne – Any case which has had
a concessionary arrangement that
is made for a period of three months
or more where financial difficulty is
present or imminent. Cases continue
to be reported as forborne for
twenty four months following the
end of the forbearance concession.
1 During 2016, loans which are individually
impaired and less than three months in arrears
have been included within individually impaired
loan disclosures. As such, 2015 comparative
disclosures on pages 115 to 123 have been
re-presented on this basis.
Risk management 115
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Credit quality of loans and advances to customers
The credit quality of assets measures the credit worthiness of the loan or the ability of the debtors to pay back the debt.
The credit quality of lending assets is provided below and is shown gross of impairment provisions:
Analysis of loans and advances by impairment status
2016
Neither past due nor individually impaired
Past due but not individually impaired
Individually impaired
2015
Neither past due nor individually impaired
Past due but not individually impaired
Individually impaired
Asset
Finance
£m
1,569.2
3.3
9.3
1,581.8
Invoice
Finance
SME Commercial
Mortgages
£m
155.9
-
3.6
159.5
£m
921.6
6.9
7.8
936.3
Asset Finance
Invoice Finance
SME Commercial
Mortgages
£m
1,344.7
2.7
6.7
1,354.1
£m
163.2
–
2.9
166.1
£m
819.0
6.5
7.9
833.4
Buy-to-Let
£m
3,308.4
13.2
8.7
3,330.3
Buy-to-Let
£m
2,402.8
10.7
6.4
2,419.9
Residential
Mortgages
£m
1,470.8
19.8
6.2
1,496.8
Residential
Mortgages
£m
1,373.0
14.9
4.1
1,392.0
Loans and advances which are past due but not individually impaired
Past due but not individually impaired loans are further analysed according to the number of months past due as below:
Past due but not individually impaired
– Up to 2 months past due
– 2 to 3 months past due
Total
Fair value of collateral held
2016
£m
35.6
7.6
43.2
42.3
Loans and advances neither past due nor individually impaired
The credit quality of assets that are neither past due nor individually impaired are internally analysed as follows:
2016
Low risk
Medium risk
High risk
Total
Fair value of collateral held
2015
Low risk
Medium risk
High risk
Total
Fair value of collateral held
1 The above analysis excludes Property Development.
Asset
Finance
£m
-
1,282.4
286.8
1,569.2
1,102.8
Asset
Finance
£m
49.1
1,204.6
91.0
1,344.7
960.6
Invoice
Finance
SME Commercial
Mortgages 1
£m
-
6.9
149.0
155.9
155.8
£m
368.6
315.8
7.1
691.5
691.5
Invoice
Finance
SME Commercial
Mortgages 1
£m
–
12.9
150.3
163.2
160.7
£m
281.7
351.4
7.0
640.1
592.7
Buy-to-Let
£m
2,710.7
523.4
74.3
3,308.4
3,308.3
Buy-to-Let
£m
1,864.9
503.0
34.9
2,402.8
2,402.8
Residential
Mortgages
£m
1,083.8
345.4
41.6
1,470.8
1,470.8
Residential
Mortgages
£m
907.4
432.2
33.4
1,373.0
1,373.0
Total
£m
7,425.9
43.2
35.6
7,504.7
Total
£m
6,102.7
34.8
28.0
6,165.5
2015
£m
28.4
6.4
34.8
35.2
Total
£m
4,163.1
2,473.9
558.8
7,195.8
6,729.2
Total
£m
3,103.1
2,504.1
316.6
5,923.8
5,489.8
116
Aldermore Group PLC Annual Report and Accounts 2016
exposure. The level of security varies,
ranging from a small number of very
short term unsecured loans in the
Asset Finance business, to highly
secured loans on residential property
within the Residential Mortgage
business. The valuation method for
assets is specific to the nature of the
collateral and includes indexation for
property valuations.
b) Fair value of collateral
methodology
For SME Commercial Mortgage,
Buy-to-Let and Residential Mortgage
agreements, the fair value of underlying
collateral is calculated based on the
indexed valuation of the property
on which the mortgage is secured.
Where the indexed valuation is greater
than the balance outstanding, the fair
value of the collateral is capped to the
value of the outstanding balance.
For Asset Finance agreements, the
estimated fair value of the collateral
is calculated by applying LGDs on a
case by case basis. The LGD against
each loan is deducted from the balance
outstanding to derive a proxy for fair
value. As the fair value is derived using
LGDs, the fair value calculated includes
an element of prudence as the LGD is
based on non-performing loan data.
Principal risks
continued
a) Risk grading methodology
The categorisation of high, medium and
low risk is based on internal grading
models utilised in portfolio monitoring.
The grading models are used to
generate a consistent Group-wide
approach for the grading of customer
credit risk exposures for all lending
businesses, and provide a relative
internal ranking of risk. Drivers for
the grade mapping include external
credit reference agency risk scores,
property valuations and qualitative
factors. The relative measure of risk
reflects a combined assessment of the
probability of default by the customer
and an assessment of the expected loss
in the event of default.
The resulting classification of balances
between low, medium and high is
consequently driven by a combination
of the Probability of Default (“PD”)
and Loss Given Default (“LGD”) grades
as further explained. A matrix of
eighteen PD (fifteen of which apply
to up to date accounts) and ten LGD
grades determine the category
within which each loan is categorised,
i.e. those accounts that have a low
PD and/or LGD are graded as ‘low’.
Those graded ‘high’ will be accounts
that have either a high PD and/or
high LGD.
• Probability of Default refers to
the probability of a customer or
counterparty defaulting within the
next 12 months which is typically
taken as three payments past due.
A default probability model predicts
this probability by using credit scores
along with financial, behavioural and
qualitative inputs.
• Key components of the Loss Given
Default are the propensity to “cure”,
that is the likelihood/propensity for a
defaulting account to be restored to
a performing status, and the level of
security held in relation to the credit
Risk management 117
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Impaired loan analysis
Individually impaired balances are further analysed as follows:
2016
Impaired but not past due
Past due less than 3 months
Past due 3-6 months
Past due 6-12 months
Past due over 12 months
Of which: Possessions
2015
Impaired but not past due
Past due less than 3 months
Past due 3-6 months
Past due 6-12 months
Past due over 12 months
Of which: Possessions
1 The above analysis includes Property Development.
Asset Finance
£m
1.0
2.5
3.1
2.0
0.7
9.3
0.7
Asset Finance
£m
1.4
1.2
1.2
1.3
1.6
6.7
0.8
Invoice Finance
£m
–
0.6
0.1
1.0
1.9
3.6
–
SME Commercial
Mortgages1
£m
2.4
0.2
–
1.2
4.0
7.8
0.6
Invoice Finance
£m
–
0.1
0.2
0.5
2.1
2.9
–
SME Commercial
Mortgages1
£m
0.9
–
3.4
–
3.6
7.9
–
Buy-to-Let
£m
0.5
1.5
2.8
3.2
0.7
8.7
5.5
Buy-to-Let
£m
1.3
–
2.8
1.6
0.7
6.4
–
Residential
Mortgages
£m
0.1
0.6
3.8
1.4
0.3
6.2
0.2
Residential
Mortgages
£m
–
0.1
3.3
0.5
0.2
4.1
0.4
Total
£m
4.0
5.4
9.8
8.8
7.6
35.6
7.0
Total
£m
3.6
1.4
10.9
3.9
8.2
28.0
1.2
The fair value of collateral held against the above individually impaired balances at 31 December 2016 of £35.6m (31 December
2015: £28.0m) was £28.8m (31 December 2015: £23.4m). We always seek to pursue timely realisation of collateral in an orderly
manner. We do not use the collateral for our own operations.
Movement in impaired loans is analysed as follows:
2016
At 1 January
Classified as impaired during the period
Transferred from impaired to unimpaired
Amounts written off
Repayments
At 30 December 2016
2015
At 1 January
Classified as impaired during the period
Transferred from impaired to unimpaired
Amounts written off
Repayments
At 31 December 2015
Asset
Finance
£m
6.7
7.3
(0.3)
(4.4)
–
9.3
Invoice
Finance
£m
2.9
2.1
–
(1.4)
–
3.6
SME Commercial
Mortgages1
£m
7.9
1.0
(1.0)
(0.1)
–
7.8
Asset Finance
£m
5.0
4.3
(0.7)
(1.9)
-
6.7
Invoice Finance
£m
6.3
1.3
-
(4.6)
(0.1)
2.9
SME Commercial
Mortgages
£m
7.1
2.8
(0.1)
(1.7)
(0.2)
7.9
Buy-to-Let
£m
6.4
3.5
(1.1)
(0.1)
–
8.7
Buy-to-Let
£m
4.4
4.9
(0.8)
(0.9)
(1.2)
6.4
Residential
Mortgages
£m
4.1
3.1
(0.7)
(0.1)
(0.2)
6.2
Residential
Mortgages
£m
3.3
3.5
(0.7)
(0.2)
(1.8)
4.1
Total
£m
28.0
17.0
(3.1)
(6.1)
(0.2)
35.6
Total
£m
26.1
16.8
(2.3)
(9.3)
(3.3)
28.0
118
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
Impairment coverage ratio
The impairment coverage is analysed as follows:
Coverage ratio
Gross loans and advances
Of which individually impaired
Impaired as a % of gross loans and advances
Allowance for losses – individual provisions
Coverage
2016
£m
7,504.7
35.6
0.47%
14.3
40.17%
2015
£m
6,165.5
28.0
0.45%
10.2
36.43%
The coverage ratio has increased during the year as the result of a small increase in the number of loans specifically provided for
(see Note 22).
Quality of collateral
The principal indicators used to assess the credit security of performing loans are Loan to Value ratios for SME Commercial,
Buy-to-Let and Residential Mortgages. The following tables show loan balances net of impairment provisions.
SME Commercial Mortgages
Loan to Value on indexed origination information on our SME Commercial Mortgage portfolio is set out below:
95–100%
90–95%
85–90%
80–85%
75–80%
70–75%
60–70%
50–60%
0–50%
Capital repayment
Interest only
Average Loan to Value percentage
2016
£m
0.4
0.5
0.7
1.7
12.1
34.8
153.2
211.9
285.5
700.8
568.4
132.4
700.8
51.74%
20151
£m
0.4
-
1.1
1.3
8.5
19.0
134.7
209.4
275.5
649.9
505.8
144.1
649.9
52.39%
1
Indexation methodology has been enhanced during 2016 hence the 2015 balances have been restated in accordance with the enhanced methodology.
The analysis excludes Property Development.
Property Development
We use ‘loan to gross development value’ as an indicator of the quality of credit security of performing loans for the Property
Development portfolio. Loan to gross development value is a measure used to monitor the loan balance drawn compared against the
expected gross development value once the development is complete. Average loan to gross development value at origination for
Property Development loans at 31 December 2016 was 58.05% (31 December 2015: 56.97%).
Risk management 119
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Buy-to-Let
Loan to Value on indexed origination information on our Buy-to-Let portfolio is set out below:
100%+
95–100%
90–95%
85–90%
80–85%
75–80%
70–75%
60–70%
50–60%
0–50%
Capital repayment
Interest only
Average Loan to Value percentage
Residential Mortgages
Loan to Value on indexed origination information on our Residential Mortgages portfolio is set out below:
100%+
95–100%
90–95%
85–90%
80–85%
75–80%
70–75%
60–70%
50–60%
0–50%
Capital repayment
Interest only
Average Loan to Value percentage
2016
£m
-
0.4
9.6
14.8
136.5
461.4
561.2
984.3
669.6
488.2
3,326.0
251.1
3,074.9
3,326.0
63.21%
2016
£m
0.2
17.2
139.9
178.4
170.4
166.1
172.8
251.4
168.4
229.1
1,493.9
1,303.1
190.8
1,493.9
69.48%
2015
£m
0.6
5.1
18.5
14.5
51.6
219.1
323.5
735.1
528.8
521.1
2,417.9
228.4
2,189.5
2,417.9
60.52%
2015
£m
6.6
55.2
200.5
166.2
153.6
138.9
121.5
218.3
145.5
183.9
1,390.2
1,188.0
202.2
1,390.2
72.29%
Lending at higher LTV bandings is largely as a result of the Group’s participation in the Help to Buy Scheme, with in excess of 90%
of the portfolio having an associated government guarantee on amounts where the Loan to Value is above 85%. This reduces the
Group’s risk exposure. As at 31 December 2016, 96.15% of the exposures with Loan to Value in excess of 85% relate to the Help
to Buy Scheme (31 December 2015: 89.16%). The Help to Buy guarantee portfolio, which makes up the majority of the Help to Buy
book, had an average indexed Loan to Value of 87.47% (31 December 2015: 90.68%). As at 31 December 2016, the average indexed
Loan to Value of the non-Help to Buy owner occupied book is 61.65% (31 December 2015: 64.14%).
120
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
Invoice Finance
In respect of Invoice Finance, collateral is provided by the underlying receivables (e.g. trade invoices). As at 31 December 2016,
the average advance rate against the fair value of sales ledger balances which have been assigned to the Group, net of amounts
considered to be irrecoverable, is 62.30% (31 December 2015: 64.99%).
In addition to the value of the underlying sales ledger balances, we will wherever possible, obtain additional collateral before
offering invoice finance facilities to a client. These may include limited personal guarantees from major shareholders, charges
over personal and other business property, cross guarantees from associated companies and unlimited warranties in the case of
frauds or certain other breaches. These additional forms of security are impractical to value given their nature.
Asset Finance
In respect of Asset Finance, collateral is provided by our rights and/or title to the underlying assets, which we are able to repossess in the
event of default. Where appropriate, we will also obtain additional security, such as parent company or personal guarantees.
Asset Finance also undertakes a small volume of unsecured lending where we have obtained an understanding of the ability of the
borrower’s business to generate cash flows to service and repay the facilities provided. As at 31 December 2016, the total amount of such
unsecured lending was £40.7m (31 December 2015: £30.3m).
Concentration of credit risk
We monitor concentration of credit risk by product type, size of asset, geographic location and sector. Analysis of concentrations
(presented net of impairment provisions) is shown below.
Credit concentration by segment
Details of our lending by segment are as follows:
Asset Finance
Invoice Finance
SME Commercial Mortgages1
Buy-to-Let
Residential Mortgages
1 Analysis includes Property Development.
2016
£m
1,573.4
154.1
929.9
3,326.0
1,493.9
7,477.3
2015
£m
1,346.7
160.8
829.2
2,417.9
1,390.2
6,144.8
Credit concentration by quantum of exposure
An analysis of our loans and advances to customers by size of asset is shown in the table below:
£0–£50k
£50–£100k
£100–£150k
£150 –£200k
£200–£300k
£300–£400k
£400–£500k
£500k–£1m
£1m–£2m
£2m+
Asset
Finance
£m
639.7
361.3
145.4
96.1
107.4
54.9
40.3
79.6
34.2
14.5
1,573.4
SME
Commercial
Mortgages1
£m
2.9
24.7
31.7
26.1
52.3
36.7
40.1
119.0
140.2
227.1
700.8
Buy-to -Let
£m
25.4
518.1
480.6
400.5
709.1
457.5
219.1
306.3
116.0
93.4
3,326.0
Residential
Mortgages
£m
15.9
252.9
414.9
299.6
314.1
120.7
21.4
51.2
3.2
–
1,493.9
Asset
Finance
£m
578.8
307.6
136.8
78.0
83.9
45.6
31.0
52.5
27.9
4.6
1,346.7
SME
Commercial
Mortgages1
£m
4.0
25.6
29.1
23.1
53.3
33.7
36.5
117.7
140.4
186.5
649.9
Buy-to -Let
£m
20.7
453.7
410.0
323.0
450.5
281.1
145.5
209.0
79.2
45.2
2,417.9
Residential
Mortgages
£m
21.1
240.0
396.2
274.3
278.7
104.9
24.1
45.7
5.2
–
1,390.2
1 The analysis of the SME Commercial Mortgages segment presented above excludes the Property Development.
Risk management 121
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Credit concentration by geography
An analysis of our loans and advances to customers by geography, including Property Development, is shown in the table below:
East Anglia
East Midlands
Greater London
North East
North West
Northern Ireland
Scotland
South East
South West
Wales
West Midlands
Yorkshire and Humberside
Credit concentration by sector
An analysis of our loans and advances to customers by sector is shown in the table below:
Agriculture, hunting and forestry
Construction
Education
Electricity, gas and water supply
Financial intermediation
Health and social work
Hotels and restaurants
Manufacturing
Mining and quarrying
Private households with employed persons
Public administration and defence; compulsory social security
Real estate, renting and business activities
Residential
Transport, storage and communication
Wholesale & retail trade; repair of motor vehicles, motorcycles & personal household goods
2016
%
9.6
6.1
20.7
2.6
10.7
0.2
4.9
19.9
9.5
2.9
6.7
6.2
2015
%
9.4
6.2
19.3
2.8
11.4
0.1
4.9
19.0
9.8
3.2
7.2
6.7
100.0
100.0
2016
%
1.1
4.4
0.1
0.5
1.7
0.3
0.3
3.1
0.2
0.8
0.1
19.2
61.9
3.8
2.5
2015
%
1.2
4.2
0.1
0.5
1.4
0.2
0.3
3.8
0.2
1.0
–
18.6
61.5
4.1
2.9
100.0
100.0
122
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
Forbearance analysis
As at 31 December 2016, we had undertaken forbearance measures as follows in each of our segments:
Asset Finance
Capitalisation
Reduced monthly payments
Loan-term extension
Deferred payment
Total Asset Finance
Forborne as a percentage of the total divisional gross lending book (%)
Invoice Finance
Agreement to advance funds in excess of normal contractual terms
Total Invoice Finance
Forborne as a percentage of the total divisional gross lending book (%)
SME Commercial Mortgages
Temporary or permanent switch to interest only
Total SME Commercial Mortgages
Forborne as a percentage of the total divisional gross lending book (%)
Buy-to-Let
Temporary or permanent switch to interest only
Reduced monthly payments
Deferred payment
Total Buy-to-Let
Forborne as a percentage of the total divisional gross lending book (%)
Residential Mortgages
Temporary or permanent switch to interest only
Reduced monthly payments
Deferred payment
Total Residential Mortgages
Forborne as a percentage of the total divisional gross lending book (%)
Total forborne
Total capitalisation
Total temporary or permanent switch to interest only
Total reduced monthly payments
Total loan-term extension
Total deferred payment
Total agreement to advance funds in excess of normal contractual terms
Total forborne
Total forborne as a percentage of the total gross lending book (%)
2016
£m
1.3
0.2
0.3
1.5
3.3
0.21%
11.1
11.1
6.96%
24.3
24.3
2.60%
0.7
1.0
0.3
2.0
0.06%
4.5
2.0
1.3
7.8
0.52%
1.3
29.5
3.2
0.3
3.1
11.1
48.5
0.65%
20151
£m
–
0.3
0.1
0.8
1.2
0.09%
1.8
1.8
1.12%
13.3
13.3
1.60%
1.5
0.8
0.3
2.6
0.10%
3.5
0.8
1.4
5.7
0.41%
–
18.3
1.9
0.1
2.5
1.8
24.6
0.40%
1 2015 SME Commercial Mortgages balance has been re-presented following a review of exposures classified as forborne.
When forbearance is granted to a borrower on a specific exposure, all exposures which are aggregated with that borrower,
e.g. by reason of common ownership, are deemed as forborne for reporting purposes.
Risk management 123
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Analysis of forborne accounts by payment status is shown in the tables below:
2016
Neither past due nor individually impaired
Past due but not individually impaired
Individually impaired
2015
Neither past due nor individually impaired
Past due but not individually impaired
Individually impaired
Asset
Finance
£m
3.2
-
0.1
3.3
Asset
Finance
£m
1.1
-
0.1
1.2
Invoice Finance
£m
10.4
0.6
0.1
11.1
SME Commercial
Mortgages
£m
23.8
0.2
0.3
24.3
Invoice Finance
£m
1.8
-
-
1.8
SME Commercial
Mortgages
£m
10.6
1.5
1.2
13.3
Buy-to-Let
£m
1.4
0.3
0.3
2.0
Buy-to-Let
£m
1.9
0.7
-
2.6
Residential
Mortgages
£m
4.9
1.5
1.4
7.8
Residential
Mortgages
£m
3.7
1.3
0.7
5.7
Total
£m
43.7
2.6
2.2
48.5
Total
£m
19.1
3.5
2.0
24.6
124
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
Credit risk – treasury assets
Credit risk exists with treasury
assets where we have acquired
securities or placed cash deposits
with other financial institutions.
The credit risk of treasury assets
is considered to be relatively low.
Certain treasury assets are held as
part of our liquidity buffer.
Credit risk appetite – treasury
assets
The Group’s appetite for credit
risk on treasury assets is minimal.
Cash and financial assets are invested
in investment grade rated entities
or investment vehicles. No assets
are held for speculative purposes or
actively traded.
Credit quality of treasury assets
The table below sets out information about the credit quality of treasury
financial assets:
2016
£m
2015
£m
Cash and balances at central banks and loans and
advances to banks
– Rated AAA
– Rated AA+ to AA-
– Rated A+ to A-
– Rated BBB+
High quality liquid assets included in the liquidity buffer
– Rated AAA
– Rated AA+ to AA-
– Rated A+ to A-
– Rated BBB+
Debt securities: Asset backed securities
– Rated AAA
– Rated AA+ to AA-
– Rated A+ to A-
– Rated BBB+
Derivatives held for risk management purposes
– Rated AAA
– Rated AA+ to AA-
– Rated A+ to A-
– Rated BBB+
– Rated BBB
–
139.3
35.6
8.7
183.6
430.9
163.2
–
–
70.4
–
–
–
664.5
–
2.6
6.1
3.7
–
12.4
860.5
105.3
29.6
48.7
15.9
199.5
396.7
134.5
–
–
71.8
–
3.1
–
606.1
–
1.4
2.0
2.3
1.0
6.7
812.3
As at 31 December 2016 and at 31 December 2015. None of the treasury assets were
past due or impaired.
For these exposures the Group uses credit ratings provided by the recognised credit
rating agencies Standard & Poor’s1, and Fitch.
1 “Standard and Poor’s disclaimer notice in relation to the ratings information set out above:
This may contain information obtained from third parties, including ratings from credit ratings agencies
such as Standard & Poor’s. Reproduction and distribution of third party content in any form is prohibited
except with the prior written permission of the related third party. Third party content providers do not
guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and
are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the
results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS
OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE
LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR
CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME
OR PROFITS AND OPPORTUNITY COSTS OR LOSSES CAUSED BY NEGLIGENCE) IN CONNECTION WITH
ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are
not statements of fact or recommendations to purchase hold or sell securities. They do not address the
suitability of securities or the suitability of securities for investment purposes, and should not be relied on as
investment advice.”
Risk management 125
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Management
Cash placements
Credit risk of Group and treasury counterparties is controlled through the treasury credit risk policy which limits the maximum
exposure by entity with which the Group can place cash deposits. All institutions need to be rated at investment grade at the time
of placement.
High quality liquid assets included in the liquidity buffer
As part of the liquidity buffer, we hold certain debt securities which qualify as high quality liquid assets included in the liquidity
buffer. These instruments are AAA to AA rated. The portfolio includes UK Gilts, supranational bonds, sovereign risk bonds issued
by European governments and agencies and corporate bonds.
Asset-backed securities (“ABS”)
We have a portfolio of ABS. The majority of these investments are in AAA or AA+ to AA- rated bonds secured on UK originated
assets. All investments are in Sterling; no foreign currency bonds were bought. The portfolio has credit enhancement, providing
principal protection against losses.
Derivatives
Credit risk on derivatives is controlled through a policy of only entering into contracts with a small number of UK credit
institutions, with an investment grade credit rating. Most derivative contracts are collateralised through the receipt/payment of
daily cash margin calls to cover the mark to market value of the asset/liability.
Offsetting financial assets and liabilities
It is our policy to enter into master netting and margining agreements with all derivative counterparties. In general, under
master netting agreements the amounts owed by each counterparty that are due on a single day in respect of all transactions
outstanding in the same currency under the agreement are aggregated into a single net amount being payable by one party to
the other. In certain circumstances, for example when a credit event such as a default occurs, all outstanding transactions under
the agreement are terminated.
Under the margining agreements where we have a net asset position with a counterparty valued at current market values, in
respect of derivatives, then that counterparty will place collateral, usually cash, with us in order to cover the position. Similarly,
we will place collateral, usually cash, with the counterparty where it has a net liability position.
As our derivatives are under master netting and margining agreements as described, they do not meet the criteria for offsetting
in the statement of financial position.
The following tables detail amounts of financial assets and liabilities subject to offsetting, enforceable master netting agreements
and similar arrangements including the Funding for Lending Scheme, and the Term Funding Scheme as detailed in Notes 22.
126
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
2016
Type of financial instrument
Assets
Loans and advances to customers (amounts
pre-positioned as collateral under the FLS)
Loans and advances to customers (amounts
pre-positioned as collateral under the TFS)
Derivatives held for risk management
Liabilities
Amount due to banks - repurchase agreements
Loans and advances to customers (amounts
pre-positioned as collateral under the TFS)
Derivatives held for risk management
2015
Type of financial instrument
Assets
Loans and advances to customers (amounts
pre-positioned as collateral under the FLS)
Loans and advances to customers (amounts
pre-positioned as collateral under the TFS)
Derivatives held for risk management
Liabilities
Amount due to banks - repurchase agreements
Loans and advances to customers (amounts
pre-positioned as collateral under the TFS)
Derivatives held for risk management
Related amounts not offset in the
statement of financial position
Gross amount
of recognised
financial
instruments
£m
Gross amount of
recognised financial
instrument offset
in the statement of
financial position
£m
Net amount of
financial instruments
presented in the
statement of financial
position
£m
Financial
instruments
£m
Cash
collateral
paid/
(received)
£m
Net amount
£m
1,066.2
578.7
12.4
1,657.3
(354.8)
(396.1)
(35.8)
(786.7)
–
–
–
–
–
–
–
–
1,066.2
(354.8)
578.7
12.4
(396.1)
(13.6)
1,657.3
(764.5)
(354.8)
354.8
(396.1)
(35.8)
(786.7)
396.1
13.6
764.5
–
–
(2.2)
(2.2)
–
–
22.2
22.2
711.4
182.6
(3.4)
890.6
–
–
–
–
Related amounts not offset in the
statement of financial position
Gross amount
of recognised
financial
instruments
£m
Gross amount of
recognised financial
instrument offset
in the statement of
financial position
£m
Net amount of
financial instruments
presented in the
statement of financial
position
£m
Financial
instruments
£m
Cash
collateral
paid/
(received)
£m
Net amount
£m
1,445.5
–
6.7
1,452.2
(398.6)
–
(35.4)
(434.0)
–
–
–
–
–
–
–
–
1,445.5
(398.6)
–
1,046.9
–
6.7
–
(3.7)
1,452.2
(402.3)
(398.6)
398.6
–
(35.4)
–
3.7
(434.0)
402.3
–
(1.3)
(1.3)
–
–
31.7
31.7
–
1.7
1,048.6
–
–
–
–
Risk management
127
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Capital and Liquidity risk
Capital risk is the risk that the
Group has insufficient capital to
cover regulatory requirements
and/or to support its growth plans.
Liquidity risk is the risk that we
are not able to meet our financial
obligations as they fall due, or can
do so only at excessive cost.
Capital Risk
Capital risk appetite
We aim to maintain a strong capital
position in line with the capital risk
appetite established by the Board.
Our capital risk appetite reflects the
desire to optimise the capital structure
of the Group and efficiently utilise its
capital resources in order to generate
appropriate returns for shareholders.
The Group’s capital risk appetite is set
to ensure that the Group:
• Meets minimum regulatory capital
requirements at all times;
•
•
Is able to achieve our strategic
objectives including business
growth plans;
Is able to withstand an adverse stress
scenario and continue to meet our
Individual Capital Guidance (“ICG”);
and
• Provides assurance of the
Group’s resilience to depositors,
customers, shareholders and other
key stakeholders.
Capital Requirements
We operate under the CRD IV CRR
regulatory framework which came
into force on 1 January 2014 and was
implemented in the UK by the Prudential
Regulation Authority (“PRA”).
Under CRD IV, the Group is subject to
capital requirements under both Pillar
1 (minimum capital requirements) and
Pillar 2 (Supervisory Review).
Pillar 1 requirements
Pillar 1 capital requirements are based
on prescribed risk calculations in line
with Capital Requirements Regulation
(“CRR”), EBA Single Rulebook and
relevant PRA regulations. Under this
framework, we hold Pillar 1 capital for
credit risk, operational risk, market
risk and Credit Valuation Adjustments
(“CVA”). We calculate our credit and
market risk Pillar 1 requirements
using the standardised approaches.
The operational risk Pillar 1 requirement
is calculated under the Basic Indicator
Approach (“BIA”).
Under CRD IV, we must hold total
capital equal to a minimum of 8%
of our total risk weighted assets to
cover our Pillar 1 capital requirements.
The 8% total capital minimum includes a
minimum common equity tier 1 (“CET1”)
requirement of 4.5% of RWAs and a
minimum Tier 1 requirement of 6%
of RWAs.
