SPECIALISTS IN
GOOD SENSE
Shawbrook Group plc
Annual Report & Accounts 2016
Contents
Strategic report
The Strategic report provides readers with a holistic
picture of Shawbrook’s business model, strategy,
2016 performance and future prospects.
01 Specialists in good sense
02 Basis of preparation
04 How we’ve done
06 At a glance
08 Chairman’s statement
10 Chief Executive Officer’s review
14 Market overview
16 Our strategy
18 Our business model
20 Business review
40 Risk management report
57 Corporate social responsibility
Corporate governance
In this section we set out our commitment to the
highest standards of corporate governance in line with
UK best practice, our approach to remuneration and
our Directors’ responsibilities.
64 Corporate governance report
66 Board of Directors
91 Directors’ remuneration report
105 Directors’ report
110 Statement of Directors’ responsibilities
111 Independent Auditor’s report
Financial statements
The Financial statements comprise of the statutory
financial statements and notes to the accounts for 2016.
117 Consolidated statement of profit and loss
and other comprehensive income
118 Consolidated and Company statements
of financial position
119 Consolidated statement of changes in equity
120 Company statement of changes in equity
121 Consolidated and Company statement of cash flows
122 Notes to the financial statements
180 Glossary
Strategic report
Corporate governance
Financial statements
01
SPECIALISTS IN GOOD SENSE
Shawbrook is a growing UK specialist bank. We challenge the conventional
approach of the mainstream banks by taking a thoughtful, good-sense
approach to the way we do business.
What sets us apart is the deep relationships we develop with our customers
and business partners. We take the time to get to know them; we learn
more about their specific needs and this allows us to identify and tailor
the products that will help them to maximise their opportunities.
Our chosen target markets are selected carefully and are ones that are
poorly served by the mainstream banks. We are determined to support our
customers and business partners by being highly engaged, straightforward,
agile and easy to do business with.
Drawing on a deep understanding of our clients’ businesses and our
specialist knowledge, we offer a clear proposition and certainty in the
markets in which we operate. It’s a refreshingly exciting and good-sense way
of building a specialist banking business.
Shawbrook is a specialist lending and savings
business with a focus on poorly served customer
segments across the SME and consumer markets
in the UK.
We use our experience and judgement to make
individual decisions that balance risk, return and
customer needs.
www.shawbrook.co.uk
twitter.com/shawbrookbank
twitter.com/shawbrookbroker
linkedin.com/company/shawbrook-bank
Shawbrook Group plc
Annual Report & Accounts 2016
02
Basis of preparation
The statutory results have been
prepared in accordance with International
Financial Reporting Standards (IFRS).
Where appropriate, certain aspects
of the results are presented to reflect the
Board’s view of the Group’s underlying
performance without distortions
caused by non-recurring items that
are not reflective of the Group’s ongoing
business activities.
Underlying results should be considered in addition to, and not
as a substitute for, the Group’s statutory results, and the Group’s
presentation of underlying results should not be construed as
an indication that future results will be unaffected by exceptional
items. Underlying results have limitations as analytical tools, and
they should not be considered in isolation or as substitutes for
analysis of the Group’s results as reported on a statutory basis.
Limitations may include, but are not limited to, the following:
> they may not reflect every cash expenditure, future requirements
for capital expenditure or contractual commitments; and
> they may not reflect the impact of earnings or charges resulting
from matters the Directors consider not to be indicative of
ongoing operations.
Because of these limitations, underlying results are not intended as
an alternative to the Group’s statutory results as an indicator of the
Group’s operating performance. The Group compensates for these
limitations by using underlying results, along with other comparative
tools, together with statutory results, to assist in the evaluation of
operating performance.
The following items have been excluded from underlying results:
> IFRS 2 charges amounting to £2.2 million recognised in relation
to share-based awards to Steve Pateman, Chief Executive Officer,
in 2016 which were fully satisfied by Special Opportunities
Fund (Guernsey) LP. This charge is a transfer from the income
statement to retained earnings and is the result of a one-off
award for compensation against forfeited long-term incentives
at a previous employer.
> Corporate activity costs amounting to £1.0 million in 2016
relate to the cost of the incremental deposits raised to prefund
the acquisition of the c.£300 million property portfolio at the
end of 2015, which completed in H2 2016. During the period
between acquisition and completion, the portfolio was funded
by the vendor due to the length of the transition period, and
reimbursed by Shawbrook, thus resulting in Shawbrook paying to
fund the portfolio twice. Future transactions would be expected
to be structured differently, resulting in lower funding costs.
Corporate activity costs of £1.1 million in 2015 include a final
£0.6 million of costs incurred in connection with the acquisition
of Money2Improve in November 2012. In addition, costs incurred
in relation to the acquisition of three asset portfolios (including the
incremental costs of raising additional deposits to fund inorganic
growth) have been excluded from the underlying results.
> IPO costs of £8.9 million recognised in the income statement
in 2015 include expenses incurred in relation to the successful
listing of Shawbrook Group plc on the LSE main market. A further
£3.7 million was recognised in equity. In addition, the adjustment
includes IFRS 2 charges in relation to share-based awards
crystallising on listing.
International Organization of Securities Commissions (IOSCO)
regulation does not permit adjustment for items that are reasonably
likely to occur in the foreseeable future, or activities that affected the
entity’s recent past, when considering underlying results as in their
experience there are rarely circumstances where an explanation
is sufficiently robust to result in restructuring costs or impairment
losses being described as non-recurring. In addition, European
Securities and Markets Authority (ESMA) regulation states that items
which affected past periods and will affect future periods – such as
restructuring costs or impairment losses – will rarely be considered
as non-recurring, infrequent or unusual.
However, in addition to the underlying adjustments outlined
above, the Board believes there are additional expenses incurred
in 2016 which, in line with IOSCO and ESMA guidelines, have not
been adjusted for, but which the Board regards as unusual and
highly unlikely to recur. These expenses relate to an £11.2 million
impairment charge and £0.8 million of administrative expenses
incurred in connection with the controls breach announced on
28 June 2016 in the Business Finance Division (increased from
the c.£9 million announced following continued monitoring and
assessment of collateral supporting the £14.7 million of impacted
facilities – see page 49 in the Risk management report for further
details). The Group believes that the steps taken to strengthen our
risk controls, including the removal of certain delegated authorities
and appropriate segregation of origination and operations, should
minimise the risk of a further breach. If this adjustment was made,
the underlying profit before tax (PBT) for the Group would have
been £103.4 million.
