Aldermore Group PLC
Report and Accounts for the
year ended 30 June 2019
Company Information
Strategic Report
Strategic Overview
Business Model
Market Overview
Financial Highlights
Business Review
Business Finance
Retail Finance
MotoNovo Finance
Central Functions
Corporate Responsibility
Corporate Governance
Corporate Governance Structure
Audit Committee Report
Risk Committee Report
Remuneration Committee Report
Directors’ Report
Risk Management
The Group’s Approach to Risk
Risk Principles
Risk Management and Internal Control
Risk Management Framework
Risk Governance and Oversight
Stress Testing
Principal Risks
Emerging Risks
2
3
3
4
6
11
13
15
16
17
20
21
23
26
30
33
33
33
33
34
36
37
39
Financial statements
Statement of Directors’ responsibilities
61
Independent auditor’s report
62
Consolidated financial statements
Notes to the consolidated
financial statements
The Company financial statements
Notes to the Company financial statements
71
77
140
143
For more information on our business visit:
www.aldermore.co.uk
1
Aldermore Group PLC | Annual Report and Accounts 2019
Executive Directors
Phillip Monks
James Mack
Christine Palmer
Company Information
Non-Executive Directors
Pat Butler
Johan Burger – Resigned 31 August 2018
Danuta Gray
John Hitchins
Harry Kellan – Appointed 8 October 2018
Alan Pullinger
Peter Shaw
Christopher Stamper – Resigned 3 July 2019
Cathy Turner
Secretary and Registered Office
Marius Van Niekerk
c/o Aldermore Bank Plc
4th Floor, Block D
Apex Plaza,Forbury Road
Reading
Berkshire
RG1 1AX
Independent Auditor
Deloitte LLP
Hill House
1 Little New Street
London
EC4A 3TR
Company number: 06764335
2
Strategic Report
Strategic Overview
Aldermore’s ambition is to help customers seek and seize opportunities in their professional and personal lives by providing
innovative financing and deposit products. The customer need for this support remains as strong and as necessary today as it did
when we launched following the 2008 banking crisis.
Group restructuring
It has been a landmark year, marking Aldermore Bank’s tenth anniversary and our first full year of trading under our new parent
FirstRand Group. We have also restructured to bring Aldermore and FirstRand’s other UK business MotoNovo, a leading motor finance
company, together.
A new entity, MotoNovo Finance Limited (‘’MotoNovo Finance’’), was established under Aldermore Group as a sister subsidiary to
Aldermore Bank. On 4 May 2019, in addition to all of the employees of MotoNovo transferring to this new company, certain trading
assets and liabilities, along with the balance of dealer financing, were acquired by MotoNovo Finance from the London branch of
FirstRand Bank Limited (the “Branch”). As the acquisition was deemed to have been a “common control transaction”, i.e. within the
same group, the assets and liabilities transferred have been recognised at their existing book values within the Aldermore Group
accounts.
Capital to support the first 15 months of trading was injected by the FirstRand Group into Aldermore Group with sufficient capital to
support regulatory requirements downstreamed to MotoNovo Finance.
On 5 May 2019, MotoNovo Finance began trading as part of the Aldermore Group with all new MotoNovo Finance lending from this
date funded via a liquidity facility with Aldermore Bank and reported as part of the Aldermore Group financial results. MotoNovo
Finance is also responsible for servicing, on behalf of the Branch, the existing back book of loans which are expected to run off over
the next three to four years. These outstanding back book loans are not included within the Aldermore results as at 30 June 2019 but
remain on the balance sheet of the Branch. The costs of servicing the back book are recharged to the Branch under a transfer pricing
agreement at arm’s length.
Continued growth
Aldermore Bank provides financing to support UK small and medium sized enterprises (“SMEs”), and supports investors and home-
buyers with mortgage finance, while offering a dynamic online savings proposition. We serve our customers and intermediary
partners online, by phone, and face to face through eight offices in the UK.
MotoNovo Finance, based in Cardiff, helps UK consumers by bringing straight forward finance to people looking to buy their next car,
van or motorcycle. See page 15 for further details.
Together, we have grown to almost 2,000 colleagues serving over 300,000 customers, with both businesses being leaders in their
specialist fields.
Strong leadership and effective governance
Although no longer listed on the London Stock Exchange, we are committed to maintaining the highest standards of corporate
governance. We intend to adopt the Wates Corporate Governance principles for the financial year ending 30 June 2020.
During the year, we welcomed Harry Kellan, Chief Financial Officer of the FirstRand Group, to the Board as a Non-Executive Director.
The year also saw the departure of Johan Burger and Christopher Stamper from the Board. We thank them for their valuable
contributions.
We also continued to strengthen our leadership team, welcoming Zish Khan as Chief Operating Officer and, following the departure
of Carl D’Ammassa, Tim Boag joined us as Interim Group MD, Business Finance. Mark Standish, CEO of MotoNovo, is another
experienced and entrepreneurial addition to the Aldermore Group leadership team.
A bright combined future
Our latest results demonstrate the strength of the Aldermore and MotoNovo Finance brands and propositions in increasingly
challenging markets. The Aldermore Group is well placed to capitalise on future opportunities and we move forward with great
optimism.
Business Model
We operate in select areas of the UK banking market, chosen specifically for their size, attractive returns and strong collateral
characteristics including Asset Finance, Invoice Finance, SME Commercial Mortgages, Residential Owner Occupied Mortgages, Buy-
to-Let and Motor Finance. For the majority of the financial year to 30 June 2019, Aldermore was structured as two distinct customer
facing businesses: Business Finance, comprising Asset Finance, Invoice Finance and SME Commercial Mortgages, and Retail Finance,
comprised of Residential Owner Occupied Mortgages, Buy-to-Let Mortgages and Savings. As of 5 May 2019, we have an additional
customer facing division in MotoNovo Finance.
3
Aldermore’s DNA is built around helping our customers to seize opportunities by being reliable, expert, dynamic and straightforward
in everything that we do. Culturally, MotoNovo is a strong fit, with a closely aligned approach in providing straight forward products
and keeping the customer at the core of everything it does, which gives us confidence for our joint future.
We use systems to intelligently support specialist underwriters to make quick and informed lending decisions delivering award-
winning customer service to our intermediary partners and direct customers. Our credit experts help to ensure that our lending
decisions are aligned to our prudent risk appetite. We use our combined expertise to manage risk across our diversified portfolio
with this robust approach to risk extending to our prudent management of capital and liquidity. Our lending is primarily funded by
retail and business customer savings, with the balance coming principally from wholesale markets.
Market Overview
Macro-economy
Despite the ongoing uncertainty posed by Brexit, the economy remained resilient during the year. The Bank of England base rate
increased to 75bps in August 2018 and remained at this level for the rest of the year with unemployment continuing to trend at
historic lows. As Aldermore is a UK-based company, the main impact of Brexit on Aldermore would be potential deterioration in the
UK economy such as higher interest rates and house prices declining. In preparation for whatever Brexit scenario the UK faces,
Aldermore has established a Brexit Working Group made up of senior managers across the business which feeds into the Group’s
Executive Risk Committee. Aldermore is also engaged with industry wide preparations via the sector trade body, UK Finance. Overall,
we are well prepared, taking all necessary precautions and are in a strong position to deal with Brexit and its impacts.
According to the Office of Budget Responsibility in the Government’s Spring Statement in March 2019, the outlook for UK GDP
economic growth is set to be 1.2% for 2019 with the medium term forecasting remaining around 1.5%.
Whilst our SME Future Attitudes report indicates that customers maintain a positive yet cautious outlook for their businesses, lower
GDP growth could be challenging for lending markets. Aldermore continues to engage with our customers to ensure we offer
appropriate products and services to help with their investment and saving needs.
Legal and regulation
Banking is a highly regulated market. The two UK financial services regulators, the PRA and the FCA, are responsible for effective
prudential supervision and market conduct respectively. These bodies jointly ensure that local and European law is applied to the UK
financial services industry.
In the Spring Statement, the Chancellor announced HM Treasury’s Future Regulatory Framework Review. The call for evidence is
the first phase in a number of planned interventions to determine the long-term effectiveness of the regulatory regime with one
key focus being the impacts of Brexit.
Aldermore waits to see the outcomes from the Future Regulatory Framework Review later this year as well as assessing and
adjusting to the impacts of Brexit.
The FCA published its report into the motor finance sector. It raised concerns regarding product commissioning such as insurance
and finance and has outlined its intention to come forward with new regulations in the near future.
These could impact the cost of motor vehicles, especially in the used car market, with car dealerships increasing the cost of
vehicles as they seek to recoup the income they currently make from the commission on insurance or finance products, from
consumers at the point of sale. The effects on MotoNovo Finance are not likely to be material given our risk adjusted pricing
methodology.
Aldermore has been active in the buy-to-let market, which serviced the rising need for rented accommodation. Market conditions
were extremely positive for many years. However, tax and fee changes have started to have a significant impact.
Since April 2017, the way landlords have to declare their rental income has started to change, meaning most will see their tax
bills rise significantly and tax relief on mortgage interest has been gradually phased out. By April 2020, landlords will not be able
to deduct any mortgage expenses from rental income to reduce their tax bill. Instead, a tax-credit will be received, based on 20%
of the mortgage interest payments. This is less generous for higher-rate taxpayers, who effectively received 40% tax relief on
mortgage payments under the old rules. The new system is being phased in over several years.
Government and regulatory interventions in the buy-to-let market are expected to contribute to a contraction in the size of the
overall market. In 2018, gross buy-to-let lending was £37 billion, down from £41 billion in 2016, according to UK Finance. The
market is also expected to further professionalise, as investors develop property portfolios and use incorporated structures or
special purchase vehicles (‘’SPVs’’) to buy property. Aldermore and other specialists already have strong relationships with
professional landlords but may see increased competition from new entrants into this area of the market.
Landlords have also been impacted from a ban on lettings fees that was introduced by the government as of the 1 June 2019.
Previously, tenants could be charged administration fees – such as tenancy renewal fees, referencing fees and credit check fees
– by landlords and letting agents. Landlords and their agents will no longer be able to charge such fees with any costs now being
met by the landlord.
4
The FCA released its full Mortgage Market Study in March 2019, concluding that the mortgage market was in general working
well for the majority of borrowers but they have announced more action on helping ‘mortgage prisoners’. A consultation closed
in June with a policy statement on ‘mortgage prisoners’ expected later in 2019.
Competition
Competition has continued to intensify in the business finance, mortgage, and car finance markets in which the Group operates. In
the banking sector, technology and reputational issues experienced by some participants have hindered the reputation and public
perception of challenger banks.
The heightened competitive pressure further reinforces the need for lenders to offer a differentiated product and service proposition
and secure effective distribution channels to support growth and customer retention. Aldermore has continued to perform well
during the current period of uncertainty and continues to invest and innovate to maintain its competitive position.
Customer behaviour
Aldermore has remained alert to the changing preferences of customers in managing their financing needs. Our retail savings
proposition was moved online for new accounts in 2018, reflecting the way the majority of customers choose to do business with us
and was positively received. The Business Finance division continues to invest in technology and processes to improve the customer
journey as does MotoNovo Finance which launched www.findandfundmycar.com in direct competition to more established car
search and buying websites. Since www.findandfundmycar.com adopted a “fee free” model in September 2018, it has seen a
significant uptake from dealers and car registrations on the site and is now a serious competitor in the consumer car search and
purchase market.
Our specialist underwriting expertise and focus on putting the customer at the forefront of what we do, enables us to continue
helping more customers to seek and seize opportunities in their professional and personal lives. This enables our continued profitable
growth which also allows us to continue to invest in our products and services, the result of which is reflected in the high levels of
customer advocacy we enjoy.
5
Financial Highlights
A year of continued growth at sustained margins
Statutory profit before tax of £129.6 million (18 month period to 30 June 2018 £195.3 million)
Net loans to customers up by 18% to £10.6 billion (2018: £9.0 billion)
Underlying profit before tax of £135.0 million1 (18 months to 30 June 2018: £231.7 million)
Underlying cost/income ratio increased to 52%1 (2018: 46%) including the cost of MotoNovo Finance for 2 months
Cost of risk at 24bps (2018: 16bps) mainly reflecting the adoption of IFRS9 and the inclusion of MotoNovo Finance
CET1 ratio has strengthened to 14.9% (30 June 2018: 12.3%) reflecting capital injection
Underlying return on equity decreased to 11.4%1 (2018: 17.2%) and return on equity decreased to 10.9% (from 13.9%) due to
capital injection to support MotoNovo Finance
Net loans (£bn)
Net Interest Margin (%)
Statutory profit before tax (£m)1
Underlying profit before tax (£m)1
Cost/income ratio (%)1
Cost of risk (bps)
Return on equity (RoE) (%)
CET1 ratio (%)
^ 2016 and 2018 NIM calculated in line with restated interest income to align with FirstRand Group policy. See point (i) in note 2(c) to the financial
statements
* 2018 represents the 18 month period to 30 June 2018
1 Underlying in 2019 excludes integration costs and the costs and income incurred in MotoNovo Finance for servicing the MotoNovo back book
recharged to FirstRand London Branch. Underlying in 2018 excludes impairment of intangibles, transaction costs and integration costs. See page 10
for a reconciliation from the alternative profit measure to statutory profit
6
Business Overview
During 2018, Aldermore changed its financial year end to 30 June to align with FirstRand Group and as a result of the change in the year
end, the 2018 results presented below are for the 18 month reporting period from 1 January 2017 to 30 June 2018. The 18 month period
comparators have been restated to align the recognition treatment of the income or expense arising from derivatives held at fair value
in hedging relationships with that of FirstRand. The restatement only impacts the Central Function and does not impact total
operating income. More detail can be found in note 2(c) on page 82. As of 5 May 2019, MotoNovo Finance began trading as part of
the Aldermore Group.
2019
2018
Change
Summary balance sheet
Net loans
Cash and investments
Intangible assets
Fixed and other assets
Total assets
Customer deposits
Wholesale funding
Other liabilities
Total liabilities
Ordinary shareholders' equity
AT1
Equity
Total liabilities and equity
Net loans of £10.6 billion
£m
£m
10,595.1
8,990.5
1,835.9
1,397.7
14.8
84.5
14.4
30.1
12,530.3
10,432.7
8,971.8
7,776.3
2,291.2
1,811.5
172.1
86.9
11,435.1
9,674.7
974.2
684.0
121.0
74.0
1,095.2
758.0
12,530.3
10,432.7
%
18
31
2
182
20
15
26
98
18
42
64
45
20
Loan growth in the period was driven by strong levels of origination across both Business Finance and Retail Finance as we continue to
build our diversified portfolio, plus £0.4 billion of lending from MotoNovo Finance driven by strong origination in the final two months
of the year. Net loans to customers reached £10.6 billion (2018: £9.0 billion) as the number of customers grew by 44% including
MotoNovo Finance (11% excluding MotoNovo Finance). Total assets exceeded £12.5 billion, an increase of 20% on 2018.
Deposit-led funding model
Our funding strategy continues to be deposit-led. In 2019, to fund our growing business and future ambitions, we have continued to
complement our deposit base with additional wholesale funding through securitisations and Tier 2 debt securities. The mix across the
funding book remains broadly stable, and as at 30 June 2019, our loan to deposit ratio was in line with the prior period at 118%
(2018: 116%).
We continue to support our asset growth through diversified, deposit-led funding carefully managed to meet the Group’s cashflow
requirements. Deposits were up 15% to £9.0 billion (2018: £7.8 billion). We saw strong growth in our Personal and Business savings
balances, up 16% and 7% respectively, as we built on our strong franchise in the market.
Our savings products won numerous industry awards in the year, including Best Cash ISA Provider and Best Business Savings Provider at
the MoneyComms awards. We also retained c.80% of our maturing balances in the year through our consistently strong customer
service, reflected by high Net Promoter Scores (NPS) in both Personal (+55) and Business Savings (+61), and remain committed to growing
the deposits franchise in Personal, Business and Corporate markets to continue supporting our future lending ambitions.
7
Our actively managed wholesale funding was up 26% to £2.3 billion (2018: £1.8 billion) as we issued Residential Mortgage Backed
Securities (“RMBS”) of £325.0 million in October 2018, and called £78.0 million of RMBS, further diversifying our funding base.
In addition, wholesale funding also includes £1.7 billion of Term Funding Scheme and £212.0 million of Tier 2 debt securities. The Group
has a number of options to replace TFS funding as it matures, including further wholesale and deposit-led funding.
In May 2019, Aldermore Group issued £209.0 million of share capital to FirstRand to support the acquisition by MotoNovo Finance of
the trading assets of MotoNovo from the Branch and pre-fund 15 months of lending growth. The transaction was further supported by
the issuance of £47.0 million Additional Tier 1 Notes and £52 million Tier 2 Notes. Total liabilities and equity have increased by 20% to
£12.5 billion (2018: £10.4 billion).
Summary income statement
Interest income
Interest expense
Net interest income
Net fee and other operating income
Net derivatives expense and gains on disposal of debt securities
Operating income
Expenses, depreciation and amortisation
Share of Profit of Associate
Transaction and Integration costs
Impairment of intangibles and goodwill
Impairment losses on loans and advances to customers
Profit before tax
Tax
Profit after tax
12 month period
to 30 June 2019
£m
18 month period
to 30 June 2018
(restated)
£m
467.3
594.4
(149.2)
(168.0)
318.1
426.4
18.2
4.0
34.6
6.4
340.3
467.4
(181.3)
(216.5)
0.5
(5.4)
(0.7)
(23.8)
129.6
(32.7)
96.9
0.3
(22.2)
(14.2)
(19.5)
195.3
(56.7)
138.6
Key performance indicators
2019
2018
Change %
Net interest margin %
Underlying cost/income ratio %
Cost of risk (bps)
3.3
52
24
3.5
46
16
(0.2)
(6)
(8)
Underlying return on equity %
11.4
17.2
(5.8)
1 Underlying in 2019 excludes integration costs and the costs and income incurred in MotoNovo Finance for servicing the MotoNovo back book
recharged to FirstRand London Branch. Underlying in 2018 excludes impairment of intangibles, transaction costs and integration costs. See page 10
for a reconciliation from the alternative profit measure to statutory profit
8
Interest income reflects continued loan growth
Interest income was £467.3 million (18 months to 30 June 2018: £594.4 million) reflecting the size of the loan book. Despite market
driven rate pressures, our gross interest margin remained robust at 4.8% (2018: 4.8%).
Interest expense of £149.2 million (18 months to 30 June 2018: £168.0 million) reflects the increased funding base required to support
the growth of our lending book. The 15% growth in customer deposits, which is relatively higher cost, coupled with the UK Base Rate
increase of 25bps in August 2018, slightly increased our cost of funds to 1.5% (2018: 1.4%).
As a result, the Bank delivered net interest income of £318.1 million (18 months to 30 June 2018: £426.4million) with our net interest
margin reducing to 3.3% (2018: 3.5%).
Other operating income reflects market changes
Net fee and other operating income of £18.2 million (18 months to 30 June 2018: £34.6 million) includes £10.5 million of income received
from the Branch in relation to the cost incurred to support the MotoNovo back book operations plus an arm’s length mark-up. Excluding
this, net fee and other operating income of £7.7 million was impacted by the continued market trend towards fee free products.
Continued investment
Operating expenses were £187.4 million (18 months to June 2018: £252.9 million) reflecting continued investment in the business,
primarily within increased people costs. The additional roles were largely to strengthen our front office propositions, drive transformation
and change, and further develop back office support functions. We also continued to invest in IT to improve our products and customer
journey, cyber security and have undertaken work to improve data quality in line with regulations. The addition of MotoNovo Finance to
the Group in May 2019, increased our overall cost base by £13.6 million which includes £9.8 million cost incurred in servicing the back
book operations at arm’s length that is recharged to the Branch. We also incurred £5.4 million integration costs relating to the integration
of MotoNovo Finance into Aldermore.
Our underlying cost to income ratio, which excludes £10.5 million cost and fee income related to MotoNovo back book operations,
increased to 52%.
Cost of risk remains well controlled at 24bps
Credit impairment charges were £23.8 million (18 months to 30 June 2018: £19.5 million), reflecting growth of the lending book, the
application of a management overlay to the portfolio for the possibility of a severe economic downturn resulting from a disorderly
(no deal) Brexit and a small number of specific individual provisions in Business Finance, the inclusion of MotoNovo Finance and the
adoption of IFRS 9. Whilst we maintain a robust approach to risk management, our cost of risk has increased to 24bps (2018: 16bps).
Statutory profit of £129.6 million
Profit before tax was £129.6 million (18 months to 30 June 2018: £195.3 million) reflecting the strong interest income performance,
continued investment in the business and £5.5 million loss from MotoNovo Finance as costs to support the business written since 5 May
2019 are incurred ahead of revenue generation from lending originated in the last few months of the year. In the period we also saw our
capital base increase due to retained earnings and additional equity injected by the FirstRand Group to support further lending growth
in MotoNovo Finance. As a result of this capital pre-funding, our return on equity was 10.9% (2018: 13.9%) and we would expect RoE to
continue to be impacted until MotoNovo Finance grows into the current capital base available.
9
Alternative profit measure reconciliation to Statutory Profit
Alternative profit measure reconciliation to Statutory profit
Underlying profit before tax
FirstRand transaction costs
FirstRand integration costs
MotoNovo back book recharges
MotoNovo Finance integration costs
Impairment of intangibles and goodwill
Statutory profit before tax
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
134.3
-
-
0.7
(5.4)
-
129.6
231.7
(19.8)
(2.4)
-
-
(14.2)
195.3
These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). Aspects of the
results are adjusted for certain items, which are described below, to reflect how management assesses the Group’s underlying
performance without distortions caused by items that are not reflective of the Group’s ongoing business activities. The following items
have been excluded from underlying profits for the year ended 30 June 2019:
MotoNovo back book recharges
These are the net impact of the recharges (costs incurred plus an arm’s length mark-up) to the Branch in relation to
MotoNovo Finance servicing the MotoNovo backbook business. Further details can be found in note 10.
MotoNovo Finance integration costs
These costs relate to the work to integrate MotoNovo Finance into the Aldermore Group. Further details can be found in
note 10.
The following items were excluded from underlying profits for the period ended 30 June 2018:
FirstRand transaction costs
These costs related to the acquisition of Aldermore by FirstRand Group and primarily consist of broker and legal expenses.
Further details of the transaction costs can be found in note 10.
FirstRand integration costs
These costs related to the work to integrate Aldermore into the FirstRand Group. Further details can be found in note 10.
Impairment of intangibles and goodwill
The £14.2m impairment of intangibles in the period ended 30 June 2018 resulted from an impairment review. Further details
can be found in note 24.
10
Business Review
Business Finance
For the majority of the financial year to 30 June 2019, Aldermore was structured as two distinct customer facing businesses: Business
Finance (comprised of Asset Finance, Invoice Finance and SME Commercial Mortgages) and Retail Finance (comprised of Buy-to-Let
Mortgages, Residential Owner Occupied Mortgages, and Savings). From a financial perspective, Savings is reported with the rest of the
funding base in Central Functions. As of 5 May 2019, MotoNovo Finance began trading as part of Aldermore Group and is hence reported
as a separate business segment.
Highlights
Segmental profit of £102.9 million (18 months to 30 June 2018: £164.6 million)
Organic origination of £1.8 billion (18 months to 30 June 2018: £2.3 billion)
Net lending to customers up 12% to £3.4 billion (2018: £3.1 billion)
Net Interest Margin broadly maintained at 4.4% in a challenging marketplace (2018: 4.5%)
NPS of +52 in Invoice Finance and an increased customer retention rate
The broker introduced Asset Finance market share has been maintained at 13% in a competitive market
Net loans to customers
Organic origination
Operating income
Administrative expenses
Impairment losses
Segmental result
Net interest margin (%)
Cost of risk (bps)
Performance
12 month period
to 30 June 2019
£m
18 month period
to 30 June 2018
£m
3,438.7
1,832.2
152.4
(33.4)
(16.1)
102.9
4.4
49
3,072.8
2,345.3
221.3
(43.6)
(13.1)
164.6
4.5
30
Change %
12
(22)
(0.1)
(19)
Business Finance loan balances were up by 12% to £3.4 billion (2018: £3.1 billion) with originations of £1.8 billion (18 months to
30 June 2018: £2.3 billion), primarily driven by Asset Finance (AF) and Invoice Finance (IF). Net lending in AF was up 10% to
£2.0 billion (2018: £1.8 billion), with strong originations of £1.3 billion (18 months to 30 June 2018: £1.7 billion) across both Broker
and Wholesale channels. There was good growth in IF, with net loans up by 51% to £0.4 billion (2018: £0.3 billion) driven by a strong
performance in Specialist IF and our continued strategy to attract and retain larger sized deals. SME Commercial Mortgages net
lending grew 6% to £1.0 billion (2018: £965.9 million) as we have repositioned ourselves in the market in a bid to attract larger deals.
Over the second half of the year, traction has increased in attracting larger commercial mortgage deals and we secured our largest
single property development facility to date in November 2018.
Net interest margin (NIM) has remained broadly stable at 4.4% (2018: 4.5%) despite increased market competition and rate
pressures, as our lending growth has been carefully managed to achieve desired returns. Administrative expenses were £33.4 million
(18 months to 30 June 2018: £43.6 million) and include investment in SME Commercial Mortgages to support growth. Cost of risk
has increased in the year to 49bps (2018: 30bps) largely due to AF, where there have been a small number of specific individual
provisions. The movement also reflects the adoption of IFRS9. Segmental profit for the year was £102.9 million (2018: £164.6 million)
with a stable margin on the growing loan book balancing increased impairments.
Market and Strategy
The Asset Finance market has grown 2%1 in the past year and is now worth c.£32.0 billion1. The broker segment has grown strongly
in the past year, up 12%1, and Aldermore continues to be a major player in this increasingly competitive segment with a 13%1 share.
In order to maintain our competitiveness we are investing in technology to simplify our credit assessment and underwriting,
particularly in less complex cases, and are reviewing our business model to streamline the end-to-end deal process and increase sales
coverage.
1 FLA, Business Finance Additional Tables, July 2019
11
The total IF market continues to grow at c.5%1 year on year, while our net lending grew 38%, largely driven by an increase in higher
value lending particularly in our specialist business, increasing our market share by 0.4% to 1.8%1. Growth in Aldermore’s core target
market (£0 - 25 million deal size) has only marginally increased, up 1% to £9.5 billion1 over the same period, and our market share
has remained broadly stable at 2.5%1. Whilst the total value of loans in the market grew, the number of UK businesses using invoice
finance facilities was similar throughout the year, less than 9,0001 businesses changed funder, demonstrating the increasing
competitiveness across existing providers and their desire to retain clients.
Our annual customer retention rate has increased by 2% to 76% and customers continue to be very satisfied with the service that we
provide, awarding us an NPS of +52. We are now seeing the benefit of our strategic repositioning two years ago coming through in
our strong performance and will seek to build on this going forward.
The SME Commercial Mortgages market was worth c.£50.0 billion2 in originations during 2018, of which Aldermore holds a share of
0.6%2, focused on multi-let commercial investment property loans and property development to experienced regional developers.
Competition in this market is increasing, with both new entrants and traditional lenders looking to grow their current asset classes
whilst exploring opportunities in new areas and the, as yet, largely untapped specialist markets. Our specialist underwriting capability
puts us in a good place to explore new opportunities as we work hand in hand with customers and our approved panel of specialist
brokers to understand the property use, the tenant covenant and the local market dynamics to underwrite effectively, providing a
bespoke service and tailored funding solution.
1 UK Finance, March 2019 statistics
2 Cass Commercial Real Estate Lending Survey, May 2019
12
Retail Finance
Highlights
Segmental profit of £158.1 million (18 months to 30 June 2018: £214.8 million)
Organic origination of £1.7 billion (18 months to 30 June 2018: £2.3 billion)
Net lending to customers up 15% to £6.8 billion (2018: £5.9 billion)
Winner of Best service from a buy-to-let lender for the fourth consecutive year (Business Moneyfacts)
NPS has increased from +6 to +22 in the year highlighting increased focus on customer service
Invested in customer proposition with development of broker portal and launch of Cascade product
Net loans to customers
Organic origination
Operating income
Administrative expenses
Impairment losses
Segmental result
Net interest margin (%)
Cost of risk (bps)
Performance
12 month period
to 30 June 2019
£m
18 month period
to 30 June 2018
£m
6,791.6
1,725.0
181.2
(19.1)
(4.0)
158.1
2.9
6
5,917.7
2,334.4
246.4
(25.3)
(6.4)
214.8
3.0
8
Change %
15
(26)
(0.1)
2
Retail Finance loan balances grew 15% to £6.8 billion (2018: £5.9 billion) with originations of £1.7 billion (18 months to 30 June 2018:
£2.3 billion). Buy-to-let lending grew 14% in the year to £5.0 billion (2018: £4.4 billion) with strong originations in Specialist
buy-to-let as we renewed our focus on this customer segment, leveraging our expertise and knowledge in this area. Residential Owner
Occupied mortgage balances grew 18% to £1.7 billion (2018: £1.5 billion), as originations increased through new product launches,
particularly Cascade our tiered mortgage offering based on the customer’s credit profile, and redemptions reduced as we increased
focus on our loyalty proposition.
Net interest income of £181.1 million (18 months to 30 June 2018: £240.5 million) was driven by the strong growth in loan balances,
partially offset by rate pressure in a highly competitive environment and increased funding costs. As a result, net interest margin has
reduced to 2.9% (2018: 3.0%). The market continues to be dominated by fee free products which has further impacted income.
Administrative expenses were £19.1 million (18 months to June 2018: £25.3 million) as we invested in the future growth of the
business and our proposition. Cost of risk fell to 6bps (2018: 8bps) demonstrating careful risk management across the portfolio.
Market and Strategy
Within the buy-to-let sector, Aldermore continues to have a strong reputation in an increasingly competitive market and our market
share has remained broadly stable. The impact of tax and regulatory changes means that professional landlords now account for
48%1 of the market, up from 38% in 2010, with this trend expected to continue. Through leveraging our expertise and experience in
specialist buy-to-let, Aldermore holds an 11.2% share of this market and we are investing in our broker portal capabilities to further
improve our offering in this space. As a result of the shift to professional landlords, there are fewer first time landlords entering the
market, resulting in a decline in purchase activity and an increase in remortgage activity to c.80% of new lending (2018: 73%).
Aldermore is investing for the future by developing our buy-to-let proposition with a focus on customer relationship, retention
strategy and in-life account servicing.
Originations in the Residential Owner Occupied mortgage market have grown 7%2 in the past 12 months, with Aldermore’s share of
originations increasing from 0.16% to 0.27%2. In late 2018, we revised our high loan-to-value (LTV) proposition and launched Cascade,
our tiered mortgage offering. Our market share of the First Time Buyer market steadily increased, to 0.4%2 in the 5 months to May
2019 from 0.3% in December 2018, as we actively support people buying their first home.
1 Intermediary Mortgage Lenders Association, Buy-to-let at a crossroads report, July 2019
2 UK Finance, May 2019
13
Our strategy of focusing on specialist segments positions us well to move forward in a challenging market. Our specialist sales and
underwriting teams enable us to support the needs of our desired customers while providing opportunities for margin growth in the
future. We continue to develop our systems to provide simpler, clearer, automated solutions for customers and brokers with a
number of key projects undertaken in the past year including credit risk affordability and online capability for brokers to automatically
switch customers to an alternative Aldermore product. As we look to grow our market share, we are investing in our analytical
capabilities to better understand our customer base, and further support the improvement of our retention strategy, particularly
within buy-to-let.
We expect the buy-to-let market to remain relatively flat over the next year, whilst steady growth is expected in the owner occupied
market. Established lenders, particularly those with ring-fenced capital and liquidity to put to work in the UK market, have started to
enter areas of market which Aldermore and its peers have served over the last few years, resulting in some rate pressure and the
continued trend towards fee free products. We believe that with our distinctive offering and our strength in underwriting and
understanding of customer needs, we will continue to thrive and will continue focusing on specialist propositions in the segments
where we operate to best serve the needs of our customers.