CRD IV buffers
CRD IV introduced a number of new
capital buffers to provide further
capital cushions for additional risks that
financial institutions may be subject
to. For the Group, the combined buffer,
which has to be met with CET1 capital, is
comprised of the counter-cyclical capital
buffer and the capital conservation
buffer. The capital conservation buffer
phase in commenced on 1 January 2016
when it was set at 0.625%, increasing
to 1.3% on 1 January 2017. The 2.5%
requirement will be fully phased in
by January 2019. The countercyclical
buffer in the UK is set by the Financial
Policy Committee (“FPC”) and reviewed
on a quarterly basis. It is currently set at
zero, and is expected to remain at this
level at least until June 2017. The FPC
has indicated that it envisages a 1%
steady state countercyclical buffer
for the UK in the future depending on
economic conditions.
In addition to the CRD IV combined
buffer, the Group is also subject to the
PRA Buffer as applied as part of the Pillar
2 framework and discussed below.
Application of the Pillar 2 Framework
We have an established Internal
Capital Adequacy Assessment
Process (“ICAAP”) which is conducted
in accordance with CRD IV and PRA
requirements. The ICAAP represents
the aggregated view of the risks faced
by the Group. It is used by the Board and
management to understand the level
of capital required over the planning
horizon to cover these risks that are
not covered or not adequately covered
by the minimum regulatory capital
requirement set out under Pillar 1, and
also to withstand a range of adverse
stress scenarios.
Key risks assessed under Pillar 2 include
credit risk, credit concentration risk,
operational risk and interest rate risk in
the banking book.
Following a review of our ICAAP
assessment, through its Supervisory
Review and Evaluation Process
(“SREP”), the PRA sets an ICG, which
supersedes Pillar 1 requirements
and establishes the minimum level of
regulatory capital we must maintain at
all times. The ICG has to be met with the
same quality of capital as Pillar 1.
We also conduct capital stress testing
and scenario analysis as part of our
ICAAP assessment. We use the stress
scenarios to size and carry a stress
loss buffer which ensures we are able
to withstand an adverse economic
downturn over a five-year planning
horizon. In addition, we identify
management actions that could be taken
to mitigate the impact of the stress on
the capital position. These are aligned
with our Recovery and Resolution Plan,
which describes actions that can be
taken to preserve capital if the stress
scenario is more extreme than expected.
128
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
The stress testing conducted in our
ICAAP forms the basis for the PRA
buffer assessment. Following their
review, the PRA sets a PRA buffer,
which in combination with the CRD
IV combined buffer is held to ensure
we can withstand an adverse market
stress. The combination of the PRA
buffer and the CRD IV combined buffer
replaced the Capital Planning Buffer
(“CPB”) with effect from 1 January 2016.
The PRA buffer has to be met fully with
CET1 capital by 1 January 2019, subject
to a phase-in from 1 January 2016,
which is aligned with the phase in of the
conservation buffer.
Throughout the year, our capital
resources remained in excess of the
minimum requirements determined
by the ICG, CRD IV buffers and the
PRA buffers.
Leverage ratio framework
Alongside the risk based capital
framework, we actively monitor our
leverage ratio. The leverage ratio at
31 December 2016 is 7.0%1 (31 December
2015: 7.2%1), calculated in accordance with
CRD IV. At present, we are not captured
under the FPC’s leverage ratio framework.
However, leverage will become a binding
requirement in 2018 as outlined in CRR,
albeit the Group comfortably meets the
new requirements.
Further details of our capital
requirements and resources are provided
in the annual Pillar III disclosures which are
available on our investor relations website:
www.investors.aldermore.co.uk.
1 Leverage ratio disclosure is not covered by
the external auditor’s opinion
Mitigation and monitoring
Our Capital Planning and Management
policy establishes a framework for
maintaining our current and prospective
capital at an appropriate level under
various scenarios. The policy describes
the process for establishing the Group’s
capital risk appetite is approved by the
Board and reviewed on an annual basis
or more frequently if required.
We monitor current and forecast levels
of capital against the capital risk appetite
approved by the Board and report the
capital position to ALCO, the Executive
Risk Committee, Board Risk Committee
and the Board on a regular basis.
The capital forecast forms an integral
component of the annual budgeting
process and is updated in line with
changes to our business plan. The capital
forecast incorporates the impact of
known forthcoming regulatory changes
to ensure we are well positioned to meet
them when implemented.
Analysis of capital risk
We operated in line with our capital risk
appetite as set by the Board and above
our regulatory capital requirements
throughout the years ended 31 December
2016 and 31 December 2015.
As at 31 December 2016, our capital base
was made up of £525.8m (31 December
2015: £435.6m) of Common Equity
Tier 1 capital and £74.0m (31 December
2015: £74.0m) of Additional Tier 1 capital
and £113.1m (31 December 2015: £48.6m)
Tier 2 capital. Common Equity Tier 1
capital consisted of fully issued ordinary
shares, satisfying all the criteria for
a Tier 1 instrument as outlined in the
CRR and audited/verified reserves.
Additional Tier 1 capital was issued in
December 2014. Tier 2 capital relates
to issued subordinated loan notes and
collective impairment allowances.
Risk management 129
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Our capital resources as at the year-end were as follows:
Common Equity Tier 1
Share capital
Share premium account
Capital redemption reserve
Available for sale reserve
Retained earnings
Less: prudential valuation adjustment
Less: intangible assets
Total Common Equity Tier 1 capital (CET1)
Additional Tier 1
Additional Tier 1 - contingent convertible securities
Total Tier 1 capital
Tier 2 capital
Subordinated notes
Collective impairment allowance
Total Tier 2 capital
Total capital resources
Risk weighted assets – Pillar 1
Capital ratios1
Common Equity Tier 1 ratio
Tier 1 capital ratio
Total capital ratio
2016
£m
34.5
73.4
0.1
1.8
442.2
(0.1)
(26.1)
525.8
74.0
599.8
100.0
13.1
113.1
2015
£m
34.5
73.4
0.1
(1.0)
352.6
-
(24.0)
435.6
74.0
509.6
38.1
10.5
48.6
712.9
558.2
4,576.1
3,693.0
11.5%
13.1%
15.6%
11.8%
13.8%
15.1%
1 Risk weighted assets, and the capital ratios are not covered by the external auditor’s opinion.
Regulatory capital has increased during 2016 due to the issuance of £60m of subordinated notes in October 2016 and the
inclusion of the profit after tax for the year in retained earnings. This has been partially offset by the coupon paid on the Additional
Tier 1 instrument in April 2016. Further details regarding the subordinated note issuance can be found in Note 35.
Reconciliation of equity per statement of financial position to capital resources
Equity per statement of financial position
Regulatory adjustments
Add: subordinated notes
Add: collective impairment allowance
Less: prudential valuation adjustment
Less: intangible assets
Total capital resources
2016
£m
626.0
100.0
13.1
(0.1)
(26.1)
712.9
2015
£m
533.6
38.1
10.5
–
(24.0)
558.2
130
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
Liquidity Risk
Liquidity risk appetite
The Board has set a liquidity risk
appetite which aims to ensure that a
prudent level of liquidity is held to cover
an unexpected liquidity outflow such
that we will be able to continue to meet
our financial commitments during an
extended period of stress. Additionally,
reputational risks are managed through
holding liquidity to meet pipeline
commitments expected to complete
during a three month period.
Based on the business model of
funding primarily via retail and SME
deposits, the Board has set a liquidity
risk appetite which it considers to
be appropriate to provide it with the
assurance that the relevant liquidity
risk drivers are considered and
prudently stressed, and that we are
able to meet liabilities beyond the
targeted survival period.
Exposures
Liquidity risk exposure represents
the amount of potential stressed
outflows in any future period less
expected inflows. Liquidity is
considered from both an internal and a
regulatory perspective.
Mitigation
To protect the Group and its depositors
against liquidity risks, we maintain
a liquidity buffer which is based on
our liquidity needs under stressed
conditions. The liquidity buffer is
monitored on a daily basis to ensure
there are sufficient liquid assets at all
times to cover cash flow movements,
fluctuations in funding, enabling us to
meet all financial obligations and to
support anticipated asset growth.
Contingency funding plan
As a regulated firm, we are required to
maintain a Contingency Funding Plan
(“CFP”). The plan (which is now part
of our Recovery and Resolution Plan
(“RRP”)) involves a two stage process,
covering preventative measures and
corrective measures to be invoked
when there is a potential risk to our
liquidity or capital position. The CFP/
RRP provides a plan for managing
a liquidity or capital situation or
crisis within the Group caused by
internal events, external events or a
combination thereof. The plan outlines
what actions we could take to ensure
we comply with the liquidity adequacy
rules, maintain sufficient capital and
operate within our risk appetite and
limits as set and approved by the Board.
Analysis of liquidity risk
Through the ILAAP process, we
have assessed the level of liquidity
necessary to prudently cover systemic
and idiosyncratic risks. The ILAAP
process determines the appropriate
liquidity buffer, taking into account the
specific nature of the deposit base and
other liquidity risk drivers.
The ILAAP requires us to consider all
material liquidity risks in detail and to
document our analysis of each key
liquidity risk driver and to set a liquidity
risk appetite against each of these
drivers. Liquidity risks are specifically
considered by the ALCO each month.
Wholesale funding sources
Repurchase agreements on drawings
under FLS Scheme
Central bank under TFS
Debt securities in issue
Deposits by banks
Subordinated notes
An overview of our key liquidity risk
drivers is provided below:
• Deposit funding risk - Deposit
funding risk is the primary liquidity
risk driver for the Group and this
risk could crystallise if there was
a concern by depositors over the
current or future creditworthiness
of the Group. We seek to operate in
such a way as to protect depositors
and in excess of 95% of deposits are
also protected by the government’s
Financial Services Compensation
Scheme (“FSCS”). The FSCS provided
£75,000 of protection to each
individual depositor at 31 December
2016. This protection has increased to
£85,000 in 2017.
• Wholesale funding - We mainly
finance our operations through retail
and SME deposit taking. We also
have long term wholesale funding
lines in place under the Term Funding
and Funding for Lending Schemes,
repurchase facilities to help manage
liquid assets, and debt securities
issued by the Group securitisation
vehicle in April 2014. We have
relationship banking facilities in place,
which are used to hedge against
currency and interest rate exposures,
as well as repurchase facilities for
short term liquidity management.
A summary of our wholesale funding
sources is show below:
Note
29
29
34
29
35
2016
£m
354.8
396.1
130.6
0.7
100.0
982.2
2015
£m
398.6
–
193.9
5.2
38.1
635.8
Risk management 131
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Payment systems
We do not form part of the UK payment
system however we make use of the
system in our day to day business.
In the event there are problems with
one of the payment systems, we have
access to other facilities with which to
make payments if needed.
Pipeline loan commitments
We need to maintain liquidity to cover
the outstanding pipeline of loan offers.
Although certain pipeline offers may not
be legally binding, the failure to honour
an expression of intent to finance a
loan contract brings reputational risk,
therefore our policy is to hold liquidity
for all such pipeline offers.
Cash collateral requirements
The Credit Support Annex (“CSA”)
agreement requires Aldermore or
the derivative counterparty to hold
cash in a deposit account depending
on whether the swap is in or out of
the money. Under a CSA, cash is
passed between parties to mitigate
the counterparty risk inherent in
the outstanding positions which are
valued daily.
Analysis of liquidity buffer
The components of the Group’s liquidity buffer were as follows:
Bank of England reserve account and unencumbered cash and bank balances
UK gilts and Treasury bills, Supranational bonds and Covered bonds (level 1 eligible)
Treasury bills held under the FLS scheme
Covered bonds (level 2 eligible)
Asset backed securities
Total liquidity buffer
As a % of funding liabilities
2016
£m
118.4
554.0
294.8
36.8
70.4
2015
£m
104.8
505.9
349.0
20.8
74.8
1,074.4
13.54%
1,055.3
15.75%
Encumbered assets
An asset is defined as encumbered if it has been pledged as collateral against an existing liability and, as a result, is no longer
available to the Group to secure funding, satisfy collateral needs or be sold to reduce the funding requirement. An asset is
therefore categorised as unencumbered if it has not been pledged against an existing liability. The Group monitors and manages
total balance sheet encumbrance via a board-approved risk appetite framework.
Details of assets pledged through repurchase activity and collateral pledges are reported in the relevant notes to the balance
sheet (Note 22 in respect of the Term Funding Scheme and Funding for Lending Scheme, and Note 42 in respect of the
securitisation vehicle).
132
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
Gross undiscounted contractual cash flows
The following is an analysis of gross undiscounted contractual cash flows payable under financial liabilities. The analysis has been
prepared on the basis of the earliest date at which contractual repayments which may take place. This includes consideration of
where the Group have the contractual right to call, irrespective of whether any decision to call has been made.
2016
Non-derivative liabilities
Amounts due to banks
Customers' accounts
Other liabilities
Debt securities in issue
Subordinated notes
Unrecognised loan commitments
Derivative liabilities
Derivatives held for risk management
settled net
Derivatives held for risk management
settled gross:
Amounts received
Amount paid
2015
Non-derivative liabilities
Amounts due to banks
Customers' accounts
Other liabilities
Debt securities in issue
Subordinated notes
Unrecognised loan commitments
Derivative liabilities
Derivatives held for risk management
settled net
Derivatives held for risk management
settled gross:
Amounts received
Amount paid
1 to 5
years
£m
More than
5 years
£m
Payable on
demand
£m
312.2
2,041.0
9.7
-
-
968.8
3,331.7
1.1
(13.1)
13.1
1.1
Payable on
demand
£m
1.3
1,347.8
6.0
-
-
556.0
1,911.1
Up to 3
months
£m
45.4
1,099.9
11.2
10.6
5.1
-
1,172.2
2.2
-
-
2.2
Up to 3
months
£m
308.8
810.5
11.6
19.8
-
-
1,150.7
3 to 12
months
£m
0.2
2,264.4
-
29.5
47.7
-
2,341.8
396.0
1,892.1
-
118.3
75.3
-
2,481.7
10.7
31.2
-
-
10.7
3 to 12
months
£m
95.0
2,122.0
-
50.0
5.2
-
2,272.2
-
-
31.2
1 to 5
years
£m
-
1,554.6
-
130.5
42.6
-
1,727.7
Total
£m
753.8
7,298.4
20.9
158.4
128.1
968.8
9,328.4
47.5
(13.1)
13.1
47.5
Total
£m
405.1
5,834.9
17.6
200.3
47.8
556.0
7,061.7
-
1.0
-
-
-
-
1.0
2.3
-
-
2.3
More than
5 years
£m
-
-
-
-
-
-
-
0.3
2.1
5.5
18.8
5.5
32.2
(4.4)
4.4
0.3
(3.1)
3.1
2.1
-
-
5.5
-
-
18.8
-
-
5.5
(7.5)
7.5
32.2
Risk management 133
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Corporate governance
Risk management
Financial statements
Appendices
Changes in the fair value of the hedged
bonds and the hedging derivatives,
and any differences between them,
which were largely attributable to
changes in the fair value of the bonds
due to changes in their credit risk,
are both reflected within the income
statement as part of “Net expense
from derivatives and other financial
instruments at fair value through profit
or loss”.
Market risk
We do not seek to take or expose
ourselves to market risk, and do
not carry out proprietary trading,
although certain liquid asset
investments which form part
of the liquid asset buffer carry
mark to market risk which we
regularly monitor.
We carry interest rate risk
which is the risk of loss through
mismatched asset and liability
positions sensitive to changes in
interest rates. Interest rate risk
consists of asset-liability gap risk
and basis risk.
Market risk
We do not carry out proprietary trading
or hold any positions in assets or
equities which are actively traded.
However, we do hold a portfolio of
highly rated asset backed securities
and a portfolio of liquid assets (primarily
gilts, Treasury bills and Supranational
bonds) which are used for liquidity
buffer purposes. The interest rate risk
on these liquid assets is considered
as part of the asset–liability gap risk
described. The instruments are also
exposed to other forms of market
risk e.g. credit spread risk. Prices are
monitored on a daily basis to ensure
that we are aware of any material
diminution in value. Formal monthly
prices are subject to independent
review and are reported to ALCO.
We have repurchase facilities in place
which can be used in the first instance
to obtain liquidity when necessary,
which will avoid the need to sell the
liquidity buffer assets and so crystallise
any price gain or loss resulting from
market price movements.
Interest rate risk
Interest rate risk appetite
We aim to minimise interest rate risk
and have a policy of matching fixed
or variable rate assets with liabilities
of a comparable interest rate basis,
supplemented by derivatives such as
interest rate swaps.
Mitigation
Hedge accounting
As detailed above, we use derivative
contracts in order to hedge existing
exposures on loans to customers,
customer deposits and available for
sale securities, principally with regard
to following our policies in respect of
the management of asset-liability gap
and basis rate risks. Wherever possible
we seek to include the derivatives
used within hedges which meet the
qualification requirements of IAS
39 to be accounted for as fair value
portfolio hedges (see accounting
policy (j) and Note 21). However there
are times where, in order to meet
IAS 39 requirements for prospective
testing of hedge effectiveness for new
derivatives to be included in hedging
portfolios, there is a time lag due to
operational process, before IAS 39
hedge accounting may commence.
Similarly, there are also certain
derivative contracts, e.g. those hedging
basis risk exposures (see above) which
do not meet the criteria for hedge
accounting under IAS 39. The gains and
losses arising on contracts which do not
meet the IAS hedge accounting criteria
are included within income as part of
“Net expense from derivatives and
other financial instruments at fair value
through profit or loss”, but, as they are
not matched by similar adjustments
to the hedged assets and liabilities,
they give rise to volatility in the income
statement on a year to year base
which will reverse over the life of the
hedge exposures.
134
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
Analysis of interest rate risk
Asset-liability gap risk
Where possible we seek to match the
interest rate structure of assets with
liabilities, creating a natural hedge.
Where this is not possible, we will enter
into interest rate swap transactions
to convert the fixed rate exposures on
loans and advances, customer deposits
and available for sale securities into
variable three month LIBOR exposures.
Given timing differences and the price
of hedging small gaps, it is not cost
effective to have an absolute match
of variable rate assets and liabilities.
The risk exposure of the overall asset-
liability interest rate profile is monitored
against approved limits using changes
to economic value of the balance sheet
as a result of a modelled 2% shift in the
interest yield curve.
Basis risk
Basis risk is where there is a mismatch
in the interest rate reference base for
assets and liabilities. When we enter
into derivative contracts to swap
fixed rate assets and liabilities into
variable rate liabilities, the reference
base is usually three month LIBOR.
Certain lending products have interest
rates which are based on the prevailing
Bank of England Base Rate (BBR) and
this different basis reference leads to
basis risk.
We have a market risk policy in place
which places limits on the net mismatch
between base rate linked assets and
liabilities, and seek to manage the
overall level of basis risk exposure by
entering into basis swap agreements.
As at 31 December 2016, the amount of
the basis risk sensitivity measure was
£0.0m (31 December 2015: £0.5m).
The impact of 2% shift in the interest yield curve is shown in the table below:
2% shift up of the yield curve:
As at year end
Average of month end positions reported to ALCO
2% shift down of the yield curve:
As at year end
Average of month end positions reported to ALCO
2016
£m
(7.0)
(3.7)
1.8
0.9
2015
£m
(5.5)
(3.0)
4.0
1.3
Risk management 135
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
The following shaded sections describe
the operational risk, compliance,
conduct and financial crime risk and
reputational risks to which we are
exposed. The sections are shaded as
these areas are unaudited. All other
areas of the Risk report are covered
by the external auditor’s opinion on
page 142.
Operational risk
Operational risk is the risk of loss
resulting from inadequate or failed
internal processes, people and
systems or from external events.
This risk includes information
technology, information security,
change management, outsourcing,
tax, legal, people and financial
control risks.
Operational risk appetite
We aim to maintain robust operational
systems and controls and seek to
operate within an acceptable level
of operational risk that enables
execution of our business strategy,
aiming for risks to be taken without
unacceptable losses or reputational
impacts. The operational risk appetite
considers risk events and the
assessment of internal controls as well
as holding additional capital for certain
operational risks.
Exposures
The key operational exposures that
the Group is exposed to include:
breakdowns in processes, controls
or procedures (or their inadequacy
relative to the growing size of the
Group’s business), systems failures and
the risk of cyber threats, which impact
the Group’s information technology
or critical infrastructure. The Group
is also subject to the risk of business
disruption, for example, arising from
facilities/transport or utility failures,
•
natural disasters and acts of terrorism,
which may give rise to losses or
reductions in service to customers
and/or losses to the Group. Given the
reliance on major outsource suppliers
and critical suppliers, the Group is also
exposed to risks in its supply chain.
The main operational risks to the
Group are:
• Business continuity – risk of
inadequate business recovery
and disaster recovery capability
to recover from any operational
disruption and continue to provide
product or service delivery to
customers. The Group has a Business
Continuity and Incident Management
Framework which has been updated
in 2016 and has been used to respond
to internal and external events
as appropriate.
• Change management – inability
to execute changes effectively
on a budget or to an acceptable
quality. As a growing business,
the Group has a significant change
agenda to respond to customer and
business needs, regulatory and legal
developments and to deliver ongoing
infrastructure and process capability
to meet the Group’s strategic aims.
• Financial Control and Management –
The Group relies on timely, robust and
accurate management information to
support its financial and operational
performance. The Group relies
on appropriate models and, in
certain cases, the use of estimates
and management judgement in
applying relevant accounting
policies. This includes provisions
for operation and conduct losses
which have occurred and credit
impairment charges.
Information security – inappropriate
disclosure of personal or sensitive
information and/or inappropriate
access to internal data sources.
In particular, cyber security threats
to the Group and its customers as a
result of attacks through the use of
computer systems exist. The growth
in criminal trading of stolen data
and the increasing size of the Group
may increase motivation to attempt
cybercrime against the Group and/
or its customers. Threats continue
to evolve as demonstrated by
an increased increase in denial of
service attacks, ransomware and
increased sophistication of targeted
fraud attacks by organised criminal
networks. Failure to adequately
manage cyber threats, and to
continually review and update
capabilities in response to new
threats, could result in increased
fraud losses, inability to perform
critical economic functions, customer
detriment, regulatory censure and
penalty, legal liability and reputational
damage. The Group continues to
invest in its security infrastructure
and remains aware that this is a
constantly evolving threat, across
the whole industry generally.
•
Information technology – risks to
the availability, performance and
capacity of IT systems/telephony/
internet. As the dependency on digital
channels and other technologies
grows, the impact of technology
issues can become more material and
immediate. The Group’s technology
and supplier infrastructure is critical
to its operations and to the delivery of
products and services to customers.
136
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
• People - inability to attract,
manage and retain competent
employees to fulfil the needs of
the Group. As the Group grows, it
requires a diverse mix of skills and
experience to deliver its strategy
and its transformation and change
agenda. Failure to attract and retain
appropriate, qualified and skilled
employees could adversely impact
the Group’s financial performance,
control environment and compliance
with evolving regulation and
legislative developments.
• Process - ineffective design or
execution of operational processes
and payment or transaction
processing failures. As the Group
matures, the risks arising from
existing processes may increase.
• Third party suppliers - inappropriate
supplier selection and contractual
arrangements, or inadequate ongoing
management of critical suppliers
and material outsource partners.
The Group is reliant on a range of
major outsource suppliers and critical
suppliers for robust delivery and
execution of services. The Group’s
Supplier Management Framework
continues to evolve to ensure it is in
line with regulatory expectations and
industry best practice.
Operational risk event reporting
is in place across the Group and
corrective actions and recoveries are
tracked accordingly.
We have placed emphasis on ensuring
that the IT infrastructure, performance,
resilience and security meet the
ongoing needs of the business.
Where possible the Group seeks to
automate or mitigate through additional
controls. In 2016 we have continued to
make significant investment in cyber
risk controls to ensure that we maintain
appropriate levels of controls to counter
the increasing threat of cyber-crime
across the banking and financial
services industries.
Mitigation of the risks arising from
on-going changes and project activity
is through a robust project governance
structure and delivery framework.
This approach was used to manage a
series of projects during the year and
ensures there are appropriate controls
in place covering scoping and planning,
design, initiation, monitoring and risk
assessment. Following completion,
post-implementation reviews are
held to ensure any process or project
improvements which are identified are
implemented for future projects.
The Group aims to maintain an engaged
and diverse workforce to ensure it
can retain, develop and attract the
right mix of skills and capabilities to
deliver its strategy. Investment in staff
training and personal development
programmes, and support of both
external and internal diversity projects,
are key parts of ensuring we remain an
employer of choice in the market.
Mitigation and monitoring
The management of operational risk
is a key area of management focus
and we adopt the Basic Indicator
Approach (“BIA”) to operational risk.
The Group has worked to understand
its operational risk management
framework as compared to peers
and continues to align to the Basel
Committee on Banking Supervision
criteria for the sound management of
operational risk.
The Operational Risk Management
Framework has three key objectives:
• Minimise the impact of losses
suffered from day-to-day operations
(expected losses) and from extreme
events (unexpected losses)
• Ensure awareness of the operational
risks faced by the Group and the
appropriate techniques to manage
them in line with risk appetite
•
Improve the effective management
of the Group and protect its
reputation and brand value
The prime responsibility for the
management of operational risk and
compliance within the Operational Risk
Management Framework lies with
business units and central functions.
The Operational Risk function within
Group Risk acts as a second line of
defence and provides oversight and
challenge of the operational risk profile,
escalating issues as appropriate.
Senior management across the Group
identify and assess operational risks
within their respective areas and assess
the effectiveness of key controls
that mitigate those risks following
the Risk & Control Self-Assessment
process. This includes an assessment
as to whether management actions
are required to bring the risk within
risk appetite, whether the level of risk
is accepted, or escalation of the risk
is required.
Risk management 137
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Compliance, Conduct and
Financial Crime risk
Compliance risk is the risk of legal
or regulatory sanctions, material
financial loss, or loss to reputation
as a result of a failure to comply
with applicable laws, regulations,
codes of conduct and standards of
good practice.
Conduct risk is the risk of legal
or regulatory sanctions, material
financial loss, or loss to reputation
as a result of causing unfair
outcomes or detriment to our
customers and/or undermining
market integrity as a result of
our behaviour, decision making,
activities or processes.
Financial crime risk is the risk of
legal or regulatory sanctions,
material financial loss, or loss
to reputation as a result of the
Group`s activities being used
by criminals for the purposes
of money laundering, terrorist
financing, bribery and corruption
and fraud.
Compliance, Conduct and Financial
Crime risk appetite
We aim to minimise Compliance,
Conduct and Financial Crime risk
by maintaining robust systems and
controls which are designed to meet
existing legislative and regulatory
requirements, identify new and
emerging changes to the external
landscape and that counter the threat
of the Group’s activities and products
being used for the purposes of
financial crime.
Exposures
The key compliance, conduct and
financial crime risks that the Group is
exposed to include:
Legal & Regulatory – failure to
identify, interpret or respond to legal
or regulatory changes or lack of
contractual arrangements in place
to protect the Group. The financial
services industry continues to be the
focus of significant regulatory change
which requires the Group to both
maintain compliance with existing
regulations and to ensure delivery
of change to achieve compliance
with new and emerging regulations.
The Group has a formal approach
to reviewing such developments,
assessing the impact on the Group
and tracking our progress towards
achieving compliance. Of particular
current significance is the continuing
embedding of the Senior Managers and
Certification Regime (SMCR), the IFRS9
accounting changes, the recent BCBS
capital proposals and the General Data
Protection Regulations (GDPR) which
are being closely managed.
Conduct – there is a risk that
customers can suffer detriment due
to actions, processes or products
which originate from within the
Group. Conduct risk can arise through
the design of products that do not
meet customers’ needs, mishandling
complaints where we have behaved
inappropriately towards our customers,
inappropriate sale processes and
exhibiting behaviour that does not
meet market or regulatory standards.
Customer detriment could affect our
reputation, lead to loss of market share
due to damage to our brand and may
lead to customer redress payments,
regulatory action or censure.
Financial crime – failure to prevent the
Group’s products and services being
used by criminals for the purposes
of financial crime, including money
laundering and terrorist financing or
failure to comply with relevant financial
sanctions requirements, and to prevent
bribery and corruption. There is a risk
the Group`s products and services
could be the subject of significant fraud,
either internally or externally leading
to increased provisions and associated
reputational damage.
Mitigation and monitoring
The primary responsibility for the
management of compliance, conduct
and financial crime risk lies with the
business units and central functions
in line with the SMCR responsibilities.
The Compliance and Financial Crime
functions within Group Risk act as a
second line of defence and provide
oversight of and challenge to the
business and central functions,
escalating issues as appropriate.
The Compliance and Financial Crime
oversight functions are responsible
for maintaining an appropriate risk
framework for the management of
compliance, conduct and financial
crime risk, including setting the overall
Group policies and minimum control
requirements for the business and
central functions to follow and for
overseeing their compliance.
Senior management across the Group
identify and assess compliance,
conduct and financial crime risks (within
their respective areas) and assess
the effectiveness of key controls that
mitigate those risks following the Risk
& Control Self-Assessment process.
This includes an assessment as to
whether management actions are
required to bring the risk within risk
appetite, whether the level of risk is
accepted or whether escalation of the
risk is required.
138
Aldermore Group PLC Annual Report and Accounts 2016
Principal risks
continued
New and emerging legislative and
regulatory driven changes are
overseen through a defined model
and standardised approach to ensure
changes are both identified and
assessed in terms of the impact on
the Group. Any significant changes
are implemented into the business
units through a formal project
governance approach.