Shawbrook Group plc Annual Report & Accounts 2016 03
2015
(£m)
230.7
(63.8)
166.9
(90.3)
(6.5)
70.1
(11.6)
58.5
–
1.1
8.9
80.1
(16.0)
64.1
2016
(£m)
292.7
(83.1)
209.6
(97.1)
(24.3)
88.2
(23.4)
64.8
2.2
1.0
–
91.4
(24.3)
67.1
2016
2015
Statutory Underlying
Statutory Underlying
7.8
(2.2)
5.6
(2.6)
7.8
(2.2)
5.6
(2.5)
8.5
(2.4)
6.2
(3.3)
8.5
(2.3)
6.2
(3.0)
(0.64)
(0.64)
(0.24)
(0.24)
2.3
1.7
18.8
46.3
25.9
2.4
1.8
19.4
45.1
26.8
2.6
2.2
20.7
54.1
24.1
3.0
2.4
22.7
48.3
26.5
Income statement
Interest income, net fee and operating lease income
Interest expense and similar charges
Net operating income
Costs and provisions for liabilities and charges
Impairment losses on financial assets
Statutory profit before taxation
Income tax charge
Profit for the period, attributable to owners
Underlying adjustments
IFRS 2 charge
Corporate activity costs
IPO transaction costs
Underlying profit before tax
Income tax on an underlying basis
Underlying profit for the period, attributable to owners
Comparison of statutory KPIs1 to underlying KPIs
Gross asset yield (%)
Liability yield (%)
Net interest margin (%)
Management expenses ratio (%)
Cost of risk (%)
Return on lending assets before tax (%)
Return on lending assets after tax (%)
Return on tangible equity (%)
Cost to income ratio (%)
Earnings per share (Pence)
1 Refer to the Glossary on page 180 for KPI definitions and calculations.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
04
How we’ve done
2016 key highlights
How we have delivered
against our strategic pillars
Underlying Group3
£
Achieve strong
risk-adjusted returns 5.6%
Stable NIM
throughout 2016
Maintain excellent
credit quality
Progressively increase
originations
64bps
Cost of risk (35bps
excluding the controls
breach1)
14%
increase in originations
to £1.9bn
Maintain conservative
foundations
13.3%
CET1 ratio
Enhance
customer focus
88%
Customer satisfaction2
Customer loans and Originations
£4.1bn
2016
1.9
Customer loans
£1.9bn
Originations
2015
2014
1.7
1.4
2.3
■ Customer loans £bn ■ Originations £bn
4.1
3.4
PBT and RoTE
£91.4m
PBT
19.4%
RoTE
2016
2015
2014
■ PBT £m
■ RoTE %
Cost to income ratio and NIM
45.1%
2016
Cost to income ratio
5.6%
NIM
2015
2014
■ Cost to income ratio % ■ NIM %
91.4
19.4
80.1
22.7
49.1
17.0
45.1
5.6
48.3
50.5
6.2
6.1
TCR, CET1 and Leverage
16.4%
2016
TCR
13.3%
CET1 ratio
7.8%
Leverage ratio
2015
2014
16.4
13.3
18.0
14.4
13.9
11.6
7.8
7.6
6.3
1 See page 49 in the Risk management report for further details.
2 Charterhouse customer survey Q4 2016.
3 See Basis of preparation on pages 2 to 3 for statutory equivalents.
17 Read more about our
KPIs
■ TCR %
■ CET1 %
■ Leverage %
Shawbrook Group plc Annual Report & Accounts 2016 05
Property Finance
Business Finance
Consumer Lending
Originations (£bn)
£1.0bn
Originations (£bn)
£0.6bn
2016
2015
2014
1.0
0.8
0.7
2016
2015
2014
0.4
Customer loans (£bn)
■ TBC
£2.5bn
■ TBC
Customer loans (£bn)
■ TBC
£1.1bn
■ TBC
2016
2015
2014
2.5
2.1
1.4
2016
2015
2014
0.9
0.7
Originations (£bn)
£0.3bn
2016
2015
2014
0.2
0.2
Customer loans (£bn)
■ TBC
£0.5bn
■ TBC
2016
2015
2014
0.3
0.2
0.3
0.5
0.6
0.6
1.1
Profit contribution (£m)
■ TBC
£82.5m
■ TBC
Profit contribution (£m)
■ TBC
£39.5m
■ TBC
Profit contribution (£m)
■ TBC
£14.6m
■ TBC
2016
2015
2014
82.5
62.0
42.3
2016
2015
2014
39.5
46.6
34.3
2016
2015
2014
5.5
14.6
11.8
Pre-tax RoLA (%)
■ TBC
3.6%
■ TBC
Pre-tax RoLA (%)
■ TBC
3.7%
■ TBC
Pre-tax RoLA (%)
■ TBC
3.6%
■ TBC
2016
2015
2014
3.6
3.9
3.9
2016
2015
2014
3.7
5.5
5.7
2016
2015
2014
3.6
4.4
3.1
■ TBC
■ TBC
■ TBC
■ TBC
■ TBC
■ TBC
23 Read more about
Property Finance
28 Read more about
Business Finance
34 Read more about
Consumer Lending
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 06
At a glance
What we do
Shawbrook is a specialist UK lending
and savings bank focused on Property
Finance, Business Finance and Consumer
lending and savings. We differentiate
ourselves by concentrating on markets
where our specialist knowledge and
personalised approach to underwriting
offers us a competitive advantage.
This supports attractive, stable returns
and sustainable growth, and also
benefits businesses and consumers in
parts of the market which continue to
be poorly served by mainstream banks.
Our divisions
Property Finance
The Property Finance Division has a well-diversified
product range with both residential and commercial
mortgage offerings.
£2.5bn
Customer loans
23 Read more about
Property Finance
Business Finance
The Business Finance Division offers an extensive product
range, enabling it to provide a comprehensive suite of services
to address the needs of the poorly served UK SME market.
£1.1bn
Customer loans
28 Read more about
Business Finance
Consumer
The Consumer Division offers a broad range of lending and
savings products enabling it to provide unsecured loans
for a variety of purposes in addition to a range of savings
products for consumer and business customers.
£0.5bn
Customer loans
34 Read more about
Consumer
Shawbrook Group plc Annual Report & Accounts 2016 07
Our differentiated approach
The Shawbrook way
A customer led
approach...
Specialists
Thoughtful decision making
Driven by customer needs
Innovative and tailored products
Focus on quality
18 Read more about
Our business model
Our values
Personal
We treat our customers and business partners as
people. We take the time to understand them, and
we listen to what they say.
Pragmatic
We look at every situation on its merits, rather than
following rigid guidelines or the accepted way of
doing things.
Expert
Our people are experienced and professional.
We know that it’s our people and their know-how
that make things happen for our customers and
business partners.
Progressive
We are proactive and strive to provide solutions
which are quicker, simpler and more efficient than
the way we do things today.
Our people and community
30+
569
Employees
(period average)
Charities
supported
80%
Employee engagement1
1 People insight pulse survey,
November 2016.
42%
58%
Gender split
Our five strategic pillars
Achieve strong
risk adjusted returns
£
Maintain excellent
credit quality
Progressively increase
originations
Maintain conservative
foundations
Enhance
customer focus
16 Read more about
Our strategy
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 08
Chairman‘s statement
Iain Cornish
I am pleased to introduce the Annual
Report & Accounts for Shawbrook
for a year which has seen us make
significant progress against the 2020
strategy laid out by Steve Pateman,
our Chief Executive Officer, and his
senior management team at our
Capital Markets Day in May 2016.
In addition to delivering a strong financial performance,
a major focus for the year has been on putting in place the
sound foundations to deliver excellent service to customers,
strong returns to investors and to grow the business
at a sensible pace in an uncertain environment.
Results
Shawbrook specialises in property finance, business finance
and consumer lending and savings. We use our specialist
knowledge and traditional relationship-based approach
to serve parts of the market which are poorly served by
mainstream banks – a model which not only benefits our
customers, but also allows us to deliver attractive and stable
returns to our shareholders.
In 2016 we delivered a strong return on tangible equity.
We did this without changing our risk appetite during the
year, whilst growing the balance sheet and delivering a net
interest margin which has remained stable throughout 2016.
All of our divisions showed growth and we maintained both
a strong capital position and a prudent liquidity position.
A Charterhouse survey conducted in Q4 2016 revealed
a customer satisfaction rate of 88%, well above the norms
for the banking sector.
Shawbrook Group plc Annual Report & Accounts 2016 09
ANOThEr yEAr O f
SIGNIfICANT PrOGrESS
Dividend
The positive results in 2016 have enabled the Board to recommend
a maiden final dividend of 2.7p per share, subject to shareholder
approval at the Group’s Annual General Meeting on 6 June 2017.
This is equivalent to c.10% of post-tax profits for the year and in line
with the guidance set out at the IPO. The Board continues to target
an increase in the dividend payout ratio to 30% of 2017 post-tax
profits subject to the continuing evolution of regulatory capital
requirements, the rate at which the Group continues to grow,
attractive investment opportunities that may arise and the optimal
capital composition of the Group’s balance sheet.
Governance
Shawbrook is committed to the highest standards of corporate
governance and we comply with all elements of the UK Corporate
Governance Code. I am delighted to say that the Board has been
further strengthened by the appointment in February 2017 of
Andrew Didham. Andrew is an Executive Vice Chairman and was
formerly the Group Finance Director of Rothschild. He takes over
as Chairman of the Board Audit Committee from Roger Lovering,
who I am very pleased remains on the Board.