14
MotoNovo Finance
Highlights
Organic originations of £293.1 million in first 2 months of trading
Net lending to customers of £364.8 million
NPS of +72
Segmental loss of £5.5 million
Net loans to customers
Organic origination
Operating income
Administrative expenses
Non-underlying expenses
Impairment losses
Segmental loss
Performance
2 month period
to 30 June 2019
£m
364.8
293.1
1.1
(2.1)
(0.7)
(3.8)
(5.5)
MotoNovo Finance started trading on 5 May 2019. Over 700 colleagues were transferred into the Aldermore Group and the
integration programme was formally closed at the end of May. All business written by MotoNovo Finance from 5 May 2019 is included
within the financial statements of Aldermore Group. Net loans to customers also include £65.1 million of loans that were transferred
from the Branch to MotoNovo Finance. Additionally, MotoNovo Finance is responsible for servicing the existing MotoNovo backbook
business on behalf of the Branch, for which the Branch pay a service fee.
Since 5 May 2019, £10.5 million of operating expenses including an arm’s length mark-up have been recharged to FirstRand in relation
to MotoNovo servicing the MotoNovo backbook business. Both the operating expenses and income are excluded from the financial
results presented above.
Additionally £0.7 million of non-underlying expenses relate to integration activity for MotoNovo Finance into Aldermore Group.
The financial performance of MotoNovo Finance is representative of 7 weeks of trading and as expected, costs have been incurred
ahead of interest income being earned on the front book. However, it is pleasing that net lending was ahead of expectations.
Market and Strategy
Despite relatively benign macroeconomic conditions, uncertainty from Brexit continues to have an effect on the UK automotive sector
and the Society of Motor Manufacturers and Traders (SMMT) has highlighted the potential repercussions a ‘no deal’ Brexit could
have on the UK Motor Sector, including increased tariffs on imported vehicles.
Demand in the used car market for the first three months of 2019 was flat compared to the same period in 2018, although it was
down 2%1 in 2018 compared to 2017. The longer term trends of a fall in demand in the sector is starting to affect current used car
prices which have suffered their largest cumulative reduction for over a decade reducing by 4.4%2 in the six months to June 2019.
Used car point of sale finance demand remains buoyant and for the 12 months to the end of June 2019, £18.0 billion3 of advances
had been funded, an increase of 7%3 compared to the previous 12 months. Over the same period, point of sale finance aided the
purchase of 1.47 million3 cars, an increase of 3% on the previous 12 months.
In January 2018, MotoNovo launched findandfundmycar.com, a direct to consumer website, which has quickly proved to be an
effective acquisition tool and entry point into a key growth market. At the end of June 2019, almost 3,000 dealers are connected and
over 150,000 vehicles were live on the site. Customer satisfaction with MotoNovo Finance is high, with an NPS of +72 and an
‘Excellent’ rating on Trust Pilot, while dealer satisfaction is also strong at 8.9 out of 10. MotoNovo has also won several awards in the
year including Finance Provider of the Year (Motor Trader Industry Awards) and Best Car Finance Provider (Consumer Credit Awards
2018).
1 SMMT, Used Car Sales, Q1 2019
2 CAP Black Book
3 FLA, Consumer Car Finance News, May 2019
15
Central Functions
Savings, Treasury and Support Functions
Highlights
Personal deposits up by 16% to £6.0 billion (2018: £5.2 billion)
Business deposits up by 7% to £2.1 billion (2018: £2.0 billion)
Corporate deposits up by 40% to £862.0 million (2018: £615.0 million)
Segmental result
Operating income / (loss)
Underlying administrative expenses
Non-underlying expenses1
Segmental loss
Retail Deposits
SME deposits
Corporate deposits
Segmental loss
2019
£m
(4.8)
(116.9)
(4.7)
(125.9)
5,967.2
2,142.5
862.1
2018
£m
(restated)
Change %
(0.2)
(147.4)
(36.4)
(183.7)
5,163.3
1,997.9
615.0
16
7
40
Central Functions include the Aldermore Group’s Treasury function and Savings businesses, as well as Aldermore’s 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. This does not include MotoNovo Finance central functions.
Performance
Net interest income predominantly includes the interest expense relating to the Tier 2 Notes which is not recharged to segments.
Net fees and other income includes the income or expense arising from derivatives held at fair value in hedging relationships, the net
expense or income from derivatives not currently recognised as being in hedging relationships and gains or losses on disposals of
available for sale debt securities. In June 2019, a decision was made to align the accounting treatment of the income or expense
arising from derivatives held at fair value in hedging relationships with that adopted by FirstRand whereby this is recognised through
profit or loss instead of interest income and interest expense. The prior period comparators have been restated on this basis. More
details are in note 2(c) on page 82.
Central administrative expenses were £116.9 million (18 months to 30 June 2018: £147.4 million) as we continue to invest in, and
grow, the business. In addition to the increase in people costs, we continued to enhance of our IT capabilities to improve the service
we offer to customers.
Additionally £4.7 million of non-underlying expenses relate to integration activity for MotoNovo Finance into Aldermore Group. In
2018, the charge of £36.4 million included expenses related to the FirstRand transaction, integration costs and intangible
impairments.
The segmental result was a charge of £125.9 million (18 months to 30 June 2018: charge of £183.7 million).
Market and Strategy
The UK savings market reported a period of steady growth over the last 12 months, with total balances growing by around 3%1,
similar to the previous year. The Bank of England Base Rate has remained at 0.75% since increasing in August 2018 and, given Brexit
uncertainty and a slowing global economic outlook, is expected to remain unchanged for most of 2019. This interest rate backdrop
has resulted in competition for deposits remaining relatively benign despite the cessation of the Term Funding Scheme in February
2018, with average rates in most product categories staying broadly unchanged since the final quarter of 2018. Relatively few new
entrants launched into the UK savings market over the last 12 months and the impact has generally been minimal, with only a couple
of notable exceptions. New savings platforms have been launched, both by established and new competitors, although these have
largely been in the investment management market.
Aldermore’s funding strategy remains principally deposit-led complemented by wholesale sources to ensure that our funding is
managed cost-effectively and diversified appropriately.
1 Bank of England
16
Corporate Responsibility
Our overriding purpose is to support our customers to seek and seize opportunities in their professional and personal lives. Through
our business operations, Aldermore enhances and touches the lives of customers, local communities and our own people. We know
that it is important to do this 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 people
Our people are the foundation of our business and underpin our business strategy. Recognising, valuing and rewarding our people’s
contribution to our success is central to our philosophy. We have therefore continued to place significant focus on building a great
place to work, including how we encourage diversity in our workplace.
During the past year, we have taken a range of steps to ensure that our employees are systematically provided with information on
matters of concern to them, examples include:
Monthly group-wide colleague newsletters;
Intranet articles; and
Regular face to face briefings from senior leaders at many of our sites.
We regularly consult our employees to ascertain their views on a range of issues, activities include:
An annual employee survey;
Colleague focus groups; and
Network groups.
We encourage and support our colleagues’ involvement in the organisation’s performance through a competitive performance
related pay and bonus structure. We also make all colleagues aware of the financial performance and economic factors affecting the
company by ensuring they are briefed on a quarterly basis. We adopt a multi-channel approach to ensure that the information is
provided in a format which our colleagues value.
1. We are committed to diversity in the workplace
Committed to equal opportunities for all our people, irrespective of gender, race, colour, age, disability, sexual orientation
or marital or civil partner status; and
Have two networks in operation – one for Women in Finance and one for Inclusion which are responsible for organising a
number of activities across the Bank including events to engage all employees with International Women’s Day and mental
health awareness.
2. We include our people in the future of our business
Throughout the period, we continued the Big Conversation, the Aldermore way of involving everyone in the continuous
improvement of our business;
Through the Big Conversation, our managers at all levels facilitate conversations with their teams about strategically
important themes. In these conversations, we surface improvement ideas which are trialled and implemented on a team
level, then shared via an online collaboration platform. In the period, over 220 new ideas have been generated by
colleagues via this approach ensuring all our colleagues are included and involved in improving the performance of our
business; and
Our 2019 employee engagement survey gave our employees the opportunity to let us know how they are feeling and what
we can improve. The response rate to the Bankwide survey was 88% and the results showed our overall Employee Net
Promoter Score (eNPS) positively increase from +5 to +15.
3. We support the professional development and recognition of our people
Our Elevate programme, a bank wide development programme for those employees who aspire to be managers, saw 47
Aldermore employees graduate;
Launched unconscious bias e-learning for all employees;
Welcomed to our business 10 new apprentices, taking us to 16 in total, ranging from level 2 to level 7 programmes;
For senior leaders, ran 6 days in total of offsite leadership development training;
10 Aldermore mentees and 10 mentors participated in the ‘30% Club’ mentoring scheme which offers cross-company,
cross-sector mentoring to women at every layer of the career pyramid;
Through the “More Awards”, Aldermore’s colleague recognition awards, saw 98 peer to peer nominations, with 24
bi-monthly winners and 7 annual winners recognised; and
MotoNovo Finance colleagues recognised their top achievers through the MotoNovo Way annual awards ceremony.
Colleagues from across the business were invited to nominate colleagues across 13 Award categories, designed to
recognise individual and team achievement, from ‘Community Hero’ to ‘Innovator of the Year’ and ‘Rising Star’. The winners
were chosen from 470 nominations.
17
Below are our employee statistics for June 2019 and June 2018:
Number of employees
Number of female employees
% of female employees
June 2019
June 2018
1,8061
803
44%
950
431
45%
I am proud to work for Aldermore (Big Conversation survey January
2019)
How likely is it that you would recommend Aldermore as a place to work
to a friend and colleague? (Big Conversation survey January 2019)
78%
+152
% of new joiners who came through our refer a friend scheme
12.3%
24.0%
Our communities
The SMEs, landlords, homeowners, savers and vehicle owners that we work with, in turn support the communities in which they live
and work. We understand that we have a responsibility to be part of these communities. We are also cognisant of the effects of our
actions on the environment and ensure that these are managed in a way that limits these impacts. We use recycled paper for printing
and have recycling facilities located in all offices in support of our undertaking to reduce the amount of waste we sent to land fill.
We play our part as a responsible member of the banking community
Actively involved with industry bodies including the UK Finance, FLA, and IMLA; and
A member of the Banking Standards Board.
We give back to the communities where we operate
Aldermore employees vote annually on a Charity of the Year they wish to support. In 2018, this charity was Independent
Age, a national charity which provides free information and advice for older people and their families on care and support,
money and benefits, and health and mobility. Colleagues raised £12,132 for Independent Age and over £30,000 for other
good causes including Headway, the brain injury charity who we support every year in memory of an Aldermore colleague,
Cancer Research and the National Autistic Society;
In 2019, Aldermore’s Charity of the Year is MIND; and
Aldermore also operates a £ for £ charity matching scheme for employees. Many of our people raise funds for their charity
of choice and we want to lend a hand in support of our employees. We will match whatever a colleague raises for charity
up to a maximum of £250.
Human Rights and Modern Slavery Act
Aldermore Group Plc, and its principal operating subsidiaries, Aldermore Bank Plc and MotoNovo Finance Limited (together
"Aldermore"), take a zero tolerance approach to slavery and human trafficking.
As a UK group with a growing number of international suppliers, Aldermore recognises that there is a risk (however small) for slavery
or human trafficking to occur in its supply chains.
Aldermore has taken appropriate steps to ensure that slavery or human trafficking is not taking place in its supply chains by reviewing
its existing business and supply chains; reviewing and revising its procurement processes; changing its due diligence processes;
conducting a risk assessment with due regard to the sector and geographical locations in which its suppliers operate and
disseminating relevant information through its businesses by means of its procurement and due diligence processes to ensure
bank-wide awareness of the risks of slavery and human trafficking in supply chains.
As part of its supplier on-boarding process, Aldermore engages with its suppliers to seek assurances about their anti-slavery and
human trafficking policies and whether they are taking steps to prevent slavery and human trafficking in their respective business
and supply chains. Aldermore will not support or engage suppliers where it is aware of slavery or human trafficking in such suppliers'
business or supply chains.
In addition, Aldermore uses new supplier due diligence documentation to include confirmations from suppliers on anti-slavery and
human trafficking compliance.
1 The June 2019 figures for number of employees, number of female employees and % of female employees includes MotoNovo Finance which became part of
Aldermore Group in May 2019
2 The score shown reflects a net rating for promoters minus detractors
18
Corporate Governance 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 papers and minutes are made available to the whole Board
through a secure online system. The Corporate Governance Structure has been updated to take into account the Aldermore Group’s
Board reporting to FirstRand International Limited and the completion of its integration with the vehicle finance business which was
incorporated as a new company, MotoNovo Finance Limited within the Aldermore Group.
Aldermore Bank PLC is a wholly owned operating subsidiary of Aldermore Group PLC and 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 comprises the same Directors as the Aldermore
Group. The Bank Board holds separate meetings immediately following the meetings of the Aldermore Group’s Board.
Since the delisting of Aldermore’s shares from the London Stock Exchange on 15 March 2018, the Board remains committed to the
highest standards of corporate governance and best practice. The Board recognises that effective governance is key to the
implementation of our strategy for our shareholder and wider stakeholders. The Aldermore Group intends to apply the Wates
Corporate Governance Principles for Large Private Companies for its financial year ending 30 June 2020.
Governance Structure Diagram
20
Audit Committee Report
The Committee is comprised of Independent Non-Executive Directors. John Hitchins, a qualified chartered accountant, was appointed
Chair of the Committee in May 2014, and the Board remains satisfied that he has recent and relevant financial experience. The other
members of the Committee are Peter Shaw (appointed 4 September 2014), Danuta Gray (appointed 3 July 2019) and Cathy Turner
(appointed 3 July 2019). Chris Stamper was a member of the Committee until his resignation from the Board on 3 July 2019.
The Committee’s principal responsibilities are:
Monitoring the integrity of the Group’s financial statements, including reviewing whether appropriate accounting
standards have been followed, and reviewing key areas of judgement.
During 2018/19, the Committee approved Pillar 3 disclosures as at 30 June 2018, and recommended the Annual Report
and Accounts for the 18 months to 30 June 2018 for approval.
Significant matters and key areas of judgement reviewed by the Committee in respect of the Annual Report and Accounts
for the year to 30 June 2019 were:
-
Loan impairment provisions, including a detailed review of the Group’s approach to implementing the new IFRS 9
accounting standard, the key assumptions and judgements underlying the provisions, and the adequacy of
disclosures in the accounts surrounding the implementation of IFRS 9. The Committee concluded that
management’s approach and assumptions were appropriate;
Assumptions on loan asset expected lives within the Effective Interest Rate accounting models. The Committee
endorsed the judgements made by management;
The appropriateness of adopting the going concern basis of accounting;
Accounting for the acquisition of the trading assets and liabilities of the MotoNovo Finance business; and
Accounting for new long term incentive arrangements for senior employees which were approved by the
Remuneration Committee during the year to 30 June 2019.
-
-
-
-
Monitoring the effectiveness of the Group’s internal control systems.
During 2018/19, the Committee:
-
-
-
Approved the annual Money Laundering Officer’s Report;
Conducted an annual review of the Group’s whistleblowing arrangements, concluding that these were adequate;
Assessed the Group’s systems of risk management and internal controls and concluded that these were
satisfactory; and
Conducted an annual review of disclosure controls and procedures, concluding that these were operating
effectively.
Reviewing the effectiveness of the Group’s Internal Audit (‘GIA’) function, and reviewing GIA reports and monitoring
management’s responsiveness to findings and recommendations. This evaluation was assisted by a questionnaire to
Committee members and members of senior management which provided positive feedback on GIA’s calibre and
approach.
Specifically, during 2018/19, the Committee:
-
-
Reviewed the approach to GIA assurance over the integration of the MotoNovo Finance business;
Approved audit plans for GIA reviews across both Aldermore and the MotoNovo Finance business covering the
period from July 2019 to June 2020;
Approved an updated GIA Charter; and
Concluded that the GIA function was performing effectively and was adequately resourced.
Overseeing the relationship with and independence of the external auditor, Deloitte LLP (‘Deloitte’), appointed with effect
from 1 January 2017.
Specifically, during 2018/19, the Committee:
-
Reviewed the external audit plan for 2018/19, as well as Deloitte’s terms of engagement and their fee proposal.
This review included consideration of the experience of the audit team assigned;
Considered the external auditor’s assessment of their own independence;
Reviewed the Group’s Combined Policy on Non-Audit Services, Auditor Independence and employment of former
employees of the Auditor, and monitored non-audit services provided by the external auditor. The Committee
also monitored adherence to additional governance requirements in relation to the engagement for non-audit
services of PricewaterhouseCoopers LLP, joint auditor with Deloitte for the FirstRand Group;
Reviewed control observations made by the external auditor, including management’s responses;
Reviewed representation letters to the external auditor and recommended these for Board approval;
Met privately with the senior members of the Deloitte audit team. In addition, the Audit Committee Chair met
regularly with Deloitte during the period to facilitate effective and timely communication; and
Assessed the effectiveness of the external auditor and recommended the re-appointment of the external auditor.
In addition to the matters above, this assessment took into account the annual report by the Financial Reporting
Council on its inspections of audits carried out by Deloitte and the Deloitte audit team’s contribution to the Audit
Committee’s discussions.
21
-
-
-
-
-
-
-
-
-
Additionally, during 2018/19, the Committee undertook a review of its own effectiveness 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 Committee members.
The review covered various areas including: the role and remit of the Committee; the effectiveness of the Chair; the appropriateness
of information provided to the Committee and the relationship with management. The Corporate Governance and Nomination
Committee discussed the outcome of the review in June 2019, concluding that the Audit Committee operated effectively and there
were no significant areas for concern.
The Committee also carried out a review of its own Terms of Reference during 2018/19.
22
Risk Committee Report
The Committee is comprised of Independent Non-Executive Directors. Peter Shaw was appointed as a member of the Committee on
4 September 2014, and as Chair with effect from 27 February 2015. The other members of the Committee are John Hitchins
(appointed 28 May 2014), Danuta Gray (appointed 3 July 2019) and Cathy Turner (appointed 3 July 2019). Chris Stamper was a
member of the Committee until his resignation from the Board on 3 July 2019.
The 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 Committee continued to have an open and transparent relationship with our regulators and during the year, considered feedback
in respect of the ongoing suite of regulatory reviews and activity, both specific to Aldermore and industry-wide.
Areas of focus
Key matters discussed by the Committee during the year are set out below. In addition, pages 37 to 38 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 33 to 40.
Overarching risk profile
The Committee carried out reviews across the Group’s principal risks on a regular basis. In addition, the Committee approved changes
to risk metrics, triggers and limits.
Integration
A key focus for the Group during 2018/19 was the integration of MotoNovo Finance into the Aldermore Group. The Committee
scrutinised key risks associated with the integration programme and its impact on the Group’s risk profile. In considering these risks,
the Committee took the views of programme personnel, Risk and Internal Audit into account.
Frameworks
During the year, the Committee approved reviews of the effectiveness of Risk Frameworks and that of the Group Policy Framework,
to ensure policies continued to be introduced and implemented effectively. The ‘Policy Hub’ was updated to be the single source and
location of all Group policies. Further details of frameworks and polices approved by the Committee during the year are outlined in
the following sections.
In addition, the Committee reviewed the enhancement of the Group’s Models Management Framework.
The Committee also approved updated key risk documentation in light of the integration of MotoNovo Finance into the Group. The
risk management approach applies to Aldermore Bank and MotoNovo Finance.
Risk culture
The Committee is required to review the Group’s risk culture and the effectiveness of its embedding across the Group on an ongoing
basis.
During the year the embedding of Risk Culture has contributed to enhanced risk management and the Committee continues to look
at how we define and measure Risk Culture relative to our scale and ambition.
Credit risk
The Committee regularly reviews the credit risk profile of the Group, with a clear focus on performance against risk appetite
statements and risk metrics. The Committee considered credit conditions during the year, how they compared to the period in the
run up to the financial downturn of 2008, and their impact on the Group. The Committee considered key credit risk concentrations
and performance against both credit risk appetite and a range of key credit risk metrics.
The current and future impact of emerging risks on the Group’s credit risk profile and risk appetite was also a particular area of focus
for the Committee. In addition, the Committee considered credit model performance metrics.
Capital and liquidity risk
The Committee monitors capital and liquidity risk and receives regular reports on actual and forecast levels in relation to key Risk
Appetite Framework (RAF) metrics. During the year, the Committee approved the Group’s ICAAP and ILAAP.
The Committee also approved changes to the Capital Risk Appetite Framework, in light of the integration of MotoNovo Finance. The
ICAAP process helped drive an enhanced understanding of the MotoNovo Finance risk profile.
23
Market risk
Although the Group does not seek to take market risk, the Committee reviewed the interest rate risk that the Group carries as part
of the ICAAP review process and the impact of market risk as we start to write MotoNovo Finance business.
Operational risk
As part of the continued development of the systems and controls in place to support the control environment, the Committee
(together with the wider Board) reviewed and approved the risks associated with the Group’s IT infrastructure during the year.
The Committee received a number of updates on operational risk matters, including enhancements to business assurance (controls)
testing and its evolution to key controls testing. Enhancements also included an alignment of controls testing across Aldermore and
MotoNovo Finance.
The Committee also considered the results of the annual review of the Group’s Operational Risk Management Framework, which had
been deemed to be fit for purpose and proportionate, having been enhanced and more aligned with FirstRand’s equivalent
framework.
In terms of the operational risk profile, the Committee received regular updates on business continuity, disaster recovery, cyber
security and cyber risk management. Cyber security remains an important area of concern for the Group as it increasingly focuses its
attention on operational resilience. During the year, the Committee approved a refreshed cyber strategy, which had been updated
to further align with the Group’s overall business strategy. The Group’s cyber strategy focuses on key areas such as access
management and control, data protection, security architecture and governance.
In addition, the Committee monitored the performance of key systems and significant projects, as well as noting material outsourced
arrangements.
As part of its focus on developing its approach to Operational Resilience, the Group has defined a number of resilience pillars and has
undertaken a pilot assessment for its Payments process. The development of an Operational Resilience Framework is materially
advanced and will be implemented in a phased approach.
The Committee also maintained a watching brief over the impact of the UK’s decision to leave the EU on the Group, receiving updates
from the Brexit Working Group (comprising senior representatives from across the Group) during the year, as further detail on the
execution of Brexit developed.
Compliance, conduct and financial crime risk
Conduct risk management continues to be a key area of focus. The Committee approved updates made to the Conduct Risk
Management Framework following the annual review of its effectiveness. In addition to regular reports on performance against
conduct risk metrics and developments regarding new and existing products, the Committee also received customer journey mapping
updates in respect of Business Finance and Retail Finance after a review of conduct risks had been carried out across these areas.
The Committee also received an update on vulnerable customers, which looked at how Aldermore identified and managed them,
noting the importance of the most suitable treatment of all customers in respect of the fair provision of banking services. In
conjunction with the Audit Committee, the Committee reviews the Group’s arrangements for anti-money laundering on an annual
basis. The effectiveness of the Financial Crime Risk Management Framework and Compliance Risk Framework were also reviewed
and the 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. The Committee additionally considered the Anti-Bribery and
Corruption Policy as part of its annual review.
To ensure the Group continued to improve its processes and governance, the Committee also reflected on lessons learned from the
programme of work that brought the Group to a compliant status in respect of GDPR.
Reputational risk
The Committee received monthly reporting on reputational risk throughout the year.
Remuneration matters
The 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 2018/19, the Committee reviewed regular reports from the Chief Risk Officer in relation to these matters.
24
Risk management function
The Committee reviewed the remit and performance of Aldermore’s risk management functions to confirm that these functions have
the requisite skills, experience and resources, along with unrestricted access to information, to discharge their responsibility
effectively, in accordance with the relevant professional standards and ensuring also that the functions have adequate independence.
Risk Committee effectiveness
The Committee undertook a review of its own effectiveness during 2018/19 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 Committee members.
The review covered various areas including the role and remit of the Committee, the effectiveness of the Chair, the appropriateness
of information provided to the Committee and the relationship with management. The Corporate Governance and Nomination
Committee discussed the outcome of the review in June 2019, concluding that the Risk Committee operated effectively and there
were no significant areas for concern.
The Committee also carried out a review of its own Terms of Reference during 2018/19.
25
Remuneration Committee Report
This report presents (i) details of the remuneration of our Executive Directors, Chairman and independent Non-Executive Directors
and aggregate remuneration for our senior management team, and (ii) a summary of our Directors’ Remuneration Policy.
In setting the Directors’ Remuneration Policy and individuals’ remuneration, the Committee is mindful of pay and benefits for the
wider employee population. The Remuneration Committee and the Board as a whole, takes a keen interest in Aldermore’s Gender
Pay Gap reporting, our progress against the HM Treasury Women in Finance Charter and our approach to equality and diversity more
generally.
As a retail bank, Aldermore is subject to the CRD IV regulations, albeit our size has allowed us to disapply certain aspects of the
regulations where these are not appropriate for Aldermore (“proportionality”). With CRD V on the horizon, the Directors’
Remuneration Policy will be kept under review.
Remuneration received by the Directors1 in the year ended 30 June 2019 is shown below:
£’000
Total fixed pay
Annual
Incentive Plan
(AIP)
Long-term
Incentive Plan
(LTIP)
Total variable pay
Total pay
Pat Butler, Chairman
Phillip Monks, CEO
James Mack, CFO
Christine Palmer, CRO
Danuta Gray, Senior
Independent Non
Executive Director
John Hitchins,
Independent Non
Executive Director
Peter Shaw, Independent
Non Executive Director
Cathy Turner,
Independent Non
Executive Director
Chris Stamper,
Independent Non
Executive Director
220.0
814.4
546.7
611.0
90.0
90.0
95.0
85.0
95.0
-
570.7
381.6
351.2
-
-
-
-
-
-
296.3
207.4
109.5
-
-
-
-
-
-
220.0
867.0
1,681.4
589.0
1,135.7
460.7
1,071.7
-
-
-
-
-
90.0
90.0
95.0
85.0
95.0
The aggregate emoluments (i.e. salary/fees, market adjusted allowances, benefits and AIP) for the Directors in the year was
£4.6 million.
1 Two non-executive directors are appointed by the FirstRand Group and receive no remuneration personally
26
Remuneration for other members of the senior management team
The senior management team consisted of 8 employees in the year. The aggregate total remuneration for the senior management
team (including the Chief Executive Officer) was £6.4 million. Of this, £3.2 million was fixed pay (salary, market adjusted allowance,
benefits and pension) and £3.2 million was variable pay (AIP and LTIP).
The principles and remuneration structures described within the Directors’ Remuneration Policy apply throughout the whole senior
management team, with slight differences for employees within key control functions (risk, compliance and internal audit).
Employees who work within key control functions and who would otherwise participate in the AIP and LTIP are subject to the following
treatments:
AIP performance measures will be set on the basis of non-financial measures relating to personal performance and the
effectiveness of their functions. Measures will not relate to the financial performance of the unit of which they have
oversight; and
Other than the Chief Risk Officer (given her status as an Executive Director with wider responsibilities), key control functions
employees will not participate in the standard LTIP and will instead participate in lower-value awards without financial
measures.
Remuneration for wider employees
Aldermore seeks to pay all of its staff competitively and fairly for the roles they undertake. Aldermore applies similar principles for
remuneration across the workforce to those which apply to our Executive Directors. All permanent employees are eligible to receive
a bonus on a discretionary basis, subject to company and individual performance.
We have reported our Gender pay gap twice and were early disclosers in 2017 and 2018. We are working on our reporting for 2019
and, while there is still a long way to go, we are working hard to ensure that our pay gap continues to come down.
We are signatories to the HM Treasury Women in Finance Charter, and we see gender representation as an integral part of our
Diversity and Inclusion agenda. By signing up to the Charter, we have committed as a business1 to:
1 As at 31 December 2018
We have also gone one step further and set ourselves the target to close our pay gap year on year. See our Women in Finance and
Gender Pay Gap disclosure on our website for more information.
Directors’ Remuneration policy
The Directors’ remuneration policy is based on the following key principles:
Aligned to the long-term success of the Company;
Competitive but not excessive;
Appropriate and balanced proportion of variable pay; and
Simplicity and transparency in the design.
Remuneration committee effectiveness
The Remuneration Committee undertook a review of its own effectiveness during 2018/19 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 Committee members.
The review covered various areas including the role and remit of the Committee, the effectiveness of the Chair, the appropriateness
of information provided to the Committee and the relationship with management. The Corporate Governance and Nomination
Committee discussed the outcome of the review in June 2019, concluding that the Remuneration Committee operated effectively
and there were no significant areas for concern.
The Committee also carried out a review of its own Terms of Reference during 2018/19.
27
The structure of remuneration for our Executive Directors’ is summarised in the table below:
Element of remuneration
Policy and operation
Salary
To provide a fair level of fixed pay
which reflects the individual’s
experience and contribution
Typically paid monthly in cash and reviewed
annually.
The annual review takes into account
corporate and individual performance, any
change in role and responsibilities, market
benchmarking and pay increases awarded
across the Company as a whole.
Performance measures and Committee
flexibility
No performance measures apply.
Base salary increases will be awarded at
the Remuneration Committee’s
discretion, taking into account the factors
listed.
Market Adjusted Allowance
To ensure appropriate weighting of
fixed and variable remuneration
within an overall competitive
package
A fixed monthly allowance, typically paid in
cash.
Paid on the same basis as salary but is not
taken account when calculating other
elements of remuneration.
No performance measures apply.
Market Adjusted Allowance increases 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.
Benefits
To provide competitive benefits
A range of benefits is provided which
includes a car allowance, insurance benefits
and, if appropriate, certain relocation costs.
No performance measures apply.
The Remuneration Committee may
introduce new benefits as appropriate.
Pension
To enable Executive Directors to
build long-term savings for
retirement within an overall
competitive package
Contributions may be paid into personal
pension arrangements or as a cash
supplement (reduced for the impact of
employers’ NICs) with the levels aligned to
those available to staff.
Annual Incentive Plan (AIP)
A bonus plan which operates annually.
To motivate Executive Directors
and incentivise delivery of
performance over a one-year
operating cycle, focusing on the
short- to medium-term elements of
our strategy
The maximum level of AIP outcome is 125%
of salary p.a..
Performance measures are set by the
Remuneration Committee at the start of the
financial year and targets are assessed
following the year-end.
At least 33% of any annual bonus payable will
be deferred (where the total bonus outcome
is at least £50,000), released in equal
tranches on the first, second and third
anniversaries of making the deferred award.
Deferral will be made in equity-linked
instruments which mirror the percentage
change in FirstRand’s share price, albeit not
subject to changes in the Rand:GBP exchange
rate.
Malus and clawback provisions apply to both
the cash bonus and the deferred bonus.
No performance measures apply.
Performance measures will be a balanced
scorecard based on four quadrants
comprising financial, assessment of
customer/strategic performance, risk and
people objectives.
For all performance measures, there is a
robust discretionary override available to
the Remuneration Committee to ensure
that outcomes are consistent with
affordability and overall appropriateness.
The performance measures for
employees within key control functions
will be set only on the basis of measures
which are predominantly non-financial
and relate to personal performance.
Performance is not assessed over the
financial performance of the unit in
respect of which they have oversight.
28
Long-Term Incentive Plan (LTIP)
To motivate Executive Directors
and incentivise delivery of
performance over the long-term
A long-term incentive plan which operates
annually.
The maximum award is 135% of salary p.a.
Awards are settled 50% in equity linked
instruments (where the headline amount
vesting will be multiplied by the percentage
change in FirstRand’s share price) and 50% in
cash if performance conditions are achieved
over a 3-year performance measurement
period.
Malus and clawback provisions apply to both
the cash and equity portions of the LTIP.
Performance for the first awards is
assessed 20% against FirstRand
performance measures and 80% against a
balanced scorecard of growth in earnings,
return on equity and conduct risk.