We monitor and mitigate conduct risk
by ensuring our products, services,
business processes and procedures
are designed to consistently deliver
fair customer outcomes which
are subject to ongoing assurance,
monitoring, testing and reporting
where we may be operating outside
of risk appetite. Conduct risk metrics
and KPIs (which include among others,
staff performance levels, training,
customer feedback, complaints,
product retention rates, cancellations,
arrears levels and customer service
standards) are in place to evidence
fair outcomes, identify any emerging
issues and document remedial
actions. Our recruitment, training
and development programmes have
a clear customer focus and reward
mechanisms are aligned with fair
customer outcomes.
The prevention of financial crime
remains a key area of management
focus. Money laundering checks are
undertaken on all applicants to establish
identity and the ultimate ownership
structure for business customers.
Financial sanctions and fraud checks
are completed at application stage
and during the customer lifecycle.
Financial crime metrics and KPIs,
(which include among others, fraud
prevention value, frauds detected,
fraud provisions and losses, suspicious
activity reports and PEPs), are in place
to oversee financial crime risk, identify
any emerging issues and document
remedial actions.
Monitoring and testing of customer
processes and outcomes is undertaken
within each business area and is
supported by independent review
and oversight through the Group
Risk function.
Reputational risk
Reputational risk is defined as the
potential negative consequences
arising from a failure to meet the
expectations and standards of our
customers, investors, regulators
or other counterparties during the
conduct of any of our business
activities. This includes not just
the Group itself but all employees
and other agents acting for,
or otherwise associated with,
the Group.
Reputational risk appetite
We aim to protect the strength of
our reputation and franchise and
consequently have a low appetite
for reputational risk. We will seek to
eliminate the potential for material risk
events of this nature, or where this is
not possible, mitigate them as fully and
quickly as possible.
The Group will not conduct its business
or engage with any stakeholders in a
manner that could adversely impact
its reputation or franchise value.
In addition, the Group seeks to protect
and enhance its reputation at all
times through proactive engagement
with stakeholders and on-going
identification and assessment of
reputational risk events with the Board
and with the establishment of clear
mitigating plans and actions.
Exposures
There are few reputational threats that
are not intertwined with the outlined
principal and emerging risks within
this report. The key reputational risks
the Group are exposed to include poor
conduct and customer detriment,
operational shortcomings, political
and regulatory developments and
external attacks.
Mitigation and monitoring
All employees are responsible for day-
to-day identification and management
of reputational risk. This is safeguarded
by each employee conducting his or
her business and personal activities in a
manner that protects and enhances the
Group’s reputation.
The Board of Directors and Executive
Management set the tone from the
top, creating a strong culture of
integrity and high ethical standards
cascaded through the Group
Corporate Governance Framework,
Risk Management Frameworks and
supporting policies and procedures.
Oversight of Reputational risk is
provided by each of the committees
detailed within the Risk Management
Framework. In addition, the Group
Corporate Affairs function supports
the oversight and management
of reputational risk and acts as a
steward for protecting, promoting and
enhancing our reputation amongst key
stakeholders under the direction of the
Chief Executive Officer. The principal
monitoring and on-going reporting
forum for Reputational Risk is the BRC.
Ultimate oversight of reputational
events and their resolution rests with
the Board, reflecting the importance
and longevity of this type of risk.
In 2016 emphasis was placed on
ensuring our Crisis and Incident
Management (“IMT”) processes were
robust and tested. Scenario based
response plans were developed and
further embedded communications into
all crisis and IMT processes. This aims to
mitigate reputational risk by ensuring
a centrally coordinated response plan
to prevent greater damage if a critical
event occurs.
Risk management 139
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
• Maintain an open and transparent
relationship with regulators and other
key stakeholder groups
• Promote effective, proactive
stakeholder management through
ongoing engagement
• Encourage business and functions to
take account of our reputation in all
decision making, including dealings
with customers and suppliers
The Group follows a stakeholder-
based approach in which reputational
risk is identified and evaluated from a
qualitative perspective depending on
the stakeholder concerned.
In addition, the Group reinforces
its commitment to protecting
its reputation by adhering to the
following principles:
• Operate in a way that is consistent
with its risk appetite and the
Group’s values
• Conduct its business and operations
with integrity and in compliance with
the spirit and intent of all applicable
laws and regulations in every
jurisdiction in which it operates
• Undertake customer business
in line with the published Terms
and Conditions, and in a manner
which results in fair outcomes
for customers
• Will not engage in or facilitate any
business activity where the purpose
is to intentionally evade legal or
regulatory obligations, or assist in
aggressive tax avoidance schemes
• Maintain conflict of interest rules for
employees, officers and Directors
to protect the interest of customers
and shareholders
• Recognise that the reputation,
integrity and character of persons
and organisations with whom we do
business, such as service providers,
counterparties and significantly
influential clients may impact
stakeholders’ views of the Group
and is an important consideration
in establishing and maintaining
relationships with them
140
Aldermore Group PLC Annual Report and Accounts 2016
Financial
statements
Statement of Directors’ responsibilities
Independent auditor’s report
Consolidated financial statements
Notes to the consolidated financial statements
The Company financial statements
Notes to the Company financial statements
141
142
148
153
199
202
141
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Financial statements
Statement of Directors’ responsibilities in respect of the
Annual Report and Accounts and the financial statements
The Directors are responsible for preparing the Annual Report and Accounts and the Group and parent company financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each financial year.
Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and
applicable law and have elected to prepare the parent company financial statements on the same basis.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and
fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the
Group and parent company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with IFRSs as adopted by the EU; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent
company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent
company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and
enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for
taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a strategic report, Directors’ Report,
Remuneration Report and corporate governance statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the
Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of
the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation
taken as a whole; and
• the Strategic report includes a fair review of the development and performance of the business and the position of the issuer
and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and
uncertainties that they face.
We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group’s position and performance, business model and strategy.
Phillip Monks,
Chief Executive Officer
1 March 2017
142
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Independent auditor’s report to the members of
Aldermore Group PLC only
Opinions and conclusions arising from our audit
1. Our opinion on the financial statements is unmodified
We have audited the financial statements of Aldermore Group PLC for the year ended 31 December 2016 set out on pages 148 to
204. In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at
31 December 2016 and of the Group’s profit for the year then ended;
• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU);
• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as
applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards
the Group financial statements, Article 4 of the IAS Regulation.
2. Overview
The starting point for our audit was our experience as auditors of the Group since formation, including our assessment of the
control environment and capital and liquidity positions, and we combined that with a consideration of external and internal
developments and the risks they present to the Group’s business model and how these risks are mitigated. These were
considered in June 2016, were refreshed following the results of the EU referendum and the half year review, and have been
continually reassessed through our interim and final audits. That consideration includes conversations not only with management
and the Board, and ongoing knowledge gained through reading pertinent management information, but also reflected the views
of the Prudential Regulatory Authority, market analysts, specialists within the firm, and peer comparisons.
We considered that the impact of regulatory change, the greater competition within some of the Group’s markets impacting
redemptions, the data migrations due to core system upgrades and the challenge of meeting market expectations would
increase the audit risk in the area of income recognition.
We considered that the continued strong loan growth, the challenge of meeting market expectations, the regulatory and tax
challenges to the Buy-to-Let market and the impact of the result of the EU referendum could all increase the audit risk in the area
of loan impairment. We note, however, that the risk continues to be mitigated through a lower interest rate environment and a
relatively benign albeit uncertain credit outlook.
We considered that the audit risk in relation to goodwill has been substantially reduced, given that the Group have fully impaired
the goodwill relating to the Invoice Finance Cash Generating Unit at the half year, due to a deterioration in the value of financial
services companies following the result of the EU referendum.
Other factors we have considered in assessing the audit risks include the substantial project spend required in relation to
systems projects, the emergence of digital and technological disrupters, increased regulation including the need to prepare for
major financial reporting changes such as IFRS 9 and the Group’s capital raising in October 2016.
The final result of our risk consideration is shown in the table, and we have shown those which have increased or decreased in
risk. We are of the view that there are seven areas of significant risk, but two – income recognition and credit risk – represent the
greatest significance.
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Financial statements
Appendices
h
g
H
i
8
3
9
10
13
14
t
c
a
p
m
I
12
w
o
L
Low
Key
1
2
4
5
11
6
15
7
Likelihood
High
Risk of greater significance
Significant financial statement audit risks
Other Business and control risks
An increasing or decreasing risk compared
with last year
1 Income recognition
2 Credit risk
3 Management override of controls
4 Hedge accounting & Derivatives
5
Capitalisation
6 Goodwill
7
Share based payments
8
Going concern
9
General IT controls
10 Taxation
11 New products
12 Fraud and reputational risk
13 Securitisation
14 FSCS
15 Reconciliations
3. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect
on our audit were as follows:
Income Recognition: Effective Interest Rate asset of £34.8 million and offsetting liability of (£31.5 million) (2015:
£23.9 million and (£21.5 million) respectively)
Refer to page 65 (Audit Committee Report), page 156 (accounting policy), page 168 (Use of estimates and judgements) and Note 5
(financial disclosures)
The Risk – Measuring interest income on loans and advances to customers under the effective interest rate method (Note 2(a))
requires the Directors to apply judgements, with the most critical being the expected life assumption.
The Group has a number of portfolios (including organic and acquired loans) across a variety of sectors and products which
results in a large number of expected life assumptions. The sensitivity to a change in expected life can vary greatly over the
portfolios depending on the underlying borrower and the other parameters also included in the effective interest rate calculation
such as reversionary interest rates at the end of the fixed term, transaction costs and discounts or premium in place at inception.
The expected life assumptions utilise repayment profiles which represent how customers are expected to repay. The Group has
limited historical experience to support these profiles due to the relatively unseasoned nature of its lending. Consequently, the
Group makes its expected life assumptions based on its forecasting process which takes into account historical data but also,
for the forecast period, the Group’s expertise and experience in the sector. As such, any change in the expected life assumptions
depend on the Directors’ assessment of whether there is any emerging experience or market information that indicates a
different repayment profile and by how much. As the forecast profiles extend significantly into the future this creates a high level
of estimation uncertainty.
144
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Independent auditor’s report to the members of
Aldermore Group PLC only continued
This has the greatest impact on the acquired loan portfolios (current balance: £113.4 million) because these were acquired at
an upfront discount (unamortised balance: £7.0 million) and repayments are linked to the bank base rate with minimal incentive
for the borrowers to remortgage until there is a change in interest rate expectations. This means any change in the repayment
profile causes the discount received on purchase of the acquired portfolios to be adjusted and spread over the revised
expected life.
In addition, repayment profiles will be affected by future changes in the market – for example, market pricing and the ability of
borrowers to remortgage
The models used to measure revenue recognition rely on manual processes and controls which increase the risk associated with
model stability and the completeness and accuracy of input data.
Our response – our audit procedures included:
• We tested the design, implementation and operating effectiveness of key controls over the completeness and accuracy of
model inputs and the reconciliation of model outputs to the financial statements;
• We performed a reconciliation of data inputs used to measure interest income, including the loans split by product type, to
reports from the Group reporting system;
• We tested application controls, with the involvement of our IT specialists, over the completeness and accuracy of the source
loan input reports;
• We assessed the accuracy of the models by re-performing a sample of calculations and comparing the methodology used to
our interpretation of the requirements of the relevant accounting standard;
• We tested the stability and integrity of the models with the involvement of our IT specialists;
• We challenged the appropriateness of key assumptions, including the expected lives and repayment profiles, by comparing
these to the available historical customer trends within the Group, internal forecasts, and to our own expectations based
on our knowledge of the Group and experience of the industry in which it operates, including the ability of customers to
remortgage based on the current offerings in the market;
• For comparable lending and where available, we benchmarked the Group’s expected life assumptions to peer data and/or
market information; and
• We also considered the adequacy of the Group’s disclosures about the changes in estimate that occurred during the period and
the sensitivity disclosures across the key loan books.
Credit Risk: Impairment of loans and advances to customers £15.5 million (2015: £10.4 million)
Refer to page 64 (Audit Committee Report), page 160 (accounting policy), page 166 (Use of estimates and judgements) and Note 22
(financial disclosures)
The Risk – The impairment provision relating to the Group’s loan portfolios requires the Directors to make significant judgements
and assumptions over the recoverability of loan balances.
The Group performs an assessment of its loans for impairment as described in Note 2(g). The loan provision is most sensitive
to assumptions made when assessing the collective provision, in particular in respect of the probability of default and the
emergence period. This is because the Group has limited historical experience to support the assumptions made due to the
relatively unseasoned nature of its loan portfolios underwritten during a relatively benign economic period.
To assess the probability of default, the Group uses a credit bureau to provide it with probabilities of default based on all available
credit data for comparable borrowers. These probabilities are then adjusted (in almost all cases downwards) to reflect the
Group’s actual borrowers and the nature of its lending. The adjustments (‘scalars’) are based on the Group’s internal data, which
would not have been taken into account by the credit bureau. Management also apply overlays to the resultant modelled results
to take into account both model risk and emerging risks that may not be otherwise appropriately factored in by the credit bureau.
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Financial statements
Appendices
The emergence period is assessed based on loans for which the Group is able to reliably measure the time between the trigger
event occurring and the loans being identified as impaired. As the Group has limited historical data available, particularly in Asset
Finance, the estimated emergence period is adjusted upwards (in the form of an overlay) and is based on market insight.
The Group’s individual provisions can also require judgement, particularly in SME Commercial Mortgages and Asset Finance,
where the valuation of collateral can be difficult to establish due to its specialised nature; as well as the exit strategy adopted,
which can significantly impact the timing and value of the cash flows.
There continues to be regulatory focus on lending institutions factoring of forbearance arrangements adequately into their
provisioning models.
The impact of the EU referendum result has also been assessed in regards to the potential impairment of collateral prices,
uncertainties surrounding the House Price Index and potential increase in emergence periods as property markets have the
potential of a slow down due to increased volatility in the funding markets.
Our response - our audit procedures included:
• We tested the design, implementation and operating effectiveness of key controls over the capture, monitoring and reporting
of loans and advances to customers;
• We assessed the accuracy of the impairment model for collectively assessed loans, with assistance from our IT specialists,
by re-performing a sample of calculations produced by the impairment model and compared the methodology used to our
interpretation of the requirements of the relevant accounting standards;
• For loans assessed collectively for impairment we:
• assessed the competency, reputation and objectivity of the credit bureau that provides the probabilities of default;
• critically assessed the assumptions made in respect of the probabilities of default (inclusive of the scalars) and the
emergence periods against our understanding of the Group as well as our knowledge of the wider market;
• assessed the reasonableness of the methodology and accuracy of loss given default models;
• assessed the consistency of the probabilities of default (inclusive of the scalars) and the emergence periods with the limited
historic internal data available; assessed and challenged management overlays within the model for completeness and
accuracy; and
• assessed the accuracy of previous estimates of the collective provision.
• For a sample of exposures that were subject to an individual impairment assessment, and focusing on those with the most
significant potential impact on the financial statements, we specifically challenged the Group’s assumptions on the expected
future cash flows, including the value of realisable collateral, based on our own understanding of the industry and reviewing
latest correspondence on the loan and third party valuations or property indexes;
• Challenged management’s assessment of identified cases of concern with material exposure;
• We assessed the performing loan book by using data analytics techniques to identify loans with characteristics that could
indicate unidentified impairment;
• We benchmarked the Group’s key metrics, such as arrears trends and provision coverage, to externally available data, with
particular focus on similar lending; and
• We also considered compliance with the relevant accounting standards including the adequacy of the Group disclosures in
relation to impairment.
146
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Independent auditor’s report to the members of
Aldermore Group PLC only continued
4. Our application of materiality and an overview of the
scope of our audit
The materiality for the Group financial statements as a whole was
set at £5.0 million (2015: £3.0 million), determined with reference
to a benchmark of the Group profit before tax of £130.0 million
(2015: £95 million), of which it represents 3.9% (2015: 3.1%).
The benchmark percentage has been increased from 3.1% to 3.9%
due to an improved control environment, resulting from increased
stability in controls and processes over risks as a listed entity.
We report to the Audit Committee any corrected or
uncorrected identified misstatements exceeding £0.25 million
(2015: £0.15 million), in addition to other identified misstatements
that warranted reporting on qualitative grounds.
Profit before tax
£130m
Materiality
£5.0m
Whole financial
statements materiality:
3.8% of profit before tax
£5.0m
£0.25m
Misstatements
reported to the AC:
5% of materiality
The Group audit team performed the audit of the Group and its only material component as if it were a single aggregated set of
financial information. The audit was performed using the materiality level set out above and covered 100% of total Group revenue,
Group profit before tax, and total Group assets.
5. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
In our opinion:
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies
Act 2006;
• the information given in the strategic report and the Directors’ Report for the financial year is consistent with the financial
statements; and
• the information given in the corporate governance statement set out on page 31 with respect to internal control and risk
management systems in relation to financial reporting processes and about share capital structures (“the specified corporate
governance information”) is consistent with the financial statements.
Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the
strategic report, the Directors’ Report and the corporate governance statement:
• we have not identified material misstatements in the strategic report, the Directors’ Report, or the specified corporate
governance information;
•
•
in our opinion, the strategic report and the Directors’ Report have been prepared in accordance with the Companies Act 2006;
and
in our opinion, the corporate governance statement has been prepared in accordance with rules 7.2.2, 7.2.3, 7.2.5, 7.2.6 and 7.2.7
of the Disclosure Rules and Transparency Rules of the Financial Conduct Authority.
6. We have nothing to report on the disclosures of principal risks
Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to:
• the Directors’ statement of risk management on pages 31 to 35, internal control on page 31 and viability reporting on page 31
concerning the principal risks, their management, and, based on that, the Directors’ assessment and expectations of the Group’s
continuing in operation over the three years to 31 December 2019; or
• the disclosures in Note 1 of the financial statements concerning the use of the going concern basis of accounting.
147
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Financial statements
Appendices
7. We have nothing to report in respect of the matters on which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have
identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial
statements, a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
• we have identified material inconsistencies between the knowledge we acquired during our audit and the Directors’ statement
that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Group’s position and performance, business model and
strategy; or
• the Audit Committee Report does not appropriately address matters communicated by us to the Audit Committee.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
• the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit; and
• a corporate governance statement has not been prepared by the company.
Under the Listing Rules we are required to review:
• the Directors’ statements, set out on pages 103 and 31, in relation to going concern and longer-term viability; and
• the part of the corporate governance statement on page 40 relating to the company’s compliance with the eleven provisions of
the 2014 UK Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
Scope and responsibilities
As explained more fully in the Directors’ Responsibilities Statement set out on page 141, the Directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an
audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate.
This report is made solely to the company’s members as a body and is subject to important explanations and disclaimers
regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2014a, which are incorporated
into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have
undertaken and the basis of our opinions.
Michael Peck (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
1 March 2017
148
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Consolidated income statement
For the year ended 31 December 2016
Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net expense from derivatives and other financial instruments at fair
value through profit or loss
Gains on disposal of available for sale debt securities
Other operating income
Total operating income
Provisions
Costs in respect of initial public offering
Impairment of goodwill
Other administrative expenses
Administrative expenses
Depreciation and amortisation
Operating profit before impairment losses
Impairment losses on loans and advances to customers
Profit before taxation
Taxation
Profit after taxation - attributable to equity holders of the Group
Basic earnings per share (pence)
Diluted earnings per share (pence)
The notes and information on pages 153 to 198 form part of these financial statements.
The result for the year is derived entirely from continuing activities.
Year ended
31 December
2016
£m
358.2
(118.8)
239.4
30.0
(7.5)
Year ended
31 December
2015
£m
300.4
(101.5)
198.9
25.2
(7.0)
(4.4)
3.8
6.2
267.5
(0.8)
–
(4.1)
(113.1)
(118.0)
(5.3)
144.2
(15.5)
128.7
(35.2)
93.5
25.2p
25.2p
(2.1)
2.3
7.4
224.7
(2.3)
(4.1)
–
(107.9)
(114.3)
(5.3)
105.1
(10.4)
94.7
(16.4)
78.3
22.7p
22.6p
Note
5
6
7
8
9
10
33
11
11
15
22
17
18
18
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Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Consolidated statement of comprehensive income
For the year ended 31 December 2016
Profit after taxation
Other comprehensive income/(expense):
Items that may subsequently be transferred to the income statement:
Available for sale debt securities:
Fair value movements
Amounts transferred to the income statement
Taxation
Total other comprehensive income/(expense)
Total comprehensive income attributable to equity holders of the Group
The notes and information on pages 153 to 198 form part of these financial statements.
Year ended
31 December
2016
£m
93.5
Year ended
31 December
2015
£m
78.3
7.6
(3.8)
(1.0)
2.8
96.3
(0.9)
(2.1)
0.6
(2.4)
75.9
150
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Consolidated statement of financial position
As at 31 December 2016
Assets
Cash and balances at central banks
Loans and advances to banks
Debt securities
Derivatives held for risk management
Loans and advances to customers
Fair value adjustment for portfolio hedged risk
Other assets
Prepayments and accrued income
Deferred taxation
Property, plant and equipment
Intangible assets
Total assets
Liabilities
Amounts due to banks
Customers' accounts
Derivatives held for risk management
Fair value adjustment for portfolio hedged risk
Other liabilities
Accruals and deferred income
Current taxation
Provisions
Debt securities in issue
Subordinated notes
Total liabilities
Equity
Share capital
Share premium account
Contingent convertible securities
Capital redemption reserve
Available for sale reserve
Retained earnings
Total equity
Total liabilities and equity
The notes and information on pages 153 to 198 form part of these financial statements.
These financial statements were approved by the Board and were signed on its behalf by:
Phillip Monks
Director
1 March 2017
James Mack
Director
1 March 2017
Registered number: 06764335
31 December
2016
£m
31 December
2015
£m
Note
19
20
21
22
24
25
26
27
28
29
30
21
31
32
33
34
35
36
38
116.4
67.2
664.5
12.4
7,477.3
(3.5)
3.1
3.4
11.2
3.1
26.1
8,381.2
753.8
6,673.7
35.8
(1.2)
25.0
27.0
9.7
0.8
130.6
100.0
7,755.2
34.5
73.4
74.0
0.1
1.8
442.2
626.0
8,381.2
105.3
94.2
606.1
6.7
6,144.8
1.1
1.4
5.1
16.4
3.4
24.0
7,008.5
405.1
5,742.0
35.4
(0.8)
21.9
25.7
12.5
1.1
193.9
38.1
6,474.9
34.5
73.4
74.0
0.1
(1.0)
352.6
533.6
7,008.5
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Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Consolidated statement of cash flows
For the year ended 31 December 2016
Cash flows from operating activities
Profit before taxation
Adjustments for non-cash items and other adjustments included within
the income statement
Increase in operating assets
Increase in operating liabilities
Income tax paid
Net cash flows generated from operating activities
Cash flows from investing activities
Purchase of debt securities
Proceeds from sale and maturity of debt securities
Capital repayments of debt securities
Interest received on debt securities
Purchase of property, plant and equipment and intangible assets
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of shares
Issuance costs of Initial Public Offering
Proceeds from exercise of warrants
Proceeds from the issue of subordinated debt
Issuance costs of subordinated debt
Capital repayments on debt securities issued
Purchase of own shares by Employee Benefit Trust
Coupon paid on contingent convertible securities
Interest paid on debt securities
Interest paid on subordinated notes
Net cash used in financing activities
Note
39
39
39
Year ended
31 December
2016
£m
Year ended
31 December
2015
£m
128.7
94.7
11.3
(1,332.8)
1,284.5
(31.5)
60.2
9.1
(1,317.9)
1,368.1
(20.2)
133.8
(298.4)
161.7
87.5
12.9
(11.2)
(47.5)
–
–
–
60.0
(0.6)
(63.6)
(0.9)
(8.9)
(2.0)
(5.2)
(21.2)
(414.0)
279.0
32.9
10.5
(7.3)
(98.9)
75.0
(2.7)
5.6
–
–
(85.7)
–
(3.5)
(3.0)
(5.2)
(19.5)
Net (decrease)/increase in cash and cash equivalents
(8.5)
15.4
Cash and cash equivalents at start of the year
Movement during the year
Cash and cash equivalents at end of the year
39
39
149.4
(8.5)
140.9
134.0
15.4
149.4
152
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Consolidated statement of changes in equity
For the year ended 31 December 2016
Share
capital
£m
Share
premium
account
£m
Contingent
convertible
securities
£m
Capital
redemption
reserve
£m
Warrant
reserve
£m
Available
for sale
reserve
£m
Retained
earnings
£m
Note
Total
£m
Year ended 31 December 2016
As at 1 January
Total comprehensive income
Transactions with equity holders:
– Share-based payments,
including tax reflected directly
in retained earnings
– Own shares adjustment
– Coupon paid on contingent
convertible securities, net of tax
As at 31 December
34.5
–
73.4
–
74.0
–
37
36
–
–
–
–
–
34.5
–
73.4
Year ended 31 December 2015
As at 1 January
Total comprehensive income
Transactions with equity holders:
– Capital reorganisation prior to IPO
– Share issue proceeds from IPO
– Share issuance costs
– Share-based payments, including tax
reflected directly in retained earnings
– Coupon paid on contingent
convertible securities, net of tax
– Tax credit on AT1 issue costs
– Exercise of share warrants
36
37
36
23.7
–
6.3
3.9
–
–
–
–
0.6
–
–
–
71.1
(2.7)
–
–
–
5.0
0.1
–
–
–
–
0.1
–
–
0.1
–
–
–
–
–
–
–
–
–
–
–
–
(1.0)
2.8
352.6
93.5
533.6
96.3
–
–
3.6
(0.9)
3.6
(0.9)
–
1.8
(6.6)
442.2
(6.6)
626.0
2.2
–
1.4
(2.4)
277.9
78.3
378.9
75.9
–
–
–
–
–
–
(2.2)
–
–
–
–
–
–
–
(6.4)
–
–
–
75.0
(2.7)
3.4
3.4
(2.8)
–
2.2
(2.8)
0.3
5.6
–
–
–
74.0
73.7
–
–
–
–
–
–
0.3
–
As at 31 December
34.5
73.4
74.0
0.1
–
(1.0)
352.6
533.6
153
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Notes to the consolidated financial statements
1 Basis of preparation
a) Accounting basis
The consolidated financial statements of Aldermore Group PLC (the “Company”) and its subsidiary undertakings (together, the
“Group”) include its principal subsidiary, Aldermore Bank PLC (the “Bank”).
Both the Group consolidated financial statements and the Company financial statements have been prepared and approved by
the Directors in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting
Standards Board (“IASB”) and as adopted by the European Union (“EU”). For IAS 39: “Financial Instruments: Recognition and
Measurement” the exclusion regarding hedge accounting (the so called “carve out”) decreed by the EU on 19 November 2014 is
taken into account.
By including the Company financial statements here together with the Group consolidated financial statements, the Company is
taking advantage of the exemption in Section 408 of the Companies Act 2006 not to present its individual income statement and
related notes that form a part of these approved financial statements.
The principal activity of the Company is that of an investment holding company.
b) Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries which are
entities controlled by the Company (jointly referred to as the Group) made up to 31 December each year.
Control is achieved when the Company:
• has power over the investee;
•
is exposed, or has rights, to variable returns from its involvement with the investee; and
• has the ability to use its power to affect returns.
If facts and circumstances indicate that there are changes to one or more of the three elements of control listed above, the
Company reassesses whether or not it controls an investee.
Subsidiaries are consolidated from the date on which control is transferred to the Group and are deconsolidated from the date
that control ceases. Uniform accounting policies are applied consistently across the Group. Intercompany transactions and
balances are eliminated upon consolidation.
Securitisation vehicles
The Group has securitised certain loans and advances to customers by the transfer of the beneficial interest in such loans to
securitisation vehicles (see Note 22). The securitisation enabled the subsequent issue of debt securities by a securitisation
vehicle to investors who have the security of the underlying assets as collateral. The securitisation vehicles are fully consolidated
into the Group’s accounts as the Group has control as defined above.
The transfer of the beneficial interest in these loans to the securitisation vehicle are not treated as sales by the Group. The Group
continues to recognise these assets within its own Statement of Financial Position after the transfer as it continues to retain
substantially all the risks and rewards from the assets.
c) Going concern
The financial statements are prepared on a going concern basis as the Directors are satisfied that the Group has the resources
to continue in business for the foreseeable future (which has been taken as 12 months from the date of approval of the financial
statements). In making this assessment, the Directors have considered a wide range of information relating to present and
future conditions, including the current state of the statement of financial position, future projections of profitability, cash flows
and capital resources and the longer-term strategy of the business. The Group’s capital and liquidity plans, including stress
tests, have been reviewed by the Directors. The Group’s forecasts and projections, including a range of stressed scenarios,
show that it will be able to operate with adequate levels of both liquidity and capital for the foreseeable future. After making due
enquiries, the Directors believe that the Group has sufficient resources to continue its activities for the foreseeable future and to
continue its planned expansion. Additionally, the Group has sufficient capital to enable it to continue to meet its regulatory capital
requirements as set out by the Prudential Regulation Authority (“PRA”).
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Notes to the consolidated financial statements
continued
1. Basis of preparation continued
d) Basis of measurement
The financial statements have been prepared on the historical cost basis except for the following material items in the
financial statements:
• derivative financial instruments are measured at fair value through profit or loss;
• certain debt securities which are designated at fair value through profit or loss;
• available for sale debt securities are valued at fair value through other comprehensive income; and
• fair value adjustments for portfolios of financial assets and financial liabilities designated as hedged items in qualifying fair
value hedge relationships, which reflect changes in fair value attributable to the risk being hedged.
e) Use of estimates and judgements
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ
from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimates are revised and in any future periods affected.