The Board carried out an externally facilitated review of its
effectiveness during the year. The review confirmed that the
Board has provided effective oversight of the business, and has
been highly engaged both in developing robust risk policies
and frameworks and in guiding longer term plans and strategies.
The review also identified areas where the Board can continue
to improve its effectiveness, and its findings are covered more
fully in the Corporate governance report.
Risk
We have continued to invest heavily in the development of our
Risk Management Framework, our risk teams and the promotion
of a strong risk culture throughout the Group and we are
confident that we have in place an effective platform to support
the continued growth of the business. As a result of this work,
we identified the controls breach in the Business Finance Division
(see page 49 in the Risk management report for further details).
The Board played an active role in the oversight of the resolution
of this matter. The current Risk Management Framework is described
fully in the Risk management report.
People
Shawbrook is a relationship business serving customers in a way
which requires experience, knowledge, judgement and integrity.
We are very fortunate to have people throughout the business
who possess these qualities in abundance, and who are passionate
about what they do, and I am extremely grateful to all my colleagues
for their efforts throughout the year. I am particularly grateful to
Steve Pateman and his leadership team for their performance
during the year.
I would also like to thank the outgoing Chief Financial Officer
and Executive Director, Tom Wood, who left us during 2016, for his
contribution to our successes. Following Tom’s departure the Board
embarked on a comprehensive market search for his successor
and in February 2017 was delighted to appoint Dylan Minto as
Chief Financial Officer and Executive Director. The leadership team
has also been strengthened by the appointment of Angela Wakelin
as Chief Operating Officer, who arrived in November 2016. I believe
we now have in place a strong and experienced leadership team
to deliver our vision and take the business forward.
Community
We seek to be a good corporate citizen and in 2016 we established
a corporate social responsibility programme with elements
covering the community, the environment, the workplace and
the marketplace. More detail on this programme is set out in the
Corporate social responsibility section on pages 57 to 62.
Outlook
As we look forward we are mindful of the uncertain political,
economic and regulatory environment. However, we have built
the bank on conservative foundations, established a strong franchise
in our chosen markets and have a great team of people. All of these
things position us strongly to take advantage of opportunities as
they arise, and we are confident that we can continue to deliver
strong and stable returns while we grow the business at a pace
appropriate to conditions as they unfold.
I would like to finish by reiterating my thanks to my fellow Board
members, the leadership team and all colleagues across Shawbrook
for their contribution to everything we have achieved together
in 2016.
Iain Cornish
Chairman
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 10
Chief Executive Officer’s review
Steve Pateman
2016 has been a year of considerable
progress for Shawbrook. We have
articulated a clear ambition which
reflects the opportunities that lie
ahead in our three divisions, allowing
us to diversify our risk and creating
a sustainable momentum that
underpins the vision we have set
out for the period through to 2020.
2016 results
On an underlying basis, and excluding the impact of
the controls breach in the Business Finance Division
(see page 49 in the Risk management report for further
details), we have achieved each of the financial objectives
we set out for the year, notwithstanding some significant
changes in our key markets.
Statutory profit before tax (PBT) amounted to £88.2 million
(£91.4 million on an underlying basis). Our underlying PBT,
excluding the costs of the controls breach in the Business
Finance Division, rose by 29% to £103.4 million, supported
by strong disciplines in costs, risk and yield management.
Net interest margin (NIM) reduced to 5.6% reflecting the
impact of the c.£300 million property portfolio acquisition
we made in December 2015 and has stabilised at 5.6%
throughout 2016. Credit risk impairment continued at low
levels with cost of risk, adjusted for the controls breach,
at 35bps (64bps on a statutory basis). The growth in revenues
led to a reduction in our underlying cost to income ratio
to 45.1% (statutory: 46.3%) notwithstanding continued
investment in our distribution, risk and technology platforms
and the absorption of £1.4 million of management exit costs
relating to a number of Executive Committee members
leaving the Group throughout 2016. As a result, we have
delivered a return on tangible equity (RoTE) of 22.0%, within
our stated target range, excluding the impact of the controls
breach in the Business Finance Division (underlying: 19.4%,
statutory 18.8%).
02 Read more about
Basis of preparation for financial impact
Shawbrook Group plc Annual Report & Accounts 2016 OUr SPECIALIST APPrOACh
11
We are pleased to be recommending a maiden final dividend
of 2.7p per share, equating to c.10% of our post-tax profits, in line
with the guidance set out at the IPO.
These numbers reflect many aspects of our business but the
common theme that underpins our success is our ability to deliver
solutions to the financing needs of individuals and businesses that
many of the mainstream banks no longer offer. We achieve this
through the combination of data and practical banking experience
which allow us to interpret the information we have on our
customers and their markets and thus deliver specialist financing
solutions based around good sense.
Business progress
Our core focus remains on our lending businesses in Property
Finance, Business Finance and Consumer, and we have continued
to develop new products and distribution channels in each of
these markets.
Within Property Finance, we have built on our core propositions in
buy-to-let, commercial property, residential (second charge) and
short-term lending by adding development finance, where we are
seeking to support small to medium-sized housebuilders, together
with the development of a suite of residential lending solutions
including interest-only extensions into retirement – a market that
has been neglected for some time.
Our asset finance and working capital solutions (invoice finance)
businesses have been integrated and their product suite will be
distributed primarily through a network of Regional Business
Centres, which also provide a broader suite of lending solutions to
small and medium-sized enterprises. We will continue to provide
specialist asset finance solutions building on our expertise in the taxi,
marine and aviation, professional services and healthcare sectors,
alongside growing our newer specialisms in agriculture, vendor
finance and technology, and establishing the Shawbrook business
in Jersey.
Structured Finance, which includes our block finance proposition,
grew its balance sheet to over £420 million and is now broadening
its offering so that it can support the Regional Business Centres
and bring structured finance solutions to small and medium-sized
enterprises.
Whilst retaining its strong position in the home improvement
market, Consumer lending has continued to diversify its product
range allowing us to post year-on-year growth in balances of
£132 million despite a significantly smaller market for solar panels.
In 2016, we launched a range of personal and retail finance
propositions across direct, broker and partnership channels with
affinity partnerships agreed with Saga and RAC, initially in unsecured
finance, but with the intention of broadening out into mortgages,
holiday finance, motor finance and savings.
Operational achievements
In addition to the considerable progress made in each of the
businesses, we have continued to strengthen our central functions
and risk platforms. Each business is now supported by dedicated
resource in risk, finance, HR and operations (which includes IT,
change, collections and recoveries and data management) led
by a strengthened executive team in each of these disciplines.
We are well placed to complete our IFRS 9 transition for January
2018 and will use the data from this project to consider whether to
progress with an application for Advanced Internal Risk Based (AIRB)
permission for our balance sheet.
Our strengthened Risk Management Framework identified the
controls breach in the Business Finance Division and, whilst it
is disappointing to have taken a significant provision on the
impaired balances, the steps we have taken to strengthen our risk
controls, including the removal of certain delegated authorities
and appropriate segregation of origination and operations, should
minimise the risk of a further breach. In addition, we are confident
that we have fully identified the impaired portfolio of £14.7 million.
Maintaining effective governance and controls strengthens our
ability to innovate, provide solutions and be entrepreneurial,
thus meeting the needs of the growing markets that are open to
us as the mainstream banks consolidate their core activities and
risk appetite.
Our approach focuses above all on quality and returns, consistent
with our risk profile, building our balance sheet with care and
consideration for the broader economic environment so that we
can continue to maintain a RoTE within our target range. We will
rein back on markets where risk appetite and pricing levels are not
consistent with our long-term return objectives and continue to
look for adjacent new opportunities.