In the view of the Remuneration
Committee, the proposed performance
measures for LTIP awards are supportive
of the Company’s risk appetite and do not
promote undue risk inconsistent with
that appetite.
Colleagues in control functions will be
subject instead to conduct risk.
The structure of remuneration for our Chairman and Non-Executive Directors is summarised in the table below. Remuneration for
the Chairman is determined by the Remuneration Committee and remuneration for the independent Non-Executive Directors is set
by the Board. No individual is involved in decision making on their own remuneration.
Element of remuneration
Policy and operation
Board flexibility
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 are reviewed annually, taking into
account time commitments and equivalent
benchmarks to those used for the Executive
Directors.
The Company may permit the Chairman or
Non-Executive Directors to participate in
any benefits in kind.
Fees are structured as a basic fee with
additional fees for chairmanship or
membership of Board Committees or
further responsibilities (such as acting as
Senior Independent Director).
The Chairman receives a basic fee only.
29
Directors’ Report
The Directors present their report and the financial statements of the Group for the twelve months ended 30 June 2019. As permitted by
legislation, some of the matters normally included in the Directors’ Report are included by reference as detailed below.
Requirement
Detail
Business Review
Information regarding the business review and future
developments, key performance indicators and principal risks
are contained within the Strategic Report.
Where to find further information:
Section
Location
Strategic Report
Pages 7 to 19
(Business Review)
Page 6 (Key
performance
indicators)
Pages 37 to 38
(Principal risks)
Strategic Report
The contents of the Strategic Report fulfil Section 414C of the
Companies Act 2006.
Strategic Report
Pages 3 to 19
Results
Dividend
The results for the year are set out in the income statement.
The profit before taxation for the year ended 30 June 2019
was £129.6 million (18 months to 30 June 2018: £195.3
million). A review of the financial performance of the Group is
included within the Strategic Report.
Income
Statement
Page 71
Strategic Report
Pages 3 to 19
The Directors do not propose to recommend a final dividend
in respect of the twelve months ended 30 June 2019
(2018:nil).
-
-
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 33 to 59
Post balance sheet
events
On 29 August 2019, the Group successfully priced its third
Residential Mortgage Backed Securities (Oak No.3 PLC)
providing £343.5 million of funding. It is expected to settle on
12 September 2019.
Note 41 to the
consolidated
financial
statements.
Share capital
At 30 June 2019, the Company’s share capital comprised
2,439,016,380 ordinary shares of £0.10 each.
The Company did not repurchase any of the issued ordinary
shares during the twelve months ended 30 June 2019 or up to
the date of this report.
Details of the Company’s share capital are provided in note 33
to the consolidated financial statements.
Note 33 to the
consolidated
financial
statements.
Page 138
Page 123
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.
30
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.
Employee 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 34 to the consolidated financial statements.
Employees
Directors
Appointment and
retirement of
Directors
Directors’ indemnities
Significant
agreements
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 with respect to entering into and
continuing employment with 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.
The names of the current Directors who served on the Board
and changes to the composition of the Board that have
occurred during 2018 and 2019 and up to the date of this
report are provided on page 2 and are incorporated into the
Directors’ Report by reference.
The appointment and retirement of the Directors is governed
by the Company’s Articles of Association 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.
According to the Company’s Articles of Association, each
Director shall retire at the Annual General Meeting held in the
third calendar year following the year in which the Director
was elected or last re-elected by the Company, or at such
earlier Annual General Meeting as the Directors may resolve.
The Directors who served on the Board up to the date of this
report have benefitted 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.
Aldermore Group PLC and FirstRand International Limited
entered into a Co-operation Agreement effective 6 November
2017 whereby FirstRand became the Company’s sole
shareholder and under which FirstRand may appoint two
representative directors to the Board.
MotoNovo Finance Limited entered into a business transfer
agreement with FirstRand under which it would purchase
certain trading assets and liabilities of MotoNovo and also
entered into a master services agreement with FirstRand in
Note 34 to the
consolidated
financial
statements
Corporate
Responsibility
Page 124
Pages 17 to 19
Company
Information
Page 2
Company
Information
Page 2
-
-
-
-
31
Risk Management
All areas of the following report are covered by the external auditor’s opinion on pages 62 to 70, except for those areas highlighted
in grey which are the yield curve on page 56, the leverage ratio and the risk weighted assets and associated capital ratios on page 58.
The Group’s approach to risk
The Board is ultimately responsible for establishing and ensuring maintenance of a sound system of risk management and internal
controls and approving the Group’s overall risk appetite.
Effective risk management is a key pillar in the execution of the Group’s strategy. The Board and senior management seek to ensure
that the risks the Group is taking are clearly identified, managed, monitored and reported and that the Group remains sustainable
including during a plausible but severely adverse economic downturn and/or idiosyncratic conditions.
The Risk Management Framework (RMF) provides the overarching approach on how the Group manages risk. The following sections
provide a summary of the RMF within the Group. It highlights our governance structure, approach to risk, key risk management
processes and the principal and emerging risks we face and the mitigating actions taken to address these.
In 2019, the integration of MotoNovo into Aldermore was completed. The Risk Management approach applies across Aldermore
Bank and MotoNovo Finance.
Risk principles
The following principles guide the Group’s overall approach to risk management:
All colleagues should adopt the role of “risk manager” and take a prudent approach to risk management in all aspects of
their role. The Board and senior management “lead from the front” and set the example with regard to risk management;
Risk management is structured around the Group’s principal risk categories, which are reviewed at least annually as part
of the RMF;
The Group maintains a robust Risk Appetite Framework, manages to a consistent appetite using an approved set of metrics,
and reports to senior management at least monthly;
The Group ensures that it remains sustainable, including during plausible but severely adverse economic and/or
idiosyncratic conditions; and
The approach to remuneration ensures that fair customer outcomes and prudent decision-making within risk appetite are
incentivised. Colleagues are not unduly rewarded for driving sales and/or profits.
Risk management and internal control
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 37.
The effectiveness of the internal controls was regularly reviewed by the Board, Audit Committee and Risk Committee during the
period. This involved receiving reports from management including reports from Finance, Risk, Compliance, 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 Internal Audit who report the progress made
in implementing them to the Audit Committee.
Based on the review performed during the period, 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 is satisfied with the effectiveness of the Group’s risk management and internal control systems.
Risk management framework
The RMF defines Aldermore Group’s overall approach to risk management across all roles and material risk types. The RMF is the
Group’s foremost risk document, to which all subsidiary risk policies and frameworks must align. The RMF is subject to Board approval,
at least annually. The RMF describes risk management roles and responsibilities, and outlines the Group’s approach to each material
risk to which it is exposed.
The RMF articulates the Group’s principal risks, i.e. the categories of risk that are most significant given the Group’s business model
and operating environment.
33
Risk governance and oversight
The Group’s risk governance structure ensures the Board and senior management are accountable for overall risk management. Each
formal risk committee is responsible for the Group-wide risk position. The Board is responsible for approving the highest materiality
risk frameworks and policies, following recommendation by subsidiary committees. A delegated authority approves other
frameworks and policies.
Three lines of defence
The Group employs a “three lines of defence” model to segregate responsibilities between 1) risk management as part of business
activities, 2) risk oversight and 3) independent assurance. Each of the three lines of defence is responsible for maintaining a prudent
and risk-aware culture.
First line of defence – Business lines and central functions
The first line of defence comprises all colleagues in business lines and central functions that are not part of the Risk or Group Internal
Audit functions. Key responsibilities with regard to risk management are as follows:
Focus on achieving good customer outcomes while avoiding a dogmatic focus on sales and/or profits;
Escalate risks via the risk event process;
Manage risk within the Group’s stated appetite in day to day business activities;
Maintain an up-to-date understanding of risk management responsibilities; and
Proactively identify material risks and design mitigating controls.
Second line of defence – Risk functions
The second line of defence comprises all colleagues in the Risk function. Key responsibilities are as follows:
Develop robust frameworks and policies to manage risk;
Support the first line with embedding risk frameworks and policies;
Own the Group’s relationship with regulators and validate adherence with applicable regulation and legislation;
Oversee the delivery of material risk management processes, such as the Internal Capital Adequacy Assessment Process
Co-ordinate the Group’s approach to setting and reporting on risk appetite; and
(ICAAP), Individual Liquidity Adequacy Assessment Process (ILAAP) and the Recovery and Resolution Plan (RRP).
Third line of defence – Internal Audit
The third line of defence comprises all colleagues in the Group Internal Audit function. Key responsibilities are as follows:
Provide independent assurance to the Board that first and second line functions are properly discharging their risk
management responsibilities;
34
Validate the appropriateness of risk management controls and governance; and
Track internal and external audit actions to completion.
Risk appetite framework
The RAF defines the Group’s approach to setting risk appetite and underpins the approach to monitoring Principal Risks. This
Framework applies to Aldermore Group and to all colleagues responsible for defining risk appetite metrics and/or statements,
providing risk appetite data or monitoring risk appetite reports. The Framework defines the Group’s approach to monthly risk
reporting to senior and working level committees and is a core component of the Group’s RMF. The Framework is subject to Board
approval at least annually.
The Board provides oversight to ensure the Group adheres to the following principles when setting and monitoring risk appetite:
The RAF is aligned with our Strategic Plan;
Risk reporting is action-oriented;
The Risk function provides independent challenge;
The risk profile is monitored on an ongoing basis; and
The framework is reviewed annually.
Risk appetite statement
A core objective of the Group’s Strategic Plan is to “build out the Aldermore Group through controlled, sustainable and customer-
centric growth”. The RAF supports the delivery of this objective, as reflected by the overarching risk appetite statement, as follows:
“Operate a sustainable and safe Group that conducts its activities in a prudent manner, taking into account the interests of customers
and ensuring its obligations to key stakeholders are met.” Key stakeholders are defined as customers, parent company, regulators
and employees.
The principal risks identified within the Risk Management Framework have an overarching qualitative risk appetite statement and,
where appropriate, quantitative metrics to measure the Group’s tolerance and appetite for risk. The suite of risk appetite metrics
enable systematic monitoring of the risk profile against appetite and is reported to Committees on a monthly basis. The Group’s risk
appetite is set by the Board and embedded down to each business line through the informal risk committees, driving a consistent
message across the organisation.
Risk culture
The Board is accountable for ensuring the Group actively embraces a strong risk culture, in which 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
adherence to risk appetite monitored by a defined suite of metrics. Risk management is embedded in the design of staff performance
management and reward practices.
Risk culture is further embedded through:
Framework for risk culture;
Risk performance considerations;
Alignment with the Internal Audit assessment methodology; and
Risk-based remuneration, in part considering the strength and appropriateness of risk culture.
35
Stress testing
Stress testing is an important risk management tool, with specific approaches documented for the Group’s key annual assessments
including the ICAAP, ILAAP, the 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. To
ensure a coherent approach to stress testing, the Group adheres to the following core principles:
Stress testing is an integral part of risk management. Results inform decision making at the appropriate level, including
strategic decisions made by the Board and senior management;
Stress testing draws on the experience and skills of staff across an appropriately wide range of disciplines;
Written policies and procedures govern the Group’s approach to stress testing, with dedicated policies maintained for
material asset classes and types of stress test;
Taken as a whole, stress tests span a range of analytical techniques, risk types, scenarios and severities to ensure a complete
view of material risks. Stress testing systems and procedures must be sufficiently flexible to facilitate this approach, while
remaining proportionate to the Group’s size and activities;
Consistent with the RMF, the Group reviews this Framework at least annually; and
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.
Scope of the stress testing framework:
Stress testing governance
The Board’s key responsibilities in terms of stress testing are:
Review and approve the STF following annual review; and
Review and approve the ICAAP, ILAAP and Recovery Plan in line with regulatory rules and internal policies. As part of this,
the Board will assess the approach to scenario design, stress testing methodologies and results.
The Board Risk Committee key responsibilities in terms of stress testing are:
Review the STF following annual review, and make a recommendation to the Board; and
Review the ICAAP, ILAAP and Recovery Plan, and make recommendation to the Board to approve the documents. As part
of this, the BRC will assess the approach to scenario design, stress testing methodologies and results.
The Chief Risk Officer (CRO) owns the Stress Testing Framework, with the Director of Enterprise Risk responsible for maintaining the
STF and ensuring it is applied across relevant parts of the Group. The CRO ensures that the STF is reviewed at least annually and
approved by the Board following recommendations from the Board Risk Committee and Executive Risk Committee.
36
Principal risks
Effective risk management is a core component of the Group, which 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 risk appetite clearly defined, managed and
reported against, and embedded down to business lines.
The following section summarises the principal risks, which are the categories of risk that are most significant given our business
model and operating environment, along with our approach to their mitigation.
Principal risk
Credit risk
The risk of financial loss arising from
a borrower or a counterparty failing
to meet financial obligations to the
Group according to agreed terms.
Refer to page 41.
Capital risk
Mitigation
Operate in selected sectors and products, where we
have expertise;
Consistently apply the approved credit policy, and price
credit facilities for risk assured;
Where appropriate, obtain physical or
financial
Commentary
The Group’s cost of risk
remains well controlled
at 24 bps reflecting our
robust approach to risk
management.
collateral; and
Undertake robust in-life management of the credit
portfolio, including providing, watch list and internal
strict daily
capital
management of customer credit
including
adherence to explicit concentration and credit rating
limits.
requirements; and perform
risk,
The risk that the Group has
insufficient capital resources, e.g.
retained profits and qualifying
financial instruments, to cover
regulatory requirements and/or
support growth plans.
Refer to page 58.
Maintain robust controls for Pillar 1 reporting;
Perform a comprehensive annual ICAAP assessment of
all material capital risks;
Plan to meet capital requirements on a forward-looking
basis,
formally assessing confirmed and potential
changes in regulatory rules; and
To a quantity deemed appropriate, maintain an internal
capital buffer over and above fully loaded regulatory
requirements to protect against unexpected losses or
risk-weighted asset growth.
The Group’s capital
remains stable, well
above internal targets
and regulatory
minimums.
Liquidity risk
The risk that we are unable to meet
our financial obligations as they fall
due, or can only do so at excessive
cost.
Refer to page 55.
Maintain a sufficient portfolio of cash and high quality
liquid assets (HQLA) to absorb liquidity shocks;
Perform a comprehensive annual ILAAP assessment of all
material liquidity risks and meet internal buffers on an
ongoing basis; and
The Group’s liquidity
position remains stable
and has been managed
well within liquidity
buffers.
Monitor the Group’s liquidity position on a daily basis,
intra-month escalation of material risks as
with
appropriate.
Market risk
The risk arising from adverse
movements in market prices given
long or short positions in impacted
assets and/ or liabilities.
Refer to page 56.
Seek to match the interest rate structure of assets and
liabilities, creating a natural hedge;
Where a natural hedge is not possible or desirable, hedge
any material market risk exposure by using financial
instruments as outlined in the Treasury Risk Limits and
Standards;
Perform a comprehensive assessment of market risk
drivers as part of the ICAAP and assess new/emerging
risks on an ongoing basis;
Maintain a strong control
framework to ensure
exposures are managed in line with risk appetite; and
Monitor the Group’s Market Risk exposure on a regular
basis (including daily monitoring), with intra-month
escalations as appropriate.
The Group’s approach
remains prudent and
underlying risks remain
unchanged.
37
Operational risk
The risk of loss resulting from
inadequate or failed internal
processes, people and systems or
from external events.
Compliance, conduct and financial
crime risk
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 and regulations, codes of
conduct and standards of good
practice.
Reputational risk
The risk of 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 business activities.
Maintain a comprehensive Risk Control Self-Assessment
(RCSA) process. Assess the efficacy of these controls by
maintaining a robust approach to business assurance
testing;
Maintain the risk event reporting process;
Mandate detailed and coherent Committee reporting
that brings together a diverse range of supporting risks;
Ensure a significant emphasis on IT resilience given the
pace of evolution of the business and continued exposure
to the risk of cyber-crime; and
Systematically monitor operational losses on both a net
(overall financial impact) and gross (excluding recoveries)
basis to understand risk profile and identify trends.
Maintain processes
Maintain a well-defined and embedded process for
legislative horizon scanning, and
regulatory and
preparation for confirmed and potential changes;
that
fair customer
focus on
outcomes,
including the use of metrics on staff
performance, training, customer feedback, complaints
and product cancellation;
Ensure that recruitment and training processes have a
clear customer focus, including the use of mandatory
training modules;
Ensure the approach to remuneration incentivises fair
customer outcomes and prudent decision-making within
risk appetite; and
Perform the requisite checks on all customers – including
money laundering, sanctions and fraud at origination –
and where appropriate, on an ongoing basis. Tightly
monitor remedial actions relating to financial crime
breaches.
Maintain a clear and explicit set of reputational risk policy
requirements to which all colleagues must confirm their
understanding and adherence;
Ensure that the reputational impact of changes to
products, pricing, systems and processes is formally
considered at the relevant Committee; and
Ensure that the Corporate Affairs function assesses
material risk events for reputational impact and initiate
mitigating actions as appropriate.
The Operational risk
profile remains stable.
Over the last 12
months, the Group has
improved a number of
key controls, continues
to invest in its IT
infrastructure including
cyber controls and
continues to effectively
manage its change
portfolio.
The Compliance and
Financial Crime key
risks remain unchanged
in an environment
where the continued
pace and volume of
regulatory change
remains an ongoing
challenge.
The Group’s risk profile
remains within
appetite. We remain
mindful of media focus
and regulatory scrutiny
as key drivers of the
profile’s ongoing status.
38
Emerging risks
We define ‘emerging risks’ as those risks that are specifically forward-looking, the likelihood and/or impact of which cannot be readily
quantified and which have not yet crystallised. Emerging risks for the Group include:
Themes
Regulatory Change or Intervention
Risk
What we are currently doing
MREL is an EU regulation that supports orderly
resolution and protects depositors and
taxpayers in the event of bank failure. The
Group is currently not considered in scope.
However, over time, the Group may fall in
scope for more complex resolution strategies
and going concern requirements.
The Group is to consider the potential
impact of MREL as part of its strategic
decision making.
We aim to have discussions with the PRA
to understand at what point the Group
may face MREL requirements to ensure
we are fully prepared.
Minimum Requirements
for Own Funds and
Eligible Liabilities (MREL)
Funding Requirements
Securitisation Regulation
Transition from LIBOR to
SONIA
Two regulations were published in December
2017, to take effect on 1 January 2019. 1) The
Securitisation Regulation (Regulation (EU)
2017/2402); and 2) The Regulation amending
the Capital Requirements Regulation
(Regulation (EU) 2017/2401).
UK regulatory authorities expect members to
transition from LIBOR to SONIA by 2021. While
industry generally accepts the principles
driving this change, a number of very
significant operational and technical
challenges have become apparent.
The Group will manage and oversee
compliance with the regulations under
the new articles in conjunction with the
appropriate internal/external
stakeholders and advisors.
The Group have set up a working group
that keep up-to-date with developments
through UK Finance and Trade bodies.
LIBOR project. We have initiated a Group
Programme focussed on preparing our
strategy for contractual changes,
alternative rates, communications and
necessary operational changes ahead of
2021.
The Supervisory Statement on Managing
Financial Risks from Climate Change was
released on 15 April 2019. The Group
have reviewed and completed an
executive briefing. A working group has
been set up by Enterprise Risk and met for
the first time on 31 July 2019.
Financial Risks from
Climate Change
The PRA is forming a strategic response to the
financial risks faced by climate change and will
produce a Supervisory Statement on Managing
Financial Risks from Climate Change.
Economic and Political Environment
Significant UK downturn
Over-indebtedness
impacting mortgage
affordability
Emerging risks are growing in terms of a no-
The Group takes a wide range of
deal Brexit with the election of Boris Johnson
as the Conservative leader and Prime
Minister. He has been consistent that he will
take the UK out of the EU by 31st October.
The market relects this as swap rates have
continued to fall and GBP is nearing the lows
of 2016.
mitigating actions as part of “business as
usual”, including the use of robust stress
tests (both for individual loan applicants
and the entire balance sheet), the
purchase of Mortgage Indemnity
Guarantees and the hedging of interest
rate risk.
The mortgage portfolio remains resilient
as demonstrated by affordability stress
testing and a low expected loss.
In July 2017, a PRA review noted the declining
resilience of some consumer credit portfolios
due to growth in higher-risk segments, lower
pricing and banks being overly influenced by
the benign economy.
The risk to Aldermore is twofold. Firstly, over-
indebted consumers may affect residential
mortgage affordability, particularly if
unemployment rises. Secondly, the FCA and
PRA reviews indicate that regulators may
impose restrictions on consumer lending.
39
Significant fall in diesel
and petrol car prices
Several factors may lead to reductions in
values for used diesel and petrol vehicles.
Key factors include the emergence of electric
cars, government initiatives to improve air
quality (including local schemes that
disincentivise diesels) and general anti-diesel
sentiment following the recent emissions
scandal.
The Group is monitoring data, consumer
trends and national and local legislation to
continue to form a view as to the
expected path for diesel and petrol
vehicle prices and implications for credit
policy and back-book management.
Competitive Environment
Heightened competition
Technology Risk
Cyber-crime incident
Competition in the Group’s selected markets
arises from a range of sources, including large
high street banks, challengers and non-bank
lenders.
We continue to monitor trends in the
external environment and the impact on
pricing, mindful of the increase in savings
stock required into 2020.
Heightened competition may lead to margin
compression and lower growth and therefore
impact profitability.
The business lines continue to take a
disciplined approach to pricing with the
aim of maintaining stable margins, risk
profile and commission arrangements.
Cyber-crime remains significant and high
The Group is continuing to progress key
profile across all industries. Coupled with an
increase in public awareness of data privacy as
a result of GDPR, there have been numerous
headlines regarding data breaches.
deliverables in its Information Security
Portfolio.
Completion of final Non-Executive
Director (NED) training provided by KPMG
and further bank-wide awareness
activities.
Failure of an outsource
provider or supplier
The Group has a number of material and
The Group continues to maintain controls
critical outsource or third-party arrangements
that are core elements of the supply chain. The
failure of one of these key partners could
significantly affect the Group’s customers,
operations and reputation.
and governance in relation to the
operating framework for suppliers. The
risk profile in this area has improved as
the Group continues to embed enhanced
governance and oversight in accordance
with the Supplier Management
Framework.
Detrimental impact on
customers from an IT
failure
The Group deploys services through a mix of
hosted systems, both externally hosted or
hosted on behalf of the Group.
The Group continues to perform robust
risk assessments and mitigation of the
risks from an IT failure.
The risk is the potential detrimental impact to
the Group from an IT failure.
Scenarios and simulated exercises are run,
as part of incident management testing,
to mitigate this risk.
40
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 primarily crystallises by customers defaulting on lending facilities. Credit risk also
arises from treasury investments and off-balance sheet activities and any other receivables, which are typically sub-categorised as
counterparty credit risk.
The credit risk section of this report includes information on the following:
1.
The Group’s maximum exposure to credit risk;
2. Credit quality and performance of loans;
3.
Forbearance granted through the flexing of contractual agreements;
4. Diversity and concentration within our loan portfolio;
5. Details of provisioning coverage and the value of assets against which loans are secured; and
6.
Information on credit risk within our treasury operations.
Disclosures as at 30 June 2019 reflect the classification and measurement requirements of IFRS 9 and amendments made to the
disclosure requirements of IFRS 7 made by IFRS 9. All comparative disclosures relating to credit risk as at 30 June 2018 are based on
the classification and measurement requirements of IAS 39 and disclosure requirements of IFRS 7 before the IFRS 9 amendments.
Due to the more bespoke nature of the Property Development business, the portfolio is excluded from a number of the following
tables, as indicated by the footnotes. Gross Property Development exposure at 30 June 2019 was £211 million (30 June 2018: £226
million), and net exposure was £210 million (30 June 2018: £225 million).
1. The Group’s maximum exposure to credit risk
The following table 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 either irrevocable or revocable only in response to material adverse change.
Our net credit risk exposure as at 30 June 2019 was £13,181.6 million (30 June 2018: £10,859.9 million), an increase of 21.4%. The
main factors contributing to the increase were:
i)
ii)
iii)
the growth in gross loans and advances to customers (our largest credit risk exposure), by £1,633.2 million;
the growth in debt securities by £415.5 million; and
an increase in commitments to lend by £272.8 million.
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
Irrevocable Commitments to lend
Gross credit risk exposure
Less: allowance for impairment losses
Net credit risk exposure
Note
20
39
37
20
30 June
2019
£m
482.9
145.2
1,207.8
9.1
10,648.9
25.9
30 June
2018
£m
508.8
96.6
792.3
22.7
9,015.7
6.2
12,519.8
10,442.3
715.6
442.8
13,235.4
10,885.1
(53.8)
(25.2)
13,181.6
10,859.9
41
2. Credit quality and performance of loans
As at 30 June 2019 (IFRS 9)
The credit quality of loans and advances to customers are analysed internally in the following tables, which also include the fair value
of collateral held capped at the gross exposure amount.
Stage 1 per IFRS 9 – no significant increase in credit risk since initial recognition:
Asset
Finance
Invoice
Finance
SME
Commercial
Mortgages1
Buy-to-
Let
Residential
Mortgages
MotoNovo
Finance
30 June 2019
Low risk
Medium risk
High risk
Total
Fair value of collateral
held
£m
263.7
1,236.4
338.6
1,838.7
1,201.7
£m
20.1
229.8
119.4
369.3
369.3
£m
£m
514.6
3,330.6
401.9
1,020.5
22.7
13.9
£m
999.1
533.2
24.0
Total
£m
£m
-
5,128.1
290.4
3,712.2
77.5
596.1
939.2
4,365.0
1,556.3
367.9
9,436.4
846.3
4,356.0
1,555.0
367.9
8,696.2
Stage 2 per IFRS 9 – a significant increase in credit risk since initial recognition:
Asset
Finance
Invoice
Finance
SME
Commercial
Mortgages1
Buy-to-
Let
Residential
Mortgages
MotoNovo
Finance
30 June 2019
Low risk
Medium risk
High risk
Total
Fair value of collateral
held
£m
1.2
75.4
96.1
172.7
96.0
£m
4.1
13.5
12.4
30.0
30.0
£m
£m
13.5
40.9
16.8
71.2
254.9
316.3
82.8
654.0
70.8
654.0
£m
23.2
69.2
62.4
154.8
154.8
Stage 3 per IFRS 9 – credit impaired assets
Total
£m
296.9
515.4
271.1
1,083.4
£m
-
0.1
0.6
0.7
0.7
1,006.3
Asset
Finance
Invoice
Finance
SME
Commercial
Mortgages1
Buy-to-
Let
Residential
Mortgages
MotoNovo
Finance
£m
£m
£m
£m
£m
30.5
30.5
14.9
5.8
5.8
3.0
13.6
13.6
12.2
37.2
37.2
35.8
41.4
41.4
40.1
£m
0.6
0.6
0.6
Total
£m
129.1
129.1
106.6
30 June 2019
High risk
Total
Fair value of collateral
held
¹ The above analysis includes Property Development
42
The credit quality in respect of irrevocable commitments to lend, which, as at 30 June 2019, were all stage 1 exposures was as per the
following table, which also includes the fair value of collateral to be provided capped at the gross exposure amount.
Asset
Finance
£m
Invoice
Finance
£m
SME
Commercial
Mortgages1
£m
Buy-to-
Let
£m
Residential
Mortgages
£m
MotoNovo
Finance
£m
Total
£m
-
-
-
-
-
-
-
-
-
-
46.8
200.7
4.5
-
3.6
-
91.1
60.1
-
51.3
204.3
151.2
-
338.6
27.5
0.6
28.1
95.7
0.6
434.9
51.3
204.3
151.2
28.1
434.9
30 June 2019
Low risk
Medium risk
High risk
Total
Assessed fair value of
collateral to be provided
1 This analysis excludes Property Development.
Not included in the above are £280.7 million of irrevocable commitments to lend for 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 compared with the expected gross development
value once the development is complete. The anticipated gross development value of the committed lending for Property
Development is £853.4 million.
The categorisation of high, medium and low risk is based on internal IFRS 9 Probability of Default (“PD”) and Loss Given Default
(“LGD”) models. Drivers for the PDs and LGDs 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 PD and LGD
grades. 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 low LGD are graded as ‘low’. Those graded ‘high’ will
be accounts that have either a high PD and/or high LGD.
As at June 2018 (IAS 39)
The tables below provides a split of our £9,015.7 million credit risk exposure to loans, gross of impairments, on the basis of:
A. Whether they are performing (neither past due nor individually impaired);
B. Past due but not individually impaired; and
C.
Individually impaired loans, in line with note 2 (g).
Asset
Finance
Invoice
Finance
SME
Commercial
Mortgages1
Buy-to-Let
Residential
Mortgages
Total
£m
£m
£m
£m
£m
£m
1,837.5
267.6
961.0
4,408.2
1,449.8
8,924.1
6.7
6.1
-
0.8
6.0
3.0
21.1
13.5
23.9
10.5
57.7
33.9
1,850.3
268.4
970.0
4,442.8
1,484.2
9,015.7
30 June 2018
A
B
Neither past due nor
individually impaired
Past due but not
individually impaired
C
Individually impaired
1 This analysis includes Property Development.
The three categories shown above are further analysed over the following pages.
All figures for 2018 exclude MotoNovo Finance which was not established as at 30 June 2018.
43
A. Loans and advances that are neither past due nor individually impaired
The credit quality of assets that are neither past due nor individually impaired is analysed internally as follows:
Asset
Finance
Invoice
Finance
SME
Commercial
Mortgages1
30 June 2018
Low risk
Medium risk
High risk
Total
£m
-
1,369.5
468.0
1,837.5
Fair value of collateral held
1,220.8
£m
-
42.3
225.3
267.6
266.0
1 This analysis excludes Property Development.
B. Loans and advances that are past due but not individually impaired
Buy-to-Let
Residential
Mortgages
£m
£m
3,693.3
1,074.8
661.6
53.3
330.2
44.8
£m
456.8
267.3
11.0
735.1
4,408.2
1,449.8
735.1
4,406.1
1,449.3
As at 30 June 2018, there was a balance of £57.7 million in relation to loans where customers had missed one or more repayments
but no specific loss had yet been recognised.
The table below provides further analysis according to the number of months past due:
- Up to 2 months past due
- 2 to 3 months past due
Total
Fair value of collateral held
The above analysis includes Property Development.
C. Loans and advances that have been individually impaired
Individually impaired balances are further analysed as follows:
30 June 2018
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
Total
Of which: Possessions
Asset
Finance
£m
0.3
1.7
2.6
0.9
0.6
6.1
0.3
Invoice
Finance
£m
-
-
-
0.3
0.5
0.8
-
SME
Commercial
Mortgages1
Buy-to-Let
Residential
Mortgages
£m
-
0.2
0.4
1.0
1.4
3.0
0.6
£m
3.3
2.2
5.7
1.3
1.0
13.5
3.6
0.30
£m
0.3
1.8
5.2
1.9
1.3
10.5
1.0
0.71
Non-performing Loan Ratio %
0.33
0.30
0.31
¹ The above analysis includes Property Development.
Against the above individually impaired balances at 30 June 2018 of £33.9 million the fair value of collateral was £30.6 million.
We always seek to pursue timely realisation of collateral in an orderly manner and do not use the collateral for our own operations.
44
Total
£m
5,224.9
2,670.9
802.4
8,698.2
8,077.3
30 June
2018
£m
45.5
12.2
57.7
55.8
Total
£m
3.9
5.9
13.9
5.4
4.8
33.9
5.5
0.38
The movement in impaired loans for the period ended 30 June 2018 is analysed as follows:
Asset
Finance
Invoice
Finance
SME
Commercial
Mortgages1
Buy-to-
Let
Residential
Mortgages
Period to 30 June 2018
At 1 January 2017
Classified as impaired
during the period
Transferred from impaired
to unimpaired
Amounts written-off
Repayments
At 30 June 2018
£m
9.3
13.1
(1.5)
(11.4)
(3.4)
6.1
£m
3.6
1.2
(0.1)
(3.1)
(0.8)
0.8
£m
7.8
2.2
(0.2)
(1.3)
(5.5)
3.0
£m
8.7
11.1
(1.2)
(0.2)
(4.9)
13.5
£m
6.2
9.0
(3.4)
(0.1)
(1.2)
10.5
Total
£m
35.6
36.6
(6.4)
(16.1)
(15.8)
33.9
¹ The above analysis includes Property Development.