Information about areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most
significant effect on the amounts recognised in the financial statements are included in Note 3.
f) Presentation of risk and capital disclosures
The disclosures required under IFRS 7: ”Financial instruments: disclosures” and IAS 1: "Presentation of financial statements"
have been included within the audited sections of the Risk Report on page 106. Where information is marked as audited,
it is incorporated into these financial statements by this cross reference and it is covered by the Independent Auditor’s report
on page 142.
g) Future accounting developments
All standards or amendments to existing standards which have been endorsed by the EU and which are available for early
adoption for annual periods commencing on or after 1 January 2016 have been adopted by the Group apart from IFRS 9: “Financial
Instruments” and IFRS 15: “Revenue from contracts with customers”.
There are also a number of standards, amendments and interpretations which have been issued by the IASB but which have not
yet been endorsed by the EU. The most significant of these is IFRS 16: “Leases” the planned replacement for IAS 17: “Leases”.
IFRS 9: “Financial Instruments” is the comprehensive standard to replace IAS 39 “Financial Instruments: Recognition and
Measurement” and was endorsed by the EU on 22 November 2016. IFRS 9 is effective for annual periods beginning on or after
1 January 2018 and is required to be applied retrospectively. However, prior periods need not be restated, instead an adjustment
may be reflected in opening retained earnings at the start of the period when IFRS 9 is first adopted.
The standard includes requirements for classification and measurement of financial assets and liabilities, hedge accounting and
the impairment of financial assets.
Classification and measurement
The classification of financial assets will be based on the objectives of the Group’s business model and the contractual cash
flow characteristics of the instruments. Financial assets will then be classified as held at amortised cost, at fair value through
other comprehensive income (“FVOCI”), or at fair value through profit or loss (“FVTPL”). In most instances, the measurement
outcomes will be similar to those under IAS 39 and therefore, any changes from the accounting treatment currently followed by
the Group under IAS 39 are not expected to be significant. The classification of financial liabilities is essentially unchanged from
the treatment under IAS 39.
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Impairment of financial assets
Impairment provisions in all financial assets are recognised based on either 12 month expected losses or lifetime expected losses.
This will result in the acceleration of the recognition of impairment provisions and will lead to more volatile impairment charges in
the income statement. However, whilst IFRS9 represents a significant change compared to IAS 39, the quantum of impairment
losses recorded against any one loan over the life of the loan will not change as IFRS 9 alters only the timing of recognition of
impairment losses.
IFRS 9 introduces a number of changes to approach as compared to the current methodology under IAS 39. The main
changes are:
• Expected credit losses (“ECL”) are based on an assessment of the probability of default, loss given default and exposure at
default discounted to give a net present value. The estimation of ECL should be unbiased and probability weighted to reflect
a range of possible outcomes taking into account all reasonable and supportable information including forward-looking
economic assumptions.
• On initial recognition, and for financial assets where there has not been a significant increase in credit risk since the date of
origination, IFRS 9 provisions will be made to reflect ECL arising from expected credit default events within the next 12 months.
• A key requirement of IFRS 9, compared with the existing impairment approach under IAS 39, relates to assets where there
has been a significant increase in credit risk since the date of origination. Provisions will be made for those assets expected to
default at any point over their lifetime, reflecting the asset’s full expected loss.
• For assets where there is evidence of credit impairment, provisions will be made under IFRS 9 for lifetime expected credit
losses, taking account of forward looking economic assumptions and a range of possible outcomes. Under IAS 39, provisions
are currently based on the asset’s carrying value and the present value of the estimated future cash flows.
It is not anticipated that changes in the approach to impairment will have a significant impact on the Group’s provisions in respect
of specifically impaired loans, as the current provisions on such loans are based on estimates of lifetime expected losses arising
based on expected future cash flows, but excluding any future credit losses that have not yet been incurred.
In respect of other loans, against which collective provisions are raised, our current approach, as explained in Note 3(a), is to
estimate probabilities of default for the next 12 months. This approach is similar to that which will be required under IFRS 9 except,
that in order to measure incurred losses, as required by IAS 39, management currently adjust the calculated 12 month expected
loss, which is based on management’s current best estimates, for an emergence period based on the nature of the underlying
asset enabling management to reflect only the impairment considered to have been incurred at the reporting date. Under IFRS 9,
the estimated probabilities of default will need to be probability weighted, based on a range of possible economic scenarios.
While the Group’s current approach to calculating collective impairment provisions (as described above) has similarities to the
approach required under IFRS 9, it should be noted that IFRS 9 is a complex accounting standard and the Group’s detailed credit
modelling approach remains under development.
Hedge accounting
The hedge accounting requirements of IFRS 9 are designed to create a stronger link with financial risk management. At present,
IFRS 9 does not address the portfolio hedging of interest rate risk currently undertaken by the Group. Pending development
of the IASB’s proposals for dynamic risk management (macro hedge accounting), to be considered in a separate accounting
standard, IFRS 9 allows the option to continue to apply the existing hedge accounting requirements of IAS 39. The Group plans
to exercise the accounting policy choice to continue IAS 39 hedge accounting (including the so called “carve out” as described in
Note 2(j)).
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Financial statements
Notes to the consolidated financial statements
continued
1. Basis of preparation continued
Implementation
The Group has established an IFRS 9 programme. The programme is jointly sponsored by the Chief Financial Officer and Chief
Risk Officer. The programme is cross-functional with representation from (but not limited to) Finance, Risk and IT. Progress is
regularly reported to the IFRS 9 Steering Group and the Audit Committee.
The key features of the programme include defining the IFRS 9 methodology and accounting policies, identifying data,
reconciliation and system requirements, and the development and establishment of appropriate and compliant operating models
within an appropriate governance framework.
Extensive work is being carried out with regards to technical analysis, the development of the credit models and the design of the
required changes to systems, data, business processes, reporting and governance relating to impairment provisions. During 2017,
work will include building and testing of credit models and validating outputs, development of management information,
implementation of business process changes and a parallel run phase.
The financial impact of IFRS 9 will be quantified once models and systems are further developed. Impacts are expected to be
disclosed no later than in the financial statements for the year ending 31 December 2017.
The IASB has also issued IFRS 15: “Revenue from contracts with customers”. IFRS 15 provides a principles-based approach
to recognise revenue and the concept of recognising revenue for obligations as they are satisfied. The impact for the Group is
currently being assessed but may impact our treatment of fees and commissions and other operating income, the majority of
which relates to the Invoice Finance business. The Standard was endorsed on 29 October 2016 and will be effective for annual
reporting periods beginning on or after 1 January 2018 with retrospective application permitted.
On 13 January 2016, the IASB issued IFRS 16: “Leases” as a replacement for IAS 17: “Leases”. The Standard will be effective
for annual reporting periods beginning on or after 1 January 2019, with early application being permitted for companies that
also apply IFRS 15. The impact for the Group is currently being assessed. A significant change will be the inclusion of a “right of
use asset” within the statement of financial position in respect of the benefit the Group receives where it leases assets under
operating leases, together with a financial liability in respect of the obligation to make operating lease payments. Within the
income statement, an operating charge will be reflected in respect of the use of the asset together with interest expense in
relation to the financing, replacing the current operating lease charges included in administrative expenses.
2. Significant accounting policies
(a) Interest income and expense
Interest income and expense are recognised in the income statement on an effective interest rate (“EIR”) basis. The EIR is the
rate that, at the inception of the financial asset or liability, exactly discounts expected future cash payments and receipts over
the expected life of the instrument back to the initial carrying amount. When calculating the EIR, the Group estimates cash flows
considering all contractual terms of the instrument (for example, prepayment options) but does not consider the assets’ future
credit losses.
At each reporting date, management makes an assessment of the expected remaining life of its financial assets, including any
acquired loan portfolios and where there is a change in those assessments, the remaining amount of any unamortised discount or
premiums is adjusted so that the interest income continues to be recognised prospectively on the amortised cost of the financial
asset at the original EIR. The adjustment is recognised within interest income in the income statement for the current period.
The calculation of the EIR includes all transaction costs and fees paid or received that are an integral part of the interest rate,
together with the discounts or premium arising on the acquisition of loan portfolios. Transaction costs include incremental costs
that are directly attributable to the acquisition or issue of a financial asset or liability.
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Interest income and expense presented in the income statement include:
•
•
•
Interest on financial assets and financial liabilities measured at amortised cost calculated on an EIR basis;
Interest on available for sale debt securities calculated on an EIR basis;
Interest income recognised on finance leases where the Group acts as the lessor (see Note 2(o));
• The effective portion of fair value changes in qualifying hedging derivatives designated in fair value hedges of interest rate risk
together with changes in the fair value of the hedged item attributable to the hedged risk; and
•
Interest income on financial assets designated at fair value so as to avoid an accounting mismatch with derivatives held as an
“economic” hedge and the matching interest component of the derivative.
Interest income includes amounts the Group charges its Invoice Finance clients as interest each day on the balance of their
outstanding loans. This interest income is recognised in the income statement on an EIR basis.
(b) Fee and commissions and other operating income
i. Fee and commission income
Fee and commission income includes fees relating to services provided to customers which do not meet the criteria for inclusion
within interest income.
Within the Invoice Finance segment of the Group, customers are charged a factoring fee for managing their sales ledgers. This fee
is recognised within fee and commissions income over the period in which the ledger management service is provided.
Other fee and commission income includes fees charged for mortgage services, arrears, and insurance commission receivable.
Fee income is recognised as the related services are performed.
Arrangement fees and other fees relating to loans and advances which do meet the criteria for inclusion within interest income
are included as part of the EIR.
ii. Fee and commission expense
Fee and commission expense predominantly consists of introducer commissions, legal and valuation fees and company search
fees. Where these fee and commissions are incremental costs that are directly attributable to the issue of a financial instrument,
they are included in interest income as part of the EIR calculation. Where they are not incremental costs that are directly
attributable, they are recognised within fee and commission expense as the services are received.
iii. Other operating income
Other operating income predominantly arises from the provision of invoice finance services and includes disbursements and
collect out income. This income is recognised within other operating income when the service is provided.
(c) Net income from derivatives and other financial instruments at fair value through profit or loss
Net income from derivatives and other financial instruments at fair value through profit or loss relates to non-trading derivatives
held for risk management purposes that do not form part of a qualifying hedging arrangement and financial assets designated
at fair value through profit or loss. It includes all realised and unrealised fair value changes, interest and foreign exchange
differences with the exception of interest income on financial assets designated at fair value and the matching interest
component of the hedging derivatives. The assets designated at fair value are treated in this manner so as to avoid an accounting
mismatch with derivatives held as an “economic” hedge.
(d) Financial instruments—recognition and derecognition
i. Recognition
The Group initially recognises loans and advances, amounts due to banks, customer accounts and subordinated notes issued on
the date that they are originated.
Regular way purchases and sales of debt securities and derivatives are recognised on the trade date at which the Group commits
to purchase or sell the asset. All other financial assets and liabilities are initially recognised on the trade date at which the Group
becomes a party to the contractual provisions of the instrument.
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Notes to the consolidated financial statements
continued
2. Significant accounting policies continued
ii. Derecognition
Financial assets are derecognised when there are qualifying transfers and:
• the rights to receive cash flows from the assets have ceased; or
• the Group has transferred substantially all the risks and rewards of ownership of the assets.
When a financial asset is derecognised in its entirety, the difference between the carrying amount, the sum of the consideration
received (including any new asset obtained less any new liability assumed) and any cumulative gain or loss that had been
recognised in other comprehensive income is recognised in the income statement.
When available for sale financial assets are derecognised, the cumulative gain or loss, including that previously recognised in
reserves, is recognised in the income statement.
A financial liability is derecognised when the obligation is discharged, cancelled or expires. Any difference between the carrying
amount of a financial liability derecognised and the consideration paid is recognised through the income statement.
iii. Funding for Lending Scheme (“FLS”)
Loans and advances over which the Group transfers its rights to the collateral thereon to the Bank of England under the FLS
are not derecognised from the statement of financial position as the Group retains substantially all the risks and rewards of
ownership including all cash flows arising from the loans and advances and exposure to credit risk. The treasury bills that the
Group borrows against the transferred assets are not recognised in the statement of financial position but, where they are sold to
third parties by the Group under agreements to repurchase, the cash received is recognised as an asset within the statement of
financial position together with the corresponding obligation to return it which is recognised as a liability at amortised cost within
‘Amounts due to banks’. Interest is accrued over the life of the agreement on an EIR basis.
iv. Term Funding Scheme (“TFS”)
Loans and advances over which the Group transfers its rights to the collateral thereon to the Bank of England under the TFS
are not derecognised from the statement of financial position as the Group retains substantially all the risks and rewards of
ownership including all cash flows arising from the loans and advances and exposure to credit risk. The cash received against
the transferred assets is recognised as an asset within the statement of financial position, together with the corresponding
obligation to return it, which is recognised as a liability at amortised cost within ‘Amounts due to banks’. Interest is accrued over
the life of the agreement on an EIR basis.
(e) Financial assets
i. Overview
The Group classifies its financial assets (excluding derivatives) as either:
•
loans and receivables;
• available for sale; or
• financial assets designated at fair value through profit or loss.
ii. Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market and that the Group does not intend to sell immediately or in the near term. These are initially measured at fair value plus
transaction costs that are directly attributable to the financial asset. Subsequently, these are measured at amortised cost
using the EIR method. The amortised cost is the amount advanced less principal repayments, plus or minus the cumulative
amortisation using the EIR method of any difference between the amount advanced and the maturity amount, less impairment
provisions for incurred losses. Loans and receivables mainly comprise loans and advances to banks and customers.
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iii. Available for sale
Available for sale financial assets are debt securities that are not held for trading and are intended to be held for an indefinite
period of time. These are initially measured at fair value plus transaction costs that are directly attributable to the financial
asset. Subsequently, they are measured at fair value based on current quoted bid prices in active markets for identical assets
that the Group can access at the reporting date. Where there is no active market, or the debt securities are unlisted, the fair
values are based on valuation techniques including discounted cash flow analysis, with reference to relevant market rates,
and other commonly used valuation techniques. Interest income is recognised in the income statement using the EIR method.
Impairment losses are recognised in the income statement. Other fair value changes are recognised in other comprehensive
income and presented in the available for sale reserve in equity. On disposal, the gain or loss accumulated in equity is reclassified
to the income statement.
iv. Financial assets designated at fair value through profit or loss
Financial assets designated at fair value through profit or loss are assets which have been designated as such to eliminate or
significantly reduce a measurement and recognition inconsistency or where management specifically manages an asset or
liability on that basis. These assets are measured at fair value based on current quoted bid prices in active markets for identical
assets that the Group can access at the reporting date. Gains and losses arising from changes in the fair value are brought into the
income statement within ‘Net income/(expense) from derivatives and other financial instruments at fair value through profit or
loss’ as they arise. The Group disposed of all of its financial assets designated at fair value through profit or loss during 2015.
(f) Financial liabilities
i. Overview
Financial liabilities are contractual obligations to deliver cash or another financial asset. Financial liabilities are recognised initially
at fair value, net of directly attributable transaction costs for financial liabilities other than derivatives. Financial liabilities, other
than derivatives, are subsequently measured at amortised cost.
ii. Financial liabilities at amortised cost
Financial liabilities at amortised cost are recognised initially at fair value, which equates to issue proceeds net of transaction costs
incurred. They are subsequently stated at amortised cost. Any difference between proceeds, net of transaction costs, and the
redemption value is recognised in the income statement over the period of the borrowings using the EIR method.
iii. Subordinated notes
Subordinated notes issued by the Group are assessed as to whether they should be treated as equity or financial liabilities.
Where there is a contractual obligation to deliver cash or other financial assets, they are treated as a financial liability and
measured at amortised cost using the EIR method after taking account of any discount or premium on the issue and directly
attributable costs that are an integral part of the EIR. The amount of any discount or premium is amortised over the period to the
expected call date of the instrument.
All subordinated notes issued by the Group are classified as financial liabilities.
(g) Impairment—financial assets
i. Assessment
At each reporting date, the Group assesses its financial assets not at fair value through profit or loss as to whether there is
objective evidence that the assets are impaired. Objective evidence that financial assets are impaired may include:
• significant financial difficulty of the borrower;
• a breach of contract such as default or delinquency in interest or principal repayments;
• the granting of a concession for economic or legal reasons relating to the borrower’s financial condition that the Group would
not otherwise grant;
•
indications that a borrower or issuer will enter bankruptcy or other financial reorganisation;
• the disappearance of an active market for a debt security because of the issuer’s financial difficulties; or
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Financial statements
Notes to the consolidated financial statements
continued
2. Significant accounting policies continued
• national or local economic conditions that correlate with defaults within groups of financial assets e.g. increases in
unemployment rates or decreases in property prices relating to the collateral held.
The Group considers evidence for the impairment of loans and advances at both the individual asset and collective level. In certain
cases, where a borrower is experiencing significant financial distress, the Group may use forbearance measures to assist them
and mitigate against default. Any forbearance measures agreed are assessed on a case by case basis.
ii. Scope
The Group considers evidence of impairment of financial assets at both an individual asset and collective level.
Individual impairment
All individually significant financial assets are assessed for individual impairment using a range of risk criteria. Those found not to
be individually impaired are then collectively assessed for any impairment that has been incurred but not yet identified.
Assets may be considered to be individually impaired where they meet one or more of the following criteria:
• a default position equivalent to three or more missed monthly repayments (or a quarterly payment which is more than 30 days
past due);
•
litigation proceedings have commenced;
• act of insolvency, e.g. bankruptcy, administration or liquidation, or appointment of an LPA Receiver;
•
invoice finance accounts are classified as in default when there is cessation of additional advances and/or when the facility is in
collect out; or
•
•where there is evidence of fraud.
Collective impairment
All financial assets that are not found to be individually impaired are collectively assessed for impairment by grouping together
financial assets with similar risk characteristics.
iii. Measurement
Impairment provisions on financial assets individually identified as impaired are calculated as the difference between the carrying
amount and the present value of estimated future cash flows discounted at the asset’s original EIR.
When assessing collective impairment, the Group estimates incurred losses using a statistical model which multiplies the
probability of default (“PD”) for each class of customer (using external credit rating information) by the loss given default
(“LGD”) multiplied by the estimated exposure at default (“EaD”) to arrive at the projected expected loss. An emergence period is
subsequently applied to the projected expected loss to determine the estimated level of incurred losses at each reporting date.
In addition, an adjustment is made to discount the imputed cash flows from the model at the assets’ original EIR to arrive at the
recorded collective provisions. The model’s results are adjusted for management’s judgement as to whether current economic
and credit conditions are such that actual losses are likely to differ from those suggested by historical modelling.
In assessing the level of collective impairment provisions, the Group uses statistical modelling of historical trends of probability
of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current
economic and credit conditions are such that actual losses are likely to be greater or less than suggested by historical trends.
Default rates, loss rates and the expected timing of future recoveries are benchmarked against actual outcomes to ensure they
remain appropriate.
Impairment losses are recognised immediately in the income statement and a corresponding reduction in the value of the
financial asset is recognised through the use of an allowance account.
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A write-off is made when all or part of a financial asset is deemed uncollectable or forgiven after all collection procedures have
been completed and the amount of the loss has been determined. Write-offs are charged against amounts previously reflected
in the allowance account or directly to the income statement. Any additional amounts recovered after a financial asset has been
previously written-off are offset against the write-off charge in the income statement. Allowances for impairment losses are
released at the point when it is deemed that, following a subsequent event, the risk has reduced such that an allowance is no
longer required.
Interest on impaired financial assets is recognised at the same EIR as applied at the initial recognition of the financial asset but
applied to the book value of the financial asset net of any individual impairment allowance that has been raised.
iv. Impairment of financial assets classified as available for sale
Impairment losses on available for sale debt securities are recognised by reclassifying the losses accumulated in the available for
sale reserve in equity to the income statement. The cumulative loss that is reclassified from equity to the income statement is
the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value less any
impairment loss recognised previously in the income statement. Changes in impairment provisions attributable to the effective
interest method are reflected as a component of interest income.
If, in a subsequent period, the fair value of an impaired available for sale debt security increases and the increase can be related
objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed.
(h) Financial instruments—fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date in the principal market, or in its absence, the most advantageous market to which the
Group has access at that date. The fair value of a liability reflects its non-performance risk.
Where applicable, the Group measures the fair value of an instrument using the quoted price in an active market for that
instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and
volume to provide pricing on an ongoing basis.
Where there is no quoted price in an active market, the Group uses valuation techniques that maximise the use of relevant
observable inputs and minimises the use of unobservable inputs. The chosen valuation techniques incorporate factors that
market participants would take into account in pricing a transaction.
The best evidence of fair value of a financial instrument at initial recognition is normally the transaction price. If an asset
measured at fair value has a bid and an offer price, the Group measures assets and long positions at the bid price and liabilities at
the offer price.
(i) Derivative financial instruments
The Group enters into derivative transactions only for the purpose of reducing exposures to fluctuations in interest rates,
exchange rates and market indices; they are not used for proprietary trading purposes.
Derivatives are carried at fair value with movements in fair values recorded in the income statement. Derivative financial
instruments are principally valued by discounted cash flow models using yield curves that are based on observable market data
or are based on valuations obtained from counterparties. As the Group’s derivatives are covered by master netting agreements
with the Group’s counterparties, with any net exposures then being further covered by the payment or receipt of periodic cash
margins, the Group has used a risk-free discount rate for the determination of their fair values.
All derivatives are classified as assets where their fair value is positive and liabilities where their fair value is negative.
Where there is the current legal ability and intention to settle net, then the derivative is classified as a net asset or liability, as
appropriate. Where cash collateral is received, to mitigate the risk inherent in amounts due to the Group, it is included as a liability
within ‘Amounts due to banks’. Where cash collateral is given, to mitigate the risk inherent in amounts due from the Group, it is
included as an asset in ‘Loans and advances to banks’.
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Financial statements
Notes to the consolidated financial statements
continued
2. Significant accounting policies continued
(j) Hedge accounting
The Group designates certain derivatives held for risk management as hedging instruments in qualifying hedging relationships.
On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and hedged
items, including the risk management objective, the strategy in undertaking the hedge and the method that will be used to assess
the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as
well as on an ongoing basis as to whether the hedging instruments are expected to be highly effective in offsetting the changes
in the fair value of the respective hedged items during the period for which the hedge is designated.
i. Fair value hedge accounting for portfolio hedges of interest rate risk
The Group applies fair value hedge accounting for portfolio hedges of interest rate risk. As part of its risk management process,
the Group identifies portfolios whose interest rate risk it wishes to hedge. The portfolios comprise either only assets or only
liabilities. The Group analyses each portfolio into repricing time periods based on expected repricing dates, by scheduling cash
flows into the periods in which they are expected to occur. Using this analysis, the Group designates as the hedged item an
amount of the assets or liabilities from each portfolio that it wishes to hedge.
The Group measures monthly the change in fair value of the portfolio relating to the interest rate risk that is being hedged.
Provided that the hedge has been highly effective, the Group recognises the change in fair value of each hedged item in the
income statement with the cumulative movement in their value being shown on the statement of financial position as a separate
item, ‘Fair value adjustment for portfolio hedged risk’, either within assets or liabilities as appropriate. This amount is amortised
on a straight line basis to the income statement over the remaining average life of the original hedge relationship from the month
in which it is first recognised.
The Group measures the fair value of each hedging instrument monthly. The value is included in derivative financial instruments
in either assets or liabilities as appropriate, with the change in value recorded in the income statement. Any hedge ineffectiveness
is recognised in the income statement as the difference between the change in fair value of the hedged item and the change in fair
value of the hedging instrument.
(k) Embedded derivatives
A derivative may be embedded in another instrument, known as the host contract. Where the economic characteristics and risks
of an embedded derivative are not closely related to those of the host contract (and the host contract is not carried at fair value
through profit or loss), the embedded derivative is separated from the host and held on the statement of financial position with
‘Derivatives held for risk management’ at fair value. Movements in fair value are recognised in the income statement, whilst the
host contract is accounted for according to the relevant accounting policy for that particular asset or liability.
Embedded derivatives contained within equity instruments are considered separately. The embedded derivative on the
contingent convertible securities is not separated as the Group has an accounting policy not to separate a feature that has
already been considered in determining that the entire issue is a non-derivative equity instrument.
(l) Property, plant and equipment
Items of property, plant and equipment are stated at cost, or deemed cost on transition to IFRSs, less accumulated depreciation
and any provision for impairment. Cost includes expenditure that is directly attributable to the acquisition of the asset or costs
incurred in bringing the asset in to use. Depreciation is provided on all property, plant and equipment at rates calculated to write
off the cost of each asset to realisable values on a straight line basis over its expected useful life, as follows:
• Fixtures, fittings and equipment
five years
• Computer hardware
one to five years
Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.
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(m) Intangible assets
i. Goodwill
Goodwill is stated at deemed cost upon transition to IFRSs less any accumulated impairment losses. Goodwill is not amortised but
is tested for impairment on an annual basis. Where impairment is required, the amount is recognised in the income statement and
cannot be subsequently reversed.
ii. Computer systems
Software acquired by the Group is measured at cost less accumulated amortisation and any accumulated impairment losses.
Expenditure on internally developed software is recognised as an asset when the Group is able to demonstrate its intention
and ability to complete the development and use the software in a manner that will generate future economic benefits and can
reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs
directly attributable to developing the software and are amortised over its useful life. Internally developed software is stated at
capitalised cost less accumulated amortisation and impairment.
Software is amortised on a straight line basis in the income statement over its useful life from the date that it is available for use.
The estimated useful life of software is one to five years.
(n) Impairment of non financial assets
The carrying amounts of the Group’s non-financial assets, i.e. goodwill and other intangible assets, are reviewed at least annually
to determine whether there is any indication of impairment. If any such indication exists, then the assets recoverable amount
is estimated.
i. Goodwill
Goodwill is tested for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to operating
segments. An impairment loss is recognised if the carrying amount of a segment is less than its recoverable amount.
The recoverable amount of a segment is the greater of its value in use and its fair value less costs to sell. Value in use is calculated
from forecasts by management of post-tax profits for the subsequent five years and a residual value discounted at a risk
adjusted interest rate appropriate to the cash generating unit. Fair value is determined through review of precedent transactions
for comparable businesses.
Where impairment is required, the amount is recognised in the income statement and cannot be subsequently reversed.
ii. Other intangible assets
If impairment is indicated, the asset’s recoverable amount, being the greater of value in use and fair value less costs to sell, is
estimated. Value in use is calculated by discounting the future cash flows from continuing use of the asset. If the carrying value
of the asset is less than the greater of the value in use and the fair value less costs to sell, an impairment loss is recognised in the
income statement.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that
would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
(o) Assets leased to customers
Leases of assets to customers are finance leases as defined by IAS 17. When assets are leased to customers under finance leases,
the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the
present value of the receivable is recognised as unearned finance income. Lease income is recognised within interest income in
the income statement over the term of the lease using the net investment method (before tax) which reflects a constant periodic
rate of return ignoring tax cash flows.
(p) Assets leased from third parties
Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases.
Payments made under operating leases, net of any incentives received from the lessor, are charged to the income statement,
within administrative expenses or staff costs (in the case of company cars), on a straight line basis over the period of the lease.
The Group holds no assets under finance leases.
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Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
2. Significant accounting policies continued
(q) Provisions
A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be
estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation.
The Group has an obligation to contribute to the Financial Services Compensation Scheme (“FSCS”) to enable the FSCS to meet
compensation claims from, in particular, retail depositors of failed banks. A provision is recognised to the extent it can be reliably
estimated and from the point when the Group has an obligation in accordance with IAS 37. The amount provided is based on
information received from the FSCS, forecast future interest rates and the Group’s historic share of industry protected deposits.
The FSCS provision is recognised at the commencement of the scheme year in line with IFRIC 21.
(r) Foreign currencies
Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets
and liabilities held at the statement of financial position date are translated into sterling using the exchange rates ruling at the
statement of financial position date. Exchange differences are charged or credited to the income statement.
(s) Taxation
Taxation comprises current and deferred tax, and is recognised in the income statement except to the extent that it relates to
items recognised directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on taxable income or loss for the period, using tax rates enacted or
substantively enacted at the statement of financial position date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for:
• temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and
that affects neither accounting nor taxable profit or loss;
• temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the
foreseeable future; and
• taxable temporary differences arising on the initial recognition of goodwill.
The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects at the
end of the reporting period to recover or settle the carrying amount of its assets and liabilities. Deferred tax is measured using
tax rates enacted or substantively enacted at the statement of financial position date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which
the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no
longer probable that the related tax benefit will be realised.
(t) Pension costs
The cost of providing retirement benefits is charged to the income statement at the amount of the defined contributions payable
for each year. Differences between contributions payable and those actually paid are shown as accruals or prepayments.
The Group has no defined benefit pension scheme.
(u) Shareholders’ funds
i. Capital instruments
The Company classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of
the contractual terms of the instruments. Where an instrument contains no obligation on the Company to deliver cash or other
financial assets, or to exchange financial assets or financial liabilities with another party under conditions that are potentially
unfavourable to the Group, or where the instrument will or may be settled in the Company’s own equity instruments but includes
no obligation to deliver a variable number of the Company’s own equity instruments, then it is treated as an equity instrument.