We do however believe that old-fashioned practical banking has
a place in the 21st century. Commoditising risk, which arguably
is a function of regulation tailored to correct the mistakes of large
high-street banks, creates marginalisation which in turn can impact
individual and business ambition. Our role is to help our customers
realise their ambitions in a way that also makes sense for us and
is attractive for all our stakeholders.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 12
Chief Executive Officer’s review continued
Divisional performance
Each of our divisions posted year-on-year growth as loans and
advances grew to £4.1 billion whilst maintaining our NIM of 5.6%
throughout 2016 despite some adverse mix impacts from the
greater flows in buy-to-let, particularly in Q1 2016, and a slower
performance in our asset finance business.
Property Finance
Property Finance remained our largest division and a real engine of
growth. Full-year originations totalled £1.0 billion which represented
a 20% increase on the prior year; buy-to-let flows were strong,
particularly in Q1, whilst residential (second charge) originations
were broadly flat reflecting the impact on the market of the
transition from the Consumer Credit regime to the Mortgage Credit
Directive. Short-term property finance improved, although this can
be a price-sensitive market and may be constrained by any adverse
economic conditions flowing from the UK’s decision to leave the EU.
Our development finance proposition came on line in Q3 and our
‘lending into retirement’ proposition will launch in early 2017, with
a complex mortgages product set to follow. This diversification will
underpin flows in what we expect to be a softer buy-to-let market
going forward as tax changes and revised underwriting standards
take effect. However, the need for manual underwriting of larger
portfolios will benefit specialist providers like Shawbrook.
The portfolio acquisition in December 2015 completed in July 2016
and is now starting to yield direct opportunities.
NIM benefited from lower funding costs and a policy of holding
pricing for much of the year, despite significant pricing pressures,
and with cost of risk of 0.09% the divisional contribution rose by
33% to £82.5 million.
23 Read more about
our divisions
Business Finance
Within Business Finance, the working capital solutions offering had
a much improved year growing balances by 38% to £253 million
on new flows of £124 million and strong retention. The Structured
Finance sub-division grew its customer balances to £425 million and
continues to produce strong returns through a low cost base and
prudent risk management.
In contrast, the asset finance offering had a more challenging year
– there was a slowdown in flows as businesses deferred investment
plans and the impact of the changes we made following the
identification of the controls breach in this business (see page 49
in the Risk management report for further details).
Originations across Business Finance grew despite a 28% reversal
in asset finance (direct and broker); gross asset yield saw a modest
dilution to 8.6% but with lower funding costs, NIM emerged at 6.6%
supporting a 10% increase in divisional contribution (excluding the
controls breach) to £51.5 million (£39.5 million on a statutory basis).
Consumer
Consumer lending had a buoyant year, growing balances to
£0.5 billion despite a softer home improvement market reflecting
changes in the solar market; there was significant growth in the
Retail and Personal Loans sub-divisions. Affinity partnerships were
agreed with Saga and RAC, which will underpin further growth.
We have also made significant progress in working with other
strategic partners, such as ClearScore – a customer credit-scoring
business which helps consumers understand the best possible
loan for their individual circumstances.
Divisional contribution rose by 24% to £14.6 million, benefitting
from revenue growth and a change in mix with NIM improving to
8.2%. Cost of risk increased to 1.9%, reflecting a higher risk profile
in Personal Loans and following some changes to our impairment
methodologies to include customer-based probabilities of default.
All of our lending businesses are primarily funded by retail deposits.
In 2016, we developed shorter term products which, taken together
with the impact of the interest rate changes in August following the
decision to leave the EU, allowed us to reduce funding costs of retail
deposits by 0.2% to 2.0%. Whilst we would anticipate making further
use of the Bank of England’s Term Funding Scheme, we will continue
to offer relatively attractive rates to savers as we see this source
of funding as key to our longer term funding and liquidity profile.
Shawbrook Group plc Annual Report & Accounts 2016
13
Our discipline on risk, returns, costs and optimal use of liquidity and
capital is clear and reflected in our underlying performance in 2016.
As we move forward into what will be more challenging markets,
our guiding principle will be quality rather than quantity and this,
combined with practical banking and good sense, will create
resilience, durability and sustainability.
In my first year as CEO, I have very much appreciated the support
and commitment of the team around me in Shawbrook; they share
my view that treating customers well – helping them achieve their
ambitions but doing so in a way that is good for all stakeholders –
is the foundation upon which great banks are built. I have equally
valued the support and encouragement from my colleagues on
the Board and, in particular, our Chairman.
Shawbrook enters 2017 with a clear strategy, solid foundations and
high levels of staff and customer engagement. It is thus well placed
to continue its growth trajectory notwithstanding the uncertainties
that inevitably lie ahead.
Steve Pateman
Chief Executive Officer
Environment
The year 2016 was one of considerable volatility and uncertainty in
the political, economic and market environment and much of that
uncertainty remains as we move into 2017. Clearly the UK’s future
relationship with Europe will continue to dominate economic and
political sentiment which, in turn, will influence the confidence
and thus investment intentions of many of our customers. Equally,
our customers’ confidence will be influenced by world events
and how these impact our home markets, by way of either trade
or price inputs.
It is entirely appropriate to be conscious of the impact of these
factors on our future business prospects and the risk profile
of our asset base. However, with change comes opportunity
and we continue to see the mainstream banks reorganise their
business lines to improve their efficiency, which in turn creates
opportunities for Shawbrook in terms of products and customers.
We thus retain confidence in our longer term ambitions for the
Group whilst being cognisant of the need for prudence in our
lending standards, capital base and liquidity profile.
Conclusion and outlook
We laid out our strategy and 2020 vision at our Capital Markets
Day in May 2016 and, although there remains macroeconomic and
regulatory uncertainty, the momentum we have seen in our results
and the pipeline we continue to build for 2017 and beyond as we
continue to invest in our platform gives confidence in our ability
to continue to deliver strong and stable returns whilst we grow
the business at a pace appropriate to market conditions as they
unfold. The rationale for Shawbrook is as clear as it was when the
bank was first put together in 2011, and then subsequently listed
on the London Stock Exchange in April 2015. Whilst it is true that
the journey since listing has been somewhat more challenging
than anticipated, Shawbrook today has sound foundations and
is well placed to take advantage of the opportunities that will
continue to arise from the structural changes taking place in the
UK banking market.
The management team has been strengthened, systems and
infrastructure significantly improved new partnerships have been
established and we are expanding our product capability in each
of our three divisions.
These foundations allow us to execute key regulatory projects such
as IFRS 9 and to consider how best to apply capital standards across
the business, so that we can effectively manage whatever changes
may emerge from the latest Basel consultations.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 14
Market overview
Macroeconomic environment
Regulation
Brexit
On 23 June 2016, the UK voted to leave the EU. The Prime
Minister set out her 12-point Brexit plan on 17 January 2017,
announcing the UK’s priorities for exit negotiations, and is
expected to trigger Article 50 before the end of March 2017.
Brexit-related effects on Shawbrook’s businesses have been
limited to date both on lending volumes and credit quality.
Although economic forecasts have been upgraded from their
post-referendum lows, it remains likely that the cycle will turn
earlier than previously expected; however, given Shawbrook’s
prudent and conservative risk appetite, it has not felt the need
to materially amend its risk appetite or underwriting criteria
in light of the referendum outcome. Nonetheless, this is
something that is continuously monitored and reviewed.
UK economy
The economic forecasts for the UK have changed markedly
following the UK’s decision to leave the EU. The Office for
Budget Responsibility (OBR) reduced its 2017 UK growth
prediction from 2.2% in March 2016 to 1.4% in November
2016. In January 2017, the International Monetary Fund (IMF)
increased its 2017 growth forecast by 0.4% to 1.5%; however,
it reduced its 2018 projection from 1.7% to 1.4%. Inflation
reached 1.6% by December 2016, with the Bank of England
stating that it could increase to 2.75% by 2018. Unemployment
has also stayed low and ended 2016 at 4.8% – compared to
4.9% in June 2016.