3. Forbearance granted through the flexing of contractual agreements
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 their
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. Forborne amounts disclosed as
Stage 1 in the below table relate to such accounts which are now performing but still reported as forborne following the end of
concessionary arrangements. In all cases, the above definitions are subject to no further concessions being made and the customers’
compliance with the new terms.
Forbearance levels remain low. The balance of forborne accounts by payment status is shown in the tables below:
Asset
Finance
Invoice
Finance
SME
Commercial
Mortgages1
Buy-to-
Let
Residential
Mortgages
MotoNovo
Finance
£m
0.2
3.2
5.3
8.7
£m
2.3
1.0
1.4
4.7
£m
5.7
2.9
0.8
9.4
£m
0.1
2.5
1.5
4.1
£m
1.9
4.7
8.5
15.1
£m
-
-
-
-
30 June 2019 (IFRS 9)
Stage 1
Stage 2
Stage 3
Total
Asset
Finance
Invoice
Finance
SME
Commercial
Mortgages1
Buy-to-Let
Residential
Mortgages
30 June 2018 (IAS 39)
A Neither past due nor
individually impaired
B Past due but not
individually impaired
C
Individually impaired
Total
¹ The above analysis includes Property Development.
£m
6.8
0.8
0.3
7.9
£m
5.4
0.7
-
6.1
£m
11.0
0.1
0.9
12.0
£m
0.7
0.7
-
1.4
£m
5.1
1.3
2.2
8.6
Total
£m
10.2
14.3
17.5
42.0
Total
£m
29.0
3.6
3.4
36.0
45
As at 30 June 2019, we had undertaken forbearance measures as follows in the following segments (forbearance levels in MotoNovo
Finance were immaterial as at 30 June 2019 and therefore excluded from the below analysis):
Asset Finance
Capitalisation
Reduced monthly payments
Loan-term extension
Deferred payment
Total Asset Finance
30 June 2019
£m
30 June 2018
£m
0.6
0.8
4.0
3.3
8.7
1.8
1.7
2.0
2.4
7.9
Forborne as a percentage of the total divisional gross lending book %
0.43%
0.42%
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 Mortgages1
Temporary or permanent switch to interest only
Reduced monthly payments
Accounts linked to forbearance
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
Payment, waiver or lower rate product switch
Deferred payment
Total Buy-to-Let
4.7
4.7
1.16%
2.6
0.5
6.3
9.4
0.92%
-
0.8
1.1
2.2
4.1
6.1
6.1
2.26%
4.7
0.8
6.5
12.0
1.25%
0.5
0.4
-
0.5
1.4
Forborne as a percentage of the total divisional gross lending book %
0.08%
0.03%
Residential Mortgages
Temporary or permanent switch to interest only
Reduced monthly payments
Payment, waiver or lower rate product switch
Deferred payment
Total Residential Mortgages
Forborne as a percentage of the total divisional gross lending book %
Total capitalisation
Total temporary or permanent switch to interest only
Total reduced monthly payments
Total loan-term extension
Total Payment, waiver or lower rate product switch
Total deferred payment
Total accounts linked to forbearance
Total agreement to advance funds in excess of normal contractual terms
Total forborne2
Total forborne as a percentage of the total gross lending book %
¹ The above analysis includes Property Development.
2 The above analysis excludes MotoNovo Finance.
2.4
9.5
0.5
2.7
15.1
0.86%
0.6
5.0
11.6
4.0
1.6
8.2
6.3
4.7
42.0
0.39%
3.9
4.2
-
0.5
8.6
0.58%
1.8
9.1
7.1
2.0
-
3.4
6.5
6.1
36.0
0.40%
46
When forbearance is granted to a borrower on a specific exposure, all exposures which are connected with that borrower, e.g. by
reason of common ownership are deemed as forborne for reporting purposes.
4. Diversity and concentration within our loan portfolio
As shown below, we monitor concentration of credit risk by segment, geography, sector and size of loan:
Credit concentration by segment
Details of our net lending by segment are as follows:
Asset Finance
Invoice Finance
SME Commercial Mortgages1
Buy-to-Let
Residential Mortgages
MotoNovo Finance
¹ The above analysis includes Property Development.
Credit concentration by geography ¹
30 June 2019
30 June 2018
£m
%
£m
%
2,017.7
400.4
1,020.6
5,043.7
1,747.9
364.8
19
4
10
48
16
3
1,841.7
265.2
965.9
4,436.8
1,480.9
-
21
3
11
49
16
-
10,595.1
100
8,990.5
100
An analysis of our loans and advances to customers by geography 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
¹ The above analysis includes Property Development.
30 June 2019
30 June 2018
%
9.9
5.9
17.5
3.1
10.7
1.6
6.4
18.1
9.0
4.3
6.6
6.9
%
10.1
5.3
21.8
2.8
10.4
0.3
5.2
20.3
9.1
2.7
6.4
5.6
100.0
100.0
47
Credit concentration by sector¹
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
Real estate, renting and business activities
Residential
Transport, storage and communication
Wholesale & retail trade; repair of motor vehicles & household goods
30 June
2019
30 June
2018
%
0.5
5.2
0.2
0.4
2.0
0.3
0.4
2.4
0.2
2.2
19.4
61.1
3.2
2.5
100.0
%
0.8
5.2
0.1
0.5
1.9
0.3
0.4
2.8
0.2
1.4
18.6
61.7
3.5
2.6
100.0
¹ The above analysis includes Property Development.
Credit concentration by quantum of exposure
An analysis of loans and advances to customers by quantum of exposure is shown in the table below:
30 June 2019
£0 - £50k
£50 - £100k
£100 - £150k
£150 - £200k
£200 - £300k
£300 - £400k
£400 - £500k
£500k - £1m
£1m - £2m
£2m+
Total
¹ The above analysis excludes Property Development
Asset
Finance
£m
Invoice
Finance
£m
SME
Commercial
Mortgages1
£m
Buy-to-Let
£m
Residential
Mortgages
£m
MotoNovo
Finance
£m
786.8
420.2
219.9
139.4
137.5
76.3
55.6
104.7
46.4
55.1
2,041.9
4.2
9.7
9.9
12.3
18.9
16.5
17.4
60.8
45.7
209.7
405.1
1.6
25.3
30.6
30.7
48.5
39.6
44.0
142.7
166.0
284.1
813.1
43.6
644.4
650.4
621.8
1,179.7
835.7
373.6
466.0
153.3
87.7
15.4
266.5
429.5
329.7
422.0
165.3
44.7
75.1
2.2
2.0
286.0
10.8
6.7
9.9
10.8
6.3
7.6
19.6
6.0
5.5
5,056.2
1,752.4
369.2
48
30 June 2018
£0 - £50k
£50 - £100k
£100 - £150k
£150 - £200k
£200 - £300k
£300 - £400k
£400 - £500k
£500k - £1m
£1m - £2m
£2m+
Total
Asset
Finance
Invoice Finance
SME
Commercial
Mortgages1
Buy-to-Let
Residential
Mortgages
£m
688.4
398.2
188.3
124.0
139.5
69.8
45.8
97.4
43.1
47.2
£m
4.6
9.6
11.7
10.1
20.5
15.1
15.8
51.4
29.7
96.7
1,841.7
265.2
£m
1.8
23.4
29.2
28.9
49.0
37.5
39.9
136.3
151.6
243.7
741.3
£m
33.1
580.6
570.9
533.7
1,016.8
742.8
333.9
410.0
120.8
94.2
£m
12.1
242.2
385.3
285.7
336.4
126.4
27.8
60.8
2.2
2.0
4,436.8
1,480.9
¹ The above analysis excludes Property Development and MotoNovo Finance (which was not established as at 30 June 2018).
5. Details of provisioning coverage and the value of assets against which loans are secured
The principal indicators used to assess the credit security of performing loans are loan-to-value (“LTV”) ratios for SME Commercial,
Buy-to-Let and Residential Mortgages.
SME Commercial Mortgages1
Loan-to-value on indexed origination information on our SME Commercial Mortgage 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
¹ The above analysis excludes Property Development.
30 June
2019
30 June
2018
£m
0.1
-
0.1
2.3
4.1
15.0
61.6
238.5
195.9
295.5
813.1
522.2
290.9
813.1
£m
0.1
-
0.1
0.2
0.1
2.1
23.5
196.4
220.6
298.2
741.3
509.6
231.7
741.3
53.90%
51.64%
49
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 compared with the
expected gross development value once the development is complete. Average loan-to-gross-development-value at origination for
Property Development loans at 30 June 2019 was 61.0% (30 June 2018: 60.0%).
Buy-to-Let
Loan-to-value on indexed origination information on our Buy-to-Let Mortgage portfolio is set out below:
30 June
2019
30 June
2018
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
£m
1.6
0.3
1.6
19.5
233.0
1,172.7
1,208.4
1,290.0
648.7
480.4
5,056.2
301.6
4,754.6
5,056.2
67.10%
£m
0.4
0.6
3.8
11.6
140.0
915.7
974.7
1,217.3
661.9
510.8
4,436.8
281.2
4,155.6
4,436.8
65.71%
Loan-to-value on indexed origination information on our Residential Mortgage portfolio is set out below:
30 June
2019
30 June
2018
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
£m
-
19.1
213.3
186.8
110.6
144.5
246.9
317.7
210.6
302.9
1,752.4
1,553.8
198.6
1,752.4
68.42%
£m
-
14.6
171.3
160.4
113.5
132.0
192.8
266.0
179.8
250.5
1,480.9
1,301.5
179.4
1,480.9
68.39%
50
Lending at higher LTV bandings continues to be largely as a result of the Group’s participation in mortgage guarantee schemes. We
participated in the Help to Buy (“HTB”) mortgage guarantee scheme, which covered lending with an LTV over 85%, until the
retirement of this scheme at the end of 2016. Following the cessation of the HTB scheme, we have introduced the Mortgage
Indemnity Guarantee (“MIG”) product to cover all new lending over 80% LTV (excluding fees).
As at 30 June 2019, 99% of the exposures with an LTV in excess of 85% relate to either HTB or MIG (30 June 2018: 99%). The average
indexed LTV for mortgages with a guarantee was 87% (30 June 2018: 87%). As at 30 June 2019, the average indexed LTV of the non-
mortgage guarantee owner occupied book is 59% (30 June 2018: 59%).
Invoice Finance
In respect of Invoice Finance, collateral is provided by the underlying receivables (e.g. trade invoices). As at 30 June 2019, 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 70.0% (30 June 2018: 66.2%).
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 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 30 June 2019, the total amount of such unsecured lending
was £40.1 million (30 June 2018: £41.1 million, restated from £191.8 million. The £191.8 million figure included lending which upon
review was deemed to be secured).
MotoNovo Finance
In respect of MotoNovo Finance Limited, collateral is provided by our rights and/or title to the underlying assets, which we are able
to repossess in the event of default. A proportion of loans are sanctioned at LTVs higher than 100% of the estimated retail value and
although the whole agreement is secured on the vehicle there may be a shortfall in the event of repossession. Loans where LTV
exceeds 100% are subject to more stringent underwriting criteria. LTV information on MotoNovo Finance’s vehicle finance portfolio
is set out as follows:
100%+
95-100%
90-95%
85-90%
80-85%
75-80%
70-75%
60-70%
50-60%
0-50%
30 June
2019
£m
107.9
39.9
35.3
29.3
21.8
17.8
14.2
18.7
11.7
9.4
306.0
30 June
2018
£m
-
-
-
-
-
-
-
-
-
-
-
51
Group impairment coverage ratio
Impairment coverage is analysed as follows:
30 June 2019
Stage 1
Stage 2
Stage 3
Undrawn loan facilities
Total
At 1 July 2018 (post IFRS 9 transitional adjustment)
Stage 1
Stage 2
Stage 3
Undrawn loan facilities
Total
At 30 June 2018 (IAS 39)
Total
Gross
carrying
amount
£m
9,436.4
1,083.4
129.1
715.6
Provisions
£m
20.7
8.9
24.2
0.8
Coverage
ratio
%
0.22%
0.81%
18.75%
0.11%
11,364.5
54.6
0.48%
Gross carrying
amount
£m
8,370.8
550.1
94.8
442.8
9,458.5
Provisions
£m
14.8
7.3
12.6
0.4
35.1
Coverage
ratio
%
0.18%
1.33%
13.49%
0.09%
0.38%
Gross
carrying
amount
£m
9,015.7
Provisions
£m
25.2
Coverage ratio
%
0.28
Under IAS 39 the coverage ratio was calculated as individual provisions divided by individually impaired loans. In the above analysis
under IFRS 9 the coverage ratio has been calculated as total provisions divided by total gross loans.
The total value of individually impaired loans has increased , with the coverage ratio also increasing by 10bps from 1 July 2018 (IFRS
9 transition date). The inclusion of MotoNovo lending in the 30 June 2019 results has increased the coverage ratio due to the higher
provisions required for vehicle finance. Stage 3 Expected Credit Loss (‘ECL’) has increased due to a number of new individually
assessed provisions entering stage 3 during the year, it should be noted that £1.4 million of the stage 3 balances at 30 June 2019 no
longer meet the criteria for inclusion but remain in stage 3 pending completion of the agreed probation periods. The increase in
provisions is also partly driven by the application of a management overlay to the portfolio for the possibility of a severe economic
downturn resulting from a disorderly (no deal) Brexit. See note 3(a) for further detail on management overlays which the Bank applies
to the modelled IFRS 9 ECL provisions.
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 we have 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 Term Funding Scheme as detailed in note 20.
52
Net amount of
financial
instruments
presented in
the statement
of financial
position
Gross amount
of recognised
financial
instruments
Related amounts not offset in the
statement of financial position
Cash
collateral
paid/
(received)
Net
amount
Financial
instruments
£m
£m
£m
£m
£m
3,303.0
3,303.0
(1,814.6)
-
1,488.4
9.1
3,312.1
9.1
3,312.1
(7.0)
(1,821.6)
(1,814.6)
(1,814.6)
1,814.6
(37.4)
(1,852.0)
(37.4)
(1,852.0)
7.0
1,821.6
-
-
-
29.6
29.6
2.1
1,490.5
-
(0.8)
(0.8)
Net amount of
financial
instruments
presented in
the statement
of financial
position
Gross amount
of recognised
financial
instruments
Related amounts not offset in the
statement of financial position
Cash
collateral
paid/
(received)
Net
amount
Financial
instruments
£m
£m
£m
£m
£m
3,032.7
3,032.7
(1,673.1)
-
1,359.6
22.7
3,055.4
22.7
3,055.4
(16.7)
(1,689.8)
(5.1)
(5.1)
0.9
1,360.5
(1,673.1)
(1,673.1)
(16.7)
(1,689.8)
(16.7)
(1,689.8)
1,673.1
16.7
1,689.8
-
-
-
-
-
-
30 June 2019
Type of financial instrument
Assets
Loans and advances to customers
(amounts pre-positioned as collateral
under the TFS)
Derivatives held for risk management
Liabilities
Amounts due to banks (central bank
under the TFS)
Derivatives held for risk management
30 June 2018
Type of financial instrument
Assets
Loans and advances to customers
(amounts pre-positioned as collateral
under the TFS)
Derivatives held for risk management
Liabilities
Amounts due to banks (central bank
under the TFS)
Derivatives held for risk management
53
6. Information on credit risk within our treasury operations
Credit risk exists where we have acquired securities or placed cash deposits with other financial institutions as part of our
treasury portfolio of assets. We consider the credit risk of treasury assets to be relatively low. No assets are held for speculative
purposes or actively traded. Certain liquid assets are held as part of our liquidity buffer.
Credit quality of treasury assets
The table below sets out information about the credit quality of treasury financial assets. As at 30 June 2019 and at 30 June
2018, all treasury assets were classified as stage 1 assets per IFRS 9 and no treasury assets were past due or impaired. No
significant impairment provision was booked as at 30 June 2019 or 1 July 2018 (under IFRS 9) or at 30 June 2018 (under IAS
39).
The analysis presented below is derived using ratings provided by Standard and Poor’s (see below disclaimer for further details)
and Fitch. The worst rating from the credit agencies for each of the counterparties is used as the basis for assessing the credit
risk of treasury financial assets.
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+
30 June
2019
£m
30 June
2018
£m
-
517.7
68.7
41.7
628.1
959.9
227.9
-
-
-
525.8
51.2
28.4
605.4
574.6
187.6
-
-
20.0
30.1
-
-
-
-
-
-
1,207.8
792.3
-
-
9.1
-
9.1
-
-
22.7
-
22.7
1,845.0
1,420.4
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.”
54
Funding and liquidity risk
Liquidity risk is the risk that we are unable to meet financial obligations, such as repaying depositors and counterparties, as
they fall due, or can only do so at excessive cost.
To protect the Group and its depositors against liquidity risk, 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 and fluctuations in funding, enabling us to meet all financial obligations and to
support anticipated asset growth.
Analysis of the liquidity buffer
The components of the Group’s liquidity buffer are shown below:
Level 1
Bank of England reserve account and unencumbered cash and bank balances
462.4
UK gilts and Treasury bills, other Sovereign, Supranational and Covered bonds
1,124.4
30 June
2019
£m
Level 2
Covered bonds
Asset backed securities
Total liquidity buffer
As a % of funding liabilities
63.4
20.0
1,670.2
14.51%
30 June
2018
£m
492.5
707.3
54.9
30.1
1,284.8
13.06%
Our liquidity buffer ensures the Group holds sufficient liquidity under stressed conditions. We monitor stress and ongoing
commitments to our statement of financial position on a daily basis. We also have access to liquidity through pre-positioned
collateral with the Bank of England (until drawn this remains off-balance sheet so is not included within the calculation).
55
Customer deposits and wholesale funding
As at 30 June 2019, deposits have grown by 15.4% to £9.0 billion (30 June 2018: £7.8 billion) and we continued to maintain a
diversified source of funding, utilising cost effective sources offered by the Bank of England.
In October 2018, the Group issued a new securitisation (Oak No.2) providing £325 million of funding, with £263.2 million in
issue as at 30 June 2019. The underlying mortgages within the outstanding Oak No.2 securitisation will continue to be repaid
with a call option in February 2023. In May 2019, the Group exercised its call option on the Oak No.1 securitisation. The Group
issued two further tranches of Tier 2 subordinated debt, to its fellow subsidiary FirstRand Bank during the year, the first tranche
of £100 million was issued in November 2018 and the second tranche of £52 million in May 2019.
Retail deposits
SME deposits
Corporate deposits
Customer deposits
Term Funding Scheme (“TFS”)
Other eligible schemes
Residential Mortgages Backed Security (“RMBS”)
Subordinated liabilities
Wholesale funding
Total funding
Interest rate and market risk
30 June
2019
£m
5,967.2
2,142.5
862.1
8,971.8
1,674.1
140.5
263.2
213.4
2,291.2
11,263.0
30 June
2018
£m
5,163.4
1,997.9
615.0
7,776.3
1,673.1
-
77.9
60.5
1,811.5
9,587.8
Interest rate risk is the risk of loss through mismatched asset and liability positions which are sensitive to changes in interest
rates. Interest rate risk consists of asset-liability gap risk and basis 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 fair value through other comprehensive income (FVOCI) securities into variable three month LIBOR
and SONIA assets and liabilities..
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 in the economic value of the balance sheet as a result of a modelled 2 percentage point shift in the interest
yield curve.
The impact of a 2 percentage point shift in the interest yield curve is as follows:
2% shift up of the yield curve:
As at period end
Average of month end positions
2% shift down of the yield curve:
As at period end
Average of month end positions
30 June
2019
£m
(4.6)
(5.6)
1.7
3.1
30 June
2018
£m
(5.9)
(5.9)
2.9
2.2
56
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 may take place. This includes consideration
of where the Group has the contractual right to call, irrespective of whether any decision to call has been made.
30 June 2019
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
30 June 2018
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
Payable on
demand
£m
Up to 3
months
£m
3 to 12
months
£m
1 to 5
years
£m
More than
5 years
£m
3.1
2,021.2
6.9
-
-
715.6
2,746.8
147.3
3,184.1
51.6
15.3
-
-
3,398.3
9.3
2,473.1
-
41.7
12.6
-
2,536.7
1,689.8
1,383.7
-
217.5
247.1
-
0.1
-
-
-
- -
3,538,6
0.1
Total
£m
1,849.5
9,062.2
58.5
274.5
259.7
715.6
12,220.0
(0.4)
(0.9)
(7.9)
(27.7)
(1.1)
(38.0)
-
-
(0.4)
8.8
(8.8)
(0.9)
-
-
(7.9)
-
-
(27.7)
-
-
(1.1)
8.8
(8.8)
(38.0)
Payable on
demand
£m
5.8
1,965.0
9.9
-
-
442.8
2,423.5
Up to 3
months
£m
0.3
2,614.5
11.4
8.6
-
-
2,634.8
3 to 12
months
£m
0.7
2,186.0
-
71.6
5.1
-
2,263.4
1 to 5
years
£m
More than
5 years
£m
1,672.0
1,112.3
-
-
72.8
-
2,857.1
-
-
-
-
-
-
-
Total
£m
1,678.8
7,877.8
21.3
80.2
77.9
442.8
10,178.8
(1.2)
(2.0)
(5.5)
(7.6)
(0.8)
(17.1)
7.5
(7.5)
(1.2)
-
-
(2.0)
-
-
(5.5)
-
-
(7.6)
-
-
(0.8)
7.5
(7.5)
(17.1)
57
Capital risk
Capital risk is the risk that the Group has insufficient capital to cover regulatory requirements and/or support its growth plans.
The Group operated in line with its capital risk appetite as set by the Board and above its regulatory capital requirements
throughout the year ended 30 June 2019 and the 18 months ended 30 June 2018.
Our capital resources as at the period end were as follows:
Common Equity Tier 1
Share capital
Share premium account
Capital redemption reserve
FVOCI reserve
Retained earnings
IFRS 9 Transitional adjustment1
Less: intangible assets
Total Common Equity Tier 1 capital (CET1)
Additional Tier 1
Total Tier 1 capital
Tier 2 capital
Subordinated notes
Collective impairment allowance
Total Tier 2 capital
Total capital resources
Risk weighted assets – Pillar 12
Capital ratios – regulatory basis2
Common Equity Tier 1 ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio (%)
30 June
2019
£m
243.9
74.4
0.1
0.4
655.4
9.6
(14.8)
969.0
121.0
1,090.0
212.0
-
212.0
1,302.0
6,484.4
14.9%
16.8%
20.1%
8.6
1 July
2018
(IFRS 9)
£m
34.9
74.4
0.1
1.1
565.5
7.8
(14.4)
669.4
74.0
743.4
60.0
-
60.0
803.4
30 June
2018
(IAS 39)
£m
34.9
74.4
0.1
1.1
573.5
-
(14.4)
669.6
74.0
743.6
60.0
17.4
77.4
821.0
5,441.2
5,441.2
12.3%
13.7%
14.8%
7.0
12.3%
13.7%
15.1%
7.0
1 Under the regulatory rules, an addback to CET1 for the transitional adjustment arising on the implementation of IFRS 9 on
11 July is permitted in the following five years. The permitted addback is 95% in the year following transition reducing to
185%/70%/50%/25% in the second/third/ fourth/fifth years respectively following transition. On a fully loaded basis, with no
1addback for the IFRS 9 transitional adjustments, the Groups’s capital ratios would be as follows:
2 Risk weighted assets, and the capital ratios are not covered by the external auditor’s opinion.
Capital ratios– fully loaded basis2
Common Equity Tier 1 ratio
Tier 1 capital ratio
Total capital ratio
30 June 2019
£m
14.8%
16.7%
19.9%
1 July 2018
£m
12.2%
13.5%
14.6%
58
Reconciliation of equity per statement of financial position to capital resources
Equity per statement of financial position
Add: subordinated notes
Add: collective impairment allowance
Add: IFRS 9 transitional adjustment
Less: intangible assets
Total capital resources
30 June
2019
£m
1,095.2
212.0
-
9.6
(14.8)
1,302.0
1 July
2018
(IFRS 9)
£m
750.0
60.0
-
7.8
(14.4)
803.4
30 June
2018
(IAS 39)
£m
758.0
60.0
17.4
-
(14.4)
821.0
59
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
61
62
71
77
140
143
60
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF
ALDERMORE GROUP PLC
Report on the audit of the financial statements
Opinion
In our opinion:
the financial statements of Aldermore Group PLC (the ‘parent company’) and its subsidiaries (the ‘Group’) give a
true and fair view of the state of the group’s and of the parent company’s affairs as at 30 June 2019 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 (IFRSs) as adopted by the European Union;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by
the European Union 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.
We have audited the financial statements which comprise:
the consolidated income statement;
the consolidated statement of comprehensive income;
the consolidated and parent company statements of financial position;
the consolidated and parent company statements of cash flows;
the consolidated and parent company statements of changes in equity;
the related group notes 1 to 42; and
the related company notes 1 to 15.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the
European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of
the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial
statements section of our report.
We are independent of the group and the parent company in accordance with the ethical requirements that are relevant
to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard
as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the
group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
62
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
Expected Credit Losses for loans and advances to customers; and
Effective Interest Rate income recognition.
Materiality
Scoping
The materiality that we used for the group financial statements was £6.5m, which was
determined on the basis of 5% of profit before tax.
Our group audit focused on Aldermore Group PLC and its significant subsidiaries, Aldermore
Bank PLC and MotoNovo Finance Limited. Our audit of financial information for these
entities provided us with coverage of all material balances as measured by revenue, profit
before tax and total assets.
Significant changes in our
approach
There were no significant changes to our audit approach from the prior year albeit our
approach did entail an audit of newly introduced methodologies and internal models for the
determination of provisions for Expected Credit Losses under International Financial
Reporting Standard 9 (“IFRS 9”) Financial Instruments adopted in these accounts for the first
time.
Conclusions relating to going concern
We are required by ISAs (UK) to report in respect of the following matters where:
•
•
the Directors’ use of the going concern basis of accounting in preparation
of the financial statements is not appropriate; or
the directors have not disclosed in the financial statements any identified
material uncertainties that may cast significant doubt about the group’s or
the parent company’s ability to continue to adopt the going concern basis
of accounting for a period of at least twelve months from the date when
the financial statements are authorised for issue.
Key audit matters
We have nothing to report in
respect of these matters.
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified. These matters included those, which had the greatest effect on: the
overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
63
Expected Credit Losses for loans and advances to customers
Key audit matter
description
The group adopted IFRS 9 from 1 July 2018. IFRS 9 requires impairment losses to be evaluated
on an Expected Credit Loss (“ECL”) basis.
ECL provisions as at 30 June 2019 were £53.8m (2018: £25.2m), which represented 0.5%
(2018: 0.3%) of loans and advances to customers. The Income Statement charge for the year
was £23.8m (2018: £19.5m).
As detailed in note 3 on pages 92-95 ‘Use of estimates and judgements’, determining ECL
estimates is complex and highly judgmental because it involves a high degree of estimation
uncertainty. Due to the considerable judgement required to estimate the ECL and given
estimates, by their nature, give rise to a higher risk of material misstatement due to error or
fraud, we have identified the determination of the ECL provision as a key audit matter.
IFRS 9 requires management to estimate the credit losses that the group is expected to incur
as a result of defaults under different scenarios covering prescribed future periods. These
ECLs impact the carrying amount of the group’s portfolio of financial assets, recognised at
amortised cost.
The impact of macro-economic events, including negative economic sentiment and volatility
in global markets, result in a challenging operating environment and may have an impact on
the credit risk of underlying counterparties.
ECLs are calculated on a portfolio basis and require the use of statistical models incorporating
loss data and assumptions on the recoverability of customers’ outstanding balances, which
are not always necessarily observable.
The specific areas of significant management judgement within the ECL calculations include:
the assumptions and methodologies applied to estimate the probability of default
(“PD”), exposure at default (“EAD”) and loss given default (“LGD”);
the assessment of whether there has been a Significant Increase in Credit Risk
(“SICR”) since origination date of the exposure to the reporting date (i.e. a trigger
event that will cause a deterioration in credit risk and result in migration of the loan
from stage 1 to stage 2);
the incorporation of forward looking information and macro-economic inputs into
SICR; and
the assumptions used for estimating the recoverable amounts (including collateral)
and timing of future cash flows, particularly for stage 3 loans.
Overlays
Management apply judgement in certain circumstances when recognising additional ECLs to
the model output. Management make adjustments when, in their judgement, there is
uncertainty in respect of the models’ ability to address specific trends or conditions. This can
occur given the inherent limitation of modelling based on past performance, the maturity of
the models, the timing of model updates and macro-economic events that could affect
customers’ ability to repay their outstanding borrowings.
How the scope of our
audit responded to the
key audit matter
We audited the ECL models by evaluating the design and implementation and where relevant,
the operating effectiveness of controls over the ECL calculation.
We also reviewed management’s accounting policies and assessed whether they are
reasonable and in accordance with accounting standards. In addition, for all portfolios we
focused our procedures in the following areas:
Model Validity and Model Changes
To test the changes to the model methodology and model inputs during the year, we engaged
Credit Modelling Experts to review the code and evaluate the appropriateness of the changes
made in the current period.
Data Inputs
We have tested management’s controls over the reconciliations of data inputs and we
substantively tested the account level and historical data inputs into the ECL for completeness
64
and accuracy.
Model Inputs (PD, LGD and EAD)
We assessed whether PDs, LGDs and EADs were calculated in line with the model
methodologies by performing a review and independent re-run of the SAS code that
estimates them as at the reporting date.
We tested management’s model performance monitoring controls and performed back
testing for a sample of PDs, LGDs and EADs across the Group’s portfolios to compare
modelled amounts to actual instances of loss.
For the LGD inputs to the Asset Finance portfolio, we additionally looked at the granular
judgements of haircuts, costs and time to sell, and cure rates in the LGD model and assessed
these against observed data.
SICR
We assessed the staging methodology for compliance with IFRS 9 and challenged the primary
quantitative PD thresholds used by management to determine whether an account has
experienced a SICR.
We tested management’s controls for identifying qualitative SICR triggers as part of the watch
list process and for a sample of accounts, we substantively challenged the staging by
performing an independent assessment to determine whether they have been appropriately
allocated to the correct stage under IFRS 9 based on the details of the credit file and a
research of publically available information.
We challenged the key judgement in staging whereby management have used the 12m PD as
a proxy for the lifetime PD of an account to assess relative changes in PD from origination.
This included testing whether significant concentrations of credit risk have been observed at
any point during the life of originated loans.
Macroeconomic Scenarios
During the current period management have implemented new UK-specific macroeconomic
scenarios. We have evaluated the methodology used to develop the forecasts and the
weightings assigned to each scenario as well as the incorporation of a possible no-deal Brexit.
Management Overlays
We assessed the validity of the model overlays and tested their valuation.
We tested completeness of overlays by evaluating whether there are any additional material
data or model methodology deficiencies, which need to be accounted for through an overlay.
ECL Assessment for Stage 3 Accounts
We tested the estimated provision for a sample of Stage 3 accounts. This included challenging
management’s collateral valuations, assessing whether the collateral was recoverable and
legally perfected, evaluating valuation haircuts and costs to sell, and through enquiry of case
managers to understand the possible workout scenarios.
To test the valuation of commercial property collateral we engaged our experts to assist us in
independently challenging the valuation of three properties where a recent reliable third
party valuation was not available.
In addition, we reviewed the disclosures in the financial statements relating to the ECL
provisions to assess whether they are in compliance with IFRSs.
Key observations
We determined that the methodology used and the assumptions management have made in
determining the ECL provisions as at 30 June 2019 are reasonable.
We did not identify any material misstatements in the balance sheet ECL provision or the
Income Statement charge for the year ended 30 June 2019.