Accordingly, the Company’s share capital and contingent convertible securities are presented as components of equity.
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Any dividends, interest or other distributions on capital instruments are also recognised in equity. Any related tax is accounted
for in accordance with IAS 12.
ii. Share premium
Share premium is the amount by which the fair value of the consideration received exceeds the nominal value of the
shares issued.
(v) Capital raising costs
Costs directly incremental to the raising of share capital are netted against the share premium account. Costs directly
incremental to the raising of convertible securities included in equity are offset against the proceeds from the issue within equity.
(w) Cash and cash equivalents
Cash and cash equivalents comprises cash balances and balances with a maturity of three months or less from the acquisition
date which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
(x) Investment in group undertakings
Investments in group undertakings are initially recognised at cost. At each reporting date, an assessment is made as to whether
there is any indication that the investment may be impaired such that the recoverable amount is lower than the carrying value.
(y) Warrants
The Company’s subsidiary, Aldermore Bank PLC, previously issued subordinated notes with attached warrants. The warrants
gave the holders the right to subscribe for shares in the Company. These warrants were exercised during 2015 resulting in an
increase in share capital and share premium. On exercise, the warrant reserve was re-classified to retained earnings.
(z) Share-based payment transactions
Employees (including Senior Executives) of the Group may receive remuneration in the form of equity settled share-based
payments to incentivise and reward future strong, long-term business performance and growth.
The grant date fair value is recognised as an employee expense with a corresponding increase in equity over the period that
the employees become unconditionally entitled to the awards. The grant date fair value is determined using valuation models
which take into account the terms and conditions attached to the awards. Inputs into valuation models may include the risk-free
interest rate, the expected volatility of the Company’s share price and other factors related to performance conditions attached
to the awards.
The amount recognised as an expense is adjusted to reflect differences between expected and actual outcomes, such that the
amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market
performance conditions at the vesting date. For share-based payment awards with market performance conditions or non-
vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no
true-up for differences between expected and actual outcomes.
Within the Parent Company standalone financial statements, the share-based payment transactions are recognised as an
investment in Group undertakings with an associated credit to the share-based payment reserve.
Employee Benefit Trust (“EBT”)
An EBT purchased shares in the Company for the sole purpose of satisfying awards under employee share plans. These shares
continue to be held within the acquiring EBT, which is consolidated in these financial statements as the EBT is deemed to be
controlled by the Group.
Where an Employee Benefit Trust (‘EBT’) purchases the Company’s share capital, the consideration paid is deducted from
shareholders’ equity as own shares until they are cancelled. Where such shares are subsequently sold or reissued, any
consideration received is included in shareholders’ equity.
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Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
3. Use of estimates and judgements
The preparation of financial information requires management to make judgements, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ
from these estimates.
Estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period
in which the estimate is revised and in any future periods affected. The judgements and assumptions that are considered to be
the most important to the portrayal of the Group’s financial condition are those relating to loan impairment provisions, EIR, and
Invoice Finance goodwill.
(a) Loan impairment provisions
Loan portfolios across all segments of the Group are reviewed on at least a monthly basis to assess for impairment.
In determining whether an impairment provision should be recorded, judgements are made as to whether there is objective
evidence that a financial asset or portfolio of financial assets is impaired as a result of loss events that occurred after recognition
of the asset and by the reporting date. The calculation of impairment loss is management’s best estimate of losses incurred in the
portfolio at the statement of financial position date and reflects expected future cash flows based on both the likelihood of a loan
or advance being written-off and the estimated loss on such a write-off.
At 31 December 2016, gross loans and advances to customers totalled £7,504.7 million (31 December 2015: £6,165.5 million)
against which impairment allowances of £27.4 million (31 December 2015: £20.7 million) had been made (see Note 22). The Group’s
accounting policy for loan impairment provisions on financial assets classified as loans and receivables is described in Note
2(g). Impairment allowances are made up of two components, those determined individually against specific assets and
those determined collectively. Of the impairment allowance of £27.4 million at 31 December 2016, £14.3 million (31 December
2015: £10.2 million) relates to individual provisions and £13.1 million (31 December 2015: £10.5 million) relates to collective
provisions. The section below provides details of the critical elements of judgement within the loan impairment calculations.
Less significant judgements are not disclosed.
i. Individual
Individual impairment allowances are established against the Group’s individual financial assets that are deemed by management
to be impaired. The determination of individual impairment allowances requires the exercise of considerable judgement by
management involving matters such as local economic conditions, the financial status of the customer and the realisable value of
the security held. The actual amount of the future cash flows and their timing may differ significantly from the assumptions made
for the purposes of determining the impairment allowances and consequently these allowances can be subject to variation as
time progresses and the circumstances of the customer become clearer.
ii. Collective
The collective impairment allowance is also subject to estimation uncertainty and, in particular, is sensitive to changes in
economic and credit conditions, including house prices, unemployment rates, interest rates, borrowers’ behaviour and consumer
bankruptcy trends. All of these factors can influence the key assumptions detailed below. However, it is inherently difficult to
estimate how changes in one or more of these factors might impact the collective impairment allowance.
The key assumptions used in the collective impairment model are: probability of default (“PD”), the loss given default (“LGD”)
and the loss emergence period (“EP”) (the time between a trigger event occurring and the loans being identified as individually
impaired). An additional element is included within the collective provision to reflect fraud losses that are incurred as at the
reporting date but are yet to be individually identified.
The Group uses two types of underlying models to calculate the LGD, depending on the availability of default data. For SME
Commercial Mortgages, Buy-to-Let and Residential Mortgages the models use a range of key assumptions to derive an
expected LGD. The key assumptions are based on management expertise and are validated against available data. For Asset
Finance and Invoice Finance, the models are empirical models which use historical loss data to determine the risk drivers behind
the loss.
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This allows the portfolios to be segmented into homogeneous buckets to derive an LGD. Further details in respect of assumptions
and details of the sensitivity of the estimate to changes in significant assumptions are as follows:
Probability of default:
The PD is based on external individual customer credit rating information updated for each reporting date. This external credit
rating information gives a PD in the next 12 months where ‘default’ is defined as loans which are 2 months or more in arrears
(“2 MIA”) and incorporates credit information from a broad range of financial services products for each customer.
Management make an estimate so as to adjust the external data to reflect both the individual nature of the Group’s lending and
the Group’s policy of classifying loans which are 3 months or more in arrears (“3 MIA”) as ‘impaired’. This adjustment is achieved
by using two management assumptions: firstly a ‘conversion rate’ that reflects how many of the loans which fall into 2 MIA will
also fall into 3 MIA; and secondly a scalar that adjusts the external PDs to reflect the individual nature of the Group’s lending.
• A 10 per cent. absolute increase in the ‘conversion rate’ assumed by management between 2 MIA and 3 MIA (e.g. a PD increasing
from 50 per cent to 60 per cent), when the loans are considered to be individually impaired would increase the impairment
allowance by £0.5 million.
• A 10 per cent. relative reduction in the scaling factors applied to external data in order to arise at PDs appropriate to the
individual nature of lending being undertaken would increase the impairment allowance by £0.7 million.
Loss given default:
The model calculates the LGD from the point of repossession of the asset. Not all cases that are 3 MIA will reach repossession.
Management therefore adjust the model by applying an assumption of the percentage of accounts 3 MIA that will
reach repossession.
• A 10 per cent. absolute reduction in this assumption would decrease the impairment allowance by £0.5 million.
The LGD is also sensitive to the application of the House Price Index (“HPI”) and Forced Sale Discount (“FSD”) which affect the
underlying value of the collateral which is expected to be received.
• A 10 per cent. relative reduction in the HPI would increase the overall impairment allowance by £2.6 million.
• A 5 per cent. absolute increase in the FSD would increase the overall impairment provision by £2.0 million.
The above assumptions are important factors when calculating the LGD to be applied for the Mortgage business.
For the Asset Finance and Invoice Finance model, the assumption with most judgment is the absolute LGD value calculated.
• A 10 per cent. relative increase in the LGD’s applied in Asset Finance and Invoice Finance would increase the overall impairment
allowance by £0.9 million.
Emergence period:
The Group’s collective models estimate the expected losses for the next 12 months, these are then scaled back using the
emergence period to reflect the level of incurred loss as at the reporting date. The emergence period is the time taken from
the trigger event (such as a job loss) to the Group identifying the loan as impaired. The emergence period varies by segment
and requires management to make judgements because of the limited data available. During the year, management increased
the emergence period applied to the Mortgage businesses by three months in order to apply a degree of caution to reflect the
potential impact of political and economic uncertainty resulting from the EU referendum. The impact of this change was to
increase the collective provisions by £1.6 million.
• A further three month increase in emergence periods for Asset Finance and Invoice Finance would increase the overall
impairment allowance by £4.5 million.
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Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
3. Use of estimates and judgements continued
(b) Effective interest rate (“EIR”)
IAS 39 requires interest earned from mortgages to be measured under the EIR method. Management must therefore use
judgement to estimate the expected life of each type of instrument and hence the expected related cash flows. The accuracy of
the EIR would therefore be affected by unexpected market movements resulting in altered customer behaviour and inaccuracies
in the models used compared to actual outcomes.
A critical estimate in determining EIR is the expected life to maturity of the Group’s SME Commercial, Buy-to-Let and Residential
Mortgage portfolios, as a change in these estimates will impact the period over which the directly attributable costs and fees and
any discount received on the acquisition of mortgage portfolios are recognised as part of the EIR.
Included within the overall Mortgages book, are a small number of portfolios which were acquired by the Group and, as at
31 December 2016, represent approximately 2 per cent, 2 per cent and 3 per cent of SME Commercial, Buy-to-Let and Residential
Mortgages net loans respectively. These portfolios were acquired at a discount which is being recognised under the EIR method.
As disclosed below, these portfolios, although representing a small proportion of overall lending, are sensitive to a change in the
expected repayment profiles which would impact the periods over which the discount is to be unwound.
As at 31 December 2016 and 31 December 2015 , a reassessment was made of the estimates used in respect of the expected lives
of the SME Commercial, Buy-to-Let and Residential Mortgage portfolios and also of those for the Asset Finance portfolios. As a
consequence, an overall adjustment of £0.5 million (2015: £0.4 million) was recorded to increase the value of the loan portfolios
and the interest income recognised in the current period, so that interest can continue to be recognised at the original effective
interest rate over the remaining life of the relevant lending portfolios.
The adjustment made at 31 December is analysed as follows:
Asset Finance - organic lending
SME Commercial - acquired portfolios
SME Commercial - organic lending
Buy-to-Let - acquired portfolios
Buy-to-Let - organic lending
Residential - acquired portfolios
Residential - organic lending
Impact on 2016
interest income
£m
(1.8)
–
0.2
(1.1)
0.1
(0.4)
3.5
0.5
Impact on 2015
interest income
£m
(1.6)
(0.7)
(0.9)
(0.6)
0.1
(1.1)
5.2
0.4
A change in the estimated expected lives, after taking account of the above adjustment, to extend the expected lives of
the SME Commercial, Buy-to-Let and Residential Mortgage portfolios by six months would have the effect of reducing the
cumulative profit before tax recognised as at 31 December 2016 by £1.4 million (31 December 2015: £1.5 million). Included within
this sensitivity of £1.4 million, is a £3.1 million cumulative reduction in profit relating to acquired portfolios (31 December
2015: £2.8 million) due to a change in the unwind of the discount which is offset by a £1.7 million cumulative increase in profit
relating to the organic portfolios (31 December 2015: £1.3 million).
A 0.5 per cent. increase in the rate of early redemptions, expressed as a percentage of the outstanding balance in respect of the
Asset Finance portfolio would have the impact of reducing cumulative profit before tax recognised as at 31 December 2016 by
£0.5 million (31 December 2015: £0.3 million).
(c) Share-based payments
The fair value of the share awards is calculated using statistical models. The inputs to these models require management
judgement to estimate the probability and timings of events taking place in the future. The significant inputs used in the models
include the exercise price, share price, expected volatility, expected life and the risk free rate. The share-based payment
recognised can be materially affected by these assumptions. Further information on the key assumptions can be found in Note 37.
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(d) Invoice Finance goodwill
IAS 36 requires an assessment of goodwill balances for impairment on at least an annual basis. An impairment charge should be
recognised where the recoverable amount from the segment is less than the carrying value of the goodwill.
During 2016, as a result of the general fall in market values of financial services businesses that occurred following the EU
referendum, there was an indication of impairment and the Invoice Finance goodwill was fully impaired. An impairment charge of
£4.1 million has been recognised in the income statement.
4. Segmental information
The Group has five reportable operating segments as described below which are based on the Group’s five lending segments
plus Central Functions. Each segment offers groups of similar products and services and are managed separately based on the
Group’s internal reporting structure.
SME Commercial Mortgages, Buy-to-Let and Residential Mortgages are operated under a single management team and
supported by a single IT platform. Shared administrative expenses in the mortgage business have been apportioned across these
segments on the basis of business activity levels in each segment.
However, the characteristics of the three segments are sufficiently different, are reported separately to the Board and therefore,
they represent separate operating segments in accordance with IFRS 8.
For each of the reportable segments, the Board, which is the Group’s Chief Operating Decision Maker, reviews internal
management reports on a monthly basis. The following summary describes the operations in each of the Group’s
reportable segments:
• Asset Finance - Lease and hire purchase financing for SMEs, focusing on sectors with strong returns and liquid secondary
asset markets;
•
Invoice Finance - provides UK SMEs with working capital solutions through invoice discounting, factoring and asset
based lending;
• SME Commercial Mortgages - Property finance needs of professional, commercial property investors, and owner-occupier
SMEs. Targets prime and specialist prime segments with loan sizes generally below £5 million;
• Buy-to-Let - Offers a wide range of standard and specialist buy-to-let mortgages for residential units, multi-unit freehold or
houses with multiple-occupation (“HMO”) to both individuals and companies; and
• Residential Mortgages - Prime residential mortgages targeting underserved segments of creditworthy borrowers that
provide attractive and sustainable margins.
Central Functions includes the reconciling items between the total of the five reportable operating segments and the
consolidated income statement. As well as common costs, Central Functions includes the Group’s Treasury and Savings
functions which are responsible for raising finance on behalf of the operating segments. The costs of raising finance are all
recharged by Central Functions to the operating segments, apart from those costs relating to the subordinated notes and the net
expense/income from derivatives held at fair value shown in Note 6.
Common costs are incurred on behalf of the operating segments and typically represent savings administration, back
office and support function costs such as Finance, Risk and Human Resources. The costs are not directly attributable to the
operating segments.
Information regarding the results of each reportable segment and their reconciliation to the total results of the Group is shown
below. Performance is measured based on the segmental result as included in the internal management reports.
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Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
4. Segmental information continued
Segmental information for the year ended 31 December 2016
Interest income – external customers
Interest expense – external customers
Interest (expense)/income – internal
Net fees and other income – external
customers
Total operating income
Administrative expenses including
depreciation and amortisation
Impairment losses on loans and advances
to customers
Segmental result
Tax
Profit after tax
Asset Finance
£m
87.3
–
(27.9)
4.2
63.6
Invoice
Finance
£m
7.0
–
(2.2)
14.2
19.0
SME
Commercial
Mortgages
£m
58.4
–
(13.0)
Buy-to-Let
£m
135.6
–
(45.2)
Residential
Mortgages
£m
75.7
–
(26.1)
Central
Functions1
£m
(5.8)
(118.8)
114.4
1.3
46.7
6.8
97.2
1.9
51.5
(0.3)
(10.5)
Total
£m
358.2
(118.8)
–
28.1
267.5
(12.9)
(10.3)
(3.1)
(10.7)
(4.5)
(81.8)
(123.3)
(5.6)
45.1
(1.7)
7.0
(2.9)
40.7
(3.4)
83.1
(1.9)
45.1
–
(92.3)
(15.5)
128.7
(35.2)
93.5
Assets
Liabilities
Net assets/(liabilities)
1,573.4
–
1,573.4
154.1
–
154.1
929.9
–
929.9
3,326.0
–
3,326.0
1,493.9
–
1,493.9
903.9
(7,755.2)
(6,851.3)
8,381.2
(7,755.2)
626.0
1 Central Functions administrative expenses of £81.8 million includes an impairment charge of £4.1 million in relation to Invoice Finance goodwill.
Segmental information for the year ended 31 December 2015
Interest income – external customers
Interest expense – external customers
Interest (expense)/income – internal
Net fees and other income – external
customers
Total operating income
Administrative expenses including
depreciation and amortisation
Impairment losses on loans and advances
to customers
Segmental result
Tax
Profit after tax
Asset Finance
£m
75.7
–
(23.9)
4.3
56.1
Invoice
Finance
£m
7.6
–
(2.3)
15.2
20.5
SME
Commercial
Mortgages
£m
44.8
–
(10.6)
Buy-to-Let
£m
111.0
–
(37.7)
Residential
Mortgages
£m
66.4
–
(22.6)
Central
Functions1
£m
(5.1)
(101.5)
97.1
0.8
35.0
3.0
76.3
2.2
46.0
0.3
(9.2)
Total
£m
300.4
(101.5)
–
25.8
224.7
(12.0)
(14.5)
(4.8)
(9.0)
(5.1)
(74.2)
(119.6)
(4.8)
39.3
(1.5)
4.5
(2.0)
28.2
(1.3)
66.0
(0.8)
40.1
–
(83.4)
(10.4)
94.7
(16.4)
78.3
Assets
Liabilities
Net assets/(liabilities)
1,346.7
–
1,346.7
160.8
–
160.8
829.2
–
829.2
2,417.9
–
2,417.9
1,390.2
–
1,390.2
863.7
(6,474.9)
(5,611.2)
7,008.5
(6,474.9)
533.6
1 Central Functions administrative expenses of £74.2 million includes costs in relation to the Group’s Initial Public Offering of £4.1 million.
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5. Interest income
On financial assets not at fair value through profit or loss:
On loans and advances to customers
On loans and advances to banks
On debt securities
On financial assets at fair value through profit or loss:
Net interest expense on financial instruments hedging assets
Net interest income on debt securities designated at fair value
2016
£m
364.0
0.7
12.4
377.1
(18.9)
–
358.2
2015
£m
305.4
0.7
11.1
317.2
(18.5)
1.7
300.4
Included within interest income on loans and advances to customers for the year ended 31 December 2016 is a total of £3.4 million
(31 December 2015: £3.2 million) relating to impaired financial advances.
Included within net interest expense on financial instruments hedging assets are fair value losses of £0.3 million (31 December
2015: gains of £2.7 million) on derivatives held in qualifying fair value hedging arrangements, together with losses of £4.4 million
(31 December 2015: losses of £6.1 million) representing changes in the fair value of the hedged item attributable to the hedged
interest rate risk on loans and advances to customers.
6. Interest expense
On financial liabilities not at fair value through profit or loss:
On customers’ accounts
On amounts due to banks
On debt securities in issue
On subordinated notes
On financial liabilities at fair value through profit or loss:
Net interest income on financial instruments hedging liabilities
Other
2016
£m
109.8
2.6
2.3
7.7
122.4
(5.6)
2.0
118.8
2015
£m
91.6
2.8
3.5
6.5
104.4
(4.5)
1.6
101.5
Included within net interest income on financial instruments hedging liabilities are fair value gains of £2.1 million (31 December
2015: losses of £1.8 million) on derivatives held in qualifying fair value hedging arrangements, together with gains of £0.4 million
(31 December 2015: gains of £2.3 million) representing changes in the fair value of the hedged item attributable to the hedged
interest rate risk on customers’ accounts.
7. Fee and commission income
Invoice Finance fees
Valuation fees
Documentation fees
Other fees
2016
£m
11.9
7.0
2.8
8.3
30.0
2015
£m
12.6
4.1
3.2
5.3
25.2
Note 2(b) Fee and commissions and other operating income provide further details of items included within Other fees.
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Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
8. Fee and commission expense
Introducer commissions
Legal and valuation fees
Company searches and other fees
Credit protection and insurance charges
Other
9. Net expense from derivatives and other financial instruments at fair
value through profit or loss
Net (losses)/gains on derivatives
Net (losses) on assets designated at fair value through profit or loss
Net gains/(losses) on available for sale assets held in fair value hedges
10. Other operating income
Disbursements, collect out and other invoice finance income
Other
11. Administrative expenses
Staff costs
Legal and professional and other services
Information technology costs
Office costs
Provisions
Other
Impairment of goodwill
Note
12
33
2016
£m
1.5
3.4
1.3
1.3
–
7.5
2016
£m
(6.5)
–
2.1
(4.4)
2016
£m
6.2
–
6.2
2016
£m
64.3
21.8
10.9
5.0
0.8
11.1
4.1
118.0
2015
£m
1.7
2.7
1.6
0.8
0.2
7.0
2015
£m
5.0
(0.2)
(6.9)
(2.1)
2015
£m
6.4
1.0
7.4
2015
£m
62.1
25.8
7.3
4.9
2.3
11.9
–
114.3
Included in other administrative expenses are costs relating to temporary staff of £4.4 million (31 December 2015: £5.0 million),
travel and subsistence of £3.0 million (31 December 2015: £3.2 million) and staff recruitment of £1.5 million (31 December
2015: £1.6 million).
Administrative expenses of £114.3 million for the year ended 31 December 2015 included £4.1 million of one-off costs associated
with the Group’s initial public offering.
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Appendices
12. Staff costs
Wages and salaries
Social security costs
Other pension costs
Share-based payments
2016
£m
52.7
6.4
1.7
3.5
64.3
2015
£m
50.8
6.3
1.6
3.4
62.1
The analysis above includes staff costs in relation to Executive and Non-Executive Directors.
The average number of persons employed by the Group during the year, including Non-Executive Directors, was 887
(31 December 2015: 845).
13. Remuneration of Directors
Directors’ emoluments
Payments in respect of personal pension plans
Contributions to money purchase scheme
Loan forgiveness
Long term incentive schemes
2016
£'000
2,713.0
53.7
5.3
–
–
2,772.0
2015
£'000
2,639.4
26.5
20.9
139.6
7,784.3
10,610.7
The above disclosure is prepared in accordance with Schedule 5 of the Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008.
Loans to Directors
At 31 December 2016, there is one loan to a Director for the value of £40,000 under normal terms of business (31 December 2015:
one loan; for the value of £50,000).
Long-term incentive schemes
The Directors held certain shares pre-IPO which converted into ordinary shares on IPO. The reported gains, at IPO, have been
calculated as the market value of shares held at IPO (£1.92) less the actual cost on any shares bought pre-IPO regardless of
whether such shares were acquired as an investment or an incentive. The aggregate gains as at 31 December 2015 on such
shares held by Directors on IPO were £7.8 million.
The Deferred Share Plan is an equity settled share-based payment and represents the portion of the Annual Incentive Plan that is
deferred to align the interests of senior employees and the Executive team with shareholders. The shares granted as part of the
Deferred Share Plan are detailed in Note 37.
14. Pension and other post-retirement benefit commitments
The Group operates two defined contribution pension schemes. The assets of the schemes are held separately from those
of the Group in independently administered funds. Pension contributions of £1.7 million (31 December 2015: £1.6 million) were
charged to the income statement during the year in respect of these schemes. The Group made payments amounting to £5,300
(31 December 2015: £26,500) in aggregate in respect of Directors’ individual personal pension plans during the year. There were
outstanding contributions of £0.3 million at the year end (31 December 2015: £0.3 million).
174
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
15. Depreciation and amortisation
Depreciation
Amortisation of intangible assets
16. Profit on ordinary activities before taxation
The profit on ordinary activities is after charging:
Note
27
28
Operating lease rentals (including service charges)
– land and buildings
– plant and equipment
The remuneration of the Group’s external auditors, KPMG LLP, and their associates is as follows:
Fees payable to the Group's auditor for the audit of the annual accounts (excluding VAT)
Fees payable to the Group's auditor for the audit of the accounts of subsidiaries (excluding VAT)
Audit fees
Fees payable to the Group's auditor and its associates for other services (excluding VAT):
Audit related assurance services 1
Other taxation advisory services
Corporate finance services
Other assurance services 2
All other services
Non-audit fees
2016
£m
1.2
4.1
5.3
2016
£m
2.6
0.3
0.1
0.6
0.7
0.2
–
–
0.1
–
0.3
1.0
2015
£m
1.1
4.2
5.3
2015
£m
2.3
0.5
0.1
0.4
0.5
0.1
0.2
0.3
0.1
0.1
0.8
1.3
1 Audit related assurance services for the year ended 31 December 2016 comprise services provided in relation to interim profit verifications during the year and work in
relation to the Group’s issuance of subordinated loan notes.
2 Other assurance services for the year ended 31 December 2016 relate to services provided in relation to the audit of the Group’s participation in the FLS scheme.
17. Taxation
a) Tax charge
Current tax on profits for the year
(Over)/under provision in previous periods
Total current tax
Deferred tax
Under/(over) provision in previous periods
Effect of new tax surcharge
Total deferred tax charge/(credit)
Total tax charge
2016
£m
33.1
(2.2)
30.9
1.9
2.4
–
4.3
35.2
2015
£m
25.1
1.1
26.2
(5.2)
(0.9)
(3.7)
(9.8)
16.4
For 2016, the effect of the new banking surcharge is included in the current year tax charge as detailed in Note 26. A tax charge
of £1.0 million in respect of the fair value movements in available for sale debt securities has been shown in other comprehensive
income during the year ended 31 December 2016 (2015: £0.6 million credit). A tax credit of £2.3 million (31 December
2015: £1.0 million) has been reflected directly in equity in respect of tax relief for contingent convertible securities coupon costs.
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Appendices
b) Factors affecting tax charge for the year
The tax assessed for the year is different to that resulting from applying the standard rate of corporation tax in the UK of 20%
(31 December 2015: 20.25%). The differences are explained below:
Profit before tax
Tax at 20% (2015: 20.25%) thereon
Effects of:
Expenses not deductible for tax purposes
Under provision in previous period
Deferred tax rate adjustment
Effect of new tax surcharge
2016
£m
128.7
25.7
1.0
0.2
0.4
7.9
35.2
2015
£m
94.7
19.2
0.7
0.2
(3.7)
–
16.4
18. Earnings per share
Basic earnings per share is calculated by dividing the net profit attributable to ordinary shareholders of the Group by the weighted
average number of ordinary shares in issue during the year.
Profit after taxation - attributable to equity holders of the Group (£ million)
Coupon paid on contingent convertible securities, net of tax relief (£ million)
Profit attributable to ordinary shareholders of the Group (£ million)
Weighted average number of ordinary shares in issue (million)
Basic earnings per share (p)
2016
93.5
(6.6)
86.9
344.5
25.2p
2015
78.3
(2.8)
75.5
332.4
22.7p
The ordinary shares in issue used in the denominator in the calculation of basic earnings per share are the ordinary shares of the
Company since the share reorganisation that occurred on the Company’s admission to the LSE on 13 March 2015. Further details
of the share reorganisation are provided in Note 36.
The calculation of diluted earnings per share has been based on the same profit attributable to ordinary shareholders of the
Group as for basic earnings and the weighted average number of ordinary shares outstanding after the potential dilutive effect
of share-based payment awards to Directors and employees. The share warrants, giving rise to dilution for the first half of 2015,
were exercised on 9 September 2015 and new shares were issued and listed on the London Stock Exchange.
Weighted average number of ordinary shares in issue (million) (basic)
Effect of share warrants prior to their exercise
Effect of share-based payment awards
Weighted average number of ordinary shares in issue (million) (diluted)
Diluted earnings per share (p)
2016
344.5
–
0.7
345.2
25.2p
2015
332.4
2.2
0.1
334.7
22.6p
176
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
19. Loans and advances to banks
Included in cash and cash equivalents: balances with less than three months to maturity at inception
Cash collateral on derivatives placed with banks
Other loans and advances to banks
2016
£m
34.1
22.2
10.9
67.2
There were no individual or collective provisions for impairment held against loans and advances to banks. £10.9 million is
recoverable more than 12 months after the reporting date (31 December 2015: £10.9 million) and relates to cash held by the
Group’s securitisation vehicle, Oak No.1 PLC.
20. Debt securities
Available for sale debt securities:
UK Government gilts and treasury bills
Supranational bonds
Corporate bonds
Asset-backed securities
Covered bonds
2016
£m
32.3
359.8
29.7
70.4
172.3
664.5
2015
£m
51.6
31.7
10.9
94.2
2015
£m
94.4
267.9
29.9
74.9
139.0
606.1
At 31 December 2016, £534.5 million (31 December 2015: £566.6 million) of debt securities are expected to be recovered more
than 12 months after the reporting date. There were no impairment losses in respect of available for sale debt securities.
The Group disposed of its holding of debt securities designated at fair value through profit or loss during 2015.
21. Derivatives held for risk management
Amounts included in the statement of financial position are analysed as follows:
Instrument type
Interest rate (not in hedging relationships)
Interest rate (fair value hedges)
Equity
Foreign exchange
2016
2015
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
0.4
11.8
0.2
–
12.4
1.5
34.1
0.2
–
35.8
0.8
5.9
–
–
6.7
1.4
33.9
–
0.1
35.4
All derivatives are held either as fair value hedges qualifying for hedge accounting or are held for the purpose of managing risk
exposures arising on the Group’s other financial instruments.
a) Fair value hedges of interest rate risk
The Group uses interest rate swaps within qualifying hedge accounting relationships to manage its exposure to changes
in market interest rates which would impact the fair values of certain fixed rate lending and savings products and debt
securities held.