Outlook
As the UK begins negotiations for Brexit, there will
undoubtedly be uncertainty in the UK macro environment
which may impact growth, inflation and unemployment
forecasts amongst other economic metrics. This in turn could
impact consumer confidence and demand in a number of the
markets in which Shawbrook operates.
Economists are typically assuming slower growth going
forward because businesses will be less certain about
investing in the UK as the country negotiates its exit from
the EU. In addition, the depreciation of Sterling will continue
to result in higher prices of British imports such as food and
fuel, driving higher inflation.
Mortgage Credit Directive (MCD) for second-charge
mortgages
On 21 March 2016, second-charge mortgages became
regulated under the MCD with loans written after this date
no longer being regulated under the Consumer Credit Act.
This resulted in significant changes to the provision of advice,
the processes for underwriting and the processing of second-
charge mortgages for both lenders and intermediaries.
Buy-to-let (BTL) underwriting standards expectations
On 29 September 2016, the Prudential Regulation Authority
(PRA) announced its expectations of firms’ underwriting
standards for the BTL market, following a review in 2015 and
2016. The PRA’s actions are intended to bring all lenders up
to prevailing market standards and guard against any slipping
of underwriting standards during a period in which firms’
growth plans could be challenged by the changing economic
landscape and the impact of forthcoming tax changes.
The PRA’s statement outlines minimum expectations that
firms should meet in underwriting BTL mortgages, including:
> affordability assessments should take into account
borrowers’ costs including tax liabilities, verified personal
income and possible future interest rate increases; and
> lending to portfolio landlords (defined by the PRA as being
those with four or more mortgaged BTL properties) should
be assessed using a specialist underwriting process.
In addition, the changes to income tax relief on mortgage
interest for BTL properties announced in 2015 begin to take
effect in April 2017.
Outlook
The implementation of the standard minimum BTL
underwriting and the changes to income tax relief on
mortgage interest are forecast by most commentators to
slow the BTL market. Given the ever present imbalance in
supply and demand for property in the UK, this is likely to
have a larger impact on the amateur BTL market than the
professional BTL market. The introduction of minimum
underwriting standards for BTL mortgages from the PRA
could arguably be beneficial for specialist lenders such as
Shawbrook, whose target market only consists of professional
landlords, and lenders which already have in place the
operational framework for stressed affordability assessments
and manual underwriting.
Shawbrook Group plc Annual Report & Accounts 2016 15
Monetary policy
On 4 August 2016, the Bank of England reduced the Bank Rate
from 50bps to 25bps and introduced a package of measures
designed to provide additional monetary stimulus, including the
Term Funding Scheme (TFS) and an expansion of the Bank of
England’s asset purchase programme for UK government bonds.
Bank of England base rate (Bank Rate) reduction
The desired outcome of the reduction in the Bank Rate was to
encourage consumer lending by reducing the cost of credit.
However, many banks reduced their savings rates by more than
25bps, whilst making only marginal, if any, changes to the cost of
credit. This resulted in a highly liquid deposit market with savers
having very few options to earn interest. The reduction in deposit
rates was further fuelled by the introduction of the TFS. Given
the level of existing competition in the first-charge residential
mortgage market, margins were already competitive prior to
the Bank Rate cut, resulting in many lenders being unable to
pass on the reduction to new borrowers without their products
becoming loss-making.
Term Funding Scheme
As with the Funding for Lending Scheme (FLS), the TFS was
announced with the intention of supplying low-cost funding
to banks to encourage greater lending at reasonable rates to
consumers. Like the FLS, the TFS works by enabling banks to
pre-position collateral with the Bank of England and to receive
funding in return. The cost of this funding is equivalent to
Bank Rate, and banks can initially encumber up to 5% of their
loans and advances and subsequently fund 100% of their
growth using the TFS. The introduction of the TFS added to
the surplus liquidity in the funding market, resulting in further
reductions to deposit rates and an increase in market demand
for savings accounts.
Asset purchase programme
The expansion of the Bank of England’s asset purchase
programme for UK government bonds is expected to lower
the yields on securities that are used to determine the cost
of borrowing for households and businesses. It is also likely to
trigger portfolio rebalancing into riskier assets by current holders
of government bonds, further enhancing the supply of credit
to the broader economy. The expansion of the asset purchase
programme resulted in increased competition, particularly in
the asset finance market, as non-bank lenders benefited from
the lower costs of their borrowings.
Outlook
Modest increases in the Bank of England base rate could be
imposed to manage continued rising levels of inflation and
significantly low asset pricing. In order to compete for volume,
pricing in some markets has become so low that it could be
considered unsustainable as the price does not plausibly cover
the level of risk undertaken.
An increase in the Bank Rate, along with the termination of
the TFS in January 2018, may have a detrimental effect on the
cost of retail deposits as competition in the market increases
to fund stable balance sheets and further growth. The level
of impact will depend heavily on the extent of the competition,
particularly if larger players in the deposit market decide
not to pass on the full rate to UK depositors as they seek to
widen margins.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 16
Our strategy
Our five strategic pillars
How we will achieve these
KPIs and key risks
Achieve strong risk
adjusted returns
£
> Continue to identify specialist lending sectors
> Achieve strong returns whilst maintaining
high quality underwriting standards
Maintain excellent
credit quality
> Ensure that the loan book is sustainable over the
long term when markets may not be so benign
Progressively
increase originations
> Increase organic originations
> Continue to identify and carefully enter adjacent
specialist markets
> Further increase diversification
Maintain conservative
foundations
> Conservative approach to risk management
> Prudently positioned capital, funding and liquidity
Enhance
customer focus
> The SME Champion – we meet the needs
of poorly served markets
> Consumer specialists – we serve sectors where
our products and high degree of choice
differentiate our offer
> Exploit leading edge technology to enhance
customer experience and drive efficiencies
2020 vision
22-25%
RoTE
35% by 2020
Cost to income ratio
50bps
Cost of risk average through the cycle
c.£8.5bn by 2020
Customer loans
12%
Target CET1 ratio > 12%
Progressive dividend policy
High
levels of customer satisfaction
Shawbrook Group plc Annual Report & Accounts 2016 CrEATING LONG -TErm vALUE
17
How we will achieve these
KPIs and key risks
> Continue to identify specialist lending sectors
> Achieve strong returns whilst maintaining
high quality underwriting standards
> Ensure that the loan book is sustainable over the
long term when markets may not be so benign
> Increase organic originations
> Continue to identify and carefully enter adjacent
specialist markets
> Further increase diversification
> Conservative approach to risk management
> Prudently positioned capital, funding and liquidity
> The SME Champion – we meet the needs
of poorly served markets
> Consumer specialists – we serve sectors where
our products and high degree of choice
differentiate our offer
> Exploit leading edge technology to enhance
customer experience and drive efficiencies
NIM, RoTE and
cost to income ratio
1
2
3
50 Read more about our
Key risks
Cost of risk
1
2
5
6
50 Read more about our
Key risks
Customer loans
and originations
1
2
3
4
50 Read more about our
Key risks
Total capital ratio,
CET1 ratio and
leverage ratio
2
4
6
50 Read more about our
Key risks
Customer
satisfaction
3
6
50 Read more about our
Key risks
2016 progress
KPIs1 (on an underlying basis)2
5.6% NIM
19.4% RoTE
45.1% Cost to income ratio
2020 vision
22-25%
RoTE
35% by 2020
Cost to income ratio
64bps Cost of risk
50bps
Cost of risk average through the cycle
£4.1bn Customer loans
£1.9bn Originations
c.£8.5bn by 2020
Customer loans
13.3% CET 1 ratio
7.8% Leverage ratio
12%
Target CET1 ratio > 12%
Progressive dividend policy
88% Customer satisfaction3
High
levels of customer satisfaction
1 See Glossary on page 180 for definitions
and calculations.
2 See Basis of Preparation on pages 2 and 3 for
statutory equivalents.