The disclosures made in the financial statements are in compliance with IFRSs.
65
Effective Interest Rate income recognition
Key audit matter
description
Interest income is detailed in note 3, ‘Use of estimates and judgements’ on pages 92 to 95.
The group’s revenue recognition policy is detailed in note 2, ‘Significant accounting policies’
on pages 81-92. The group’s net interest income was £318.1 million (18 months to June 2018:
£426.4 million restated).
Interest income on loans and advances in each portfolio is determined using the effective
interest rate (“EIR”) method. Management’s approach to determining the interest income
that should be recognised at each reporting date involves the use of complex models and
relies on a number of key judgements and decisions about what fees and costs should be
included in the calculation.
We have identified management’s estimate of the expected life of each loan portfolio to be
the most critical judgement area. The determination of expected life ‘curves’ to be used in
each EIR model is inherently subjective given they are forward-looking, and the level of
judgement to be exercised by management is increased given the limited availability of
historical repayment information. This is particularly relevant for the Group’s acquired
portfolios, which were underwritten outside of the Group’s standard processes and therefore
may have different profiles than self-originated loans.
We identify EIR as a potential fraud risk as there is an opportunity and incentive for
management to manipulate the amount of interest income reported at period-end.
How the scope of our
audit responded to the
key audit matter
We audited the EIR models by evaluating the design and implementation of controls over the
EIR calculation. In addition, for all portfolios we:
•
reviewed management’s accounting policies and assessed whether they are
reasonable and in accordance with accounting standards. A particular focus was the
fees included / excluded from the EIR models.
• we substantively tested the relevant loan data inputs, to check they had been
completely and accurately included in the EIR models.
• we tested the mathematical integrity of management’s EIR models by building our
own models (“challenger models”) and comparing the output from our models to
the output from management’s models.
Key observations
We determined that the EIR models used and the assumptions management have made are
appropriate and that net interest income for the period is not materially misstated.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the
economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in
planning the scope of our audit work and in evaluating the results of our work.
66
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent Company financial statements
Materiality
£6,500,000 (2018: £10,000,000)
£2,600,000 (2018: £4,000,000)
Basis for
determining
materiality
5% of profit before tax (2018: 5% of profit
before tax)
For the 2019 Parent Company Financial
Statements, we have determined our materiality
to be £2.6m (2018: £4.0m) on the basis of 40%
of Group materiality because the Parent
Company is a component in scope for our Group
audit.
Rationale for the
benchmark
applied
Profit before tax was used as the basis for
determining materiality, as we believe it is the
key metric used by members of the Parent
Group and other relevant stakeholders in
assessing financial performance.
PBT £130m
PBT
Group materiality
Group materiality
£6.5m
Audit Committee
reporting threshold
£0.325m
We agreed with the Audit Committee that we would report all audit differences in excess of £0.325m (2018: £0.5m), as well
as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the
Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial
statements.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide
controls, and assessing the risks of material misstatement at the group level. Our Group audit focused on Aldermore
Group PLC and its significant subsidiaries, Aldermore Bank PLC and MotoNovo Finance Limited which were subject to a full
scope audit while the remaining subsidiaries were subject to specified audit procedures. The full scope audit of the three
entities named above provided us with coverage of all material balances as measured by revenue, profit before tax and
total assets. Our audits of each of the subsidiaries were performed using lower levels of materiality based on their size
relative to the Group. The materiality for each subsidiary audit ranged from £0.065m to £6.435m. At the Group level we
also tested the consolidation process.
67
Other information
The directors are responsible for the other information. The other information
comprises the information included in the annual report, other than the financial
statements and our auditor’s report thereon.
We have nothing to report in
respect of these matters.
Our opinion on the financial statements does not cover the other information and,
except to the extent otherwise explicitly stated in our report, we do not express
any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to
read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our
knowledge obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements,
we are required to determine whether there is a material misstatement in the
financial statements or a material misstatement of the other information. If, based
on the work we have performed, we conclude that there is a material
misstatement of this other information then we are required to report that fact.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view, and for such internal control as the
directors determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s
ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going
concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out
below.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and
then design and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient
and appropriate to provide a basis for our opinion.
68
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance
with laws and regulations, our procedures included the following:
enquiring of management, Internal Audit and the Audit Committee, including obtaining and reviewing
supporting documentation, concerning the group’s policies and procedures relating to:
o
o
o
identifying, evaluating and complying with laws and regulations and whether they were aware of any
instances of non-compliance;
detecting and responding to the risks of fraud and whether they have knowledge of any actual,
suspected or alleged frauds;
the internal controls established to mitigate risks related to fraud or non-compliance with laws and
regulations;
discussing among the engagement team, and involving relevant internal specialists, including tax, valuations and
IT, regarding how and where fraud might occur in the financial statements and any potential indicators of fraud.
As part of this discussion, we identified potential for fraud in the following areas: Effective Interest Rate income
recognition and Expected Credit Losses for loans and advances to customers; and
obtaining an understanding of the legal and regulatory frameworks that the group operates in, focusing on
those laws and regulations that had a direct effect on the financial statements or that had a fundamental effect
on the operations of the group. The key laws and regulations we considered in this context included the UK
Companies Act and tax legislation.
Audit response to risks identified
As a result of performing the above, we identified Effective Interest Rate income recognition and Expected Credit Losses
for loans and advances to customers as key audit matters. The key audit matters section of our report explains the
matters in more detail and also describes the specific procedures we performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks identified included the following:
reviewing the financial statement disclosures and testing to supporting documentation to assess compliance
with relevant laws and regulations discussed above;
enquiring of management, the Audit Committee and external legal counsel concerning actual and potential
litigation and claims;
performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of
material misstatement due to fraud;
reading minutes of meetings of those charged with governance, reviewing Internal Audit reports and reviewing
correspondence with the Group’s primary regulators the Prudential Regulatory Authority and the Financial
Conduct Authority.
in addressing the risk of fraud through management override of controls, testing the appropriateness of journal
entries and other adjustments; assessing whether the judgements made in making accounting estimates are
indicative of a potential bias; and evaluating the business rationale of any significant transactions that are
unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team
members including internal specialists and remained alert to any indications of fraud or non-compliance with laws and
regulations throughout the audit.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
the information given in the strategic report and the directors’ report for the financial year for which the financial
statements are prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
69
Consolidated income statement
For the year ended 30 June 2019
Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net gains from derivatives and other financial instruments at fair
value through profit or loss
Gains on disposal of fair value through other comprehensive income (FVOCI)
(2018: available for sale) debt securities
Other operating income
Total operating income
Provisions
Transaction costs
Integration costs
Impairment of intangibles and goodwill
Other administrative expenses
Administrative expenses
Depreciation and amortisation
Operating profit before impairment losses and share of profit of associate
Share of profit of associate
Impairment losses
Profit before taxation
Taxation
Profit after taxation - attributable to equity holders of the Group
Note
5
6
7
8
9
29
10
10
24
10
10
14
23
20
16
Year ended
30 June 2019
£m
467.3
Period ended
30 June 2018
(restated*)
£m
594.4
(149.2)
(168.0)
318.1
7.6
(6.2)
3.8
0.2
16.8
340.3
(1.2)
-
(5.4)
(0.7)
426.4
36.6
(11.0)
5.2
1.2
9.0
467.4
(1.2)
(19.8)
(2.4)
(14.2)
(175.0)
(206.9)
(182.3)
(244.5)
(5.1)
152.9
0.5
(23.8)
129.6
(32.7)
96.9
(8.4)
214.5
0.3
(19.5)
195.3
(56.7)
138.6
The notes and information on pages 77 to 139 form part of these financial statements.
The result for the period is derived entirely from continuing activities.
*Prior period amounts for interest income, interest expense and net gains from derivatives and other financial instruments
at fair value through profit or loss have been restated to align with FirstRand Group policy. Total operating income has not
changed. See point (i) in note 2(c).
71
Consolidated statement of comprehensive income
For the year ended 30 June 2019
Profit after taxation
Other comprehensive income:
Items that may subsequently be reclassified to profit or loss:
Fair value movements
Amounts transferred to the income statement
Taxation
Total other comprehensive (expense) / income
Total comprehensive income attributable to equity holders of the Group
The notes and information on pages 77 to 139 form part of these financial statements.
Year ended
30 June
2019
£m
96.9
Period ended
30 June
2018
£m
£m
138.6
(0.2)
(0.8)
0.3
(0.7)
96.2
0.3
(1.2)
0.2
(0.7)
137.9
72
Consolidated statement of financial position
As at 30 June 2019
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
Investments in associates
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
Additional Tier 1 capital
Capital redemption reserve
FVOCI reserve (2018: Available-for-sale reserve)
Retained earnings
Total equity
Total liabilities and equity
Note
30 June 2019
£m
30 June 2018
£m
17
18
19
20
22
23
24
25
26
19
27
28
29
30
31
33
35
482.9
145.2
1,207.8
9.1
508.8
96.6
792.3
22.7
10,595.1
8,990.5
17.9
25.9
9.8
4.8
5.4
11.6
14.8
(15.7)
6.3
6.3
1.7
5.1
3.7
14.4
12,530.3
10,432.7
1,814.6
1,678.2
8,971.8
7,776.3
37.4
1.0
61.4
51.6
18.3
2.4
263.2
213.4
16.7
0.2
23.6
34.5
5.8
1.0
77.9
60.5
11,435.1
9,674.7
243.9
74.4
121.0
0.1
34.9
74.4
74.0
0.1
0.4 1.1
655.4
1,095.2
573.5
758.0
12,530.3
10,432.7
73
Consolidated statement of cash flows
For the year ended 30 June 2019
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
Taxation paid
Net cash flows (used in) / 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
Acquisition of MotoNovo business from FirstRand Bank
Purchase of property, plant and equipment and intangible assets
Purchase of shares in associate
Net cash used in investing activities
Cash flows from financing activities
Proceeds from the issue of share capital
Proceeds from the issue of Additional Tier 1 capital
Proceeds from exercise of share options
Proceeds from the issue of subordinated notes
Repayment of subordinated notes
Proceeds from issue of debt securities
Capital repayments on debt securities issued
Coupons paid on Additional Tier 1 capital
Interest paid on debt securities issued
Interest paid on subordinated notes
Net cash generated from / (used in) financing activities
Net (decrease) / increase in cash and cash equivalents
Cash and cash equivalents at start of the period
Movement during the period
Cash and cash equivalents at end of the period
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
Note
36
36
36
18
18
18
5
36
23
33
35
33
31
31
30
30
35
30
31
36
36
129.6
25.4
195.3
30.7
(1,632.4)
(1,534.1)
1,396.8
2,015.6
(18.7)
(99.3)
(44.9)
662.6
(810.6)
(703.7)
348.9
53.8
13.3
(86.4)
(2.2)
(0.5)
316.0
250.8
15.3
-
(11.6)
(3.8)
(483.7)
(137.0)
209.0
47.0
-
152.0
-
-
1.0
-
-
(40.0)
323.3
(138.9)
(8.9)
(4.0)
(7.5)
-
(53.1)
(17.8)
(1.7)
(10.2)
572.0
(121.8)
(11.0)
)
544.7
(11.0)
533.7
403.8
140.9
403.8
544.7
75
Consolidated statement of changes in equity
For the year ended 30 June 2019
Share
capital
£m
Share
premium
account
£m
Additional
Tier 1 capital
£m
Note
Capital
redemption
reserve
£m
FVOCI reserve
(2018:
Available-for-
sale reserve)
£m
Retained
earnings
£m
Total
£m
Year ended 30 June 2019
As at 30 June 2018
Adjustment for adoption of IFRS 9
Adjustment for adoption of IFRS 15
34.9
74.4
74.0
0.1
1.1
573.5
758.0
-
-
-
-
-
-
-
-
-
-
(7.8)
(0.2)
(7.8)
(0.2)
Restated balance as at 1 July 2018
34.9
74.4
74.0
0.1
1.1
565.5
750.0
Profit after taxation
Other comprehensive income
Transactions with equity holders:
Share issue proceeds
Issuance of Additional Tier 1 capital
Coupon paid on Additional Tier 1 capital
securities, net of tax
-
-
209.0
-
-
33
35
-
-
-
-
-
-
-
-
47.0
-
-
-
-
-
-
-
96.9
96.9
(0.7)
209.0
47.0
-
-
-
(7.0)
(7.0)
(0.7)
-
-
-
As at 30 June 2019
243.9
74.4
121.0
0.1
0.4
655.4
1,095.2
Period ended 30 June 2018
As at 1 January 2017
Profit after taxation
Other comprehensive income
Transactions with equity holders:
Share-based payments,
including tax reflected directly in retained
earnings
Exercise of share options
34
33
Coupon paid on Additional Tier 1 capital
securities, net of tax
34.5
73.4
74.0
0.1
-
-
-
0.4
-
-
-
-
1.0
-
-
-
-
-
-
-
-
-
-
-
1.8
-
(0.7)
442.2
138.6
-
626.0
138.6
(0.7)
-
-
-
6.4
(0.4)
6.4
1.0
(13.3)
(13.3)
As at 30 June 2018
34.9
74.4
74.0
0.1
1.1
573.5
758.0
76
Notes to the consolidated financial statements
1. Basis of preparation
a) Accounting basis
The consolidated financial statements of Aldermore Group PLC (the “Company”) include the assets, liabilities and results of
the operations of the Company, its subsidiary undertakings (together, the “Group”) including Aldermore Bank PLC (the
“Bank”), MotoNovo Finance Limited and its share of earnings of its associate.
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”).
During the year ended 30 June 2019, the Group has adopted the following new standards and amendments to existing
standards which were effective for accounting periods starting on or after 1 July 2018:
New IFRS
Description of change
Impact on the Group
IFRS 9
The Group adopted IFRS 9 in the current
year. The following resulted from the
implementation:
The main impacts on the Group’s financial
statements from the adoption of IFRS 9
were the following:
for holding
the classification of financial assets
under IFRS 9 is based on both the
business model
the
instruments as well as the contractual
characteristics of the instruments;
impairments in terms of IFRS 9 are
determined based on an expected loss
model that considers the significant
changes to the assets' credit risk and
the expected loss that will arise in the
event of default;
the requirements for the classification
of liabilities remained unchanged;
IFRS 7 has been amended to include
additional disclosures as a result of the
introduction of IFRS 9.
The general hedge accounting requirements
under IFRS 9 are more closely aligned to
how entities undertake risk management
activities when hedging financial and non-
financial risk exposures.
However, at
IFRS 9 does not address the
present,
interest rate risk
portfolio hedging of
the Group.
currently undertaken by
Pending development of
IASB’s
the
proposals for dynamic risk management
(macro hedge accounting), IFRS 9 allows the
option to continue to apply the existing
hedge accounting requirements of IAS 39.
certain items have been reclassified
based on the new classification rules.
The details of these reclassifications
are provided in note 42 of the financial
statements;
the loss allowance on financial assets
has increased because of the change
from an incurred loss to an expected
credit loss model. For details refer to
note 42 of the financial statements;
Therefore,
the Group.
the amended disclosure requirements
of IFRS 7 will be prospectively applied
by
all
comparative disclosures relating to
financial instruments are based on the
classification
and measurement
requirements of IAS 39 and disclosure
requirements of IFRS 7 before the IFRS
9 amendments.
As the Group’s hedging is predominantly
made up of portfolio hedges of interest rate
risk the Group has elected to exercise its
accounting policy choice to continue IAS 39
hedge accounting, and consequently there
is no
impact on the Group’s hedge
accounting arising from the adoption of
IFRS 9.
77
New IFRS
Description of change
Impact on the Group
IFRS 15
revenue
leases and
IFRS 15 contains a single model that is
applied when accounting for contracts with
customers. It replaces substantially all of the
recognition guidance,
current
except for contracts that are out of scope –
e.g.
insurance. The model
specifies that revenue is recognised as and
when control of goods or services are
transferred to a customer and that revenue
is recognised at the amount which an entity
expects to receive. Depending on certain
criteria, revenue is recognised at a point in
time or over time.
IFRS 15 requires that goods and services are
split out into their separate performance
obligations and that the revenue from each
performance obligation is recognised at a
point in time or over time depending on the
IFRS 15 criteria for revenue recognition. The
impact on adoption of IFRS 15 is a reduction
of £0.2 million to equity. This was not
material as most revenue streams either fell
under IFRS 9 or the approach to revenue
recognition did not change
following
adoption of IFRS 15.
includes new quantitative and
IFRS 15
qualitative disclosure
to
enable users of financial statements to
understand the nature, amount and timing
of revenue from contracts with customers.
requirements
Other than for IFRS 9 and IFRS 15, there is no impact on these financial statements from new standards and amendments to
existing standards effective for accounting periods starting on or after 1 July 2018.
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. The Company is public and limited by shares.
The address of the Company’s registered office is: Aldermore Group PLC, Apex Plaza, 4th Floor Block D, Forbury Road, Reading,
Berkshire, RG1 1AX.
b) Accounting period
Following the acquisition by FirstRand International Limited in March 2018, the Group changed its reporting period to 30 June
in order to align with their reporting period. This change extended the reporting period of the Group to 18 months for the
period ended on 30 June 2018, accordingly the current and prior period amounts disclosed are not comparable. The
comparative periods amount disclosed are also not comparable as IFRS 9 was adopted prospectively with effect from 1 July
2018 and as a result there was no restatement of comparative amounts for IFRS 9.
c) 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), for the year ended 30 June 2019.
Control is achieved when the Group:
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
Group 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 30). 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.
78
d) 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, 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”).
e) 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;
fair value through other comprehensive income (FVOCI) debt securities (2018: 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 and
are reflected through profit or loss in order to match the gains or losses arising on the derivative financial contracts
that qualify as hedging instruments.
f) 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.
g) 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 pages 41 to 59. 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 62.
h) Standards and interpretation issued not yet effective
The following new and revised standards and interpretations, all of which have been endorsed for use within the EU (except
where stated) are applicable to the business of the Group. The Group will comply with these from the stated effective date.
79
Standard
Impact assessment
IFRS 16
Leases
IFRS 16 establishes principles for the recognition, measurement, presentation and
disclosure of leases, with the objective of ensuring that lessees and lessors provide
relevant information that faithfully represents those transactions. IFRS 16 will be effective
for the Group from 1 July 2019.
The accounting treatment of leases by the lessee will change fundamentally. IFRS 16
eliminates the current dual accounting model for lessees, which distinguishes between on-
balance sheet finance leases and off-balance sheet operating leases. Instead, there is a
single on-balance sheet model that is similar to the current finance lease accounting with
the exception of low-value and short-term leases.
The greatest impact of the standard will be on lessee accounting because of the
requirement for lessees to recognise an asset and corresponding liability in respect of
operating leases.
Under the current standard on leases, operating lease payments were expensed by the
lessee when incurred, with no recognition on the statement of financial position. IFRS 16
requires that at the commencement date of the lease (regardless of whether it is finance
or operating lease), a lessee shall recognise nearly all leases on the balance sheet which
will reflect their right to use an asset for a period of time and the associated liability for
payment. The exceptions available for lessees are leases of a short term (less than 12
months) for low-value assets.
IFRS 16 is expected to result in the recognition of a lease commitment of £38.1 million and
a right of use asset of £39.1 million, including an adjustment of £1.0 million in respect of
lease prepayments as at 1 July 2019 in respect of the Group’s existing lease commitments.
The Group has made the policy choice to use the modified retrospective approach, and as
a result there is no impact on the Group’s retained earnings as at 1 July 2019.
Lessor accounting remains similar to current accounting, whereby the lessor continues to
classify leases as finance or operating leases. There are enhanced disclosure requirements
for lessors under IFRS 16.
Improvements to IFRS
The IASB issued the Annual Improvements to IFRS Standards 2015-2017 cycle. The
amendments are not expected to have any impact on the Group’s financial statements on
its adoption with effect from 1 July 2019, apart from the amendment to IAS 12 which will
require the Group to recognise in profit or loss any tax relief received on payments on
financial instruments included in equity. This will result in tax relief on Additional Tier 1
capital coupon payments being recognised in profit or loss rather than directly in equity
with effect from 1 July 2019. The 2019 comparatives in the 2020 statements will be
restated to reduce the tax charge and increase profit after tax in the profit or loss account
by £1.9m, with a corresponding increase in the amount charged directly to equity in
respect of Additional Tier 1 coupons.
Annual
Improvements
2015-2017
cycle
Effective date
Annual
periods
commencing
on or after 1
January 2019
Annual
periods
commencing
on or after
1 January
2019
80
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
cashflows considering all contractual terms of the instrument (for example, prepayment options) but does not consider the
assets’ future credit losses.
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 impairment allowance.
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.
Interest income and expense presented in the income statement includes:
interest on financial assets and financial liabilities measured at amortised cost calculated on an EIR basis;
interest on FVOCI (2018: 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)); and
interest income charged to Invoice Finance clients each day on the balance of their outstanding loans 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.
Other fee and commission income includes fees charged for mortgage services, arrears and insurance commission receivable.
Fee income is recognised as the Group satisfies its performance obligations, which can either be satisfied at a specific point in
time or over a period of time.
For fees earned on the execution of a significant act, the performance obligation is satisfied when the significant act or
transaction takes place. Where the performance obligation is satisfied over a period of time, the fees are recognised as follows:
fees for services rendered are recognised on an accruals basis as the service is rendered and the Group’s
performance obligation is satisfied; and
commission income is credited to profit or loss over the life of the relevant instrument on a time apportionment
basis.
Arrangement fees, factoring fees for managing the customer sales ledgers within Invoice Finance and other fees relating to
loans and advances which 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 fees 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 Group satisfies its performance
obligations.
81
(c) Net gains / (losses) 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. It includes all
realised and unrealised fair value movements, interest and foreign exchange differences.
i. Changes in accounting policy
The Group has decided to align its recognition treatment of net fair value gains / (losses) on derivatives held in qualifying fair
value hedging arrangements, together with losses representing changes in the fair value of the hedged items attributable to
the hedged interest rate risk on loans and advances to customers’ with that of its parent company. The treatment now
recognises the movements in net gains / (losses) from derivatives and other financial instruments at fair value through profit
or loss instead of interest income and interest expense.
Following is an extract of the consolidated income statement before the change in recognition treatment:
Interest income
Interest expense
Net Interest Income
Net (losses) / gains from derivatives and other financial instruments at fair
value through profit or loss
Profit before taxation
Year ended
30 June 2019
£m
Period
ended
30 June
2018
£m
472.5
602.2
(149.1)
(172.2)
323.4
430.0
(1.5)
1.6
129.6
195.3
The change in recognition treatment represents a change in accounting policy which must be accounted for retrospectively in
the financial statements. Therefore the change must be applied as if the new accounting policy was always in place.
The consolidated income statement extract appears as follows after the retrospective application of the change in accounting
policy:
Interest income
Interest expense
Net Interest Income
Net gains from derivatives and other financial instruments at fair
value through profit or loss
Profit before taxation
Year ended
30 June 2019
£m
Period
ended
30 June
2018
£m
467.3
594.4
(149.2)
(168.0)
318.1
426.4
3.8
5.2
129.6
195.3
Note that the change is applied to both current period and prior period comparative amounts presented (i.e. retrospectively).
There is no impact on the opening reserves as the profit before taxation amounts have not changed.
In addition to the above, IFRS 15 was implemented as detailed in section 1(a).
This resulted in a reduction in equity of £0.2 million as disclosed in the statement of changes in equity.
82
(d) Financial instruments - recognition and derecognition
IAS 39 applied previously, with implementation of IFRS 9 from 1 July 2018 (no impact on financial statements)
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 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.
ii. Derecognition
Financial assets are derecognised when and only when:
the contractual rights to receive the cash flows from the financial asset expire; 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 gains on disposal of fair value through other
comprehensive income (FVOCI) (2018: available for sale debt) 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 gains on disposal of fair value
through other comprehensive income (FVOCI) (2018: available for sale debt) in the income statement.
iii. 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, with the corresponding obligation
to return it 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
IAS 39 applied previously, with implementation of IFRS 9 from 1 July 2018 (no impact on financial statements)
i. Classification
Management determines the classification of its financial assets at initial recognition, based on:
the Group’s business model for managing the financial assets; and
the contractual cash flow characteristics of the financial asset.
The Group distinguishes three main business models for managing financial assets:
holding financial assets to collect contractual cash flows;
managing financial assets and liabilities on a fair value basis or selling financial assets; and
a mixed business model of collecting contractual cash flows and selling financial assets.
The business model assessment is not performed on an instrument by instrument basis, but at a level that reflects how groups
of financial assets are managed together to achieve a particular business objective. This assessment is done on a portfolio or
sub-portfolio level depending on the manner in which groups of financial assets are managed.
In considering whether the business objective of holding a group of financial assets is achieved primarily through collecting
contractual cash flows, amongst other considerations, management monitors the frequency and significance of sales of
financial assets out of these portfolios for purposes other than managing credit risk. For the purposes of performing the
business model assessment, the Group only considers a transaction a sale if the asset is derecognised for accounting purposes.
For example, a repo transaction where a financial asset is sold with the commitment to buy back the asset at a fixed price at
a future date is not considered a sale transaction as substantially all the risks and rewards relating to the ownership of the
asset have not been transferred and the asset is not derecognised from an accounting perspective.
83
A change in business model of the Group only occurs on the rare occasion when the Group changes the way in which it
manages financial assets. Any changes in business models would result in a reclassification of the relevant financial assets from
the start of the next reporting period.
In order for a debt securities to be measured at amortised cost or fair value through other comprehensive income, the cash
flows on the asset have to be solely payments of principal and interest (SPPI), i.e. consistent with those of a basic lending
agreement. The SPPI test is applied to individual securities at initial recognition, based on the cash flow characteristics of the
asset. All debt securities held at the transition date to IFRS 9, 1 July 2018, and those subsequently acquired all passed the SPPI
test and, as they are held as part of a mixed business model whose objectives include both the collection of contractual cash
flows and the sale of financial assets, all debt securities have been classified as measured at fair value through other
comprehensive income.
The SPPI test is applied on a portfolio basis for loans and advances to customers, cash and balances at central banks and loans
and advances to banks, as the cash flow characteristics of these assets are standardised. This included consideration of any
prepayment charges, which in all cases were reasonable compensation and therefore did not cause these assets to fail the
SPPI test. As all of these financial assets were held as part of business models with the objective of collecting contractual cash
flows and they all passed the SPPI test, they have all been classified as financial assets to be measured at amortised cost with
effect from 1 July 2018 and throughout the year ended 30 June 2019.
ii. Measurement
Financial assets measured at amortised cost
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. Financial assets measured at amortised
cost mainly comprise loans and advances to customers and loans and advances to banks.
Financial assets measured at fair value through other comprehensive income (FVOCI)
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 provisions are recognised in the income statement. Other fair value movements are recognised in other
comprehensive income and presented in the FVOCI reserve in equity. On disposal, the gain or loss accumulated in equity is
reclassified to the income statement.
Financial assets at fair value through profit or loss
These are measured both initially and subsequently at fair value with movements in fair value recorded in the income
statement. Any costs that are directly attributable to their acquisition are recognised in profit or loss when incurred. The Group
only measures derivative financial assets under this classification.
2018 Comparatives (under IAS 39 prior to the implementation of IFRS 9)
i. Overview
The Group classifies its financial assets (excluding derivatives) as either:
loans and receivables; or
available for sale.
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 nor 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 customers and banks.
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.
84
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.
(f) Financial liabilities
IAS 39 applied previously, with implementation of IFRS 9 from 1 July 2018 (no impact on financial statements)
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
From 1 July 2018 on implementation of IFRS 9
This policy applies to:
financial assets measured at amortised cost;
debt securities measured at fair value through other comprehensive income;
loan commitments; and
finance lease receivables where Group is the lessor.
IFRS 9 establishes a three-stage approach for impairment of financial assets.
Stage 1 - at initial recognition of a financial asset, or when an irrevocable loan commitment is made if this occurs
before a financial asset is recognised, the asset or loan commitment is classified as stage 1 and 12-month expected
credit losses (ECL) are recognised, which are credit losses related to default events expected to occur within the next
12 months;
Stage 2 - if the asset has experienced a significant increase in credit risk since initial recognition, the asset is classified
as stage 2 and lifetime expected credit losses are recognised; and
Stage 3 - credit impaired assets are classified as stage 3, with expected credit losses measured and recognised on a
lifetime basis.
Collective and individual assessment
The Group uses a bespoke credit engine to estimate ECL on a collective basis for all loans to customers and loan commitments.
The collective assessment groups loans with shared credit risk characteristics through lines of business. The engine captures
model outputs from the 12 month Probability of Default (PD), Exposure at Default (EAD), Loss Given Default (LGD), Lifetime
PD, Macroeconomic models and Staging analysis to derive an ECL estimate for each account.
Statistical modelling techniques are used to determine which borrower and transaction characteristics are predictive of certain
behaviours, based on relationships observed in historical data related to the group of accounts to which the model will be
applied. This results in the production of models that are used to predict impairment parameters (PD, LGD, and EAD) based
on the predictive characteristics identified through the regression process.
When impairments are calculated, each exposure is assigned unique impairment parameters (a PD, LGD and EAD) based on
that exposure’s individual characteristics. These account-level impairment parameters are then used to calculate account-
level expected credit losses.
85
Where a loan is in stage 3, then a lifetime ECL is estimated based upon an individual assessment of the borrower and any
collateral provided. Typically, the assessment will evaluate the emergence period, likelihood of recovery, recovery period and
size of haircut to be applied to the value of the collateral under the different scenarios to estimate their corresponding specific
provision amounts on a best estimate basis. A scalar is then applied to the best estimate so as to provide a probability weighted
estimated of the lifetime ECL. For recent non-performing assets, where individual assessment is still outstanding, and those
stage 3 assets where the individually assessed lifetime ECLs are not significant, then the provisions will be based on the lifetime
ECLs determined on a collective basis as the same models used for stage 1 and stage 2 exposures.
In respect of debt securities and loans to banks, estimates of expected losses are calculated on the current individual credit
grading of the exposure and externally sourced expected loss rates.
Significant increase in credit risk (movement to stage 2) (‘SICR’)
In assessing whether loans to customers and loan commitments have been subject to a significant increase in credit risk the
Group applies the following criteria in order:
a presumption that an account which is more than 30 days past due or out of order has suffered a significant increase
in credit risk. IFRS 9 allows this presumption to be rebutted, but the Group believes that more than 30 days past
due to be an appropriate back stop measure and therefore has not rebutted the presumption;
quantitative criteria based upon a change in the modelled probability of default of individual credit exposures.
Staging models using statistical techniques have been developed on a portfolio basis to determine the levels of
changes in PDs since origination which correlate to a significant increase in the likelihood of delinquency among
historic loans with similar characteristics; and
qualitative criteria, where an exposure is subject to temporary forbearance or has been placed on a watch list as a
result of possessing certain qualitative features based on Basel Committee On Banking Supervision “Guidance on
credit risk and accounting for expected credit losses”, including such matters as significant change in the operating
results of the borrower or in the value of the collateral provided.
The staging models for applying the quantitative criteria use the change in 12 month PD as a proxy for lifetime PD, as permitted
by IFRS 9.
In respect of debt securities and loans to banks, use is made of the low credit risk expedient permitted by IFRS 9 whereby the
credit risk is not considered to have increased significantly where the exposures are assumed to be “low” credit risk at the
reporting date or/and where they continue to be investment grade, or equivalent.
Definition of credit impaired (movement to stage 3)
The Group has identified certain quantitative and qualitative criteria to be considered in determining when an exposure is
credit impaired and should therefore be moved into stage 3, these include the following:
•
•
the exposure becomes 90 days past due. IFRS 9 allows this assumption to be rebutted, but at present the Group
has not done so; and
qualitative criteria, which vary according to the type of lending being undertaken, but include indicators such as
bankruptcies, Individual Voluntary Arrangements and permanent forbearance.
The Group has used the same definition of default as that for the purpose of calculating PDs used in its credit models. In
addition, the definition has been aligned with those used for regulatory reporting purposes.