Further details regarding the Group’s approach to hedge accounting, including a description of the Group’s exposure to volatility,
are provided in the risk report on page 106.
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Financial statements
Appendices
b) Other derivatives held for risk management
The Group uses other derivatives, not designated in qualifying hedge accounting relationships, to manage its exposure to
the following:
•
•
interest rate risk on certain debt securities held which are designated at fair value through profit or loss;
interest rate basis risk on certain mortgage loans;
• equity market risk on equity-linked products offered to depositors; and
• foreign exchange risk on currency loans provided to Invoice Finance customers.
22. Loans and advances to customers
Gross loans and advances
less: allowance for impairment losses
Amounts include:
Expected to be recovered more than 12 months after the reporting date
2016
£m
7,504.7
(27.4)
7,477.3
2015
£m
6,165.5
(20.7)
6,144.8
6,466.4
5,345.5
At 31 December 2016, loans and advances to customers of £1,066.2 million (31 December 2015: £1,445.5 million) were pre-
positioned with the Bank of England and HM Treasury Funding for Lending Scheme. These loans and advances were available
for use as collateral with the Scheme, against which £650.0 million of UK Treasury Bills had been drawn as at the reporting date
(31 December 2015: £750.0 million).
At 31 December 2016, loans and advances to customers of £578.7 million (31 December 2015: £nil) were pre-positioned with the
Bank of England and HM Treasury Term Funding Scheme. These loans and advances were available for use as collateral with the
Scheme. Details of amounts drawn on the facility are shown Note 29.
At 31 December 2016, loans and advances to customers include £148.7 million (31 December 2015: £206.5 million) which have
been used in secured funding arrangements, resulting in the beneficial interest in these loans being transferred to Oak No. 1 PLC
which is a securitisation vehicle consolidated into these financial statements. The carrying value of these loans on 10 April 2014,
when the beneficial interest was transferred, was £362.3 million. These loans secured £333.3 million of funding for the Group.
All the assets pledged are retained within the statement of financial position as the Group retains substantially all the risks and
rewards relating to the loans.
Allowance for impairment losses
Year ended 31 December 2016
Balance as at 1 January
Impairment loss for the year:
Charge to the income statement
Unwind of discounting
Write-offs net of recoveries
Balance as at 31 December
Individual
£m
Collective
£m
Total
£m
10.2
10.5
20.7
10.8
(1.3)
(5.4)
14.3
4.7
(2.1)
–
13.1
15.5
(3.4)
(5.4)
27.4
178
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
22. Loans and advances to customers continued
Allowance for impairment losses
Year ended 31 December 2015
Balance as at 1 January
Impairment loss for the year
Charge to the income statement
Unwind of discounting
Write-offs net of recoveries
Balance as at 31 December
Individual
£m
Collective
£m
Total
£m
14.0
6.8
(1.6)
(9.0)
10.2
8.5
22.5
3.6
(1.6)
–
10.5
10.4
(3.2)
(9.0)
20.7
Finance lease receivables
Loans and advances to customers include the following finance leases where the Group is the lessor:
Gross investment in finance leases, receivable:
Less than one year
Between one and five years
More than five years
Unearned finance income
Net investment in finance leases
Net investment in finance leases, receivable:
Less than one year
Between one and five years
More than five years
2016
£m
20151
£m
521.5
960.3
20.3
1,502.1
(162.4)
1,339.7
448.9
871.2
19.6
1,339.7
465.4
840.1
20.1
1,325.6
(152.7)
1,172.9
397.3
755.8
19.8
1,172.9
1 The prior year comparatives have been restated to reflect a more granular analysis of the finance lease portfolio.
The Group enters into finance lease and hire purchase arrangements with customers in a wide range of sectors including plant
and machinery, cars and commercial vehicles. The accumulated allowance for uncollectable minimum lease payments receivable
is £4.5 million (31 December 2015: £3.9 million).
Due to the nature of the business undertaken, there are no material unguaranteed residual values for any of the finance leases at
31 December 2016.
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Financial statements
Appendices
23. Investment in subsidiaries
The Company has an interest in the total ordinary share capital of the following subsidiaries (except the securitisation vehicles),
all of which are registered in England and Wales and operate in the UK. All subsidiary undertakings are included in these
consolidated financial statements.
Subsidiary undertakings
(direct interest)
Aldermore Bank PLC
Principal activity
Banking and related
services
Shareholding per cent
100
Country of
incorporation
UK
Dormant subsidiary undertakings (indirect interest)
Aldermore Invoice Finance (Holdings) Limited
Aldermore Invoice Finance Limited
Aldermore Invoice Finance (Oxford) Limited
AR Audit Services Limited
Securitisation vehicles
Oak No.1 Mortgage Holdings Limited
Oak No.1 PLC
Dormant
Dormant
Dormant
Dormant
Holding company for
securitisation vehicle
Securitisation vehicle
100
100
100
100
*
*
UK
UK
UK
UK
UK
UK
* The share capital of the securitisation vehicles is not owned by the Group but the vehicles are included in the consolidated financial statements as they are controlled by
the Group.
24. Other assets
Amounts recoverable within one year
25. Prepayments and accrued income
Amounts recoverable within 12 months:
Prepayments
Accrued income
2016
£m
3.1
2016
£m
2.6
0.8
3.4
2015
£m
1.4
2015
£m
3.2
1.9
5.1
180
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
26. Deferred tax asset
A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence,
it can be regarded as probable that there will be suitable future taxable profits against which the unwinding of the asset can
be offset.
Analysis of recognised deferred tax asset:
Year ended 31 December 2016
Capital allowances less than depreciation
Available for sale debt securities transition adjustment
(Gains)/Losses on available for sale debt securities
recognised through other comprehensive income
Other temporary differences
Share-based payment timing differences
Year ended 31 December 2015
Capital allowances less than depreciation
Available for sale debt securities transition adjustment
Other temporary differences
Share-based payment timing differences
Balance at start
of the year
£m
Recognised
in income
statement
£m
Recognised
in other
comprehensive
income
£m
Recognised in
equity
£m
Balance at
end of the year
£m
16.5
(0.2)
–
(0.4)
0.5
16.4
6.5
(0.3)
0.4
–
6.6
(5.2)
–
–
(0.4)
1.3
(4.3)
10.0
0.1
(0.8)
0.5
9.8
–
–
(1.0)
–
–
(1.0)
–
–
–
–
–
–
–
–
–
0.1
0.1
–
–
–
–
–
11.3
(0.2)
(1.0)
(0.8)
1.9
11.2
16.5
(0.2)
(0.4)
0.5
16.4
Reductions have been enacted in the mainstream UK corporation tax rate from 21% to 20% (effective from 1 April 2015).
Further planned reductions have been enacted to reduce the mainstream rate to 19% with effect from 1 April 2017 and to 17% with
effect from 1 April 2020. The 8% corporation tax banking surcharge applicable to banking companies is effective from 1 January
2016. The surcharge is levied on the profits chargeable to corporation tax of banking companies which exceed a £25 million
threshold. The net result of these changes will be to increase the Group’s effective tax rate for years commencing from
1 January 2016.
Deferred tax has been provided at the revised substantively enacted rates that will apply when the deferred tax assets are
realised or the deferred tax liabilities settled in line with the prior year.
There were no unrecognised deferred tax balances at 31 December 2016 (31 December 2015: £nil).
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Strategic report
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Financial statements
Appendices
27. Property, plant and equipment
Cost
1 January 2016
Additions
31 December 2016
1 January 2015
Additions
31 December 2015
Depreciation
1 January 2016
Charge for the year
31 December 2016
1 January 2015
Charge for the year
31 December 2015
Net book value
31 December 2016
31 December 2015
Fixtures, fittings
and equipment
£m
Computer
hardware
£m
3.9
0.7
4.6
3.2
0.7
3.9
2.3
0.5
2.8
1.8
0.5
2.3
1.8
1.6
4.4
0.2
4.6
3.4
1.0
4.4
2.6
0.7
3.3
2.0
0.6
2.6
1.3
1.8
Total
£m
8.3
0.9
9.2
6.6
1.7
8.3
4.9
1.2
6.1
3.8
1.1
4.9
3.1
3.4
182
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
28. Intangible assets
Cost
1 January 2016
Additions
Write-off
31 December 2016
1 January 2015
Additions
31 December 2015
Amortisation
1 January 2016
Charge for the year
31 December 2016
1 January 2015
Charge for the year
31 December 2015
Net book value
31 December 2016
31 December 2015
Computer
Systems
£m
Goodwill
£m
24.8
10.3
–
35.1
19.2
5.6
24.8
13.4
4.1
17.5
9.2
4.2
13.4
17.6
11.4
12.6
–
(4.1)
8.5
12.6
–
12.6
–
–
–
–
–
–
8.5
12.6
Total
£m
37.4
10.3
(4.1)
43.6
31.8
5.6
37.4
13.4
4.1
17.5
9.2
4.2
13.4
26.1
24.0
Goodwill arose on the acquisitions of Ruffler Holdings Limited (subsequently renamed Aldermore Holdings Limited), Base
Commercial Mortgages Holdings Limited and Absolute Invoice Finance (Holdings) Limited. For the purpose of impairment testing,
goodwill is allocated to the Group’s operating segments with the aggregate amount allocated to each segment as follows:
SME Commercial Mortgages
Invoice Finance
2016
£m
8.5
–
8.5
2015
£m
8.5
4.1
12.6
At 1 January 2016, the Invoice Finance goodwill was fully supported using the Fair Value less Costs of Disposal (“FVLCD”)
method. During 2016, as a result of the general fall in market values of financial services businesses following the EU referendum,
management concluded the goodwill balance was fully impaired and a charge of £4.1 million has been recognised in the
income statement.
The Value in Use (“VIU”) for SME Commercial Mortgages was determined by discounting the future cash flows to be
generated from the continuing use of the segment. VIU at 31 December 2016 has been determined in a similar manner as at
31 December 2015.
183
Strategic report
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Financial statements
Appendices
Key assumptions used in the calculation of VIU were the following:
• Cash flows were projected based on past experience, actual operating results and the five year business plan (31 December
2015: the five year business plan). Cash flows after the planning period were extrapolated using a constant growth rate of 2 per
cent (31 December 2015: 2 per cent) into perpetuity.
• A pre-tax discount rate of 13.0 per cent (31 December 2015: 13.0 per cent) was applied in determining the recoverable amounts
for the SME Commercial Mortgages operating segment. These discount rates were based on the weighted average cost of
funding for the segment, taking into account the Group’s regulatory capital requirement and expected market returns for debt
and equity funding, then adjusted for risk premiums to reflect the systemic risk of the segment.
IAS 36 requires an assessment of goodwill balances for impairment on an annual basis, or more frequently if there is an indication
of impairment. An impairment charge should be recognised where the recoverable amount from the segment is less than the
carrying value of the goodwill. Under IAS 36, the recoverable amount is the greater of either the VIU of a business or its Fair Value
less Costs of Disposal (“FVLCD”).
The VIU of the SME Commercial Mortgages segment is significantly above the carrying value of the attributable goodwill and
net assets. The Group estimates that reasonably possible changes in the above assumptions are not expected to cause the
recoverable amount of SME Commercial Mortgages to reduce below the carrying amount.
29. Amounts due to banks
Amounts repayable within 12 months:
Due to banks – repurchase agreements
Due to banks –deposits
Cash collateral received on derivatives
Amounts repayable after 12 months:
Due to banks –central banks – Term Funding Scheme
2016
£m
354.8
0.7
2.2
357.7
396.1
753.8
2015
£m
398.6
5.2
1.3
405.1
–
405.1
(a) Collateral given under repurchase agreements
The face value of securities sold under agreements to repurchase at 31 December 2016 was £355.0 million (31 December
2015: £400.0 million), all of which were drawn down from the Bank of England under the terms of the Funding for Lending Scheme.
The Group conducts these repurchase transactions under the terms of applicable General Master Repurchase Agreement
guidelines. Consideration received in return for the collateral is recorded as ‘Amounts due to banks’ and is accounted for as a
financial liability at amortised cost.
(b) Amounts repayable after 12 months
Loans received from the Bank of England against which the Group provides collateral under the Term Funding Scheme are
recorded as ‘Amounts due to banks’ and are accounted for as a financial liability at amortised cost.
Further details of a) and b) can be found in Note 22.
184
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
30. Customers’ accounts
Retail deposits
SME deposits
Corporate deposits
Amounts repayable within one year
Amounts repayable after one year
31. Other liabilities
Amounts payable within 12 months:
Amounts payable to Invoice Finance customers
Other taxation and social security costs
Trade creditors
Other payables
32. Accruals and deferred income
Amounts payable within 12 months:
Accruals
Deferred income
33. Provisions
1 January 2016
Utilised during the year
Provided during the year
31 December 2016
1 January 2015
Utilised during the year
Provided during the year
31 December 2015
2016
£m
4,766.8
1,647.2
259.7
6,673.7
5,397.1
1,276.6
6,673.7
2016
£m
10.5
4.1
3.3
7.1
25.0
2016
£m
26.4
0.6
27.0
Customer
redress
£m
–
–
–
–
0.8
(0.9)
0.1
–
2015
£m
4,186.3
1,399.4
156.3
5,742.0
4,288.8
1,453.2
5,742.0
2015
£m
9.4
4.3
3.2
5.0
21.9
2015
£m
24.0
1.7
25.7
Total
£m
1.1
(1.1)
0.8
0.8
2.0
(3.2)
2.3
1.1
Financial Services
Compensation
Scheme
£m
1.1
(1.1)
0.8
0.8
1.2
(2.3)
2.2
1.1
Financial Services Compensation Scheme (“FSCS”)
In common with all regulated UK deposit takers, the Group’s principal subsidiary, Aldermore Bank PLC, pays levies to the
FSCS to enable the FSCS to meet claims against it. The FSCS levy consists of two parts: a management expenses levy and a
compensation levy. The management expenses levy covers the costs of running the scheme and the compensation levy covers
the amount of compensation the scheme pays net of any recoveries it makes using the rights that have been assigned to it.
The FSCS provision at 31 December 2016 of £0.8 million (31 December 2015: £1.1 million) represents the interest element of the
compensation levy for the 2016/2017 scheme year (31 December 2015: interest levy for the 2015/2016 scheme year).
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Customer redress
The Group has a small number of loans which are regulated under the Consumer Credit Act (“CCA”) and had identified that,
following changes to the CCA in 2008, certain letters and statements were sent to customers that did not fully comply with
the requirements prescribed by the CCA. Accordingly, these customers were entitled to redress for interest and fees charged
on the relevant loans as a result of this technical non-compliance notwithstanding there is unlikely to have been any customer
detriment. Remediation payments to customers impacted were completed during the year ended 31 December 2015.
34. Debt securities in issue
Debt securities in issue are repayable from the reporting date in the ordinary course of business as follows:
In more than one year
2016
£m
130.6
2015
£m
193.9
Debt securities in issue with a principal value of £131.2 million (31 December 2015: £194.8 million) are secured on certain portfolios
of variable and fixed rate mortgages through the Group’s securitisation vehicle, Oak No. 1 PLC. These notes are redeemable in
part from time to time, such redemptions being limited to the net capital received from mortgage customers in respect of the
underlying assets. There is no obligation for the Group to make good any shortfall. Further disclosure relating to the underlying
assets is contained in Note 22.
35. Subordinated notes
Subordinated notes
2016
£m
100.0
2015
£m
38.1
During 2012, the Group issued £40 million subordinated 12.875 per cent loan notes, repayable in 2022, with an option for the Group
to redeem after five years. The interest rate is fixed until May 2017. The loan notes were issued at a discount and are carried in
the statement of financial position at amortised cost using an EIR of 18.597 per cent. In addition to the loan notes, a warrant was
issued by the Group’s parent company, Aldermore Group PLC. The warrants were valued at £2.2 million, and this was treated as
a warrant reserve within equity in accordance with the accounting policy in Note 2(f). On 9 September 2015, the warrants were
exercised resulting in 5.5 million ordinary £0.10 shares being issued (see Note 36).
On 28 October 2016, the Group issued £60 million subordinated 8.50 per cent loan notes, repayable in 2026, with an option for
the Group to redeem after five years. The interest rate is fixed until October 2021. The loan is carried in the statement of financial
position at amortised cost using an EIR of 8.9 per cent.
36. Share capital
Type
Ordinary shares of £0.10 each
2016
£m
34.5
34.5
2015
£m
34.5
34.5
On 13 March 2015, the Company reorganised its share capital in preparation for listing on the LSE. Following the reorganisation,
117,934,783 ordinary shares of £0.10 each were issued in the IPO at a price of £1.92 per share. Of the 117,934,783 shares in the
offer, 78,872,283 were sold by existing shareholders, with the remaining 39,062,500 being issued by the Company, resulting in an
increase in share capital of £3,906,250 and share premium account of £71,093,750 (excluding costs).
Ordinary shares have full voting rights, dividend rights and distribution rights in the event of sale or wind up.
Following the listing, the Company made an award of free share awards under the Share Incentive Plan (“SIP”). Further details
regarding the SIP are provided in Note 37. Of that original award 734 shares remain unallocated and are held in the SIP Trust, and
are recorded against retained earnings within equity. The SIP Trustee waives any dividends that may be declared in respect of
unallocated shares.
186
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
36. Share capital continued
On 9 September 2015, the share warrants attached to the subordinated notes (see Note 2(f)) were exercised resulting in the
following share issue:
Number of warrant shares exercised
5,502,164
Share capital
£’000
550.2
Share premium
£’000
4,970.3
Total
£’000
5,520.5
During June 2016, an Employee Benefit Trust (“EBT”) purchased 466,179 Aldermore Group PLC ordinary £0.10 shares from the
market for consideration of £0.9 million. Purchases were made to enable the Group to meet a future share-based payment
obligation in respect of the recruitment award detailed in Note 37. These purchases constitute Aldermore Group PLC shares held
by a Group EBT and are recorded against retained earnings within equity. The EBT waives any dividends that may be declared in
respect of such shares prior to their release to the participant.
At 31 December 2016, there were 344,739,584 ordinary £0.10 shares in issue resulting in share capital of £34,473,958
(31 December 2015: 344,739,584 and £34,473,958 respectively).
37. Share-based payments
The table below shows the charge to the income statement:
Share plans issued in 2015
Share plans issued in 2016
Total share-based payment charge
2016
£m
2.0
1.5
3.5
2015
£m
2.2
–
2.2
Included within the 2015 charge disclosed in Note 12 was £1.2 million in relation to the Deferred Share Plan which was granted, as
expected, during 2016.
Scheme details:
Plan
a) Performance Share Plan
Eligible employees
Selected senior
employees
Nature of award
Conditional share award
b) Pre-IPO Award under the
Performance Share Plan
Selected senior
employees
Conditional share award
c) “Top Up” Pre-IPO Award
under the Performance
Share Plan
d) Restricted Share Plan
e) Recruitment Award
f) Share Incentive Plan
Selected senior
employees
Selected senior
employees
Selected senior
employees
All employees
g) Sharesave Plan
All employees
h) Deferred Share Plan
Selected senior
employees
Conditional share award
Conditional share award
Conditional share award
Non-conditional share
award
Qualifying SAYE plan with
an option to purchase
shares at the end of the
saving period
Deferred conditional
share award
Vesting conditions 1
Continuing employment or leaving in certain
limited circumstances and achievement of Total
Shareholder Return and Earnings Per Share
performance conditions
Continuing employment or leaving in certain
limited circumstances and achievement of Total
Shareholder Return performance condition.
Continuing employment or leaving in certain
limited circumstances and achievement of
personal and Company performance conditions
Continuing employment or leaving in certain
limited circumstances
Continuing employment or leaving in certain
limited circumstances
Employment at date of grant
Monthly contributions to the scheme and
continuing employment or leavers in certain
limited circumstances
Grant dates 2
2015 & 2016
2015
2015
2015 & 2016
2016
2015
2015 & 2016
Continuing employment or leavers
in certain limited circumstances
20163
1 All awards are subject to vesting conditions and therefore may or may not vest.
2 Year in which grants have been made under the relevant Plan. Further grants in future years under the Plan are possible.
3 Grants under the Deferred Share Plan are made the year following the financial year to which they relate.
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Appendices
The terms of the schemes are as follows:
a) Performance Share Plan
The Performance Share Plan (“PSP”) is open to senior employees including the Executive team. There are currently awards
outstanding for two plan years as per the table above. Individuals are required to remain in employment for three years following
the grant date and the awards are subject to a two-year holding period following the required employment date.
Awards under the PSP are subject to performance conditions which are set by the Remuneration Committee and determine the
extent to which awards can become available to individuals. Performance conditions for the PSP awards relate to the growth
in Total Shareholder Return (“TSR”) for 50% of each award and Earnings Per Share (“EPS”) performance for the remaining 50%
of each award. The outcome of the performance conditions, as assessed by the Remuneration Committee, will determine the
vesting outcome of the awards and the shares available for exercise.
In addition, there are “underpin” performance conditions which must be met in relation to both elements of the award and
the result achieved must both appropriately reflect the performance of the Company and be consistent with the Company’s
risk appetite. Furthermore, in respect of the TSR element of the grant made in 2015, the value of the TSR achieved over the
performance period must be equal to or greater than the TSR of the median company of FTSE 350 companies, excluding
Investment Trusts and the Company itself.
b) Pre-IPO Award under the Performance Share Plan
Pre-IPO Awards in respect of 6,920,420 shares, which were granted on 2 March 2015 to individuals as a one-off reward to
recognise their contribution up to the Company’s IPO, have lapsed as the principal performance condition relating to growth in
TSR for the period to 31 December 2016 was not satisfied.
c) “Top Up” Pre-IPO awards under the Performance Share Plan
For the small number of employees who had been granted a “Top Up” Pre-IPO Award at the time of IPO which was intended to
promote their retention and to reward them for their performance both pre-IPO and post-IPO, the Remuneration Committee
amended the “Top Up” portion of those awards over 513,589 shares such that:
• The principal performance condition was a personal performance condition, as well as an underpin whereby the Remuneration
Committee would determine that the performance of the Company justified the vesting. The Remuneration Committee
determined that the amended performance condition and underpin had been met as at 31 December 2016.
• The awards normally become exercisable on 31 December 2018 and are contingent on employment to this date, with a leaver
receiving a pro-rated proportion of the shares (for the period 31 December 2016 to 31 December 2018) except if the individual
ceases employment because of misconduct in which case the whole award would lapse.
The total incremental fair value arising from the modification of the awards is £1,188,000 of which £16,000 has been reflected in
the 2016 income statement charge. The fair value of the awards has been determined using the market price of Aldermore Group
PLC shares as at 22 December 2016.
d) Restricted Share Plan
The Restricted Share Plan (“RSP”) is open to a small number of senior employees engaged in risk and control functions. There is
a requirement for individuals to remain in employment for three years following the grant date, following which the awards are
subject to a two-year holding period. There are no financial performance conditions attached to the awards under the RSP.
e) Recruitment Award
The Recruitment Award was granted for the purpose of buying out awards forfeited by senior employees on resignation from
their previous employment. There are no performance conditions attached to this award. The award will be released in tranches
with twenty per cent vesting on each of the first, second and third anniversaries of the grant date and forty per cent on the fourth
anniversary of the award, subject to continued employment.
188
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
37. Share-based payments continued
f) Share Incentive Plan
All employees who were in employment on both 13 March 2015 and the grant date were eligible to participate in the Share
Incentive Plan (“SIP”). An award of ‘free shares’ was granted under the SIP on 17 April 2015. Each eligible employee received
shares worth £200, with an additional £200 for each year of service up to a maximum award of £1,000. There are no performance
conditions associated with the share awards. Participants in the SIP are the beneficial owners of the shares granted to them, but
not the registered owner. Voting rights are normally exercised by the registered owner at the direction of the participant.
g) Sharesave Plan
All employees are eligible to participate in the Group’s annual invitation to join the Sharesave Plan. The grant dates of the awards
are shown in the table above, with individuals in the Plan contributing a set amount each month for three years. At the end of
the savings period, participants have the option to buy shares in Aldermore Group PLC at an option price which was fixed at the
grant date.
There are no financial performance conditions attached to the awards but employees may only continue to participate in the Plan
whilst in the employment of the Group, and subject to having made all monthly contributions. Participants have the option, but
not the obligation, to buy shares at the end of the plan. There are no holding conditions in respect of shares acquired pursuant to
the exercise of an option.
h) Deferred Share Plan
The Deferred Share Plan (“DSP”) is open to senior employees, including the Executive team, and represents the portion of
awards under the Annual Incentive Plan that is deferred to align the interests of senior employees and the Executive team with
shareholders. The awards typically vest in tranches of one-third on the first, second and third anniversary of the award date,
subject to continued employment. There are no market performance conditions attached to the awards made under the DSP.
Share awards, representing the deferred element of the 2015 bonus payments, with a grant date fair value of £1.2 million, were
granted in March 2016.
There is an anticipation that share awards for the deferred element of the 2016 bonuses, with a grant date fair value of
£1.6 million, will be made in 2017.
Awards/options granted, forfeited and vested
The table below shows the changes to the options awarded during the period and the number of awards outstanding as at
31 December 2016:
Plan
Performance Share Plan
Pre-IPO award under
the PSP1
“Top Up” Pre IPO Award
under the PSP
Restricted Share Plan
Recruitment Award
Sharesave Plan
Deferred Share Plan
Total
Awards
Awards /
outstanding at
options
1 January 2016
granted
1,406,231 1,526,448
Awards /
options
forfeited
(292,742)
Awards /
options
expired
–
Awards /
options
vested
–
Awards
outstanding at
31 December
2016
Number
2,639,937
Average fair
value per award
granted during
the year at grant
date (rounded)
£1.46
Total fair value
to be recognised
over the vesting
period £m
3.9
6,920,420
–
(134,274)
(6,786,146)
–
–
£0.31
513,589
105,753
–
–
175,875
466,179
794,966 1,379,516
543,837
9,740,959 4,091,855
–
–
(24,635)
–
(624,011)
(1,850)
–
–
–
–
–
(1,077,512) (6,786,146)
513,589
–
256,993
–
466,179
–
1,550,471
–
541,987
–
– 5,969,156
£2.31
£2.09
£1.91
£0.73
£2.28
–
–
1.2
0.5
0.9
1.1
1.2
8.8
1 Average fair value includes incremental value attributable to modification for each award outstanding.
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Appendices
Plan
Performance Share Plan
Pre-IPO award under the PSP
Restricted Share Plan
Share Incentive Plan
Sharesave Plan
Total
Awards /
options granted
1,539,629
7,549,101
105,753
174,920
794,966
10,164,369
Awards /
options
forfeited
(133,398)
(115,092)
–
–
–
(248,490)
Awards
outstanding at
31 December
2015
Number
1,406,231
7,434,009
105,753
–
794,966
9,740,959
Average fair
value per award
granted during
the year at grant
date (rounded)
£1.13
£0.31
£1.92
£2.41
£0.79
–
Total fair value
to be recognised
over the vesting
period £m
1.6
2.3
0.2
0.4
0.6
5.1
Awards /
options
vested
–
–
–
(174,920)
–
(174,920)
Awards /
options
expired
–
–
–
–
–
–
Determination of grant date fair values
Share awards are not entitled to dividends until the awards vest, but the number of shares subject to vested PSP, RSP and DSP
awards may be increased to reflect the value of dividends that would have been paid up to the end of the holding period for the
awards. This is designed to deliver a benefit similar to that which ordinary shareholders may receive in respect of any dividends
paid during the vesting period. Accordingly, the grant date fair value of the awards with no performance conditions other than
service conditions has been taken as the market value of the Company’s ordinary shares at the grant date.
In respect of awards for which there are non-market performance conditions (e.g. EPS), the grant date fair value per award has
been taken as the market value of an ordinary share at the grant date. A forecast is made of the number of awards expected
to vest in order to determine the overall share-based payment charge to be recognised over the vesting period. In respect of
awards for which there are market performance conditions (e.g. TSR), the grant date fair value of each award is required to reflect
the likelihood of achieving the market conditions within the valuation.
For the awards concerned, the grant date fair values for each award were determined using stochastic simulation models with
the following significant inputs:
Ordinary share price
Risk-free rate
Probability distributions of TSRs for Aldermore and the median FTSE 350 (excluding Investment Trust companies)
Annual volatility (of logarithm of TSR) for Aldermore share price (based on recently floated banks)
Annual volatility (of logarithm of TSR) for median of FTSE 350 (excluding Investment Trust companies)
(based on five years data)
Correlation between volatilities
1
Based on Aldermore Group PLC share price volatility annualised, from date of listing (13 March 2015) to the grant date (21 March 2016).
PSP
£2.29
0.50% p.a.
Log normal
40%1
29%
None
Share options (Sharesave Plan)
Options granted under the Sharesave Plan have no entitlement to dividends until they are exercised. The grant date fair value of
the options were determined using a Black Scholes valuation model with the following significant inputs:
Share price at grant date
Exercise price
Risk-free rate
Expected volatility of Company share price
Expected life
1
Based on Aldermore Group PLC share price volatility annualised, from the date of listing (13 March 2015) to the grant date (12 October 2016).
Sharesave plan
£1.74
£1.54
0.19% p.a.