3 Charterhouse Survey conducted in Q4 2016.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 18
Our business model
The conventional way
A commoditised approach…
The Shawbrook way
A customer led approach…
1
Generalists
Specialists
Automated decision making
Thoughtful decision making
Driven by efficiencies
Closed product set
Focus on quantity
Driven by customer needs
Innovative and tailored products
Focus on quality
Traditional banking models
have been forced to drive
returns through high volume,
commoditised products with
generic risk.
We use our expertise and
judgement to make individual
decisions that balance risk and
return with customer needs.
Shawbrook Group plc Annual Report & Accounts 2016 ...DrIvING SUSTAINA bLE
vALUE C rEATION
2
3
4
where we leverage
our key differentiators...
across our carefully
selected markets...
to our customers...
Our ability to serve markets
where there is a structural supply
and demand imbalance.
> Our people
> Unique expertise
> Deep relationships with
customers and business
partners
> Diversification across
core asset classes and
new markets
> Specialist underwriting
> Thoughtful innovation
SMEs
Landlords
Property Finance
Homeowners
Consumers
Business Finance
Savers
Consumer
Underpinned by exemplary risk management, strong governance and our pragmatic culture
How we make money
Existing loan book
Customer deposits
Originations
Strategic reportCorporate governanceFinancial statements 5
through direct and
indirect channels...
Established distribution channels
with wide reach through business
partners, intermediates and directly
to customers.
> Direct / Indirect
Business partners / Customers
6
to create value for
all our stakeholders.
2.7p
dividend
per share
90%
partner
satisfaction1
Our shareholders
Our partners
88%
customer
satisfaction2
80%
employee
engagement3
Our customers
Our people
30+
charities
supported
Our communities
1 Property Finance partner surveys, Q4 2016.
2 Charterhouse customer survey, Q4 2016.
3 People Insight pulse survey, November 2016.
%
Lend to poorly
served customers
Interest charged
22-25%
RoTE
Value created
Underpinned by exemplary risk management, strong governance and our pragmatic culture
% Strategic report
Corporate governance
Financial statements
19
A UNI qUE m ODEL f Or
A GOOD SENSE b USINESS...
We differentiate ourselves by concentrating on markets where our
specialist knowledge and personalised approach to underwriting offer
us a competitive advantage. This supports attractive, stable returns and
sustainable growth, and also benefits businesses and consumers in
parts of the market which continue to be poorly served by mainstream
banks. Fundamental to our success is a relationship focus which puts
the interests of our customers and business partners at the heart of
everything we do, built on a culture which stresses the use of our
experience and judgement to make decisions that balance risk, return
and customer needs.
Turn over to read more
about our business model
Shawbrook Group plc
Annual Report & Accounts 2016
20
Business review
Chief Financial Officer’s review
Dylan Minto
Key performance indicators1
Customer loans and Originations
£4.1bn
2016
1.9
Customer loans
£1.9bn
Originations
2015
2014
1.7
1.4
2.3
■ Customer loans £bn ■ Originations £bn
4.1
3.4
PBT and RoTE
£91.4m
Underlying PBT
19.4%
Underlying RoTE
2016
2015
2014
91.4
19.4
80.1
22.7
49.1
17.0
■ PBT £m
■ Underlying RoTE %
1 See Basis of preparation on pages 2 and 3 for statutory equivalents.
In 2016, Shawbrook achieved 26%
growth in statutory profit before tax
(PBT) to £88.2 million (14% growth
in underlying PBT to £91.4 million),
driven by increased volumes and
further cost efficiencies. This includes
costs and impairments relating to
the controls breach in the Business
Finance Division (see page 49 in the
Risk management report for further
details).
Shawbrook Group plc
Annual Report & Accounts 2016
fINANCIAL DISCIPLINE
AND ST rONG PErfO rmANCE
21
Impairments and non-performing loans (NPLs)
The impairment charge for 2016 amounted to £24.3 million,
£11.2 million of which related to the controls breach in the
Business Finance Division. The cost of risk for 2016 was 64bps
(35bps excluding the controls breach), compared to 24bps in 2015.
The low levels of impairments that we continue to experience
are representative of the benign economic environment in which
we are operating. The widely anticipated downturn following the
UK’s decision to leave the EU has yet to materialise, and whilst we
remain cognisant of the macroeconomic environment, we have
yet to witness any associated material changes in the performance
of our loan book. The non-performing loan (NPL) ratio as at
31 December 2016 of 0.99% (1.17% including the controls breach;
31 December 2015: 0.65%) continues to reflect the benign
economic environment with the increase largely attributable to
slower transaction cycles in a number of prime property segments
of the market, the time taken to optimise the recovery of assets
in Business Finance and the maturity of the residential mortgage
portfolio. Our credit appetite remains conservatively positioned
with significant collateral against our watch list cases. Overall, our
assessment of the impairment requirement against these cases
results in a NPL provision coverage ratio of 51% at 31 December 2016.
£
Solid financial performance
Statutory return on tangible equity (RoTE) amounted to 18.8%
(2015: 20.7%) and, on an underlying basis, RoTE was 19.4%
(2015: 22.7%). When excluding costs and impairments relating
to the controls breach in the Business Finance Division, RoTE
remained within our guidance, amounting to 22.0%.
Net operating income
The Group achieved a net interest margin (NIM) of 5.6% in 2016,
down from 6.2% in 2015. This was due partly to a higher proportion
of lower yielding property loans following the portfolio acquisition
made at the end of 2015; and partly to the higher yielding back
book running off and being replaced by a lower yielding front book
as a result of the ‘lower for longer’ interest rate environment and
increased competition in some of our markets. However, following
the UK’s decision to leave the EU, the Bank of England subsequently
reduced the Bank Rate and introduced the Term Funding Scheme
(TFS), which have both had a beneficial impact on the cost of funds.
The Group’s customer loans (including operating leases, net of
provisions) amounted to £4.1 billion at 31 December 2016, up
22% from £3.4 billion at 31 December 2015. The Group achieved
originations of £1.9 billion in 2016, an increase of 14% compared
to £1.7 billion in 2015, with all three divisions delivering record
levels of originations as we continue to develop new products
and expand into adjacent markets, for example, expansion into
the development finance market, expansion into Jersey through
Shawbrook International, and agreement of strategic partnerships
which increase our addressable market (e.g. Saga and RAC).
Administrative expenses
Growth in income, coupled with continued operational efficiencies
across the three divisions and in the central functions, resulted in
a reduction in the cost to income ratio of 7.8 percentage points
to 46.3% (3.2 percentage points on an underlying basis to 45.1%).
Administrative expenses (including provisions for liabilities and
charges) amounted to £97.1 million in 2016 (£94.9 million on an
underlying basis), compared to £90.3 million in 2015 (£80.8 million
on an underlying basis). The development of the COO function
will drive further efficiencies in 2017 and beyond; however, we will
continue to invest in innovative solutions to ensure our competitive
advantages of exceptional service, and speed and certainty of
delivery, remain best in class.
04 Read more about
2016 Key highlights
16 Read more about
Our strategy
91 Read more about
Directors’ Remuneration Report
116 Read more about
Operating performance
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 22
Business review continued
Chief Financial Officer’s review
Continue to build on conservative foundations
Funding
The Group continues to be primarily retail deposit funded, with a
loan to deposit ratio of 102.7% at 31 December 2016 (31 December
2015: 104.2%). As at 31 December 2016, the Group’s deposit balance
amounted to £3.9 billion, an increase of 24% from £3.2 billion at
31 December 2015.
Following our entry into the easy access and ISA deposit markets
in 2015, we have continued to diversify our deposit base, with 17%
relating to easy access products; however, we remain predominantly
funded by longer-dated term and notice deposits. The increase in
the proportion of easy access products, along with the exceptionally
low deposit rates in the market following the Bank Rate reduction
and introduction of the government’s TFS, has resulted in a decrease
in the cost of new deposit flows. The cost of funds has reduced from
2.3% in 2015 to 2.2% in 2016, with further benefit expected in 2017
and beyond as more expensive back-book deposits are replaced.