Movements back to stages 1 and 2
Exposures will move out of stage 3 to stage 2 when they no longer meet the criteria for inclusion and have completed agreed
probation periods set according to the type of lending. Movement into stage 1 will only occur when the SICR criteria are no
longer met.
Write-Off and Recoveries
Write-off shall occur when either part, or all, of the outstanding debt is considered irrecoverable and all viable options to
recover the debt have been exhausted. Any amount received after a provision has been raised or debt has been written-off,
will be recorded as a recovery and reflected as a reduction in the impairment loss reflected in the income statement.
Forward-looking macroeconomic scenarios
ECLs and SICR take into account forecasts of future economic conditions in addition to current conditions. The Group has
developed a macroeconomic model which adjusts the ECLs calculated by the credit models to provide probability weighted
numbers based on a number of forward-looking macroeconomic scenarios. The Group sources its forward-looking economic
scenarios and probability weightings from an external provider. The Group is able, by exception and with sufficient rationale,
to reject scenarios or adjust scenario weightings.
86
2018 Comparatives (under IAS 39 prior to the implementation of IFRS 9)
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
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 where 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 inputted 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.
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.
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.
87
(h) Financial instruments—fair value measurement
IAS 39 applied previously, with implementation of IFRS 9 from 1 July 2018 (no impact on financial statements)
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
IAS 39 applied previously, with implementation of IFRS 9 from 1 July 2018 (no impact on financial statements)
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 gains from derivatives and other financial
instruments at fair value through profit or loss 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’.
(j) Hedge accounting
The Group exercised the accounting policy choice to continue using IAS 39 hedge accounting (no impact from the
implementation of IFRS 9)
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 movements in the fair value of the respective
hedged items during the period for which the hedge is designated.
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 movements 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. In terms of
repricing, 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.
88
The Group measures the fair value of each hedging instrument monthly. The value is included in derivatives held for risk
management in either assets or liabilities as appropriate, with the change in value recorded in net gains from derivatives and
other financial instruments at fair value through profit or loss in the income statement. Any hedge ineffectiveness is recognised
in net gains from derivatives and other financial instruments at fair value through profit or loss 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
IAS 39 applied previously, with implementation of IFRS 9 from 1 July 2018 (no impact on financial statements)
A derivative may be embedded in a financial liability at amortised cost, 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 net gains from derivatives and other financial instruments at fair value through profit or loss 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 derivatives on the
Additional Tier 1 instruments are not separated as the Group has an accounting policy not to separate features that have
already been considered in determining that the entire issues are non-derivative equity instruments.
2018 Comparatives (under IAS 39 prior to the implementation of IFRS 9)
Prior to the implementation of IFRS 9 with effect from 1 July 2018, it was permitted to separate embedded derivatives from
host contracts where the host was a financial asset subject to certain conditions. This treatment is no longer permitted under
IFRS 9 given the revised approach to the classification and measurement of financial assets. There was no impact in respect
of the Group as there were no embedded derivatives within financial assets, prior to the implementation of IFRS 9, that were
required to be separated.
(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:
five years
Fixtures, fittings and equipment
Computer hardware
one to five years
Leasehold improvements one to ten years
Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.
Brought forward cost and depreciation was £8.9 million and £5.2 million respectively, with £8.1 million recognised on transfer
of MotoNovo business from the Branch, other additions of £1.6 million and depreciation of £1.8 million charged in the period,
resulting in a closing cost of £18.6 million and accumulated depreciation of £7.0 million as at 30 June 2019.
(m) Intangible assets
i. Goodwill
Goodwill is stated at deemed cost upon transition to IFRSs less any accumulated impairment losses.
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.
Acquired and internally developed software is amortised on a straight line basis in the income statement over its expected
useful life from the date that it is available for use, being 3 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 asset’s recoverable
amount is estimated.
89
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. If the carrying value of the asset is greater 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.
(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.
Following the implementation of IFRS 9 with effect from 1 July 2018, the Group is now required to reflect provisions in respect
of any impairment losses expected in respect of any outstanding irrevocable loan commitments. As the underlying loan
commitments are not reflected in the statement of financial position, the impairment provisions required for expected losses
from the date the commitment becomes irrevocable are recognised as provisions. The provisions are utilised when the loan
commitment is drawn down, either in whole or part, and when an impairment provision is calculated for expected losses.
See note 29 for provisions in respect of FSCS and customer redress in accordance with IAS 37 as well expected losses on loan
commitments in accordance with IFRS 9.
(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.
90
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 Additional Tier 1 capital securities are presented
as components of equity. 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) Share-based payment transactions
Employees, including Senior Executives, of the Group received remuneration in the form of equity-settled share-based
payments to incentivise and reward future strong, long-term business performance and growth. Following the takeover by
FirstRand International Limited, the majority of equity-settled schemes vested, with a small number of ShareSave options
outstanding as at 30 June 2018 (see note 34).
In order to incentivise and reward future strong, long-term business performance and growth, Senior Executives and
employees of the Group have been granted part of their remuneration, since the takeover, in the form of payments which are
linked to the quoted share price of FirstRand Group. The cost of such awards is to be settled by payments to be made by the
Company to an associate of the FirstRand Group which will assume liability for the settlement of the awards, and the cost will
be recharged to the Aldermore Group companies to which the awardees provide their services. Accordingly, the awards will
be recognised in these Group accounts as cash-settled share-based payments. Awards granted under cash-settled plans result
in a liability being recognised and measured at fair value until settlement. An expense is recognised in profit or loss for
employee services received over the vesting period of the plans.
In respect of the equity-settled schemes entered into before the takeover, 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 FirstRand Limited share price and other factors related to performance conditions attached to the awards.
91
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 equity-settled share-based payment transactions are
recognised as an investment in Group undertakings with an associated credit to the share-based payment reserve. For cash-
settled share-based payments no cost has been recognised as the costs incurred by the Company are fully rechargeable to the
Aldermore Group companies for which the awardees provide their services.
(z) Investment in associates
An associate is a company over which the Group has significant influence and that is neither a subsidiary undertaking nor an
interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of
the investee, but is neither control nor joint control over those policies. The results and assets of associates are accounted for
in these consolidated financial statements using the equity method of accounting. Investments are measured at cost, which
includes transaction costs. Subsequent to initial recognition, the Group includes its share of profit or loss and other
comprehensive income of equity-accounted investees, until the date on which significant influence ceases.
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, and impact the results for the current year and
future reporting periods are those relating to loan impairment provisions and EIR.
(a) Loan impairment provisions
The key judgements made in applying the accounting policies were as follows:
Definition of default
IFRS 9 does not define default for the purpose of defining the PD as used when calculating ECLs and impairment provisions for
stage 1 and stage 2 assets. As detailed in note 1(g), the Group has defined default on a basis that is consistent with the
definition it uses for determining whether an asset is credit impaired, and is therefore classified as stage 3, and with the
definition of default that is used for regulatory reporting purposes.
Significant increase in Credit Risk for classification in stage 2
As explained in note 1(g), loan impairment provisions are measured as an allowance equal to 12-month ECL for stage 1 assets,
or lifetime ECL for stage 2 or stage 3 assets. An asset moves to stage 2 when its credit risk has increased significantly since
initial recognition. IFRS 9 does not define what constitutes a significant increase in credit risk. In assessing whether the credit
risk of an asset has significantly increased, the Group takes into account qualitative and quantitative reasonable and
supportable forward looking information. Refer to note 1(g) for more details.
The probation period for reclassification from stage 3 into stage 2 and 1
As explained in note 1(g), loans are only considered for reclassification from stage 3 into stage 2 when they no longer meet
the criteria for inclusion and have completed agreed probation periods. The probation periods are set according to the type
of lending and are based upon professional judgement as to when the risk of a return to stage 3 is considered minimal. Stage
3 ECL has increased due to a number of new individually assessed provisions entering stage 3 during the year, it should be
noted that £1.4 million of the stage 3 ECL at 30 June 2019 no longer meet the criteria for inclusion but remain in stage 3
pending completion of the agreed probation periods. The increase in provisions is also partly driven by the application of a
management overlay to the portfolio for the possibility of a severe economic downturn resulting from a disorderly (no deal)
Brexit. Reclassifications from stage 2 to stage 1 are only possible when the SICR criteria are no longer met.
PD models
The Group has employed a number of PD models, tailored to different types of lending with shared characteristics, to assess
the likelihood of default within the next 12 months and over the lifetime of each loan. The models calculate estimates of PDs
based upon current characteristics of the borrower and observed historical default rates. A 10.0 % deterioration in the
modelled PDs would result in an increase in impairment provisions by £2.2 million as at 30 June 2019 (£1.8 million as at 1 July
2018 on the transition to IFRS 9).
92
LGD models
The group has developed LGD models for the different types of lending. The models use a number of estimated inputs
including cure rates (i.e. the proportion of loans that do not go into possession) and the valuation of collateral to be collected
reflecting the impact of changes in House Price Indices (HPI) and other valuation measures, forced sale discounts (FSD) and
the time to sale. The models are most sensitive to changes in cure rates and collateral valuations:
a 10.0% absolute improvement in the cure rate would reduce total impairment provisions by £4.0 million as at
30 June 2019 (£4.1 million as at 1 July 2018 on the transition to IFRS 9).
a 10.0% relative reduction in the HPI would increase the total impairment provisions for mortgage lending by
£2.4 million as at 30 June 2019 (£2.6 million as at 1 July 2018 on the transition to IFRS 9).
a 5.0% absolute increase in the FSD would increase the total impairment provisions for mortgage lending by
£1.6 million as at 30 June 2019 (£2.2 million as at 1 July 2018 on the transition to IFRS 9).
a 10.0% relative reduction in the overall value of collateral realised in the Asset Finance and Invoice Finance
businesses would increase the total impairment provisions for such lending by £1.5 million as at 30 June 2019
(£1.2 million as at 1 July 2018 on the transition to IFRS 9).
Forward looking macroeconomic scenarios
The Group has employed an external firm specialising in economic forecasting in order to provide it with probability weighted
forward-looking macroeconomic scenarios. The probability weighted scenarios are then used to model impacts on ECLs based
on a combination of regression analysis where the relationship between economic variables, derived from the probability
weighted forward-looking macroeconomic scenarios, and key risk inputs is established through a regression analysis on long
term historical data and expert judgement in respect of the relationship between economic variables and key risk inputs.
From 1 July 2018 to May 2019, the forward-looking macroeconomic scenarios, were obtained from the Global Scenario Service
(GSS) from Oxford Economics. In addition to the GSS scenarios the Group also applied the PRA ACS (Q1 2018) scenario with a
probably weighting of 4.0%. The Annual Cyclical Scenario (ACS) is published by the Bank of England / PRA. The 2018 ACS was
designed to test the resilience of the UK banking system to deep simultaneous recessions in the UK and global economies,
large falls in asset prices and a separate stress of misconduct costs. From May 2019 to 30 June 2019 the forward-looking
macroeconomic scenarios were obtained from the IFRS9 Scenario Service from Oxford Economics. The IFRS9 scenarios used
at 30 June 2019 are outlined below:
Upside scenario (5th percentile) - The UK economy expands rapidly. GDP growth accelerates at the fastest pace
since before the financial crisis;
Mild upside scenario (15th percentile) - The cyclical momentum in demand in the UK and other economies is stronger
than currently thought, reflecting in part improved business, household and investor sentiment and more buoyant
global trade;
Stagnation scenario (75th percentile) - Spare capacity opens up in the economy as growth weakens and
unemployment rises to a peak of 6.0% in Q3 2022;
Downside scenario (85th percentile) - The UK enters recession during 2019, but the 1.0% contraction in output is
very mild by historical standards and the UK economy then gradually recovers; and
Severe Downside scenario (95th percentile) - The UK enters a recession in H2 2019 and contracts until late 2021. The
level of UK GDP falls by 2.8% from peak to trough.
The Group, by exception and with sufficient rationale, has the ability to reject scenarios or adjust scenario weightings.
Scenarios and weightings are approved at the Credit Committee prior to deployment for use in the ECL. Alternatively, and as
adopted for the year ended 30 June 2019, the Group can apply an overlay rather than adjusting the underlying macroeconomic
scenarios.
93
As at 30 June 2019, the following forward-looking macroeconomic scenarios, together with their probability weighting and
key economic variables, were used in calculating the ECLs used for determining impairment provisions:
Scenario
Probability
weighting
Economic variables per scenario – average next 5 years
Severe Downside
Downside
Stagnation
Base
Mild Upside
Upside
GDP Growth
HPI
Bank of
Unemployment
England Base
rate
10%
10%
10%
50%
10%
10%
0.24%
0.85%
1.22%
1.98%
2.80%
3.37%
-4.53%
-1.87%
-0.29%
3.32%
6.30%
8.45%
Rate
0.38
0.76
0.92
1.44
1.76
2.18
5.81
5.55
5.39
3.72
3.45
2.48
The external provider’s forecasts only cover a 5-year period, so the Group has made the estimates in order to extend the
forecast horizon:
the House Price Inflation (HPI) level has been kept flat at 2.5% per annum in line with the inflation target rate; and
the other macro-economic indicators revert to the mean calculated over the first 5-year period.
As at 30 June 2019, applying a 100% weighting to the severe downside scenario would result in an incremental £8.1 million of
provisions being required. Applying a 100% weighting to the upside scenario would result in a £4.5 million reduction of
provisions being required.
As at 1 July 2018 on transition to IFRS 9, details of the forward looking macroeconomic scenarios used to determine ECLs and
impairment were as follows:
Scenario
Probability
weighting
Economic variables per scenario – average next 5 years
GDP Growth
HPI
Bank of
Unemployment
Baseline forecast
Trade war hits global growth
Synchronised global slowdown
Market turmoil amid late-cycle policy
tightening
Central bank tightening delayed amid
subdued inflationary pressures
PRA ACS (H1-2018)
50%
10%
10%
10%
10%
4%
1.92%
1.81%
1.73%
1.71%
2.21%
-0.01%
2.55%
2.49%
1.91%
2.48%
2.98%
-5.2%
England Base
Rate
1.38
0.77
0.77
0.99
0.85
3.61
rate
4.15
4.34
4.44
4.55
3.50
8.42
In the above table, the probability weightings do not add to 100% as the “PRA ACS (H1-2018) scenario” has been included as
an additional scenario, the weightings used within the models are prorated down to 100%.
Management Overlays
The Group applies management overlays to the modelled IFRS 9 ECL provisions as listed below. Overlays are reviewed and
approved on a quarterly basis at the Credit Committee and Audit Committee.
End of Term (EoT) Risk overlay applied to the Commercial and Residential Mortgages portfolios to account for
additional risk at EoT on Interest-only products;
Overlay to compensate for a lack of historic impairments causing volatility in the observed defaults and loss given
defaults; and
Overlay to accommodate for the possibility of a severe economic downturn resulting from a disorderly (no deal)
Brexit
The total value of ECL overlays as at 30 June 2019 is £8.9 million.
94
Individually assessed impairment provisions on stage 3 loans
In order to determine the lifetime ECL to be reflected as an impairment provision, estimates were made based upon individual
assessments of the borrower and the valuation of collateral provided, net of any costs to sell. The most significant estimate
is in respect of the valuation of collateral provided and it is estimated that a 10.0% relative reduction in its valuation would
increase the total impairment provisions for such lending by £0.6 million as at 30 June 2019 (£1.3 million as at 1 July 2018 on
the transition to IFRS 9).
(b) Effective interest rate (“EIR”)
IFRSs require 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.
As at 30 June 2019, included within the overall Residential Mortgages book, are a small number of portfolios which were
acquired by the Group and represent approximately 1.2% and 1.7% of Buy-to-Let and Residential Mortgages net loans
respectively (30 June 2018: 1.5% and 2.4% 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.
In the year ended 30 June 2019 and period ended 30 June 2018, 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. In addition, during the period ended 30 June 2018, adjustments were made to reflect certain fees and costs
within interest income as it was considered that such amounts were now an integral part of the effective interest rate. As a
consequence, an overall adjustment of £4.4 million (2018: £8.4 million decrease) was recorded to reduce 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 the period end is analysed as follows:
Asset Finance - organic lending
SME Commercial - organic lending
Buy-to-Let - acquired portfolios
Buy-to-Let - organic lending
Residential - acquired portfolios
Residential - organic lending
Year ended
30 June 2019
interest income
£m
Period ending
30 June 2018
interest income
£m
(0.3)
(2.9)
-
4.4
(0.8)
(4.8)
(4.4)
3.1
1.3
(8.8)
2.2
(4.5)
(1.7)
(8.4)
A change in the estimated expected lives 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 30 June
2019 by £5.4 million (30 June 2018: £3.3 million). Included within this sensitivity of £5.4 million, is a £1.5 million cumulative
reduction in profit relating to acquired portfolios (30 June 2018: £1.8 million) due to a change in the unwind of the discount
together with a £3.9 million cumulative reduction in profit relating to the organic portfolios (30 June 2018: cumulative
reduction in profit of £1.5 million).
A 0.5% 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 increasing cumulative profit before tax recognised as at 30 June 2019 by
£2.4 million (30 June 2018: cumulative reduction in profit of £0.1 million).
95
4. Segmental information
The Group has seven reportable operating segments as described below which are based on the Group’s six lending segments
plus Central Functions.
The organisation adjusted its operating model in 2018, where previously the business was divided into Business Finance,
Mortgages and Savings, the operating segments are now allocated to three distinct customer facing businesses: Business
Finance (made up of Asset Finance, Invoice Finance and Commercial Mortgages); Retail Finance (made up of Residential Owner
Occupied Mortgages and Buy to Let Mortgages) and MotoNovo Finance. All 2019 financial reports have continued to detail
performance on an operating segment basis. It is also possible to review performance aggregated by Business Finance and
Retail Finance using data from the individual operating segments. As such, it is still deemed appropriate to split the segmental
reporting by individual operating segments for the 2019 IFRS 8 disclosure.
For each of the reportable segments, the Board, which is the Group’s Chief Operating Decision Maker, reviews internal
management reports every two months. 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 complex and structured deals,
which play to our specialist underwriting advantage;
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 multi-let commercial investment property loans and property development to experienced
regional developers;
Buy-to-Let Mortgages - 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;
Residential Mortgages - prime residential mortgages targeting under-served segments of creditworthy borrowers
that provide attractive and sustainable margins; and
MotoNovo Finance - provides individuals and dealers with funding to purchase cars, vans and motorcycles.
Central Functions include the reconciling items between the total of the six reportable operating segments and the
consolidated income statement. As well as common costs, Central Functions include 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 gains / losses from derivatives held at fair value shown in note 19.
Common costs are incurred on behalf of the Business and Retail Finance operating segments and typically represent savings
administration, back office and support function costs such as Finance, IT, 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.
The Group does not have reliance on any major customers, and all lending is in the UK.
96
Segmental information for the year ended 30 June 2019
Asset Finance
£m
Invoice
Finance
£m
SME
Commercial
Mortgages
£m
Buy-to-Let
£m
Residential
Mortgages
£m
MotoNovo
Finance
£m
Central
Functions
£m
Total
£m
Interest income – external customers
104.7
23.7
57.8
205.4
62.1
1.7
11.9
467.3
Interest expense – external customers
-
-
-
-
-
-
(149.2)
(149.2)
Interest (expense)/income – internal
(25.9)
(2.8)
(12.8)
(65.3)
(21.2)
(0.5)
128.5
-
Net fees and other income – external
customers
2.2
4.6
0.9
-
0.1
10.4
4.0
22.2
Total operating income
81.0
25.5
45.9
140.1
41.0
11.6
(4.8)
340.3
Administrative expenses including
depreciation and amortisation1
(17.0)
(9.6)
(6.8)
(12.4)
(6.7)
(13.3)
(121.6)
(187.4)
Impairment losses
(13.4)
(1.5)
(1.1)
(3.5)
(0.5)
(3.8)
-
(23.8)
Share of profit of associate
-
-
-
-
-
-
0.5
0.5
Segmental result
50.6
14.4
38.0
124.2
33.8
(5.5)
(125.9)
129.6
Tax
Profit after tax
Assets
Liabilities
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(32.7)
96.9
2,017.7
400.4
1,020.6
5,043.7
1,747.9
364.8
1,935.2 12,530.3
-
-
-
-
-
- (11,435.1) (11,435.1)
Net assets/(liabilities)
2,017.7
400.4
1,020.6
5,043.7
1,747.9
364.8
(9,499.9)
1,095.2
1.
Administrative expenses include £5.4m in relation to the integration of MotoNovo Finance into the Aldermore Group.
97
Segmental information for the period ended 30 June 2018
Asset Finance
£m
Invoice
Finance
£m
SME
Commercial
Mortgages
£m
Buy-to-Let
£m
Residential
Mortgages
£m
Central
Functions
(restated)
£m
Total
(restated)
£m
Interest income – external customers
141.8
12.3
93.5
255.5
95.1
(3.8)
594.4
Interest expense – external customers
-
-
-
-
-
(168.0)
(168.0)
Interest (expense)/income – internal
(36.6)
(2.6)
(15.4)
(80.3)
(29.8)
164.7
-
Net fees and other income – external
customers
Total operating income
8.0
113.2
19.4
29.1
0.9
3.9
79.0
179.1
1.9
67.2
6.9
41.0
(0.2)
467.4
Administrative expenses including
depreciation and amortisation2
(23.2)
(14.8)
(5.7)
(18.0)
(7.4)
(183.8)
(252.9)
Impairment losses
(9.7)
(1.4)
(1.9)
(4.2)
(2.3)
-
(19.5)
Share of profit of associate
-
-
-
-
-
0.3
0.3
Segmental result
Tax
Profit after tax
As at 30 June 2018 per IAS 39
Assets
Liabilities
80.3
12.9
71.4
156.9
57.5
(183.7)
195.3
-
-
-
-
-
-
-
-
-
-
-
-
(56.7)
138.6
1,841.7
265.2
965.9
4,436.8
1,480.9
1,442.2
10,432.7
-
-
-
-
-
(9,674.7)
(9,674.7)
Net assets/(liabilities) (per IAS 39)
1,841.7
265.2
965.9
4,436.8
1,480.9
(8,232.5)
758.0
Adjustment for adoption of IFRS 9
Assets
Liabilities
Restated balance as at 1 July 2018
(per IFRS 9)
(9.8)
(0.7)
-
-
1.5
-
(1.6)
-
0.9
-
2.4
(0.4)
(7.3)
(0.4)
1,831.9
264.5
967.4
4,435.2
1,481.8
(8,230.5)
750.3
2
Administrative expenses include £36.4 million relating to the FirstRand transaction costs (£19.8m) and integration of Aldermore into the FirstRand Group
(£2.4m), and an impairment charge relating to intangible assets (£14.2m). These costs were all charged to Central Functions.
Prior period amounts have been restated based on a change in accounting policy, see point (i) in note 2(c) and non-underlying
administrative expenses have been included with Central Functions administrative expenses.
98
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 – measured at FVOCI (2018: measured as AFS)
On financial assets at fair value through profit or loss:
Net interest expense on financial instruments hedging assets
Year ended 30
June 2019
£m
Period ended 30
June 2018
(restated)
£m
455.3
598.1
4.8
14.7
2.1
14.5
474.8
614.7
(7.5)
(20.3)
467.3
594.4
Prior period amounts have been restated based on a change in accounting policy, see point (i) in note 2(c).
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
Other
On financial liabilities at fair value through profit or loss:
Net interest (income) / expense on financial instruments hedging liabilities
Year ended
30 June 2019
£m
Period ended
30 June 2018
(restated)
£m
124.0
12.7
4.9
8.4
0.2
149.8
7.9
2.1
10.7
0.7
150.2
171.2
(1.0)
(3.2)
149.2
168.0
Prior period amounts have been restated based on a change in accounting policy, see point (i) in note 2(c).
99
7. Fee and commission income
Invoice Finance fees
Valuation fees
Documentation fees
Other fees
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
0.8
1.5
-
5.3
7.6
16.5
3.3
4.8
12.0
36.6
The reduction in the amount of fee and commission income recognised during the current year compared with the prior period
relates to the adoption of IFRS 15 with effect from 1 July 2019 (see note 1(a)). Amounts previously recognised as a fee and
commission income in accordance with IAS 18, were considered to be more appropriately recognised as interest income (see
note 5) in accordance with the Effective Interest Rate (EIR) method (see note 2(b)). There was no restatement of the amounts
shown as fee and commission income for the period ended 30 June 2018, as the Group adopted the IFRS 15 transition option
where no such restatement was required. An adjustment to equity of £0.2 million was made as a result of the transition to
IFRS 15.
8. Fee and commission expense
Introducer commissions
Legal and valuation fees
Company searches and other fees
Credit protection and insurance charges
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
0.1
2.3
2.5
1.3
6.2
2.2
4.5
2.5
1.8
11.0
9. Net gains / (losses) from derivatives and other financial instruments at fair
value through profit or loss
Net (losses) / gains on derivatives
Net gains / (losses) on available for sale assets held in fair value hedges
Year ended
30 June 2019
£m
(2.6)
6.4
3.8
Period ended
30 June 2018
(restated)
£m
13.8
(8.6)
5.2
Prior period amounts have been restated based on a change in accounting policy, see point (i) in note 2(c).
Included within net gains / (losses) on derivatives on financial instruments at fair value through profit or loss are losses of
£28.5 million (30 June 2018: £20.0 million gain) on derivatives held in qualifying fair value hedging arrangements to hedge
interest rate risk associated with loans and advances to customers, together with gains of £33.7 million (30 June 2018: £12.2
million loss) representing changes in the fair value of the hedged interest rate risk. Also included are gains of £0.9 million (30
June 2018: £2.7 million loss) on derivatives held in qualifying fair value hedging arrangements to hedge interest rate risk
associated with customer deposits, together with losses of £0.8 million (30 June 2018: £1.4 million loss) representing changes
in the fair value of the hedged interest rate risk.
100
10. Administrative expenses
Staff costs
Legal and professional and other services
Information technology costs
Office costs
Provisions
Other
Impairment of intangibles
Note
11
29
24
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
86.8
35.8
23.8
7.3
1.2
26.7
0.7
109.8
56.0
33.5
9.5
1.2
20.3
14.2
182.3
244.5
Administrative expenses for the year ended 30 June 2019 included £12.5 million incurred by MotoNovo Finance, of which
£9.8 million was incurred on behalf of and recharged back to the Branch. The administrative expenses comprise of staff costs
of £6.0 million, legal and professional and other services of £3.5 million, information technology costs of £1.7 million and other
expenditure of £1.3 million.
Included in other administrative expenses are costs relating to temporary staff of £17.7 million (period ended 30 June 2018:
£18.7 million), travel and subsistence of £3.5 million (period ended 30 June 2018: £4.2 million) and staff recruitment of
£1.5 million (period ended 30 June 2018: £1.9 million).
Disclosed on the face of the Income Statement are £5.4 million (period ended 30 June 2018: £2.4 million) of integration costs.
£2.5 million of these costs relate to legal and professional and other services and £2.9 million relate to other expenditure. The
current year costs relate to the integration of MotoNovo Finance into the Aldermore Group, whereas the prior period costs
relate to the integration of Aldermore into the FirstRand Group.
Disclosed on the face of the Income Statement for the period ended 30 June 2018 are £19.8 million of Transaction costs.
£3.7 million of these costs relate to acceleration of share schemes and other bonuses following the FirstRand takeover and
are included in Staff Costs in the above disclosure. Included in legal and professional and other services are £14.8 million
payable in respect of transactional broker and advisory fees as part of the FirstRand takeover, as well as £1.3 million payable
in respect of legal and other fees relating to the takeover.
11. Staff costs
Wages and salaries
Social security costs
Other pension costs
Share-based payments
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
71.7
9.2
3.0
2.9
88.9
12.2
3.1
5.6
86.8
109.8
The analysis above includes staff costs in relation to Executive and Non-Executive Directors, and includes MotoNovo Finance
staff costs from May 2019 onwards.
101
The average number of persons employed by the Group during the period, including Non-Executive Directors, is disclosed as
below:
Central Functions
Business Finance and Retail Finance
MotoNovo Finance
Year ended
30 June 2019
Period ended
30 June 2018
536
514
124
1,174
397
539
-
936
The staff numbers disclosed in the table above includes MotoNovo Finance from May 2019 onwards. Staff are all employed
in Aldermore Bank PLC or MotoNovo Finance Limited.
12. Remuneration of Directors
Directors’ emoluments
Payments in respect of personal pension plans
Long term incentive schemes
Year ended
30 June 2019
£’000
Period ended
30 June 2018
£’000
3,969.2
5,542.2
104.7
159.6
613.2
8,777.7
4,687.1
14,479.5
The above disclosure is prepared in accordance with Schedule 5 of the Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008.
In the year ending 30 June 2019 the Group's securitisation vehicles paid third party fees of £21 thousand for corporate director
services (period ended 30 June 2018: £19 thousand). While the share capital of these vehicles is not owned by the Group, the
vehicles are included in the consolidated financial statements as they are controlled by the Group.
Long-term incentive schemes
A number of long-term cash-settled incentive schemes were introduced following the acquisition by FirstRand in March 2018
to replace the existing share schemes already in place. The deferred portion of the annual bonus is also settled in cash.
Amounts are reflected in the above remuneration disclosures when the awards are payable as a result of the Director satisfying
the scheme conditions.
Following the acquisition of Aldermore Group PLC by FirstRand International Limited in March 2018, all the share schemes to
key personnel vested and FirstRand International Limited acquired 100.0% of the share capital of Aldermore Group PLC. The
reported gains, at acquisition have been calculated as the market value offered for the shares by FirstRand (£3.13). The
aggregate gains as at March 2018 on such shares held by directors were £5.9 million.
There were a number of long-term incentive schemes introduced following the acquisition by FirstRand in March 2018. These
new schemes are a mixture of equity and cash linked schemes with a requirement to purchase FirstRand shares at vesting.
During the year, a portion of the Transition Award scheme vested as a result of the directors satisfying the scheme conditions.
Included in the values disclosed in the table above is the deferred portion of the Annual Incentive Plan paid in cash to align
the interests of the Executive team with Shareholders.
102
Highest paid director
The amounts below include the following in respect of the highest paid director:
Emoluments
Payments in respect of personal pension plans
Long term incentive schemes
Year ended
30 June 2019
£’000
Period ended
30 June 2018
£’000
1,341.8
1,822.3
43.3
54.0
296.3
3,774.7
1,681.4
5,651.0
13. Pension and other post-retirement benefit commitments
The Group operates three defined contribution pension schemes. The assets of the schemes are held separately from those
of the Group in independently administered funds. Pension contributions of £3.0 million (30 June 2018: £3.1 million) were
charged to the income statement during the period in respect of these schemes. The Group made payments amounting to
£104,680 (30 June 2018: £159,600) in aggregate in respect of three Directors’ individual personal pension plans during the
period. There were outstanding contributions of £0.7 million at the year end (30 June 2018: £0.5 million).
14. Depreciation and amortisation
Depreciation
Amortisation of intangible assets
Note
24
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
1.8
3.3
5.1
2.2
6.2
8.4
103
15. Profit before taxation
The profit before taxation is after charging:
Operating lease rentals (including service charges)
– land and buildings
– plant and equipment
The remuneration of the Group’s external auditor, Deloitte LLP, and their associates (excluding VAT) is as
follows:
Fees payable to the Group's auditor for the audit of the annual accounts
Fees payable to the Group's auditor for the audit of the accounts of subsidiaries
Audit fees
Fees payable to the Group's auditor and its associates for other services (excluding VAT):
Audit related assurance services 1
Other assurance services 2
Non-audit fees
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
3.3
0.3
0.1
0.7
0.8
0.2
0.1
0.3
1.1
4.7
0.4
0.1
0.7
0.8
0.3
0.3
0.6
1.4
1
2
Audit related assurance services for the periods ended 30 June 2019 and 30 June 2018 comprise services provided in relation to interim profit verifications
during the year and work responding to FirstRand Group audit instructions.