54%1
3.14 years
190
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
38. Contingent convertible securities
Contingent convertible securities
2016
£m
74.0
2015
£m
74.0
On 9 December 2014, the Company issued £75 million Fixed Rate Reset Additional Tier 1 Perpetual Subordinated Contingent
Convertible Securities (the “Securities”). Net proceeds arising from the issuance, after deducting issuance costs and the
associated tax credit, totalled £74.0 million.
The Securities are perpetual and have no fixed redemption date. Redemption of the Securities is at the option of the Company
on 30 April 2020 and annually thereafter. The Securities bear interest at an initial rate of 11.875 per cent per annum until 30 April
2020 and thereafter at the relevant Reset Interest Rate as provided in the Information Memorandum. Interest is payable on the
Securities annually in arrears on each interest payment date commencing 30 April 2015 and is non-cumulative. The Borrower has
the full discretion to cancel any interest scheduled to be paid on the Securities.
The Securities are convertible into Ordinary Shares of the Company in the event of the Group’s Common equity ratio falling
below 7 per cent. As the Securities contain no obligation on the Company to make payments of principal or interest, they have
been classified as equity instruments as required by IAS 32. Accordingly, the Securities have been included in equity at the
fair value of the proceeds received less any direct costs attributable to the issue of the Securities, net of tax relief thereon.
Any interest paid on the Securities, net of tax relief thereon, is a distribution to holders of equity instruments and has been
recognised directly in equity on the payment date. Although there are number of additional terms relating to events such as
acquisition and wind up, there are no circumstances in which the Group has an unavoidable obligation to issue a variable number
of its own shares. The Group has not separated any embedded derivative features because the Group has an accounting
policy not to separate a feature that has already been considered in determining that the entire issue is a non-derivative
equity instrument.
39. Statement of cash flows
(a) Adjustments for non-cash items and other adjustments included within the income statement
Depreciation and amortisation
Impairment of goodwill
Amortisation of securitisation issuance cost
Discount accretion on subordinated notes
Impairment losses on loans and advances
Unwind of discounting
Write-offs net of recoveries
Net losses on debt securities designated at fair value through profit or loss
(Gains)/losses on hedged available for sale debt securities recognised in profit or loss
Net gains on disposal of available for sale debt securities
Interest expense on subordinated notes
Interest income on debt securities
Interest expense on debt securities in issue
Equity settled share-based payment charge
2016
£m
5.3
4.1
0.4
1.6
15.5
(3.4)
(5.4)
–
(2.1)
(3.8)
6.1
(12.4)
1.9
3.5
11.3
2015
£m
5.3
–
0.5
1.4
10.4
(3.2)
(9.0)
0.2
6.9
(2.1)
5.1
(12.8)
3.0
3.4
9.1
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Appendices
(b) Increase in operating assets
Loans and advances to customers
Loans and advances to banks
Derivative financial instruments
Fair value adjustments for portfolio hedged risk
Other operating assets
(c) Increase in operating liabilities
Amounts due to banks
Customers' accounts
Derivative financial instruments
Fair value adjustments for portfolio hedged risk
Other operating liabilities
2016
£m
(1,339.2)
9.5
(5.7)
4.6
(2.0)
(1,332.8)
2016
£m
348.7
931.7
0.4
(0.4)
4.1
1,284.5
2015
£m
(1,341.9)
14.4
1.5
6.1
2.0
(1,317.9)
2015
£m
99.2
1,283.0
(18.8)
(2.3)
7.0
1,368.1
(d) Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash equivalents comprise cash on demand and overnight deposits
classified as cash and balances at central banks (unless restricted) and balances within loans and advances to banks.
The following balances have been identified as being cash and cash equivalents.
Cash and balances at central banks
Less restricted balances
Loans and advances to banks
2016
£m
116.4
(9.6)
34.1
140.9
2015
£m
105.3
(7.5)
51.6
149.4
Restricted balances comprise minimum balances required to be held at the Bank of England as they are not readily convertible
to cash in hand or demand deposits. Loans and advances to banks as at 31 December 2016 include £10.9 million held by the
securitisation vehicle, Oak No.1 PLC, which is not available to the other members of the Group (31 December 2015: £10.9 million).
192
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
40. Commitments and contingencies
At 31 December 2016, the Group had undrawn commitments to lend of £968.8 million (31 December 2015: £556.0 million).
These relate mostly to irrevocable lines of credit granted to customers.
At the end of the reporting period, the future minimum lease payments under non-cancellable operating leases are payable as follows:
Land and buildings
In less than one year
Between one and five years
More than five years
Equipment
In less than one year
Between one and five years
2016
£m
1.9
5.4
1.6
8.9
2016
£m
0.2
–
0.2
2015
£m
1.9
6.0
2.4
10.3
2015
£m
0.4
0.2
0.6
At 31 December 2016, the majority of operating leases for equipment related to 64 cars that the Group held under lease
(31 December 2015: 70). The majority of these leases are due to expire in 2017.
Legislation
As a financial services group, Aldermore Group PLC is subject to extensive and comprehensive regulation. The Group must
comply with numerous laws and regulations which significantly affect the way it does business. Whilst the Group believes there
are no unidentified areas of failure to comply with these laws and regulations which would have a material impact on the financial
statements, there can be no guarantee that all issues have been identified.
41. Related parties
(a) Controlling parties
Prior to IPO, the Group was controlled by AnaCap Financial Partners, II L.P. (52.3 per cent. of voting rights) and AnaCap Financial
Partners, L.P. (47.7 per cent. of voting rights) who were the sole voting shareholders of Aldermore Group PLC.
On 13 March 2015, the Company was admitted to the LSE, offering 117,934,783 Ordinary shares, of which 78,872,283 shares were
sold by the Selling shareholders. Upon admission, AnaCap Financial Partners L.P., AnaCap Financial Partners II L.P., AnaCap Derby
Co-Investment (No.1.) L.P. and AnaCap Derby Co-Investment (No.2.) (collectively “the Principal Shareholders”) and the Company
entered into the ‘Relationship agreement’. Details of the Relationship agreement were provided within the Prospectus issued
prior to the admission to the LSE.
On 15 September 2015, the Principal Shareholders sold 40,885,613 Ordinary £0.10 shares on the open market.
At 31 December 2016, AnaCap Financial Partners L.P., AnaCap Financial Partners II L.P., AnaCap Derby Co-Investment (No.1.) L.P.
and AnaCap Derby Co-Investment (No.2.) L.P held 8.33 per cent, 11.01 per cent, 11.26 per cent and 9.54 per cent of the Company’s
ordinary share capital respectively. Although the Principal Shareholders are no longer a controlling party for the Group they
continue to have significant influence and are therefore considered to be a related party.
The Group had agreements in place with Syscap Limited which was previously under the control of Anacap Financial Partners
II L.P and Anacap Financial Partners, L.P. Syscap Limited ceased to be a related party when Anacap sold their interest on
20 February 2015. Details of the previous agreements in place are listed in the Aldermore Group PLC 2015 report and accounts.
During 2016, the Group also incurred fees of £0.1 million in relation to the Directors who represent the Principal Shareholders
(2015: £0.1 million).
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Strategic report
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Financial statements
Appendices
b) Key management personnel
Key Management Personnel (“KMP”) comprise Directors of the Group and members of the Executive Committee. Details of the
compensation paid (in accordance with IAS 24) to KMP are:
Emoluments
Payments in respect of personal pension plans
Contributions to money purchase scheme
Loan forgiveness
Termination benefits
Share-based payments
2016
£’000
5,207.8
104.4
37.3
–
1,161.9
2,439.1
8,950.5
2015
£’000
5,035.8
45.9
71.3
162.3
–
1,196.5
6,511.8
The Group made payments of £37,300 in aggregate in respect of seven key persons’ personal pension plans during the year
ended 31 December 2016 (31 December 2015: £45,900, four key persons).
Key persons’ emoluments includes £1.0 million of deferred bonus (31 December 2015: £0.8 million).
Share-based payments (“SBP”)
As at 1 January 2015, certain KMP held a number of shares in the B, C and E classes. In preparation for the IPO, the rights to these
shares were varied and the holdings re-designated.
A number of KMP were awarded shares in the Company under new share incentive plans created upon IPO. In total, KMP were
granted awards over 1,822,022 shares. Further details of the share schemes, including performance conditions are provided
in Note 37. In addition, a number of KMP participated in the Sharesave Plan, holding options over a total of 88,828 shares at
31 December 2016.
Transactions with KMP
The aggregate value of transactions and outstanding balances related to KMP (as defined by IAS 24: “Related Party Disclosures”)
were as follows:
Deposits
At 1 January
Net movement
At 31 December
2016
£’000
2015
£’000
2,019.2
(1,053.7)
965.5
1,565.0
454.2
2,019.2
The table above includes transactions and balances relating to KMP in post at the end of the year.
From 1 January 2015 until admission to the LSE, a number of KMP had loans with the Company. Upon admission, the Company
forgave loans totalling £0.2 million. A number of KMP continue to have loans and deposits in the ordinary course of business with
the Group.
At 31 December 2016, there is one loan with KMP for the value of £40,000 (31 December 2015: two loans, £126,000). All current
transactions, loans and deposits, with KMP are conducted through the ordinary course of business with the Group.
During 2015 and up to admission, interest rates charged on loan balances outstanding from related parties were lower than the
rates that would be charged in arm’s length transactions. Interest was charged on these loans at an annual rate of 0.8 per cent
above one month LIBOR.
All deposit arrangements have been operated by the Group on commercial terms and conditions.
194
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
42. Financial instruments and fair values
The following table summarises the classification and carrying amounts of the Group’s financial assets and liabilities:
31 December 2016
Cash and balances at central banks
Loans and advances to banks
Debt securities
Derivatives held for risk management
Loans and advances to customers
Fair value adjustment for portfolio hedged risk
Other assets
Total financial assets
Non-financial assets
Total assets
Amounts due to banks
Customers’ accounts
Derivatives held for risk management
Fair value adjustment for portfolio hedged risk
Other liabilities
Debt securities in issue
Subordinated notes
Total financial liabilities
Non-financial liabilities
Total liabilities
31 December 2015
Cash and balances at central banks
Loans and advances to banks
Debt securities
Derivatives held for risk management
Loans and advances to customers
Fair value adjustment for portfolio hedged risk
Other assets
Total financial assets
Non-financial assets
Total assets
Amounts due to banks
Customers’ accounts
Derivatives held for risk management
Fair value adjustment for portfolio hedged risk
Other liabilities
Debt securities in issue
Subordinated notes
Total financial liabilities
Non-financial liabilities
Total liabilities
Loans and
receivables
£m
116.4
67.2
–
–
7,477.3
–
2.9
7,663.8
Available
for sale
£m
–
–
664.5
–
–
–
–
664.5
Fair value
through profit or
loss (required)
£m
–
–
–
12.4
–
–
–
12.4
Fair value
hedges
£m
–
–
–
–
–
(3.5)
–
(3.5)
Liabilities at
amortised cost
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
35.8
–
–
–
35.8
–
–
–
(1.2)
–
–
(1.2)
753.8
6,673.7
–
–
20.9
130.6
100.0
7,679.0
Loans and
receivables
£m
105.3
94.2
–
–
6,144.8
–
0.4
6,344.7
Available
for sale
£m
–
–
606.1
–
–
–
–
606.1
Fair value
through profit or
loss (required)
£m
–
–
–
6.7
–
–
–
6.7
Fair value
hedges
£m
–
–
–
–
–
1.1
–
1.1
Liabilities at
amortised cost
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
35.4
–
–
–
–
35.4
–
–
–
(0.8)
–
–
–
(0.8)
405.1
5,742.0
–
–
17.6
193.9
38.1
6,396.7
Total
£m
116.4
67.2
664.5
12.4
7,477.3
(3.5)
2.9
8,337.2
44.0
8,381.2
753.8
6,673.7
35.8
(1.2)
20.9
130.6
100.0
7,713.6
41.6
7,755.2
Total
£m
105.3
94.2
606.1
6.7
6,144.8
1.1
0.4
6,958.6
49.9
7,008.5
405.1
5,742.0
35.4
(0.8)
17.6
193.9
38.1
6,431.3
43.6
6,474.9
195
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented in
the statement of financial position at fair value. The fair values in this note are stated at a specific date and may be significantly
different from the amounts which will actually be paid on the maturity or settlement dates of the instruments. As a wide range of
valuation techniques are available, it may be inappropriate to compare this fair value information to that of independent market or
other financial institutions.
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Other assets
Total financial assets
Amounts due to banks
Customers’ accounts
Other liabilities
Debt securities in issue
Subordinated notes
Total financial liabilities
2016
2015
Carrying value
£m
116.4
67.2
7,477.3
2.9
7,663.8
753.8
6,673.7
20.9
130.6
100.0
7,679.0
Fair value
£m
116.4
67.2
7,613.0
2.9
7,799.5
753.8
6,705.9
20.9
131.9
101.8
7,714.3
Carrying value
£m
105.3
94.2
6,144.8
0.4
6,344.7
405.1
5,742.0
17.6
193.9
38.1
6,396.7
Fair value
£m
105.3
94.2
6,194.1
0.4
6,394.0
405.1
5,752.8
17.6
194.8
48.0
6,418.3
Key considerations in the calculation of the disclosed fair values for those financial assets and liabilities carried at amortised cost
include the following:
(a) Cash and balances at central banks
These represent amounts with an initial maturity of less than three months and, as such, their carrying value is considered a
reasonable approximation of their fair value.
(b) Loans and advances to banks
These represent either amounts with an initial maturity of less than three months or longer term variable rate deposits placed
with banks, where adjustments to fair value in respect of the credit risk of the counterparty are not considered necessary.
Accordingly, the carrying value of the assets is considered to be not materially different from their fair value.
(c) Loans and advances to customers
For fixed rate lending products, the Group has estimated the fair value of the fixed rate interest cash flows by discounting
those cash flows by the current appropriate market reference rate used for pricing equivalent products plus the credit spread
attributable to the borrower. For standard variable rate lending products, and fixed rate products when they revert to the Group’s
standard variable rate, the interest rate on such products is considered equivalent to a current market product rate and, as
such, the Group considers the discounted future cash flows of these mortgages to be equal to their carrying value. The fair value
estimations do not incorporate adjustments for changes in future credit risk, since loans were granted. However, incurred loss
provisions are deducted from the fair value amounts.
(d) Other assets and liabilities
These represent short term receivables and payables and, as such, their carrying value is not considered to be materially
different from their fair value.
(e) Amounts due to banks
These mainly represent securities sold under agreements to repurchase which were drawn down from the Bank of England
under the terms of the Funding for Lending and Term Funding Schemes. These transactions are collateralised by UK Government
Treasury Bills, which have a low susceptibility to credit risk, so adjustments to fair value in respect of the credit risk of the
counterparty are not considered necessary. Accordingly, the carrying value of the liabilities are not considered to be materially
different from their fair value.
196
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
42. Financial instruments and fair value continued
(f) Customers’ accounts
The fair value of fixed rate customers’ accounts have been determined by discounting estimated future cash flows based on
rates currently offered by the Group for equivalent deposits. Customers’ accounts at variable rates are at current market rates
and therefore, the Group regards the fair value to be equal to the carrying value. The estimated fair value of deposits with no
stated maturity is the amount repayable on demand.
(g) Debt securities in issue
As the securities are actively traded in a recognised market, with readily available and quoted prices, these have been used to
value the securities. These securities are therefore regarded as having Level 1 fair values, see below.
(h) Subordinated notes
The estimated fair value of the subordinated notes is based on discounted cash flows using interest rates for similar liabilities
with the same remaining maturity, credit ranking and rating. The calculated fair value takes no account of the warrants issued
separately to the holders of the 2012 subordinated notes, which have been separately accounted for as a capital contribution
within equity on issue. The warrants attached to the subordinated notes were exercised during September 2015 (see note 36).
The following table provides an analysis of financial assets and liabilities held on the consolidated statement of financial position
at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
31 December 2016
Financial assets:
Derivatives held for risk management
Debt securities:
Asset-backed securities
UK Gilts and Supranational bonds
Corporate bonds
Covered bonds
Financial liabilities:
Derivatives held for risk management
31 December 2015
Financial assets:
Derivatives held for risk management
Debt securities:
Asset-backed securities
UK Gilts and Supranational bonds
Corporate bonds
Covered bonds
Financial liabilities:
Derivatives held for risk management
Level 1
£m
–
–
392.1
29.7
172.3
594.1
–
–
Level 1
£m
–
–
362.3
29.9
139.0
531.2
–
–
Level 2
£m
Level 3
£m
12.4
70.4
–
–
–
82.8
35.8
35.8
Level 2
£m
6.7
74.9
–
–
–
81.6
35.4
35.4
–
–
–
–
–
–
–
–
Level 3
£m
–
–
–
–
–
–
–
–
Total
£m
12.4
70.4
392.1
29.7
172.3
676.9
35.8
35.8
Total
£m
6.7
74.9
362.3
29.9
139.0
612.8
35.4
35.4
197
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Level 1: Fair value determined using quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
Fair value determined using directly or indirectly observable inputs other than unadjusted quoted prices included within
Level 1 that are observable.
Level 3: Fair value determined using one or more significant inputs that are not based on observable market data.
The fair values of UK Gilts, Supranational bonds, Corporate bonds and Covered bonds are based on quoted bid prices in
active markets.
The fair value of asset-backed securities are based on indicative prices provided by market counterparties, but before relying on
these prices, the Group has obtained an understanding of how the prices were derived to ensure that each investment is assigned
an appropriate classification within the fair value hierarchy.
The fair values of derivative assets and liabilities are determined using widely recognised valuation methods for financial
instruments such as interest rate swaps and use only observable market data that require little management judgement
and estimation. Credit value and debit value adjustments have not been applied as the derivative assets and liabilities are
largely collateralised.
Fair value measurement – financial assets and liabilities held at amortised cost
All the fair values of financial assets and liabilities carried at amortised cost are considered to be Level 2 valuations which are
determined using directly or indirectly observable inputs other than unadjusted quoted prices, except for debt securities in issue
which are Level 1 and loans and advances to customers which are Level 3.
Fair value of transferred assets and associated liabilities
Securitisation vehicle
The sale of the beneficial ownership of the loans and advances to customers to the securitisation vehicle by the Bank fail the
derecognition criteria, and consequently, these loans remain on the statement of financial position of the Group. The Bank,
therefore, recognises a deemed loan financial liability on its statement of financial position and an equivalent deemed loan
asset is held on the securitisation vehicle’s statement of financial position. As the securitisation vehicle is consolidated into the
Group with the Bank, the deemed loans net out in the consolidated accounts. The deemed loans are repaid as and when principal
repayments are made by customers against these transferred loans and advances.
The securitisation vehicle has issued fixed and floating rate notes which are secured on loans and advances to customers.
The notes are redeemable in part from time to time, such redemptions being limited to the net capital received from mortgagors
in respect of the underlying assets.
The Group retains substantially all of the risks and rewards of ownership. The Group benefits to the extent to which surplus
income generated by the transferred mortgage portfolios exceeds the administration costs of these mortgages. The Group
continues to bear the credit risk of these mortgage assets.
198
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the consolidated financial statements
continued
42. Financial instruments and fair value continued
The results of the securitisation vehicle listed in Note 23 are consolidated into the results of the Group. The table below shows
the carrying value and fair value of the assets transferred to the securitisation vehicle and its associated liabilities. The carrying
value presented below are the carrying amounts recorded in the Group accounts. Some of the notes issued by the securitisation
vehicle are held by the Group and as such are not shown in the consolidated statement of financial position of the Group.
31 December 2016
Oak No. 1 PLC
31 December 2015
Oak No. 1 PLC
Carrying
amount of
transferred
assets not
derecognised
£m
148.7
Carrying
amount of
transferred
assets not
derecognised
£m
206.5
Carrying
amount of
associated
liabilities
£m
130.6
Fair value of
transferred
assets not
derecognised
£m
155.0
Carrying
amount of
associated
liabilities
£m
193.9
Fair value of
transferred
assets not
derecognised
£m
209.9
Fair value of
associated
liabilities
£m
131.9
Fair value of
associated
liabilities
£m
194.8
Net position
£m
23.1
Net position
£m
15.1
43. Country-by-Country reporting
The Capital Requirements (Country-by-Country reporting) Regulations came into effect on 1 January 2014 and introduce
reporting obligations for institutions within the scope of the European Union’s Capital Requirements Directive (CRD IV).
The requirements aim to give increased transparency regarding the activities of institutions.
All companies consolidated within the Group’s financial statements are registered entities in England and Wales. Note 23 to
these financial statements includes an analysis of subsidiary undertakings and their principal activities. All of the subsidiary
undertakings were incorporated in the UK.
The Group did not receive any public subsidies
Total operating income
Profit before tax
Corporation tax (paid)
Employees (average FTE equivalent)
44. Post balance sheet events
There have been no material post balance sheet events
Jurisdiction
income/
expense arose
UK
UK
UK
UK
2016
£m
267.5
128.7
(31.5)
874
2015
£m
224.7
94.7
(20.2)
839
199
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
The Company statement of financial position
As at 31 December 2016
Assets
Loans and advances to banks
Investment in Group undertakings
Amounts receivable from Group undertakings
Total assets
Liabilities
Amounts payable to Group undertakings
Subordinated notes
Total liabilities
Equity
Share capital
Share premium account
Contingent convertible securities
Capital redemption reserve
Share-based payment reserve
Retained earnings
Total equity
Total liabilities and equity
The notes and information on pages 202 to 204 form part of these financial statements.
These financial statements were approved by the Board and were signed on its behalf by:
Phillip Monks
Director
1 March 2017
James Mack
Director
1 March 2017
Registered number: 06764335
31 December
2016
£m
31 December
2015
£m
Note
3
4
6
7
8
9
9
11
10
0.8
415.0
60.9
476.7
0.9
60.9
61.8
34.5
73.4
74.0
0.1
6.9
226.0
414.9
476.7
0.5
411.5
0.4
412.4
–
–
–
34.5
73.4
74.0
0.1
3.4
227.0
412.4
412.4
200
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
The Company statement of cash flows
For the year ended 31 December 2016
Cash flows from operating activities
Profit/(loss) before taxation
Decrease in operating assets
Decrease in operating liabilities
Net cash flows generated/(used in) from operating activities
Cash flows from investing activities
Investment in Group undertakings
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of shares
Issuance costs of Initial Public Offering
Proceeds from exercise of warrants
Proceeds from subordinated notes
Issue of subordinated notes
Interest received on subordinated notes
Interest paid on subordinated notes
Proceeds received from Bank for the purchase of treasury shares
Purchase of treasury shares
Coupon paid on contingent convertible securities, net of tax
Net cash (used in)/ from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at start of the year
Movement during the year
Cash and cash equivalents at end of the year
Note
2
4
9
8
8
8
8
3
Year ended
31 December
2016
£m
Year ended
31 December
2015
£m
6.5
0.4
–
6.9
–
–
–
–
–
60.0
(60.0)
0.9
(0.9)
0.9
(0.9)
(6.6)
(6.6)
0.3
0.5
0.3
0.8
(1.2)
0.2
(0.9)
(1.9)
(74.1)
(74.1)
75.0
(2.7)
5.6
–
–
–
–
–
–
(2.8)
75.1
(0.9)
1.4
(0.9)
0.5
201
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
The Company statement of changes in equity
For the year ended 31 December 2016
Share
capital
£m
Share
premium
account
£m
Contingent
convertible
securities
£m
Capital
redemption
reserve
£m
Share-
based
payment
reserve
£m
Warrant
reserve
£m
Retained
earnings
£m
Total
£m
Year ended 31 December 2016
As at 1 January
Profit for the year
Transactions with equity holders:
– Share-based payments, including tax
reflected directly in retained earnings
– Coupon paid on contingent convertible
securities issue costs
– Own shares adjustments
As at 31 December
Year ended 31 December 2015
As at 1 January
Loss for the year
Transactions with equity holders:
– Capital reorganisation prior to IPO
– Share issue proceeds from IPO
– Share issuance costs
– Share-based payments, including tax
reflected directly in retained earnings
– Coupon paid on convertible securities,
net of tax
– Tax credit on contingent convertible
securities issue costs
– Exercise of share warrants
– Transfer of capital contribution to retained
earnings
As at 31 December
34.5
–
73.4
–
74.0
–
–
–
–
–
–
34.5
23.7
–
6.3
3.9
–
–
–
–
0.6
–
–
73.4
–
–
–
71.1
(2.7)
–
–
–
5.0
–
34.5
–
73.4
–
–
74.0
73.7
–
–
–
–
–
–
0.3
–
–
74.0
0.1
–
–
–
–
0.1
–
–
0.1
–
–
–
–
–
–
3.4
–
3.5
–
–
6.9
0.9
–
–
–
–
3.4
–
–
–
–
–
–
–
–
–
227.0
6.5
412.4
6.5
–
3.5
(6.6)
(0.9)
226.0
(6.6)
(0.9)
414.9
2.2
–
234.3
(1.2)
334.8
(1.2)
–
–
–
–
–
(6.4)
–
–
–
75.0
(2.7)
–
3.4
(2.8)
(2.8)
–
(2.2)
–
2.2
0.3
5.6
–
0.1
(0.9)
3.4
–
–
0.9
227.0
–
412.4
202
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the Company financial statements
1. Basis of preparation
a) Accounting basis
These standalone financial statements for Aldermore Group PLC (the “Company”) have been prepared and approved by the
Directors in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting
Standards Board (“IASB”) and as adopted by the European Union (“EU”). The significant accounting policies adopted are set out in
Note 2 to the consolidated financial statements.
These results include the Employee Benefit Trust (“EBT”). Further details of the own shares purchased under the EBT can be
found in Note 36 to the consolidated financial statements.
b) Going concern
As detailed in Note 1(c) to the consolidated financial statements, the Directors have performed an assessment of the
appropriateness of the going concern basis. The Directors consider that it is appropriate to continue to adopt the going concern
basis in preparing the financial statements.
c) Income statement
Under Section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own
income statement.
2. Net profit attributable to equity shareholders of the Company
On including the standalone Company financial statements here together with the Group consolidated financial statements, the
Company is taking advantage of the exemption in Section 408 of the Companies Act 2006 not to present its individual income
statement and related notes that form a part of these financial statements.
Net profit/(loss) attributable to equity shareholders of the Company
3. Loans and advances to banks
Repayable on demand
2016
£m
6.5
2016
£m
0.8
2015
£m
(1.2)
2015
£m
0.5
There were no collective or individual provisions for impairment against loans and advances to banks. All amounts are considered
to be cash and cash equivalents.
4. Investment in Group undertakings
As at 1 January
Capital injections - share capital
Capital contributions - Share-based payments
As at 31 December
2016
£m
411.5
–
3.5
415.0
2015
£m
334.0
74.1
3.4
411.5
As at 31 December 2016, £nil investments (31 December 2015: £nil) were classed as impaired.
Investment in subsidiaries
The Company owns 100 per cent of the issued share capital of Aldermore Bank PLC, which is a registered bank. Details of
subsidiary undertakings of the Bank are provided in Note 23 to the consolidated financial statements.
All the companies listed in Note 23 to the consolidated financial statements are related parties to the Company.
203
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Additional Tier 1 Perpetual Loan
On 9 December 2014, the Company set up a perpetual loan of indefinite duration that is repayable at the option of the Bank, and
bears interest at an initial rate of 11.875 per cent per annum until 30 April 2020 and thereafter at the relevant Reset Interest Rate
as provided in the loan agreement. The loan has been classified as an investment in a subsidiary undertaking and is carried at cost
in accordance with IAS 27. Interest on the loan is recognised on payment as that is the point at which the unconditional receipt by
the Company is established.
5. Related party transactions
Details of related party transactions of the Company are provided in Note 41 to the consolidated financial statements.
6. Amounts receivable from Group undertakings
Group relief on contingent convertible securities
Subordinated loan to Aldermore Bank PLC
2016
£m
–
60.9
60.9
2015
£m
0.4
–
0.4
On the 28 October 2016, the Company made a £60 million subordinated 8.50 per cent loan to Aldermore Bank PLC, repayable in
2026, with an option for the Bank to redeem after five years. The interest rate is fixed until October 2021. The loan is carried in the
statement of financial position at amortised cost.
7. Amounts payable to Group undertakings
Employee Benefit Trust
2016
£m
0.9
2015
£m
–
During 2016, the Bank made an interest free loan to the Employee Benefit Trust (“EBT”) in order to purchase own shares to enable
the Group to meet future share-based payments awards as detailed in Note 10.
8. Subordinated notes
Subordinated notes
2016
£m
60.9
2015
£m
–
On 28 October 2016, the Company issued £60 million subordinated 8.50 per cent notes, repayable in 2026, with an option for the
Company to redeem after five years. The loan notes are carried in the statement of financial position at amortised cost.
9. Share capital
Details of share capital and share premium account of the Company are provided in Note 36 to the consolidated
financial statements.
10. Share-based payments
Details of share-based payments issued by the Company are provided in Note 37 to the consolidated financial statements.
During June 2016, an Employee Benefit Trust (“EBT”) purchased 466,179 of Aldermore Group PLC’s ordinary £0.10 shares from
the market for consideration of £0.9 million. Purchases were made to enable the Group to meet a future share-based payment
obligation in respect of the recruitment award as detailed in Note 36. These purchases constitute own shares held by a Group EBT
and are recorded against retained earnings within equity.
This purchase constitutes own shares held by a Group EBT and the related costs are recorded against retained earnings
within equity.