Capital
As part of its 2016 results announcement, the Group has announced
that the Board has recommended a maiden final dividend of 2.7p
per share, equating to c.10% of 2016 post-tax profits, subject to
shareholder approval at the forthcoming AGM.
The Common Equity Tier 1 (CET1) ratio and total capital ratio
at 31 December 2016 were 13.3% and 16.4% respectively
(31 December 2015: 14.4% and 18.0% respectively). The CET1 ratio
remains above our target minimum and our risk-weighted asset
(RWA) density (RWAs divided by customer loans) for the Group
at 31 December 2016 was 68%. This resulted in a leverage ratio
of 7.8% (2015: 7.6%). We will continue to assess capital optimisation
in conjunction with our growth strategy.
The Group continues to use standardised risk weights to calculate
its capital requirement. As we progress with our preparations for the
implementation of IFRS 9, the models being built put us in a good
position to develop internal ratings-based (IRB) models which will
allow us to consider the adoption of an advanced IRB approach.
A transition to an advanced IRB approach continues to be discussed
and considered by management, with the changing regulatory
environment being a catalyst for potential adoption.
Liquidity
True to Shawbrook’s conservative foundations, the Group continues
to position risk appetite against its lending assets, with the majority
of the Group’s liquidity held with the Bank of England. The liquidity
ratio at 31 December 2016 was 16.8% (2015: 25.8%) with 96.4% of the
liquidity balance being liquidity buffer eligible assets (2015: 96.2%).
The Group has commenced utilisation of the Term Funding Scheme
(TFS) to begin to replace its off-balance-sheet Treasury Bills acquired
as part of the Funding for Lending Scheme (FLS). Going forward,
we expect to continue to utilise the TFS.
Consideration of accounting policy and regulatory changes
During 2016 and continuing into 2017, there has been a particular
focus on our preparedness for IFRS 9, which aims to ensure we
understand the impacts and have the necessary systems and
processes in place ahead of the effective date of 1 January 2018.
Progress has been made in developing our Expected Credit Loss
(ECL) models, including our Credit Grading Framework (CGF).
The IFRS 9 programme, which is jointly sponsored by the Chief
Financial Officer and Chief Risk Officer and managed by a dedicated
management committee, is currently within its build phase, with the
majority of the testing and implementation concluding during 2017.
Until such time as the ECL models (including the CGF and future-
looking economic scenarios) have been tested, we do not plan
to quantify the impacts of IFRS 9.
Outlook
2016 was a pivotal year for Shawbrook, in which we invested
significantly across the bank to position us for continued success in
the short and medium term. Whilst we have seen little evidence to
date to suggest a downturn in the economy, we remain alert to the
potential effects of uncertainty in the macroeconomic environment
following the triggering of Article 50. We also continue to proactively
monitor our risk appetite and underwriting criteria, policies and
procedures to ensure our loan book can withstand various
macroeconomic scenarios.
Our primary aim in 2017 and beyond is to maintain returns of
between 22% and 25% whilst adhering to our conservative risk
appetite and prudent approach to managing capital and liquidity.
Should the economy weaken and we find ourselves unable to
deliver progressive growth within these parameters, we will look
to realign our growth ambitions. However, as of today we see no
reason to scale back any of our initiatives and we are continuing
to develop a number of new product and market opportunities in
order to progressively grow our lending portfolio. We are confident
that our diverse product offering and the flexibility and agility with
which we can deploy capital put us in a favourable position to
ensure a successful year ahead, and beyond as we look to deliver
towards our 2020 vision.
Dylan Minto
Chief Financial Officer
Shawbrook Group plc Annual Report & Accounts 2016
23
Activity
The Property Finance Division has a well-diversified product range
with both residential and commercial mortgage offerings. Within
these broad markets, we actively specialise in the following areas:
> Residential: serving homeowners primarily through second-
charge mortgages and specialist first-charge mortgages.
> Commercial: serving property professionals in both residential
and commercial investment markets through the provision of
traditional mortgages and short-term lending, and development
finance to established SME housebuilders and well-established
SME owner-occupiers.
The Division’s products are distributed through the mortgage
intermediary market, leveraging long-established relationships
and a highly regarded brand.
Differentiation
The Property Finance Division is our most mature business,
built on foundations of strong, longstanding relationships with
mortgage brokers and intermediaries, working hand in hand to
deliver exceptional service and positive outcomes for our customers.
We remain progressive in our approach to further product
diversification and process innovation in order to continuously
improve our customer service proposition. For example, during
2016, we formed a new specialist development finance team;
took a leading role in the second-charge mortgage market’s
transition to mortgage regulation from the consumer credit regime;
and introduced an electronic application (E-AIP) system for our
investment mortgage products. This E-AIP system now receives
the majority of our initial case submissions, allowing us to deliver
speedier and more efficient initial agreements in principle.
Our specialist knowledge and deep sector expertise allow us to
continue to provide thoughtful judgement and a personal service.
We operate selectively within extensive markets and our specialist
approach continues to resonate with customers. Each loan is
manually underwritten, allowing our teams to provide pragmatic
and good-sense solutions. As with all our divisions, we continue to
maintain a sensible and clearly defined risk appetite which, allied
to our robust underwriting processes, positions us appropriately
through the cycle. The breadth of our product range, combined
with the exceptional service levels delivered by our teams, continue
to receive industry accolades – we received a total of 10 awards
during 2016.
Property Finance
We provide finance to the specialist
residential investment and
commercial property market and to
professional property investors and
SME owner-occupiers. In addition
we provide second-charge
mortgages to consumers.
Pre-tax RoLA walk 2016
6.6%
(2.3%)
(0.7%)
(0.1%)
3.6%
2016 Gross
Asset Yield
Liability
Yield
Operating
Expenses
Cost of
Risk
2016
RoLA
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 24
Business review continued
Property Finance
Residential
Our residential proposition remains predominantly focused on
the second-charge mortgage market – we provide a wide range
of secured loans, primarily to super-prime and prime borrowers.
Loans are provided for a variety of purposes including home
improvements, loan consolidation and large consumer purchases.
During 2016, second-charge mortgages transitioned to FCA
regulation under the Mortgage Credit Directive, away from the
former consumer credit regime. This took place on 21 March
2016 and created significant system, process and documentation
changes for the industry. Our teams managed this transition well
with minimal disruption to lending flows. This was a testament to
the capability of our mortgage platform and the expertise of our
teams who, through our Academy programme, took a leading role
in supporting our intermediary partners. More broadly, the inclusion
of second-charge lending within the mortgage market is having
a significant impact on product distribution, as generalist advisers
become more aware of the product and the loan application
process is more aligned to first-charge lending. This has significant
potential to grow the market, although 2016 volumes remained
broadly flat. We therefore believe that this growth will take some
time to materialise.
Whilst remaining committed to maintaining our prominent position
in the second-charge mortgage market, we have made progress
with our plans to diversify into specialist segments of the first-charge
market. In Q1 2017, we will be actively launching a range of ‘lending
into retirement’ products and continue to explore other segments
where our pragmatic approach can deliver good outcomes for
carefully identified customer segments.
Commercial
Our activity in the commercial markets remains focused on
providing financing to property professionals for the purpose
of investment, refurbishment or redevelopment and to SMEs for
owner-occupied property. Specialist buy-to-let (BTL) mortgages
remain a significant part of our activity and we have seen strong
growth during the year.
We have progressed with our ambition to develop a capability
within the development finance market, and we now have in place
a dedicated and experienced team who have commenced activity
in a controlled manner. Our early engagement in the market has
reaffirmed our confidence in our product design and capability to
offer a selective service to professional SME housebuilders, many of
whom we have existing relationships with. Allied to the distribution
reach we have with our intermediary partners, we are able to adopt
a controlled entry into this market, validating our principles in regard
to risk appetite and customer service delivery.
The BTL sector was subject to a number of material events in 2016.
The stamp duty surcharge introduction at the beginning of Q2 had
a distorting effect on transaction activity in Q1 and, combined with
the impending changes to interest tax relief for landlords, has started
to drive an emerging trend of lower BTL purchases relative to 2015
levels. This has been offset, however, by significant demand for
refinancing driven by increasing liquidity.