Other assurance services for the year ended 30 June 2019 comprise work in relation to securitisation issuances. Other assurance services for the period
ended 30 June 2018 comprise work in relation to the audit of the Group's 31 March 2018 Balance Sheet and work in relation to the Term Funding Scheme
audit.
16. Taxation
a) Tax charge
Current tax on profits for the year
Over provision in previous periods
Total current tax
Deferred tax
Under provision in previous periods
Total deferred tax (credit)/charge
Total tax charge
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
33.6
(0.8)
32.8
(0.2)
0.1
(0.1)
32.7
47.5
(0.9)
46.6
8.0
2.1
10.1
56.7
Current tax on profits reflects UK mainstream corporation tax levied at a rate of 19.0% for the year ended 30 June 2019
(18 months ended 30 June 2018: 19.2%) and the Banking Surcharge levied at a rate of 8.0% on the profits of banking companies
chargeable to corporation tax after an allowance of £25.0 million per annum.
A tax credit of £0.3 million in respect of the fair value movements in FVOCI sale debt securities has been shown in other
comprehensive income during the year ended 30 June 2019 (30 June 2018: £0.2 million credit in respect of AFS securities). A
tax credit of £nil (30 June 2018: £1.5 million credit) has been recognised in equity in respect of tax relief on vesting of share
awards.
104
A tax credit of £1.9 million (30 June 2018: £4.6 million credit) has been reflected directly in equity in respect of tax relief for
contingent convertible securities coupon costs.
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 19.0%
(30 June 2018: 19.2%). The differences are explained below:
Profit before tax
Tax at 19.0% (2018: 19.2%) thereon
Effects of:
Expenses not deductible for tax purposes
(Over)/under provision in previous periods
Deferred tax rate adjustment
Effect of the Banking tax surcharge
Other differences
Deferred tax recognition in MotoNovo Finance Ltd 1
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
129.6
195.3
24.6
37.5
0.7
(0.7)
0.4
8.9
(0.1)
(1.1)
32.7
3.2
1.2
0.6
14.1
0.1
-
56.7
1
The deferred tax asset arose primarily as a result of fixed assets transferred from the integration of MotoNovo Finance into the Aldermore Group. It is a
timing difference between the net book value and the tax written down value in the tax computations.
17. 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
30 June 2019
£m
30 June 2018
£m
71.3
69.0
4.9
145.2
52.2
33.6
10.8
96.6
£4.9 million is recoverable more than 12 months after the reporting date in respect of cash held by the Group’s securitisation
vehicles (30 June 2018: £nil).
All loans and advances to banks were stage 1 assets under IFRS 9 as at 30 June 2019 and on transition to IFRS 9 as at 1 July
2018. There were no significant impairment provisions in respect of expected losses as at 30 June 2019 or during the year
then ended. There were no impairment provisions recognised under IAS 39 as at 30 June 2018.
105
18. Debt securities
FVOCI (2018: Available for sale) debt securities:
UK Government gilts and treasury bills
Supranational bonds
Asset-backed securities
Covered bonds
30 June 2019
£m
30 June 2018
£m
47.5
721.5
20.0
418.8
1,207.8
45.9
436.3
30.1
280.0
792.3
At 30 June 2019, £1,110.2 million (30 June 2018: £732.4 million) of debt securities are expected to be recovered more than
12 months after the reporting date.
All debt securities were stage 1 assets under IFRS 9 as at 30 June 2019 and on transition to IFRS 9 as at 1 July 2018. There
were no significant impairment provisions in respect of expected losses as at 30 June 2019 or during the year then ended.
There were no impairment provisions recognised under IAS 39 as at 30 June 2018.
19. 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
30 June 2019
30 June 2018
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
0.7
7.9
0.5
-
9.1
0.7
36.1
0.5
0.1
37.4
0.3
22.4
-
-
22.7
0.3
16.3
-
0.1
16.7
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
In accordance with its risk management strategy as described on page 33 the Group enters into interest rate swap contracts
to manage the interest rate risk arising in respect of the fixed rate interest exposures on loans and advances to customers,
debt securities and customer deposits, which are each treated as separate portfolios.
The Group hedges the fixed interest rate risk on each portfolio firstly by looking for direct offsets between the asset and
liability exposures and then by using the interest rate swaps between fixed interest rates and market reference rates such as
LIBOR and SONIA in order to manage the Group’s overall interest rate risk exposure. The Group applies hedge accounting in
respect of the interest rate risk arising on these portfolios as described in note 2(j). The Group manages all other risks derived
by these exposures, such as credit risk, but does not apply hedge accounting for these risks.
The Group assesses prospective hedge effectiveness by comparing the changes in fair value of each portfolio resulting from
changes in market interest rates with the changes in fair value of allocated interest rate swaps used to hedge the exposure.
106
The Group has identified the following possible sources of ineffectiveness:
the use of derivatives as a protection against interest rate risk creates an exposure to the derivative counterparty’s
credit risk which is not offset by the hedged item. This risk is minimised by entering into derivatives which are subject
to daily margining through a recognised exchange;
different amortisation profiles on hedged item principal amounts and interest rate swap notionals;
use of different discounting curves when measuring the fair value of the hedged items and hedging instruments;
for derivatives the discounting curve used depends on collateralisation and the type of collateral used; and
difference in the timing of settlement of hedging instruments and hedged items.
No other sources of ineffectiveness were identified in these hedge relationships.
The tables below summarise the derivatives designated as hedging instruments in qualifying portfolio hedges of interest rate
risk:
Nominal amount of the
hedging instruments
Year ended 30 June 2019
Carrying amount of the hedging
instruments
Year ended 30 June 2019
Line item in the statement of financial
position where the
hedging instrument is located
Changes in fair value used for
calculating hedge ineffectiveness
Year ended 30 June 2019
Fair value hedges
Interest rate risk
Interest rate swaps
£m
5,727.3
Assets
£m
7.9
Liabilities
£m
36.1
Derivatives held for risk
management
£m
(34.2)
The amounts relating to portfolios designated as hedged items in fair value hedge relationships to manage the Group’s
exposure to interest rate risk were as follows:
Carrying amount of the hedged items
Year ended 30 June 2019
Assets
£m
Liabilities
£m
3,355.7
623.7
N/A
N/A
N/A
1,762.6
Accumulated amount of fair value hedge
adjustments on the hedged item included in the
carrying amount of the hedged items
Year ended 30 June 2019
Line item in the statement of
financial position
where the hedging
instrument is located
Assets
£m
17.9
(1.0)
N/A
Liabilities
£m
N/A
N/A
Loans and advances
to customers
Debt securities
1.7
Customer accounts
Fair value hedges
Interest rate risk
Loans and advances
to customers
Debt securities
Customer deposits
The table below summarises the hedge ineffectiveness recognised in profit or loss during the financial year ended 30 June
2019, for the Group’s designated fair value hedge relationships.
Ineffectiveness recognised in the income statement
Year ended 30 June 2019
£m
Line item in the statement of financial position
where the hedging instrument is located
Fair value hedges
Interest rate risk
1.57
Net gains / losses from derivatives and other financial
instruments at fair value through profit or loss
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:
equity market risk on equity-linked products offered to depositors; and
foreign exchange risk on currency loans provided to Invoice Finance customers.
107
20. Loans and advances to customers
Gross loans and advances
less: allowance for impairment losses
Amounts include:
30 June 2019
£m
30 June 2018
£m
10,648.9
(53.8)
10,595.1
9,015.7
(25.2)
8,990.5
Expected to be recovered more than 12 months after the reporting date
9,033.7
7,835.5
At 30 June 2019, loans and advances to customers of £3,303.0 million (30 June 2018: £3,032.7 million) were pre-positioned
into a Single Funding Pool 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 in note 25.
At 30 June 2019, loans and advances to customers included £276.9 million (30 June 2018: £103.2 million) which have been
used in secured funding arrangements, resulting in the beneficial interest in these loans being transferred to securitisation
vehicles consolidated into these financial statements. 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.
Reconciliation of the gross carrying amount of loans and advances to customers measured at amortised
cost
Amount as at 30 June 2018 (IAS 39)
IFRS 9 adjustments
Amount as at 30 June 2018 (IFRS 9)
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Transfers from FirstRand Bank on acquisition of
MotoNovo business
Stage 1
£m
8,981.9
(611.1)
8,370.8
Stage 2
£m
-
550.1
550.1
1,050.3
(1,016.9)
(1,915.5)
1,928.0
(30.9)
(90.8)
64.9
-
Repayments of loans and advances
(1,460.9)
(275.0)
Bad debts written off
New business and other changes in exposures
Amount as at 30 June 2019
Analysed between classes of lending:
Asset Finance
Invoice Finance
SME Commercial Mortgages
Buy-to-Let
Residential Mortgages
MotoNovo Finance
-
3,357.7
9,436.4
1,838.7
369.3
939.2
4,365.0
1,556.3
367.9
-
(12.0)
1,083.4
172.7
30.0
71.2
654.0
154.8
0.7
Stage 3
£m
33.8
61.0
94.8
(33.4)
(12.5)
121.7
0.3
(35.6)
(11.9)
5.7
Total
£m
9,015.7
-
9,015.7
-
-
-
65.2
(1,771.5)
(11.9)
3,351.4
129.1
10,648.9
30.5
5.8
13.6
37.2
41.4
0.6
2,041.9
405.1
1,024.0
5,056.2
1,752.5
369.2
108
Reconciliation of the allowance for impairment losses on total advances measured at amortised cost
and related exposures (IFRS 9)
Amount as at 30 June 2018 (IAS 39)
IFRS 9 adjustments
Amount as at 30 June 2018 (IFRS 9)
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Repayments of loans and advances
Bad debts written off
Increase/decrease in impairment
Changes in models and risk parameters
New business and changes in exposure
Changes in economic forecasts
Provision created/(released) due to transfers
Transfers from FirstRand Bank on acquisition of
MotoNovo business
Interest suspense
Amount as at 30 June 2019
Where recognised:
Netted against loans and advances to customers
Included in provisions in respect of loan commitments
Analysed between classes of lending:
Asset Finance
Invoice Finance
SME Commercial Mortgages
Buy-to-Let
Residential Mortgages
MotoNovo Finance
Stage 1
£m
17.4
(2.2)
15.2
8.7
(14.9)
(2.7)
(2.3)
-
17.5
(0.4)
20.8
1.8
(5.2)
0.5
-
21.5
20.7
0.8
21.5
7.5
2.4
2.4
4.2
1.1
3.9
Stage 2
£m
-
7.3
7.3
(8.6)
15.1
(16.7)
(1.9)
-
13.7
-
(1.4)
0.5
14.6
-
-
8.9
8.9
-
8.9
5.4
0.4
0.3
2.2
0.5
0.1
Stage 3
£m
7.8
5.0
12.8
(0.1)
(0.2)
19.4
(14.0)
(11.9)
14.9
(0.4)
13.9
1.2
-
0.2
3.3
Total
£m
25.2
10.1
35.3
-
-
-
(18.2)
(11.9)
46.1
(0.8)
33.3
3.5
9.4
0.7
3.3
24.2
54.6
24.2
-
24.2
11.3
1.9
1.2
6.3
3.1
0.4
53.8
0.8
54.6
24.2
4.7
3.9
12.7
4.7
4.4
109
Reconciliation of the allowance for impairment losses by class – Asset Finance
Amount as at 30 June 2018 (IAS 39)
IFRS 9 adjustments
Amount as at 30 June 2018 (IFRS 9)
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Repayments of loans and advances
Bad debts written off
Increase/decrease in impairment
Changes in models and risk parameters
New business and changes in exposure
Changes in economic forecasts
Provision created/(released) due to transfers
Interest in suspense
Amount as at 30 June 2019
Stage 1
£m
4.8
2.6
7.4
7.1
(10.2)
(1.8)
(1.1)
-
6.1
(0.3)
11.0
-
(4.6)
-
7.5
Stage 2
£m
-
5.0
5.0
(7.0)
10.3
(13.8)
(1.3)
-
12.2
(0.5)
-
-
12.7
-
5.4
Stage 3
£m
3.8
2.2
6.0
(0.1)
(0.1)
15.6
(11.8)
(10.4)
12.1
(0.2)
12.3
-
-
-
11.3
Reconciliation of the allowance for impairment losses by class – Invoice Finance
Amount as at 30 June 2018 (IAS 39)
IFRS 9 adjustments
Amount as at 30 June 2018 (IFRS 9)
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Repayments of loans and advances
Bad debts written off
Increase/decrease in impairment
Changes in models and risk parameters
New business and changes in exposure
Changes in economic forecasts
Provision created/(released) due to transfers
Interest in suspense
Amount as at 30 June 2019
Stage 1
£m
2.4
(0.6)
1.8
0.6
(2.5)
(0.4)
(0.2)
-
3.1
(0.2)
3.3
-
-
-
2.4
Stage 2
£m
Stage 3
£m
-
0.3
0.3
(0.6)
2.6
(1.4)
(0.1)
-
(0.4)
-
(0.5)
-
0.1
-
0.4
0.8
1.0
1.8
-
(0.1)
1.8
(1.1)
(0.6)
0.1
(0.1)
0.2
-
-
-
1.9
Total
£m
8.6
9.8
18.4
-
-
-
(14.2)
(10.4)
30.4
(1.0)
23.3
-
8.1
-
24.2
Total
£m
3.2
0.7
3.9
-
-
-
(1.4)
(0.6)
2.8
(0.3)
3.0
-
0.1
-
4.7
110
Reconciliation of the allowance for impairment losses by class – SME Commercial Mortgages
Amount as at 30 June 2018 (IAS 39)
IFRS 9 adjustments
Amount as at 30 June 2018 (IFRS 9)
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Repayments of loans and advances
Bad debts written off
Increase/decrease in impairment
Changes in models and risk parameters
New business and changes in exposure
Changes in economic forecasts
Provision created/(released) due to transfers
Interest in suspense
Amount as at 30 June 2019
Stage 1
£m
3.7
(2.2)
1.5
0.2
(0.4)
(0.2)
(0.5)
-
1.8
(0.1)
1.8
0.2
(0.1)
-
2.4
Stage 2
£m
Stage 3
£m
-
0.5
0.5
(0.2)
0.4
(0.1)
(0.2)
-
(0.1)
-
(0.5)
0.1
0.3
-
0.3
0.3
0.5
0.8
-
-
0.3
(0.4)
(0.5)
0.6
(0.4)
0.8
0.2
-
0.4
1.2
Reconciliation of the allowance for impairment losses by class – Buy-to-Let
Amount as at 30 June 2018 (IAS 39)
IFRS 9 adjustments
Amount as at 30 June 2018 (IFRS 9)
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Repayments of loans and advances
Bad debts written off
Increase/decrease in impairment
Changes in models and risk parameters
New business and changes in exposure
Changes in economic forecasts
Provision created/(released) due to transfers
Interest in suspense
Amount as at 30 June 2019
Stage 1
£m
3.9
(0.4)
3.5
0.5
(1.3)
(0.2)
(0.3)
-
2.0
0.2
0.9
1.2
(0.3)
-
4.2
Stage 2
£m
Stage 3
£m
-
1.0
1.0
(0.5)
1.3
(0.9)
(0.2)
-
1.5
0.3
(0.3)
0.3
1.2
-
2.2
2.1
1.1
3.2
-
-
1.1
(0.5)
(0.4)
1.3
0.3
0.3
0.7
-
1.6
6.3
Total
£m
4.0
(1.2)
2.8
-
-
-
(1.1)
(0.5)
2.3
(0.5)
2.1
0.5
0.2
0.4
3.9
Total
£m
6.0
1.7
7.7
-
-
-
(1.0)
(0.4)
4.8
0.8
0.9
2.2
0.9
1.6
12.7
111
Reconciliation of the allowance for impairment losses by class – Residential Mortgages
Amount as at 30 June 2018 (IAS 39)
IFRS 9 adjustments
Amount as at 30 June 2018 (IFRS 9)
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Repayments of loans and advances
Bad debts written off
Increase/decrease in impairment
Changes in models and risk parameters
New business and changes in exposure
Changes in economic forecasts
Provision created/(released) due to transfers
Interest in suspense
Amount as at 30 June 2019
Stage 1
£m
2.6
(1.6)
1.0
0.3
(0.5)
(0.1)
(0.2)
-
0.6
-
0.4
0.4
(0.2)
-
1.1
Stage 2
£m
-
0.5
0.5
(0.3)
0.5
(0.5)
(0.1)
-
0.4
0.2
(0.2)
0.1
0.3
-
0.5
Stage 3
£m
0.8
0.2
1.0
-
-
0.6
(0.2)
-
0.4
-
0.1
0.3
-
1.3
3.1
Total
£m
3.4
(0.9)
2.5
-
-
-
(0.5)
-
1.4
0.2
0.3
0.8
0.1
1.3
4.7
Reconciliation of the allowance for impairment losses by class – MotoNovo Finance
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Amount as at 30 June 2018 (IAS 39)
IFRS 9 adjustments
Amount as at 30 June 2018 (IFRS 9)
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Repayments of loans and advances
Bad debts written off
Increase/decrease in impairment
Changes in models and risk parameters
New business and changes in exposure
Changes in economic forecasts
Transfers from FirstRand Bank on acquisition of
MotoNovo business
Interest in suspense
Amount as at 30 June 2019
-
-
-
-
-
-
-
-
3.9
-
3.4
-
0.5
-
3.9
-
-
-
-
-
-
-
-
0.1
-
0.1
-
-
-
0.1
-
-
-
-
-
-
-
-
0.4
-
0.2
-
0.2
-
0.4
-
-
-
-
-
-
-
-
4.4
-
3.7
-
0.7
-
4.4
112
Allowance for impairment losses (IAS 39)
Period ended 30 June 2018
Balance as at 1 January 2017
Impairment loss for the period:
Charge to the income statement
Unwind of discounting
Write-offs net of recoveries
Balance as at 30 June 2018
Individual
£m
Collective
£m
Total
£m
14.3
13.1
27.4
10.6
8.9
19.5
(2.2)
(4.6)
(6.8)
(14.9)
–
(14.9)
7.8
17.4
25.2
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
30 June 2019
£m
30 June 2018
£m
849.4
568.4
1,541.7
1,177.9
24.5
21.8
2,415.6
1,768.1
(290.4)
(187.3)
2,125.2
1,580.8
726.2
482.4
1,375.7
1,077.3
23.3
21.1
2,125.2
1,580.8
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 £20.5 million (30 June 2018: £3.7 million).
Due to the nature of the business undertaken, there are no material unguaranteed residual values for any of the finance leases
at 30 June 2019 (30 June 2018: no material residual values).
113
21. 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)
Principal activity Shareholding %
Class of
shareholding
Country of
incorporation
Aldermore Bank PLC
Banking and related services
MotoNovo Finance Limited
Motor finance
100
100
Ordinary
Ordinary
Dormant subsidiary undertakings
(indirect interest)
Aldermore Invoice Finance (Holdings) Limited
(Company number 06913207)
Aldermore Invoice Finance Limited (Company
number 02483505)
Aldermore Invoice Finance (Oxford) Limited
(Company number 02129734)
AR Audit Services Limited (Company number
09495046)
Securitisation vehicles (indirect interest)
Oak No.1 Mortgage Holdings Limited++
Oak No.1 PLC++
Oak No.2 Mortgage Holdings Limited
Oak No.2 PLC
Dormant
100
Ordinary
Dormant
100
Ordinary
Dormant
100
Ordinary
Dormant
Holding company for
securitisation vehicle
Securitisation vehicle
Holding company for
securitisation vehicle
Securitisation vehicle
#
*
*
*
*
#
*
*
*
*
UK1
UK2
UK1
UK1
UK1
UK3
UK4
UK4
UK5
UK5
# The share capital of this company is not owned by the Group, but is included in the consolidated financial statements as it is controlled by the Group.
* 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.
++ The accounting reference date of this company is 31 December and was not changed to 30 June as the Group exercised its call option on the Oak No.1 securitisation
in May 2019.
1 Registered address 1st Floor, Block B, Western House Lynch Wood, Peterborough, England, United Kingdom PE2 6FZ
2 Registered address One, Central Square, Cardiff, Wales, United Kingdom, CF10 1FS
3 Registered address 6 Coldbath Square, London, England, United Kingdom, EC1R 5HL
4 Registered address 35 Great St. Helen’s, London, England, United Kingdom EC3A 6AP
5 Registered address 11th Floor, 200 Aldersgate Street, London, England, United Kingdom, EC1A 4HD
On 4 May 2019, certain assets and liabilities and the future business of MotoNovo, which was a part of the London Branch of
FirstRand Bank, the Group’s Parent Company, were transferred to MotoNovo Finance Limited. As the acquisition was a
common control transaction, the assets and liabilities transferred have been recognised at their existing book values within
the Group accounts. Details of the assets and liabilities acquired on the acquisition are provided in note 36.
114
22. Deferred taxation
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 30 June 2019
Capital allowances less than depreciation
FVOCI (period ended 30 June 2018: AFS) debt securities
transition adjustment
(Gains) / losses on debt securities recognised through other
comprehensive income
Other temporary differences
IFRS 9 transition adjustment
Share-based payment timing differences
Period ended 30 June 2018
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
Balance as at
30 June 2018
(IAS 39)
£m
IFRS 9
adjustment
£m
Balance as at
1 July 2018
(IFRS 9)
£m
Recognised in
income
statement
£m
Recognised in
other
comprehensive
income
£m
Balance as
at 30 June
2019
£m
3.0
(0.5)
(0.3)
(0.5)
-
-
1.7
-
-
-
-
2.4
-
2.4
3.0
(0.5)
(0.5)
(0.3)
-
-
(0.5)
1.1
2.4
(0.4)
-
4.1
0.2
0.4
-
-
2.5
(0.5)
0.3
-
-
-
-
0.3
0.6
2.0
0.2
4.8
Balance as at 31
December 2016
£m
Recognised in
income statement
£m
Recognised in other
comprehensive
income
£m
Balance as at 30
June 2018
£m
11.3
(0.2)
(1.0)
(0.8)
1.9
11.2
(8.3)
(0.3)
0.5
0.3
(1.9)
(9.7)
-
-
0.2
-
-
0.2
3.0
(0.5)
(0.3)
(0.5)
-
1.7
The deferred tax asset at 30 June 2019 of £4.8 million has been calculated at an overall rate of 20.9%. This is based on
substantively enacted tax rates at the balance sheet date. These are expected to apply when the temporary differences giving
rise to the deferred tax are expected to reverse. The deferred tax asset relates largely to temporary differences between
capital allowances and depreciation.
A reduction in the UK corporation tax rate from 19.0% to 17.0% from 1 April 2020 was substantively enacted on 15 September
2016.
There were no unrecognised deferred tax balances at 30 June 2019 (30 June 2018: £nil).
115
23.
Investment in associate
On 28 September 2017, the Group acquired a 48% stake in AFS Group Holdings Limited in exchange for consideration of £4.8
million. £3.8 million was paid in September 2017 with two tranches of £0.5 million deferred and held in an escrow account,
subject to certain targets being met. The first tranche was paid in full on 15 August 2018 and the second tranche is due to be
paid in full on 30 August 2019. Details of the Group's material associate at the end of the reporting period is as follows:
Name of associate
Principal activity
Registered office
Proportion of ownership interest/voting
rights held by the Group
30 June 2019 and 2018
30 June 2019 and 2018
AFS Group Holdings
Limited (Company
number 09438039)
Financial Services
Intermediary
UK1
48%2
1 Registered address Greenbank Court Challenge Way, Greenbank Business Park, Blackburn, UK, BB1 5QB1
2 Class B ordinary shares
The above associate is accounted for using the equity method in these consolidated financial statements. The carrying amount
of the investment as at 30 June 2019 is £5.4 million (30 June 2018: £5.1 million). This includes a £0.5 million share of profit of
associate which has been recognised in the Consolidated Income Statement for the period ended 30 June 2019
(30 June 2018: £0.3 million).
The financial year end date of AFS Group Holdings Limited is 30 April. For the purposes of applying the equity method of
accounting, the management accounts of AFS Group Holdings Limited for the 12 months ended 30 April 2019 have been used.
Summarised financial information in respect of the associate is set out below. The summarised financial information below
represents amounts shown in the associate’s management accounts for the 12 months ended 30 April 2019 (adjusted by the
Group for equity accounting purposes).
AFS Group Holdings Limited
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Revenue
Profit from continuing operations
Profit for the period
Total comprehensive income for the period
Dividends received from the associate during the period
As at 30 April
2019
As at 30 April
2018
£m
3.7
0.4
2.0
0.2
£m
2.9
0.1
1.7
0.1
Year ended
30 April 2019
Period from 28
September 2017 to
30 April 2018
£m
14.7
1.5
1.5
1.5
0.2
£m
7.0
0.6
0.6
0.6
-
116
A reconciliation of the above summarised financial information to the carrying amount of the interest in AFS Group Holdings
Limited recognised in the consolidated financial statements is shown below:
Net assets of the associate
Proportion of the Group’s ownership interest in the associate
Goodwill
Carrying amount of the Group’s interest in the associate
AFS Group Holdings Limited
30 June 2019
30 June 2018
£m
1.9
48%
4.5
5.4
£m
1.2
48%
4.5
5.1
117
24. Intangible assets
Cost
1 July 2018
Additions
Retirements
Write-off
Transfers from FirstRand Bank on acquisition of MotoNovo business
30 June 2019
1 January 2017
Additions
Write-off
30 June 2018
Amortisation
1 July 2018
Charge for the year
Retirements
Write-off
30 June 2019
1 January 2017
Charge for the year
Write-off
30 June 2018
Net book value
30 June 2019
30 June 2018
Computer
Systems
£m
Goodwill
£m
Total
£m
24.4
8.5
32.9
0.6
(9.1)
(0.9)
3.8
18.8
35.1
8.7
(19.4)
24.4
18.5
3.3
(9.1)
(0.2)
12.5
17.5
6.2
(5.2)
18.5
-
-
8.5
8.5
-
-
0.6
(9.1)
(0.9)
3.8
27.3
43.6
8.7
(19.4)
8.5
32.9
-
-
-
-
-
-
-
-
-
18.5
3.3
(9.1)
(0.2)
12.5
17.5
6.2
(5.2)
18.5
6.3
5.9
8.5
8.5
14.8
14.4
As a result of the Group’s withdrawal from the Asset Finance dealer market at the end of June 2019, intangible assets relating
to this business were identified as no longer generating ongoing economic benefit to the Group. As such it was deemed
appropriate to fully write-off these intangible assets, resulting in a charge to the income statement for the period ending
30 June 2019 of £0.7 million.
118
In the prior period, a number of intangible assets were identified as no longer fulfilling any ongoing economic benefit to the
Group. As such it was deemed appropriate to fully impair the intangible assets, resulting in an impairment charge to the income
statement for the period ended 30 June 2018 of £14.2 million.
The Goodwill disclosed above relates to the SME Commercial Mortgages segment. 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 30 June 2019 has been determined in a similar manner as at 30 June 2018.
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
(30 June 2018: the five year business plan). Cash flows after the planning period were extrapolated using a constant
growth rate of 2.0% (30 June 2018: 2.0%) into perpetuity; and
A pre-tax discount rate of 11.1% (30 June 2018: 14.1%) 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.
25. Amounts due to banks
Amounts repayable within 12 months:
Cash collateral received on derivatives
Due to banks – central banks – Term Funding Scheme interest accrual
Due to banks – central banks – other eligible schemes interest accrual
Amounts repayable after 12 months:
Due to banks – central banks – Term Funding Scheme
Due to banks – central banks – other eligible schemes
30 June 2019
£m
30 June 2018
£m
-
3.1
0.5
3.6
5.1
2.1
-
7.2
1,671.0
1,671.0
140.0
-
1,814.6
1,678.2
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 can be
found in note 20.
119
26. Customers’ accounts
Retail deposits
SME deposits
Corporate deposits
Amounts repayable within one year
Amounts repayable after one year
27. Other liabilities
Amounts payable within 12 months:
Amounts payable to Invoice Finance customers
Other taxation and social security costs
Trade creditors
Other payables
30 June 2019
£m
30 June 2018
£m
5,967.2
5,163.4
2,142.5
1,997.9
862.1
615.0
8,971.8
7,776.3
7,626.4
6,786.9
1,345.4
989.4
8,971.8
7,776.3
30 June 2019
£m
30 June 2018
£m
11.2
2.0
7.3
40.9
61.4
9.9
1.9
9.5
2.3
23.6
The increase in other liabilities for the year ended 30 June 2019 include £38.4 million in other payables in respect of the
transfer of the MotoNovo business into the Group. The other payables comprise of intercompany liabilities with FirstRand
Group companies of £7.9 million (also see note 38) and MotoNovo Finance dealer commissions of £30.5 million.
28. Accruals and deferred income
Amounts payable within 12 months:
Accruals
Deferred income
30 June 2019
£m
30 June 2018
£m
51.0
0.6
51.6
30.1
4.4
34.5
The increase in accruals for the year ended 30 June 2019 includes £12.5 million in respect of the transfer of the MotoNovo
business into the Group.
120
29. Provisions
1 July 2018
Adjustment for adoption of IFRS 9
Utilised during the year
Provided/(released) during the year
30 June 2019
1 January 2017
Utilised during the period
Provided during the period
30 June 2018
Financial Services
Compensation
Scheme
Customer redress
£m
1.0
-
(0.6)
(0.1)
0.3
0.8
(1.0)
1.2
1.0
£m
-
-
-
1.3
1.3
-
-
-
-
Expected losses
recognised on loan
commitments
£m
-
0.4
-
0.4
0.8
-
-
-
-
Total
£m
1.0
0.4
(0.6)
1.6
2.4
0.8
(1.0)
1.2
1.0
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 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.
The FSCS provision at 30 June 2019 of £0.3 million (30 June 2018: £1.0 million) represents the interest element of the
compensation levy for the 2018/2019 scheme year (30 June 2018: interest levy for the 2017/2018 scheme year).
Customer redress
Following an internal compliance review, it became evident that a proportion of 500 customers that were sold mortgages to
consolidate debt over a number of years were not given sufficient and appropriate advice. The sale of debt consolidation
mortgages by the Group ceased from February 2019. Work is ongoing by the Group to evaluate which customers, past and
present, did not receive sufficient and appropriate advice and calculate the redress due. A provision has been made at 30 June
2019 for £1.3 million (30 June 2018: £nil) for potential compensation based on an analysis of a sample of cases reviewed to
that date.
Expected losses on loan commitments
On implementing IFRS 9 on 1 July 2018, the Group recognised impairment losses expected in respect of any outstanding
irrevocable loan commitments of £0.4 million. The expected losses on loan commitments increased to £0.8 million as at
30 June 2019 reflecting the increase in committed irrevocable lending to customers.
30. Debt securities in issue
Debt securities in issue are repayable from the reporting date in the ordinary course of business as follows:
Debt securities in issue – Oak No.1 PLC
Debt securities in issue – Oak No.2 PLC
30 June 2019
£m
30 June 2018
£m
-
263.2
263.2
77.9
-
77.9
121
Debt securities in issue with a book value of £263.2 million (30 June 2018: £77.9 million) are secured on certain portfolios of
variable and fixed rate mortgages through the Group’s securitisation vehicles. 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. In May 2019, the Group exercised its call option in respect of the Oak No 1 PLC Notes. The final maturity date in respect
of the Oak No.2 PLC notes is 26 May 2055, with a call option exercisable on the notes falling due on 27 February 2023. There
is no obligation for the Group to make good any shortfall. Further disclosure relating to the underlying assets is contained in
note 20.
31. Subordinated notes
Subordinated notes 2026
Subordinated notes 2028
Subordinated notes 2029
30 June 2019
£m
30 June 2018
£m
60.5
100.6
52.3
213.4
60.5
-
-
60.5
On 28 October 2016, the Group issued £60.0 million subordinated 8.5% 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%.
On 22 November 2018, the Group issued to FirstRand Bank Limited, a fellow subsidiary of FirstRand Limited, £100.0 million
subordinated 4.9% loan notes, repayable in 2028, with an option for the Group to redeem after five years. The interest rate is
fixed until November 2023. The loan is carried in the statement of financial position at amortised cost using an EIR of 4.9%
which is identical to the coupon rate.