204
Aldermore Group PLC Annual Report and Accounts 2016
Financial statements
Notes to the Company financial statements
continued
11. Contingent convertible securities
Details of the contingent convertible securities issued by the Company are provided in Note 38 to the consolidated
financial statements.
12. Risk management
Through its Risk Management Framework, the Group is responsible for determining its principal risks, and the level of acceptable
risks, as stipulated in the Group’s risk appetite statement, thus ensuring that there is an adequate system of risk management so
that the levels of capital and liquidity held are consistent with the risk profile of the business.
The risk management disclosures of the Group on pages 106 to 139 apply to the Company where relevant and therefore no
additional disclosures are included in this note.
13. Fair value of financial assets and liabilities
The Directors consider that the fair value of its financial assets and liabilities are approximately equal to their carrying value.
Accordingly no further disclosures in respect of fair values are provided.
14. Controlling party information
Details of controlling party information of the Company are provided in Note 41 to the consolidated financial statements.
15. Post balance sheet events
There have been no material post balance sheet events.
205
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Appendices
Glossary
Shareholder information
206
210
206
Aldermore Group PLC Annual Report and Accounts 2016
Glossary
AIP: Annual Incentive Plan. Annual bonus
scheme that is open to selected
senior employees.
ALCO: Asset and Liabilities Committee.
Responsible for managing the Group’s
exposure to capital, liquidity, interest rate and
market risk.
Allowance for impairment losses: Allowances
held against assets on the statement of
financial position as a result of the raising
of a charge against profit for the incurred
losses in the lending book. The allowance
represents management’s best estimate of
losses incurred in the loan portfolio at the
reporting date.
AnaCap: See “Principal Shareholders” below.
Arrears: Customers are said to be in arrears
or non-performing when they are behind
in fulfilling their obligations with the result
that an outstanding loan is unpaid or
overdue. Corporate customers may also be
considered non-performing prior to being
behind in fulfilling their obligations. This can
happen when a significant restructuring
exercise begins.
AT1 Capital: See “Contingent Convertible
Securities” below.
Bank: Aldermore Bank PLC, the principal
subsidiary of Aldermore Group PLC. Bank is
authorised by the Prudential Regulation
Authority and regulated by the Financial
Conduct Authority and the Prudential
Regulation Authority (Financial Services
Register Number: 204503). It is registered in
England (company number: 00947662).
Basel II: A statement of best practice
issued by the Basel Committee on Banking
Supervision, that defines the methods by
which firms should calculate their regulatory
capital requirements to retain enough capital
to protect the financial system against
unexpected losses. Basel II became law in
the EU Capital Requirements Directive, and
was implemented in the UK via the then
FSA Handbook.
Basel III: A strengthening of the requirements
laid out in Basel II and has been phased
into the Group from 2014 ahead of full
implementation by 2022. Basel III is
implemented within the European Union
(including the UK) through CRD IV.
Basis points (bps): One hundredth of a per
cent (0.01%). 100 basis points is 1%. It is used
in quoting movements in interest rates or
yields on securities.
BBR: Bank of England Base Rate.
Board: The Board of Directors of Aldermore
Group PLC.
Capital Requirements Directive (CRD IV):
This encompasses the Capital Requirements
Directive and the Capital Requirements
Regulation (CRR) as well as the PRA’s Policy
Statement PS7/13: “Strengthening capital
standards”. CRD IV implements Basel III within
the European Union (including the UK) and is
a strengthening of the requirements laid out
in Basel II.
Capital Requirements Regulation (CRR):
The European Union has implemented
the Basel III capital proposals through the
Capital Requirements Regulation (CRR) and
the Capital Requirements Directive (CRD),
collectively known as CRD IV. CRD IV was
implemented on 1 January 2014.
Capital resources: Capital held, allowable
under regulatory rules, less certain
regulatory adjustments and deductions that
are required to be made. Capital includes
retained earnings, share capital and
share premium.
Capital risk: The risk that the Group has
insufficient capital to cover regulatory
requirements and growth plans.
CCA: Consumer Credit Act.
CEO: Chief Executive Officer, Philip Monks.
CET1: See Fully Loaded CRD IV Common
Equity Tier 1 (CET1) capital.
CFO: Chief Financial Officer, James Mack.
CFP: Contingency Funding Plan.
Outlines what actions the Group could take to
ensure it complies with the liquidity adequacy
rules, maintains sufficient capital and
operated within its risk appetite and limits,
as set and approved by the Board. Forms part
of the Group’s Recovery and Resolution Plan
(see “RRP” below).
Chairman: Danuta Gray (interim).
CML: Council of Mortgage Lenders, the
main trade body representing UK mortgage
lenders, of which Aldermore Bank PLC is a
full member.
Collateral: A borrower’s pledge, usually
a property, which acts as security for
repayment of the loan.
Company: Aldermore Group PLC as a
standalone entity. Aldermore Group PLC
is registered in England (company number:
06764335).
Conduct risk: The risk of detriment to the
Group’s customers due to the inappropriate
execution of its business activities
and processes.
Contingent Convertible Securities: Fixed
Rate Reset Additional Tier 1 Perpetual
Subordinated Contingent Convertible
Securities also referred to as AT1 Capital.
The Group issued £75 million of AT1
securities on the Irish Stock Exchange on
9 December 2014.
COO: Chief Operating Officer, Dana Cuffe.
Cost of risk: Cost of risk is defined as credit
impairment losses divided by average gross
loans for a given period.
Cost/income ratio: Administrative expenses
including depreciation and amortisation
divided by total operating income.
Coverage ratio: The proportion of
individually impaired loans and advances
that are covered by individual allowances for
impairment losses.
CRD III: The Third Capital Requirements
Directive issued by the EU. CRD III has been
superseded by CRD IV.
CRD IV: The Fourth Capital Requirements
Directive issued by the EU, intended
to implement the Basel III agreement.
Preceded by CRD III.
Credit impairment: Impairment losses on
loans and advances to customers.
Credit risk: The risk of financial loss arising
from a borrower failing to meet their financial
obligations to the Group in accordance with
agreed terms.
Credit Support Annex (CSA): The swap Credit
Support Annex agreement requires the
Group or a swap counterparty to hold cash in
a deposit account, depending on whether the
swap is in or out of the money.
CRO: Chief Risk Officer, Christine Palmer.
Customers’ accounts: Money deposited by
individuals and companies that are not credit
institutions. Such funds are recorded as
liabilities in the Group’s statement of financial
position under “customers’ accounts”.
Debt securities in issue: Securities issued
by the Group that are secured on certain
portfolios of variable and fixed rate
mortgages through the Group’s securitisation
vehicle, Oak No. 1 PLC.
Derivative: A financial instrument that has
a value based on the expected future price
movements of the instrument to which it
is linked.
Appendices 207
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Disclosure and Transparency Rules (DTR):
A set of rules implemented by the United
Kingdom Listing Authority which covers
matters relating to financial reporting.
DRR Regulations: Large and Medium-sized
Companies and Groups (Accounts and
Reports) Regulations 2008.
DSP: Deferred Share Plan. A share plan under
which a proportion of the annual bonus
earned by selected senior employees is
deferred into shares.
Effective Interest Rate (EIR): The effective
interest rate method calculates the
amortised cost of a financial asset or financial
liability, and allocates the interest income
over the relevant period. The effective
interest rate is the rate that exactly discounts
estimated future cash receipts through the
expected life of the financial asset or financial
liability. Calculation of the effective interest
rate takes into account all contractual terms
of the financial instrument but includes all
amounts received or paid that are an integral
part of the overall return, direct incremental
transaction costs related to the acquisition
or issue of a financial instrument and all other
premiums and discounts.
Emergence Period (EP): The time between a
trigger event occurring and the loans being
identified as individually impaired.
EPS: Earnings per share.
EU: European Union.
Executive Directors: Phillip Monks (CEO) and
James Mack (CFO).
Executive Committee: Comprises Phillip
Monks (CEO), James Mack (CFO), Christine
Palmer (CRO), Dana Cuffe (COO), Carl
D’Ammassa (Group Managing Director –
Business Finance), Charles Haresnape (Group
Managing Director – Mortgages) and Rob
Divall (Group HR Director). Charles is leaving
the Group in 2017. A search is underway for
his replacement. Under the leadership of the
CEO, the Executive Committee is responsible
for the management of the Group.
Expected loss (EL): A measure of anticipated
loss for exposures captured under an
internal ratings based credit risk approach.
The 12 month expected loss amount is the
exposure, arising from a potential default
of a counterparty, over the next 12 months
in respect of the amount expected to be
outstanding at default.
Exposure at default (EaD): An estimate of the
amount expected to be owed by a customer
at the time of a customer’s default.
External audit: An independent opinion, by an
external firm (KPMG LLP), on the Group and
Company’s financial statements.
Fair Value: Fair value is defined as the amount
for which an asset could be exchanged, or a
liability settled, between willing parties in an
arm’s length transaction.
Financial Conduct Authority (FCA): The FCA
is responsible for the regulation of conduct
in retail, as well as wholesale, financial
markets and the infrastructure that supports
those markets.
Financial instruments: Any document with
monetary value. Examples include cash and
cash equivalents, but also securities such as
bonds and stocks which have value and may
be traded in exchange for money.
Financial Services Authority (FSA): An
independent non-governmental body, given
statutory powers by the Financial Services
and Markets Act 2000, which regulated the
financial services industry. It was replaced
as the UK’s financial regulator on 1 April 2013
by the Prudential Regulation Authority (PRA)
and the Financial Conduct Authority (FCA).
Financial Services Compensation Scheme
(FSCS): The UK’s compensation fund of
last resort for customers of authorised
financial services firms. The FSCS may pay
compensation to customers, up to a specified
limit, if a firm is unable, or likely to be unable,
to pay claims against it, usually because it
has stopped trading or has been declared in
default. The FSCS is funded by the financial
services industry. Every firm authorised
by the PRA is obliged to pay an annual levy,
which goes towards its running costs and
compensation payments.
Forbearance: Forbearance takes place when
a concession is made on the contractual
terms of a loan in response to borrowers
financial difficulties. Forbearance options
are determined by assessing the customer’s
personal circumstances.
Forced Sale Discount (FSD): The difference in
sale proceeds between a sale under normal
conditions and a sale at auction.
FTSE 250: The share index consisting of the
101st to 350th largest company listed on the
London Stock Exchange. Aldermore Group
PLC has been a member of the FTSE 250
since June 2015.
Fully loaded CRD IV Common Equity Tier 1
(CET1) capital: A measure of capital that is
predominantly common equity as defined
by the Capital Requirements Regulation.
CET 1 capital is the highest quality of capital
and comprises share capital, share premium,
capital redemption reserve, available
for sale reserve, net assets and retained
earnings. The book values of goodwill and
intangible assets as well as other regulatory
adjustments, including the full 12 month
amount of expected loss over provisions, are
deducted from Common Equity Tier 1 capital
for the purposes of capital adequacy.
Funding for Lending Scheme (FLS): Launched
by The Bank of England. Originally due to end
in January 2015, the FLS was subsequently
extended and will now end in January 2018.
Gap: The Bank’s net exposure between fixed
and variable rate elements being managed
within its market risk, e.g. interest rate
movements (see Market risk).
GIA: Group Internal Audit.
Group: The Aldermore Group PLC standalone
entity and its subsidiary undertakings,
including its principal subsidiary, Aldermore
Bank PLC. Aldermore Group PLC is registered
in England (company number: 06764335).
Hedging: A technique used by the Group to
offset risks on one instrument by purchasing
a second instrument that is expected to
perform in the opposite way.
Help to Buy: “Help to Buy” was formed as
part of the 2013 Budget announcement by
the Government and is part of a package
of measures designed to increase the
availability of low-deposit mortgages for
credit worthy households and to boost the
supply of new housing.
HMO: Houses of multiple occupancy.
A property rented out by at least 3 people
who are not from 1 “household” (e.g. a family)
but share facilities like the bathroom
and kitchen. It is sometimes called a
“house share”.
HPI: House Price Index.
IASB: International Accounting Standards
Board. A London-based organisation which
seeks to set and enforce standards for
accounting procedures. It is responsible
for maintaining the International Financial
Reporting Standards (IRFS).
IFRSs: International Financial Reporting
Standards, the accounting standards subject
to endorsement by the EU by which the Group
prepared its statutory accounts commencing
from 1 January 2014.
Impaired loans: Loans where the Group does
not expect to collect all the contractual cash
flows or expects to collect them later than
they are contractually due.
208
Aldermore Group PLC Annual Report and Accounts 2016
Glossary
continued
Impairment allowance: A loss allowance held
on the statement of financial position as a
result of the raising of a charge against profit
for the incurred losses in the lending book.
An impairment loss allowance may be either
individual or collective.
Independent Non-Executive Directors:
A Director that is free from any business
or other relationship that could materially
interfere with the exercise of their
independent judgement.
Individual Capital Guidance (ICG): The PRA’s
statement as to the regulatory capital under
Pillar 2a that it expects the Group to hold over
the Pillar 1 requirement.
Individual Liquidity Adequacy Assessment
(ILAA): The Group’s assessment of its
liquidity risks, controls and quantification
of liquid assets required to survive severe
financial shocks addressed through the use
of stress tests prescribed by the PRA (see
Liquidity risk).
Individually significant: Large value loans that
exceed a balance threshold established by the
Group, above which it is deemed appropriate
to assess accounts for impairment on an
individual basis.
Initial Public Offering (IPO): The act of
offering ordinary equity shares of a company
on a public stock exchange for the first
time. The Group completed its IPO on
13 March 2015.
Interest rate risk: The risk of financial loss
through un-hedged or mismatched asset
and liability positions sensitive to changes in
interest rates.
Interim Chairman: Danuta Gray.
Internal audit: The examination of the Group’s
records and reports by its employees.
Internal audits are usually intended to prevent
fraud and to ensure compliance with Board
directives and management policies.
Internal Capital Adequacy Assessment
Process (ICAAP): The Group’s own
assessment, as part of Basel II and Basel III
requirements, of the levels of capital that
it needs to hold in respect of its regulatory
capital requirements (for credit, market and
operational risks) and for other risks including
stress events.
KMP: Key management personnel, namely
Directors of the Group and members of the
Executive Committee.
KPIs: Key performance indicators.
Leverage ratio: A CRD IV measure,
calculated as the ratio of Tier 1 capital to
total exposures. Total exposures include
on-balance sheet items, off-balance sheet
items and derivatives. The leverage ratio is
a supplementary measure to the risk based
capital requirements and is intended to
constrain the build-up of excess leverage in
the banking sector.
LIBOR (London Interbank Offered Rate): The
interest rate participating banks offer to
other banks for loans on the London market.
Liquid Asset Buffer: The stock of assets
which the Bank has available in order to
manage its liquidity risk. These assets have
relatively short maturity dates.
Liquidity risk: The risk that the Group is not
able to meet its obligations as they fall due, or
can only do so at excessive cost.
Loan to value (LTV): A ratio which expresses
the amount of a mortgage outstanding as
a percentage of the value of the property.
The Group calculates residential mortgage
LTV on an indexed basis (the value of the
property is updated on a quarterly basis to
reflect changes in the house price index (HPI).
Loans to Deposit Ratio: The ratio of
loans and advances to customers net of
allowance for impairment losses divided by
customer deposits.
Loss given default (LGD): An estimate of the
actual loss that would occur in the event of
default expressed as a percentage of the
Exposure at Default.
LPA: Law of Property Act.
LSE: London Stock Exchange.
Market risk: The financial impact from
movements in market prices on the value
of assets and liabilities. The majority of the
Bank’s market risk arises from changes in
interest rates.
MIA: Months in arrears.
Monte Carlo simulation: A broad class
of computational algorithms that rely
on repeated random sampling to obtain
numerical results.
Net interest income: The difference between
interest received on assets and interest paid
on liabilities after taking into account the
effect of hedging derivatives.
Net Interest Margin (NIM): Net interest
income as a percentage of average interest-
earning assets.
Net revenue margin: Total operating income
as a percentage of average interest-
earning assets.
NPL (non-performing loans) ratio: Individually
impaired loans expressed as a percentage of
gross loans.
Oak No 1 PLC: The Group’s securitisation
vehicle. Oak No.1 PLC is registered in England
(company number: 08814635).
Operational risk: The risk of financial loss
and/or reputational damage resulting from
inadequate or failed internal processes,
people and systems or from external events
including financial crime.
Origination: The process of creating or
acquiring a loan or mortgage.
Parent Company: Aldermore Group PLC.
Aldermore Group PLC is registered in England
(company number: 06764335).
Past due: When a counterparty has failed to
make a payment when contractually due.
Pillar 1: Minimum capital requirement under
Capital Requirements Regulation.
Pillar 2a: PRA’s guidance as to regulatory
capital it expects a bank to hold above Pillar 1.
Pillar 3: The part of CRD IV that sets out
disclosure requirements in relation to their
risks, the amount of capital required to
absorb them, and their approach to risk
management. The aim is to strengthen
market discipline.
Principal Shareholders: Collectively
AnaCap Financial Partners L.P., AnaCap
Financial Partners II, L.P., AnaCap Derby
Co-Investment (No.1) L.P. and AnaCap Derby
Co-Investment (No.2) L.P.
Probability of default (PD): The likelihood
that a loan will not be repaid and will fall into
default. To calculate PD, the Group assesses
the credit quality of borrowers and other
counterparties and assigns them an internal
risk rating.
Prudential Regulation Authority (PRA):
The FSA was replaced as the UK’s financial
regulator on 1 April 2013 with two new
regulatory bodies: the PRA and the FCA.
The PRA, a subsidiary of the Bank of England,
is responsible for promoting the stable and
prudent operation of the financial system
through regulation of all deposit-taking
institutions, insurers and investment banks.
PSP: Performance Share Plan. A share plan
that is open to selected senior employees.
Pts: Percentage points.
RAF: Risk Appetite Framework.
Appendices 209
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Tier 1: A regulatory measure of financial
(capital) strength. Tier 1 is divided into
Common Equity Tier 1 (CET1) and Additional
Tier 1 capital. CET 1 capital comprises share
capital, share premium, capital redemption
reserve, available for sale reserve and
retained earnings. The book values of
goodwill and intangible assets are deducted
from CET1 capital and other regulatory
adjustments may be made for the purposes
of capital adequacy. Qualifying capital
instruments such as Contingent Convertible
Securities are included in Additional Tier
1 capital.
Tier 1 ratio: Tier 1 capital divided by Risk
Weighted Assets.
Tier 2: Tier 2 capital comprises the Group’s
subordinated notes and collective impairment
allowance (for exposures treated on a Basel
II standardised basis). Certain regulatory
deductions may be made for the purposes of
assessing capital adequacy.
Total capital ratio: The sum of the Tier 1 capital
ratio and the Tier 2 capital ratio.
TSR: Total Shareholder Return. A measure
of performance that combines share price
appreciation and dividends paid to show the
total return to the shareholder expressed as
an annualised percentage.
UK GAAP: United Kingdom Generally
Accepted Accounting Practice, the
accounting standards to which the Group
prepared its statutory accounts until
31 December 2013.
Unsecured lending: Lending for which there is
no collateral for the loan.
SIP: Share Incentive Plan. A share plan that is
open to all employees.
SMEs: Small and medium sized businesses
engaging with the Group as customers.
SREP: Supervisory Review Evaluation
Process. The SREP is a process by which the
PRA will (taking into account the nature, scale
and complexity of a firm’s activities) review
the arrangements, strategies, processes
and mechanisms implemented by a firm to
comply with its regulatory requirements laid
down in PRA rules and the CRR, evaluate the
risks to which the firm is or might be exposed,
assess the risks that the firm poses to the
financial system, and evaluate the further
risks revealed by stress testing.
Standard Variable Rate (SVR): A variable and
basic rate of interest charged on a mortgage.
This may change in reaction to market
conditions resulting in monthly repayments
going up or down. Within Aldermore the SVR
is called the Aldermore Managed Rate (AMR).
Strategic risk: The risk which can affect the
Group’s ability to achieve its corporate and
strategic objectives.
Supervisory Authority: The UK Prudential
Regulation Authority.
Term Funding Scheme (TFS): Designed to
reinforce the transmission of Bank Rate cuts
to those interest rates actually faced by
households and businesses by providing term
funding to banks at rates close to Bank Rate.
The TFS also provides participants with a cost
effective source of funding.
The Bank: Aldermore Bank PLC, the principal
subsidiary of Aldermore Group PLC. Bank is
authorised by the Prudential Regulation
Authority and regulated by the Financial
Conduct Authority and the Prudential
Regulation Authority (Financial Services
Register Number: 204503). It is registered in
England (company number: 00947662).
The Group: The Aldermore Group PLC
standalone entity and its subsidiary
undertakings, including its principal
subsidiary, Aldermore Bank PLC.
Aldermore Group PLC is registered in England
(company number: 06764335).
Recovery and Resolution Plan (RRP): The
FSA required all UK deposit takers and large
investment firms to draw up a Recovery
and Resolution Plan by 31 December 2012.
The Recovery Plan assesses and documents
the recovery options available in situations
of financial stress or negative financial
shocks, either market-wide or idiosyncratic.
The Resolution Plan will provide authorities
with sufficient information to enable them
to determine a detailed roadmap to resolve a
failed financial institution, without resorting
to government (effectively taxpayer)
support.
Return on Equity (RoE): The ratio of profit for
the year (after tax) to average shareholders’
equity, expressed as a percentage.
Risk Weighted Assets (RWA): A measure of
a bank’s assets adjusted for their associated
risks. Risk weightings are established in
accordance with Basel II.
RMBS: Residential Mortgage Backed
Securities. See “Securitisation” below.
RMF: Risk Management Framework. The Risk
Management Framework outlines the
governance, policies, procedures, systems,
tools, techniques and activities by which
the Board and senior management establish
and monitor the Group’s risk appetite and
effectively manage risk.
RSP: Restricted Share Plan. A share plan that
is open to selected senior employees.
SBP: Share-based payments.
Securitisation: Securitisation is a process by
which a group of assets, usually loans, are
aggregated into a pool, which is used to back
the issuance of new securities. A company
sells assets to a securitisation vehicle which
then issued securities backed by the assets.
This allows the credit quality of the assets
to be separated from the credit rating of
the original company. Assets used in the
securitisations undertaken to date include
mortgages to create residential mortgage
backed securities (RMBS). The Group
established Oak No 1 PLC as part of its
funding and capital management activities.
Senior Independent Director: Danuta Gray
joined the Board in September 2014 and
acted as the Senior Independent Director
from her appointment until 7 February 2017,
when she was appointed as Interim Chairman.
Danuta Gray will resume her responsibilities
as Senior Independent Director on the
appointment of a new Chairman.
210
Aldermore Group PLC Annual Report and Accounts 2016
Shareholder information
Annual General Meeting
(AGM)
The AGM will be held on 16 May 2017
at the offices of Linklaters LLP,
1 Silk Street, London EC2Y 8HQ,
commencing at 11.00am. Further details
about the meeting, including the
proposed resolutions, can be found
in the Notice of AGM which will be
posted to shareholders and made
available on the Company’s website at
www.investors.aldermore.co.uk
Reports and
communications
The Group issues regulatory
announcements through the
Regulatory News Service (“RNS”);
shareholders can view releases via
the “News and Results” section
of the Company’s website at
www.investors.aldermore.co.uk.
You will also find frequently asked
questions on shareholding matters on
the website.
A summary of our statutory reports
and shareholder communications
which can also be found in the “News
and Results” section of the Company’s
website are listed below:
Information on your
shareholding
The Company’s register of members
is maintained by Equiniti Limited who
act as our registrar. If you have any
questions about your shareholding or
you require any other guidance, you can
contact Equiniti as follows:
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
United Kingdom
Tel: 0371 384 2030
Correspondence should refer to
Aldermore Group PLC and include your
full name, address and your 8 or 11 digit
Shareholder Reference which can be
found on your Aldermore Group PLC
share certificate or proxy card.
A range of shareholder information
and forms are available online at
Equiniti’s shareholder website,
www.shareview.co.uk, including the
portfolio service which gives you
access to more information on your
investment. By registering for this
service you can also:
• Elect to view company
communications online
Tel: +44 121 415 7047 (if calling from
outside the UK)
• Research market news and data to
help your investment decisions
Lines open 8.30am to 5.30pm (UK time),
Monday to Friday (excluding public
holidays in England and Wales)
Website: www.shareview.co.uk
• Update your details online, including
your address or UK bank mandate
• Buy and sell shares easily through
Equiniti’s Shareview Dealing service
• Create your own investment portfolio
showing all of your shareholdings
using Shareview Portfolio
• Email queries securely
Available format
Month
Online
Full-year results
Annual Report and Accounts
Pillar 3 report
Notice of AGM and voting materials
Q1 trading update
Interim results
Q3 trading update
Mar
Apr
Apr
Apr
May
Aug
Nov
Y
Y
Y
Y
Y
Y
Y
RNS
Y
Y
Y
Y
Paper
Y
Y
Appendices 211
Strategic report
Corporate governance
Risk management
Financial statements
Appendices
Share price information
Shareholders can access both the
latest and historical share prices on our
website at www.investors.aldermore.
co.uk. For a real-time buying or
selling price, you will need to contact
a stockbroker.
Electronic shareholder
communications
As an alternative to receiving
documents in hard copy, shareholders
can choose to receive all Company
information, such as the Annual
Report and Accounts and Notice
of AGM, electronically. This way of
receiving information has a number of
advantages, including quicker delivery
of documents and the ability to access
reports and results on the internet
wherever you are. There are also cost
and environmental benefits due to the
reduction in printing, packaging and
postage costs.
Registering for electronic
shareholder communications is very
straightforward and can be done online
at any time via Equiniti’s shareholder
website at www.shareview.co.uk
Share dealing services
The Company itself does not endorse
or recommend any one service for the
buying or selling of shares. The price
and value of any investments and any
income from them can fluctuate and
may fall. Therefore, you may get back
less than the amount you invested.
Past performance is not a guide to
future performance.
ShareGift is a charity (No.1052686)
which realises the value locked up in
small shareholdings. The resulting
proceeds are donated to a wide range
of charities based on donor suggestion.
For further details please visit
www.sharegift.org
Share fraud – warning to
shareholders
In recent years, a number of other
companies have become aware
that their shareholders have
received unsolicited phone calls
or correspondence concerning
investment matters. These are typically
from overseas-based organisations
who target UK shareholders, offering
to sell them what often turn out to be
worthless or high-risk shares in US
or UK investments. These operations
are commonly known as “boiler
rooms”. They can be very persistent
and extremely persuasive, and may
attempt to persuade individuals to
provide email addresses or other
personal information. We are not aware
of any Aldermore Group investors
having been targeted, but we would
urge you to remain vigilant.
It is not just the novice investor that
has been duped in this way; many of the
victims had been successfully investing
for several years. 5,000 people contact
the Financial Conduct Authority (“FCA”)
about share fraud each year, with
victims losing an average of £20,000.
The FCA provides the following
guidance should you be contacted in
this manner:
• obtain the name of the person calling
and the organisation they represent;
• check that they are properly
authorised by checking the FCA
register of regulated firms at
www.fca.org.uk/firms/financial-
services-register;
• call the organisation back to verify
their identity using the telephone
number listed for them on the
FCA register;
• search the FCA list of unauthorised
firms and individuals to avoid doing
business with at www.fca.org.uk/
consumers/unauthorised-firms-
individuals#list. If you deal with
an unauthorised firm you will not
be eligible to receive payment
under the Financial Services
Compensation Scheme;
• report any suspicions to the FCA
either by calling 0800 111 6768
or completing the online form at
www.fca.org.uk/consumers/report-
scam-unauthorised-firm and if the
calls persist, hang up; and
•
if you have already paid money to
share fraudsters you should contact
Action Fraud on 0300 123 2040.
212
Aldermore Group PLC Annual Report and Accounts 2016
Shareholder information
continued
To reduce the risk of becoming a victim
of fraud you should:
• ensure all your certificates are stored
in a safe place, or hold your shares
electronically in CREST (electronic
settlement system for UK and Irish
securities) via a nominee;
• reduce the number of cold
calls you receive by registering
with the Telephone Preference
Service on 0345 070 0707 or by
visiting www.tpsonline.org.uk.
Alternatively you can also register
by writing to Telephone Preference
Service, DMA House, 70 Margaret
Street, London W1W 8SS;
• keep all correspondence containing
your shareholder reference in a
safe place;
• shred all unwanted correspondence;
•
inform Equiniti as soon as possible
if you change your address.
If you receive a letter from Equiniti
regarding a change of address and
have not recently moved house,
please contact them immediately.
You may be a victim of identity theft;
• know when dividends will be paid.
You can request that dividends be
paid direct to your bank, reducing the
risk of cheques being intercepted or
lost in the post. If you change your
bank account, inform Equiniti of the
details of your new account; and
• consider getting advice from a
suitably authorised financial advisor
before making any investment
decision, particularly if the type of
investment is unfamiliar to you.
Appendices Designed and produced by Radley Yeldar www.ry.com
Aldermore are committed to caring for the environment and looking for sustainable ways to minimise our impact on it.
This report has been printed on paper which is certified by the Forest Stewardship Council®. The paper is Process Chlorine
Free (PCF) made at a mill with ISO 14001 environmental management system accreditation. This report was produced using
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Aldermore Group PLC
Registered Office:
Apex Plaza
4th Floor Block D
Forbury Road
Reading
Berkshire
RG1 1AX
United Kingdom
aldermore.co.uk