On 22 May 2019, the Group issued to FirstRand Bank Limited, a fellow subsidiary of FirstRand Limited, £52.0 million
subordinated 5.1% loan notes, repayable in 2029, with an option for the Group to redeem after five years. The interest rate is
fixed until May 2024. The loan is carried in the statement of financial position at amortised cost using an EIR of 5.1 %.
32. Financing activity
The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash
changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified
in the Group's consolidated statement of cash flows as cash flows from financing activities.
Year ended 30 June 2019
Debt Securities in Issue -
note 30
Subordinated notes -
note 31
As at 1 July 2018
Financing cash flows-
debt issued
Financing cash flows-
repayment of debt
£m
£m
£m
Financing cash
flows - interest paid
on debt
£m
Non-cash changes-
Interest expense per
Income Statement
£m
As at 30 June 2019
£m
77.9
323.3
(138.9)
(4.0)
4.9
263.2
60.5
152.0
-
(7.5)
8.4
213.4
122
Period ended 30 June 2018
As at 31 December
2016
Financing cash flows-
repayment of debt
Financing cash flows-
interest paid on debt
£m
£m
130.6
(53.1)
£m
(1.7)
100.0
(40.0)
(10.2)
Non-cash changes-Interest
expense per Income
Statement
£m
2.1
10.7
As at 30 June 2018
£m
77.9
60.5
Debt Securities in Issue -
note 30
Subordinated notes -
note 31
33. Share capital
Type
Ordinary shares of £0.10 each
30 June 2019
£m
30 June 2018
£m
243.9
34.9
As at 30 June 2019, there were 2,439,016,370 ordinary £0.10 shares in issue resulting in share capital of £243,901,637
(30 June 2018: 348,993,805 and £34,899,381 respectively).
2,090,000,000 Ordinary Shares of £0.10 each were issued to FirstRand International Limited (the Group’s Parent company) on
3 May 2019 to ensure Aldermore Group was able to meet the additional capital requirements arising from new business that
will be written by MotoNovo Finance Limited.
34. Share-based payments
The table below shows the charge to the income statement:
Year ended 30 June 2019
£m
Period ended 30 June 2018
£m
Share plans issued in 2015
Share plans issued in 2016
Share plans issued in period ended 30 June 2018
Share plans issued in year ended 30 June 2019
Total share-based payment charge
-
-
2.0
0.9
2.9
1.2
1.9
2.5
-
5.6
123
Awards
The table below shows the number of awards outstanding as at 30 June 2019:
Awards
outstanding
value 30 June
2018
£m 1
Awards
outstanding
value 30 June
2019
£m
Adjusted for
movement
in Firstrand
ZAR Share
Price
Vesting
Dates
Employee
Service
Conditions
Non Market
Performance
Conditions
Attached 3
Liability
transferred to
RMBMS by
assumption of
liability
agreement 4
Aldermore
Group
Residual
Liability
Charge for
current year
£m
Settlement
Plan
Sharesave Plan
0.2
-
No
No
Cash
No
No
-
No
Yes
No
Cash
No
No
2.0
Transition Award
4.0
2.5 2
Deferred Bonus
Scheme
-
0.5
Oct 2019
Mar 2020
Equal
tranches:
Sep 2019
Sep 2020
Sep 2021
Yes
Yes
No
Cash or
FirstRand
shares to the
value of the
award at the
vesting date
Cash or
FirstRand
shares to the
value of the
award at the
vesting date
Cash or
FirstRand
shares to the
value of the
award at the
vesting date
FirstRand
shares to the
value of the
award at the
vesting date
Cash or
FirstRand
shares to the
value of the
award at the
vesting date
Yes
Yes
0.3
Yes
Yes
-
Yes
No
0.1
Yes
No
0.2
No
Yes
0.3
2.9
LTIP awards (risk
& compliance)
-
0.1 Sep 2021
Yes
Yes
No
LTIP awards
-
0.6 Sep 2021
Yes
Yes
Yes
LTIP awards (Exco)
-
1.4 Sep 2021
Yes
Yes
Yes
Conditional Share
Plan (MotoNovo
Finance) – CP16 &
CP17
Total
Sep 2019
(CP16)
Sep 2020
(CP17)
-
4.2
2.2
7.3
Yes
Yes
No
1.
2.
3.
4.
Sharesave value based on 97,110 shares at 200 pence per share. Transition award outstanding value based on 1,267,206 awards at 313 pence per award.
Transition award outstanding value based on 801,732 awards at 313 pence per award.
Non Market Performance Conditions - 40.0% of the conditional award will vest if: Increase in FirstRand normalised earnings per share equals or exceeds
the South Africa CPI plus real GDP growth, on a cumulative basis, over the performance period; FirstRand Limited delivers ROE of at least 18 .0% over the
performance period; and
60.0% of the conditional award will be based on the performance conditions linked to Aldermore.
Aldermore entered into an assumption of liability and novation agreement with RMB Morgan Stanley Proprietary Ltd (‘RMBMS’), a 50.0% owned JV of the
FirstRand Group to hedge the cost of the awards linked to the FirstRand share price. In return for Aldermore making a payment to RMBMS, RMBMS is
substituted in the agreement and will be obligated to pay the GBP amount due to the Aldermore employees at the vesting date.
124
The table below shows the number of awards outstanding as at 30 June 2018:
Plan
Awards
outstanding at
1 January 2017
Awards / options
granted
Awards / options
forfeited
Awards / options
expired
Awards /
options
vested
Awards
outstanding at 30
June 2018
Number
Average fair value
per award granted
during the period
at grant date
(rounded)
Performance Share Plan
2,639,937
700,126
(283,483)
(1,334,210)
(1,722,370)
“Top Up” Pre IPO Award
under the PSP
513,589
–
(129,968)
–
(383,621)
Restricted Share Plan
256,993
553,503
(33,608)
(432,293)
(344,595)
Recruitment Award
466,179
–
–
–
(466,179)
–
–
–
–
Sharesave Plan
1,550,471
421,722
(292,120)
(952,450)
(630,513)
97,110
Deferred Share Plan
541,987
648,805
(145,320)
–
(1,045,472)
–
Transition Award
–
1,279,202
(11,996)
–
–
1,267,206
£1.88
–
£2.22
–
£1.04
£2.22
£3.13
Total
5,969,156
3,603,358
(896,495)
(2,718,953) (4,592,750)
1,364,316
The terms of the schemes which are all cash-settled are as follows:
a) Sharesave Plan
All employees were eligible to participate in the Group’s annual invitation to join the Sharesave Plan. Individuals in the Plan
contributed a set amount each month for three years. At the end of the savings period, participants had the option to buy
shares in Aldermore Group PLC at an option price which was fixed at the grant date.
There were no performance conditions attached to the awards but employees could only continue to participate in the Plan
whilst in the employment of the Group. Participants had the option but not the obligation, to buy shares at the end of the
Plan, subject to having made all monthly contributions. There were no holding conditions in respect of shares acquired
pursuant to the exercise of an option.
Prior to the completion of the takeover of Aldermore by FirstRand Group, all participants in the Sharesave Plan were given the
opportunity to use the savings in their accounts to purchase Aldermore Shares at the Option price set at the start of the
relevant invitation. The Aldermore Shares were subsequently sold to FirstRand who paid the participant 313 pence in cash for
each Aldermore Share. Alternatively, participants could elect to continue saving after the takeover and exercise their Option
within the six-month period following the Court sanction of the Scheme. Again, these shares would be sold to FirstRand for
313 pence per Aldermore Share. Those participants who took up the 2015 and 2016 invitations to join the Sharesave Plan
were eligible to receive a compensation payment in respect of options that lapsed as a result of their Option being exercised
ahead of the usual maturity date (provided that they elected to exercise their Option ahead of the Court Sanction date).
b) Transition Award
The shares under Performance Share Plan (PSP) and Restricted Share Plan (RSP) awards which lapsed as a result of the
application of time pro-rating were rolled over into cash-settled Transition Awards. The Transition Awards are accounted for
as a cash-settled share based payment under IFRS 2, with a liability accruing on the Statement of Financial Position. The fair
value is remeasured at the end of each reporting period, with changes to fair value recognised in profit or loss.
c) Deferred Bonus Scheme
A deferred portion of the annual bonus (or Bonus deferral scheme ‘BDS’), which is based on the Aldermore Group’s and
individual’s performance against specified factors during the period to which the annual bonus relates. The deferred bonus is
equity linked. The awards vest in 3 equal annual instalments, on the first, second and third anniversary of the date the annual
bonus is confirmed. There are no performance conditions in respect of the awards however there are service conditions
attached to the awards in respect of the employee continuing to be employed by the Aldermore Group at each vesting date.
125
d) LTIP (Long Term Incentive Plan)
A long term incentive plan (LTIP) for which vesting occurs 3 years after the award date. The same service conditions apply as
for the BDS, i.e. continuing to be employed at each vesting date for all awards. The awards are equity linked without
performance conditions for a small number of employees engaged in risk and control functions. The awards are equity linked
with performance conditions for other senior employees with performance conditions linked to FirstRand and Aldermore
performance.
e) Conditional Share Plan (MotoNovo Finance)
The conditional award comprises a number of full shares with no strike price. These awards vest after three years. The number
of shares that vest is determined by the extent to which the performance conditions are met. Conditional awards are made
annually and vesting is subject to specified financial and non-financial performance targets set annually by the remuneration
committee. The conditional share plan (CSP) is valued using the Black Scholes option pricing model with a zero strike price.
The scheme is cash-settled and is therefore repriced at each reporting date.
35. Additional Tier 1 capital
Contingent convertible securities – issued December 2014
Perpetual subordinated capital notes – issued June 2019
30 June 2019
£m
30 June 2018
£m
74.0
47.0
121.0
74.0
-
74.0
Perpetual subordinated capital notes
On 25 June 2019, the Company issued £47.0 million of Perpetual Subordinated Capital Notes to FirstRand Bank Limited, a
fellow subsidiary of FirstRand Limited.
The Securities are perpetual and have no fixed redemption date. Redemption of the Securities is at the option of the Company
on 27 June 2024 and semi-annually thereafter. The Securities bear interest at an initial rate of 7.3% per annum until 27 June
2024 and thereafter at the relevant Reset Interest Rate as provided in the Information Memorandum. Interest is payable on
the Securities semi-annually in arrears on each interest payment date commencing from 27 December 2019 and is non-
cumulative. The Borrower has the full discretion to cancel any interest scheduled to be paid on the Securities.
Contingent convertible securities
On 9 December 2014, the Company issued £75.0 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 11.9% 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 from 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 loan balance is written down to zero and all accrued but unpaid interest and any other amounts payable on the loan are
cancelled in the event of either the Bank’s or the Group’s Common Equity Tier 1 ratio falling below 7.0%. 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. 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.
126
36. Statement of cash flows
(a) Adjustments for non-cash items and other adjustments included within the income statement
Depreciation and amortisation
Impairment of intangibles and goodwill
Amortisation of securitisation issuance cost
Impairment losses on loans and advances and commitments1
Unwind of discounting1
Write-offs net of recoveries1
Interest in suspense
(Gains) / losses on hedged available for sale debt securities recognised in profit or loss
Net gains on disposal of FVOCI (2018: available for sale) debt securities
Interest expense on subordinated notes
Interest income on debt securities
Interest expense on debt securities in issue
Share of profit of associate
Equity-settled share-based payment charge
Year ended 30
June 2019
£m
Period ended 30
June 2018
£m
5.1
0.7
0.6
26.8
(0.5)
-
2.4
(6.4)
(0.8)
8.4
8.4
14.2
0.5
19.5
(6.8)
(14.9)
-
8.6
(1.2)
10.7
(14.7)
(14.5)
4.3
(0.5)
-
25.4
1.6
(0.3)
4.9
30.7
1.
Impairment losses as at 30 June 2019 reflect expected credit losses calculated in accordance with IFRS 9. Impairment losses as at 30 June 2018 reflect
impairment losses calculated in accordance with IAS 39
127
(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
Dividend received from associate
(c) Increase in operating liabilities
Amounts due to banks
Customers' accounts
Derivative financial instruments
Fair value adjustments for portfolio hedged risk
Other operating liabilities
(d) Cash and cash equivalents
Year ended 30
June 2019
£m
Period ended 30
June 2018
£m
(1,578.2)
(1,511.0)
(29.1)
13.6
(33.6)
(4.9)
(0.2)
(12.3)
(10.3)
12.2
(12.7)
-
(1,632.4)
(1,534.1)
Year ended 30
June 2019
£m
Period ended 30
June 2018
£m
136.4
924.4
1,196.0
1,102.6
20.7
0.8
42.9
(19.1)
1.4
6.3
1,396.8
2,015.6
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
30 June 2019
£m
30 June 2018
£m
482.9
(20.4)
71.2
533.7
508.8
(16.3)
52.2
544.7
128
(e) Acquisition of MotoNovo business from FirstRand Bank
The following assets and liabilities were acquired from the London Branch of FirstRand Bank in respect of the transfer of the
MotoNovo business to the Group.
Loans and advances to customers
Property, plant and equipment, and intangibles
Other operating assets
Other operating liabilities
Book value of
assets and
liabilities
transferred
£m
64.4
11.9
22.3
(12.2)
86.4
Cash and cash equivalents transferred to London Branch of FirstRand Bank in respect of the transfer of the MotoNovo business
to the Group in May 2019 totalled £86.4 million.
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 30 June 2019 include £4.9 million held by the
securitisation vehicles, which are not available to the other members of the Group (30 June 2018: £10.9 million).
37. Commitments and contingencies
At 30 June 2019, the Group had undrawn commitments to lend of £715.6 million (30 June 2018: £442.8 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
At 30 June 2019, the majority of operating leases for equipment related to 115 cars that the Group held under lease
(30 June 2018: 36). The majority of these leases are due to expire in 2020.
30 June 2019
£m
30 June 2018
£m
4.7
18.7
9.5
32.9
2.8
8.7
3.7
15.2
30 June 2019
£m
30 June 2018
£m
0.2
0.4
0.6
0.3
0.6
0.9
129
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.
38. Related parties
(a) Controlling parties
FirstRand International Limited acquired 100.0% of the share capital of Aldermore Group PLC in March 2018. It therefore
became the immediate parent of Aldermore Group PLC. FirstRand International Limited is a company incorporated in
Guernsey (registered number 17166), and is a wholly owned subsidiary of FirstRand Limited, a company incorporated in South
Africa (registered number 1966/010753/06) and the ultimate parent and ultimate controlling party. Consolidated accounts
are prepared by FirstRand Limited and copies are available to the public from the ultimate parent’s registered office c/o 4
Merchant Place, Corner Fredman Drive and Rivonia Road, Sandton, Gauteng, South Africa, 2196.
Until the purchase by FirstRand International Limited in March 2018, 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 5.2%, 6.9%, 7.1% and 6.0%
of the Company’s ordinary share capital respectively and until the purchase by FirstRand retained significant influence and
were therefore considered to be a related party for the period ending 30 June 2018 from 1 January 2017 until 14 March 2018.
During the year ended 30 June 2019, the Group also incurred fees of £123,000 (period ended 30 June 2018: £30,000) in
relation to the Directors who represent the ultimate parent company. Prior to the FirstRand International Limited acquisition
the Group incurred fees of £0.1 million during the period ended 30 June 2018 in relation to the directors who represented the
principal shareholders (Anacap) until March 2018.
On 4 May 2019, certain assets and liabilities and the future business of MotoNovo, which was a part of the London Branch of
FirstRand Bank, the Group’s Parent Company, were transferred to MotoNovo Finance Limited for the consideration of
£86.4 million. Details of the assets and liabilities acquired on the acquisition are provided in note 36.
As at 30 June 2019, the Group owed FirstRand Bank Limited a balance of £208.7 million (period ended 30 June 2018: £nil)
which includes subordinated securities totaling £199.8 million and were owed a balance of £7.9 million from FirstRand Bank
Limited (period ended 30 June 2018: £nil) consisting of recharged administrative and operational costs.
During the year ended 30 June 2019, the Group received income from FirstRand Bank Limited totalling £10.5 million (period
ended 30 June 2018: £nil) relating to administrative costs recharged to FirstRand Bank Limited by MotoNovo Finance Limited,
and were recharged expenses totalling £4.2 million (period ended 30 June 2018: £nil) which includes a subordinated loan note
coupon of £3.2 million and the remainder being software license costs.
The Group entered into an assumption of liability and novation agreement with RMB Morgan Stanley Proprietary Ltd
(‘RMBMS’), a 50% owned JV of the FirstRand Group to hedge the cost of the Share-Based Payment awards linked to the
FirstRand share price. Further detail of this can be found in note 34.
b) Associates
The Group holds a 48% holding in AFS Group Holdings Limited which was acquired on 28 September 2017. During the year
ended 30 June 2019, the Group paid commission of £2.6 million to the associate (2018: £1.4 million). The Group also received
dividends totalling £0.2 million during the year (period ended 30 June 2018: £nil).
130
c) 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
Termination benefits
Share-based payments
Year ended
30 June 2019
£’000
Period ended
30 June 2018
£’000
5,578.3
7,938.8
154.6
27.1
-
181.3
59.3
780.0
1,906.3
2,365.2
7,666.3
11,324.6
Key persons’ emoluments include £2.7 million of deferred bonus (period ended 30 June 2018: £2.4 million).
Share-based payments (“SBP”)
As per note 34, the shares under PSP and RSP awards which lapsed as a result of the application of time pro-rating were rolled
over into cash-settled Transition Awards.
During the year ended 30 June 2019, KMP were granted awards which are linked to the share price of the ultimate parent
FirstRand Limited. Further details of the schemes are provided in note 34.
131
39. Financial instruments and fair values
The following table summarises the classification and carrying amounts of the Group’s financial assets and liabilities:
Assets at amortised
cost
£m
Debt securities
at FVOCI
£m
Fair value
through profit or
loss (required)
£m
Fair value
hedges
£m
Liabilities at
amortised cost
£m
30 June 2019
Cash and balances at central banks
Loans and advances to banks
Debt securities
Derivatives held for risk management
Fair value adjustment for portfolio hedged
risk
Loans and advances to customers
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
482.9
145.2
-
-
-
10,595.1
25.9
-
-
1,207.8
-
-
-
-
-
-
-
9.1
-
-
-
-
-
-
-
17.9
-
-
11,249.1
1,207.8
9.1
17.9
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
37.4
-
-
-
-
37.4
-
-
-
-
-
1.0
-
-
-
-
-
-
-
-
-
-
-
-
Total
£m
482.9
145.2
1,207.8
9.1
17.9
10,595.1
25.9
12,483.9
46.4
12,530.3
1,814.6
1,814.6
8,971.8
8,971.8
-
-
61.4
263.2
213.4
37.4
1.0
61.4
263.2
213.4
1.0
11,324.4
11,362.8
-
-
72.3
11,435.1
132
30 June 2018 (per IAS 39)
Cash and balances at central banks
Loans and advances to banks
Debt securities
Derivatives held for risk management
Loans and
receivables
£m
508.8
96.6
-
-
Loans and advances to customers
8,990.5
Available
for sale
£m
Fair value
through profit or
loss (required)
£m
Fair value
hedges
£m
Liabilities at
amortised cost
£m
-
-
792.3
-
-
-
-
-
-
-
22.7
-
-
-
-
-
-
-
-
(15.7)
-
-
6.3
9,602.2
792.3
22.7
(15.7)
Total
£m
508.8
96.6
792.3
22.7
8,990.5
(15.7)
6.3
10,401.5
31.2
10,432.7
-
-
-
-
-
-
-
-
-
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
16.7
-
-
-
-
-
-
-
-
1,678.2
1,678.2
7,776.3
7,776.3
-
16.7
0.2 - 0.2
-
-
-
21.8
77.9
60.5
21.8
77.9
60.5
16.7
0.2
9,614.7
9,631.6
-
-
-
43.1
9,674.7
133
Details of the adjustments and reclassification of the above amounts on the adoption of IFRS 9 as at 1 July 2018 are provided
in note 42.
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 valuations.
Cash and balances at central banks
Loans and advances to banks
30 June 2019
30 June 2018
Carrying value
£m
Fair value
£m
Carrying value
£m
Fair value
£m
482.9
145.2
482.9
145.2
508.8
96.6
508.8
96.6
Loans and advances to customers
10,595.1
10,606.9
8,990.5
8,979.4
Other assets
Total financial assets
Amounts due to banks
Customers’ accounts
Other liabilities
Debt securities in issue
Subordinated notes
Total financial liabilities
25.9
25.9
6.2
6.2
11,249.1
11,260.9
9,602.1
9,591.0
1,814.6
1,814.6
1,678.2
1,678.2
8,971.8
8,978.1
7,776.3
7,778.8
61.4
263.2
213.4
61.4
265.2
220.9
21.8
77.9
60.5
21.8
78.3
61.9
11,324.4
11,340.2
9,614.7
9,619.0
134
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.
Expected credit losses as determined for IFRS 9 purposes are reflected in 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.
(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 following table provides an analysis of financial assets and liabilities held on the consolidated statement of financial
position at fair value, which are all subject to recurring valuation, grouped into Levels 1 to 3 based on the degree to which the
fair value is observable:
135
30 June 2019
Financial assets:
Derivatives held for risk management
Debt securities:
Asset-backed securities
UK Gilts and Supranational bonds
Covered bonds
Financial liabilities:
Derivatives held for risk management
30 June 2018
Financial assets:
Derivatives held for risk management
Debt securities:
Asset-backed securities
UK Gilts and Supranational bonds
Covered bonds
Financial liabilities:
Derivatives held for risk management
Level 1
£m
Level 2
£m
Level 3
£m
-
-
769.0
418.8
9.1
20.0
-
-
1,187.8
29.1
-
-
37.4
37.4
-
-
-
-
-
-
-
Total
£m
9.1
20.0
769.0
418.8
1,216.9
37.4
37.4
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
-
-
482.2
280.0
762.2
-
-
22.7
30.1
-
-
52.8
16.7
16.7
-
-
-
-
-
-
-
22.7
30.1
482.2
280.0
815.0
16.7
16.7
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.
136
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
conducted through a recognised exchange and as such are subject to daily margining requirements.
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 vehicles
The sale of the beneficial ownership of the loans and advances to customers to the securitisation vehicles 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 vehicles have 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.
The results of the securitisation vehicle listed in note 30 are consolidated into the results of the Group. The table below shows
the carrying values 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.
30 June 2019
Oak No.1 PLC
Oak No.2 PLC
30 June 2018
Oak No.1 PLC
Carrying
amount of
transferred
assets not
derecognised
£m
Carrying
amount of
associated
liabilities
£m
Fair value of
transferred
assets not
derecognised
£m
Fair value of
associated
liabilities
£m
Net position
£m
-
-
-
-
-
277.4
263.2
277.9
265.2
12.7
Carrying
amount of
transferred
assets not
derecognised
£m
Carrying
amount of
associated
liabilities
£m
Fair value of
transferred
assets not
derecognised
£m
Fair value of
associated
liabilities
£m
Net position
£m
103.2
77.9
110.8
78.3
32.5
137
40. 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 21 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 net of refunds received)
Employees (average FTE equivalent)
41. Post balance sheet events
Jurisdiction
income/
expense arose
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
UK
UK
UK
UK
340.3
129.6
(18.7)
1,174
467.4
195.3
(44.9)
936
On 29 August 2019, the Group successfully priced its third Residential Mortgage Backed Securities (Oak No.3 PLC) providing
£343.5 million of funding. It is expected to settle on 12 September 2019.
138
42. Impact of adopting IFRS 9
The Group has adopted IFRS 9. As set out in accounting policy note 1(a), comparative information has not been restated, but
retained earnings, as at the date of initial adoption of 1 July 2018, have been restated.
Impact on carrying values
Details of changes in the carrying values of assets, liabilities and equity on the adoption of IFRS 9 as at 1 July 2018 were as
follows:
Assets:
Loans and advances to customers before
impairment provisions
Less impairment provisions
Net
Deferred tax
Liabilities:
Provisions
Equity:
Retained earnings
Available for sale reserve
FVOCI reserve
At 30 June 2018
Per IAS 39
£m
Additional impairment
provisions
£m
Impact of reclassifications
£m
At 1 July 2018
per IFRS 9
£m
9,015.7
(25.2)
8,990.5
1.7
1.0
573.5
1.1
-
-
(9.7)
(9.7)
2.4
0.4
(7.8)
-
-
-
-
-
-
-
-
(1.1)
1.1
9,015.7
(34.9)
8,980.8
4.1
1.4
565.7
-
1.1
Additional impairment provisions
The increase in impairment provisions relate to loans and advances to customers and undrawn balances relating to partially
drawn down facilities as detailed in note 20. Expected losses on irrevocable loan commitments result in an increase in
provisions as detailed in note 29.
Impact on reclassifications
All financial assets classified as loans and receivables as at 30 June 2018 per IAS 39 were reclassified as financial assets at
amortised cost. Debt securities which were previously classified as available for sale financial assets were reclassified as fair
value through other comprehensive debt securities, and the related available for sales reserve in equity was reclassified as a
FVOCI reserve.
No changes were made to the classifications of financial liabilities or derivatives held for risk management.
139
The Company statement of cash flows
For the year ended 30 June 2019
Cash flows from operating activities
Profit before taxation
(Decrease)/ Increase in operating liabilities
Adjustments for non-cash items within the income statement
Net cash flows generated from operating activities
Cash flows from investing activities
Acquisition of investment in an associate
Acquisition of investment in Subsidiaries
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of shares
Proceeds from issue of subordinated notes
Subordinated loan made to subsidiary
Interest received on subordinated loan
Interest paid on subordinated notes
Proceeds from issue of AT1 capital
Coupon paid on contingent convertible securities, net of tax
Deposit placed with Aldermore Bank PLC
Proceeds received on new intercompany loan raised
Net cash received from financing activities
Net (decrease)/increase 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
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
Note
8.9
(0.1)
-
8.8
-
(59.0)
(59.0)
209.0
152.0
(100.0)
7.4
(7.4)
47.0
(8.9)
(249.0)
-
50.1
1.1
0.2
0.1
1.4
(4.8)
-
(4.8)
1.0
-
-
7.6
(7.6)
-
(17.8)
-
20.4
3.6
(0.1)
0.2
1.0
(0.1)
0.9
0.8
0.2
1.0
141
6
4
10
11
9
9
9
8
3
The Company statement of changes in equity
For the year ended 30 June 2019
Share
capital
£m
Share
premium
account
£m
Additional Tier 1
Capital
£m
Capital
redemption
reserve
£m
Share-based
payment
reserve
£m
Retained
earnings
£m
Total
£m
Year ended 30 June 2019
As at 1 July 2018
Profit for the year
Transactions with equity holders:
Share issue proceeds
Additional Tier 1 capital issue proceeds
Coupon paid on contingent convertible securities
34.9
74.4
74.0
-
-
209.0
-
-
-
-
-
-
-
47.0
-
0.1
-
-
-
-
As at 30 June 2019
243.9
74.4
121.0
0.1
-
-
-
-
-
-
221.7
405.1
6.6
6.6
-
-
209.0
47.0
(6.5)
(6.5)
221.8
661.2
Period ended 30 June 2018
As at 1 January 2017
34.5
73.4
74.0
0.1
6.9
226.0
414.9
Loss for the period
Transactions with equity holders:
– Share-based payments, including tax
reflected directly in retained earnings
– Coupon paid on contingent convertible
securities issue costs
-
-
-
-
-
-
– Exercise of share options
0.4
1.0
– Release of loan payable by the Employee
Benefit Trust
– Transfer of share-based payment reserve
to retained earnings
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1.6)
(1.6)
4.9
-
4.9
-
-
-
(15.0)
(15.0)
(0.4)
0.9
1.0
0.9
(11.8)
11.8
-
As at 30 June 2018
34.9
74.4
74.0
0.1
-
221.7
405.1
142
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.
b) Going concern
As detailed in note 1(d) 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
Net profit / (loss) attributable to equity shareholders of the Company
3. Loans and advances to banks
Repayable on demand
Year ended
30 June 2019
£m
Period ended
30 June 2018
£m
6.6
(1.6)
30 June 2019
£m
30 June 2018
£m
0.9
1.0
There were no material impairment provisions against loans and advances to banks, all of which were stage 1 assets as at
30 June 2019. All amounts are considered to be cash and cash equivalents.
4. Investment in Group undertakings
As at 1 July 2018/1 January 2017
Capital injections - Share capital
Capital contributions - Share-based payments
As at Period End
30 June 2019
£m
30 June 2018
£m
419.9
59.0
-
415.0
-
4.9
478.9
419.9
As at 30 June 2019, £nil investments (30 June 2018: £nil) were classified as impaired.
Investment in subsidiaries
The Company owns 100.0% of the issued share capital of Aldermore Bank PLC, which is a registered bank and 100.0% of
MotoNovo Finance Limited a company engaged in motor finance. Details of subsidiary undertakings of the Bank are provided
in note 21 to the consolidated financial statements. All the companies listed in note 21 to the consolidated financial statements
are related parties to the Company.
143
Additional Tier 1 Perpetual Loan
On 9 December 2014, the Company made a perpetual loan of indefinite duration that is repayable at the option of the Bank,
and bears interest at an initial rate of 11.9% 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 38 to the consolidated financial statements.
6. Investment in associated companies
Investment in AFS Group Holdings Limited
30 June 2019
£m
30 June 2018
£m
4.8
4.8
4.8
4.8
Details of the acquisition of the associate can be found in note 23 to the consolidated financial statements. Aldermore Group
PLC transferred consideration via Aldermore Bank PLC, with two tranches of £0.5m deferred and held in an escrow account in
Aldermore Bank PLC until 2018 and 2019, subject to certain targets being met. The first tranche was paid in full on 15 August
2018 and the second tranche is due to be paid in full on 30 August 2019.
7. Amounts receivable from Group undertakings
Subordinated loan to Aldermore Bank PLC
Deposit with Aldermore Bank PLC
30 June 2019
£m
30 June 2018
£m
161.4
60.9
249.9
411.3
-
60.9
On the 28 October 2016 and 22 November 2018, the Company made a £60.0 million and £100.0 million subordinated 8.5%
and 4.9% loans respectively to Aldermore Bank PLC, repayable in 2026 and 2028, with an option for the Bank to redeem after
five years. The interest rates are fixed until October 2021 and November 2023 respectively. The loans are carried in the
statement of financial position at amortised cost.
A £150.0 million deposit placed with Aldermore Bank PLC from the Group pays interest of 1.6% above SONIA on the
outstanding balance. The interest is paid semi-annually.
The Group placed £52.0 million and £47.0 million of deposits with Aldermore Bank PLC with interest of 2.5% and 2.3% fixed
rate on the outstanding balances. The interest is paid semi-annually.
8. Amounts payable to Group undertakings
Intercompany loans from Aldermore Bank PLC
30 June 2019
£m
30 June 2018
£m
20.8
20.8
20.4
20.4
Amounts payable to Aldermore Bank PLC carry interest of between 1.0% per annum above LIBOR to 1.3% per annum above
LIBOR charged on the outstanding loan balances.
144
9. Subordinated notes
Subordinated notes
30 June 2019
£m
30 June 2018
£m
213.7
60.9
Details of subordinated notes issued by the Company are provided in note 31 to the consolidated financial statements.
10. Share capital
Details of share capital and the share premium account of the Company are provided in note 33 to the consolidated financial
statements.
11. Additional Tier 1 capital
Details of the Additional Tier 1 capital issued by the Company are provided in note 35 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 page 33 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, apart from its investments in Group undertakings
and associates, are approximately equal to their carrying value. Accordingly no further disclosures in respect of fair values are
provided. The investments in both Aldermore Bank PLC and in AFS Group Holdings Limited are is considered to be greater than
the carrying value.
14. Controlling party information
Details of controlling party information of the Company are provided in note 38(a) to the consolidated financial statements.
15. Post balance sheet events
The directors are not aware of any material events that have occurred between the date of the statement of financial position
and the date of this report.
145