Financials and KPIs
The Division has had a record year in terms of originations, driving
loan book growth of 21% to £2.5 billion at 31 December 2016. The
change in mix following the acquisition of BTL loans and commercial
mortgages in December 2015 contributed to a reduction in NIM
to 4.3% in 2016 from 4.8% in 2015. Continued adherence to strict
underwriting criteria has resulted in a stable cost of risk of 0.1%,
reflective of the continued benign macro environment.
Shawbrook Group plc Annual Report & Accounts 2016 25
1.0
0.8
0.7
2.5
2.1
Outlook
Going into 2017, most commentators forecast a slowing trend in
BTL activity as the headwinds of stamp duty, interest tax relief and
the introduction of a higher affordability standard for new lending
combine. We are confident our proposition is well placed for the
changing and increasingly complex environment in which landlords
operate, and that our specialist underwriting capability and service
proposition are well suited to supporting customers through
these changes.
Following the transition of second-charge mortgages from the
consumer credit regime to the Mortgage Credit Directive, there
is significant growth potential in the market, although it may take
some time to materialise. Following the launch of our ‘lending into
retirement’ products, we would expect increasing originations
throughout 2017 and beyond as significant volumes of interest-only
mortgages begin to mature.
Divisional KPIs
Originations (£bn)
£1.0bn 2016
2015
2014
Customer loans (£bn)
£2.5bn
2016
2015
2014
1.4
Profit contribution (£m)
£82.5m 2016
2015
2014
42.3
82.5
62.0
Pre-tax RoLA (%)
3.6%
2016
2015
2014
3.6
3.9
3.9
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 26
Commercial Property Finance
GOOD SENSE
IS bASED ON mOrE
ThAN jUST brICkS
AND mOrTAr
The Commercial team at Shawbrook
works closely with our panel of accredited
Broker Partners, providing case-by-case
lending decisions for their clients
which are based on good sense and
pragmatism. In this case, our Strategic
Broker Partner CPC Finance‘s client
has a strong track record in property
investment. The client, Mr Malkit Purewal,
is a repeat customer of Shawbrook.
Partner story
Malkit understands the importance of
time. He has a clear business model
based on the purchase of a property,
usually in need of repair, with a view
to completing the renovation and
then getting a tenant in as quickly
as possible. As his broker, I need to
be able to understand his needs and
place him with a lender that can meet
his expectations.
Shawbrook understands this and is
prepared to work with you, not only
do they turn deals around quickly they
keep you fully informed throughout
the process.
Shawbrook Group plc Annual Report & Accounts 2016 27
Customer story
We have long-established relationships
with both Shawbrook and the
associated broker, CPC Finance. This
has given us comfort that they have a
deep understanding of our investment
strategy and business model. When
looking to obtain credit we need
someone who is willing to work with
us and be able to deliver quickly and
effectively. Emma and the team give us
just that – quick progress at the quality
I expect.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 28
Business review
Business Finance
We primarily finance soft and
business critical assets operated
by established UK SME and
specialist businesses. In addition,
we provide finance to smaller
UK financial institutions through
wholesale and block facilities.
Pre-tax RoLA walk 2016
8.6%
(2.0%)
(1.5%)
(1.4%)
3.7%
2016 Gross
Asset Yield
Liability
Yield
Operating
Expenses
Cost of
Risk
2016
RoLA
Activity
The Business Finance Division has an extensive product range,
enabling it to provide a comprehensive suite of services to address
the needs of the poorly served UK SME market. The Division is
managed through three propositions:
> Regional Business Centres: proven lenders to established
businesses in UK SME markets, primarily through a direct
product offering.
> Structured Finance: lending to SME finance companies with
security against receivables within their portfolios.
> Specialist Sectors: leasing and hire purchase finance solutions in
specialist UK SME market segments such as marine and aviation,
healthcare and taxis.
Differentiation
The Business Finance Division provides a comprehensive suite
of collateral-backed finance solutions for SMEs across the UK and
Jersey, competing on quality of service and speed of delivery.
We operate in several niche and poorly served markets, offering
a well-diversified range of products.
Following the global financial crisis many SMEs either lost funding
lines due to the tightening of lending criteria from high-street
banks and the exit of non-UK-based banks from the UK market, or
found that lenders ceased to provide the most appropriate funding
to SMEs. Whilst funding has returned to the SME market, levels
remain significantly below pre-crisis levels and a proportion of
the SME market therefore remains underserved, as there are fewer
local experts and minimal opportunity to understand and price
for idiosyncratic risk.
Our relationship-led model has an entrepreneurial edge which
complements our high-touch, high quality service approach.
Our expert teams have deep sector understanding and recognise
that every SME is different and has different needs and risks. Our
pragmatic and personal attitude to lending allows us to consider
each circumstance’s merits and risks, manually underwriting each
loan to ensure the Division generates strong risk-adjusted returns.
Shawbrook Group plc Annual Report & Accounts 2016 29
Structured Finance
The Structured Finance product set provides wholesale finance
and block discounting to smaller UK financial institutions to allow
customers to release cash and grow their businesses. Loans are
secured against receivables within the customers’ portfolios, with
the security given by the ultimate borrower taking the form of
a hard asset or a pool of loan receivables.
Products are distributed directly through a team of specialists
located at our London and Dorking offices. The team continues to
expand as we achieve significant growth in our current markets as
well as continuing to develop new products to fulfil the needs of
customers. In 2016, we launched an investor ‘call bridge’ product,
to provide liquidity to UK private equity funds, to assist them in
achieving higher returns. We have also been actively involved in
a number of syndicated loan propositions, attracting considerable
trade media praise.
2016 was a highly successful year for Structured Finance with record
growth at strong margins whilst maintaining excellent credit quality.
Lending in Structured Finance is capital-intensive; however, the
sub-division continues to contribute to the high risk-adjusted returns
delivered by the Group on a consistent basis.
Regional Business Centres
Shawbrook’s Regional Business Centres (RBCs) primarily provide
leasing finance for business-critical assets operated by established
UK SME businesses, and working capital solutions in the form of
invoice discounting and asset-based lending. The RBCs provide SMEs
with access to the full suite of Shawbrook product offerings and
direct access to our sales experts. They also provide intermediaries
and key business introducers with a first point of contact for
Shawbrook, developing and enhancing the intermediary-led
distribution channel within our Business Finance Division.
The locations of the RBCs have been carefully selected to provide
a wide and far-reaching geographical footprint, focusing on the
regions we believe are key to the growth of the SME market in the
UK. Developing and supporting the growth of businesses located
outside London is a top priority for the government and we are fully
committed to supporting growth in the economy across the whole
of the UK.
Whilst retention rates have improved across our working capital
solutions offering in 2016, the asset finance business has typically
been more challenging due to increased liquidity driving greater
competition in the hire purchase and leasing market. The Bank
of England’s quantitative easing (QE) programme was extended
in August 2016, resulting in new, non-deposit-taking lenders
entering the markets in which we operate. Our absolute focus on
returns and credit quality has resulted in a marginal reduction in
asset finance originations. The controls breach in the asset finance
business (see page 49 in the Risk management report for further
details) led to the acceleration of our plans to restructure the
Division, creating a more integrated offering, and further improving
the service we deliver to our customers.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 30
Business review continued
Business Finance
Divisional KPIs
Originations (£bn)
£0.6bn
2016
2015
2014
0.4
Customer loans (£bn)
£1.1bn
2016
2015
2014
0.7
Profit contribution (£m)
£39.5m 2016
2015
2014
34.3
0.6
0.6
1.1
0.9
39.5
46.6
Pre-tax RoLA (%)
3.7%
2016
2015
2014
3.7
5.5
5.7
Specialist Sectors
Specialist Sectors provides financing to UK SMEs for business-critical
assets in specialist markets including marine, aviation, healthcare,
technology, agriculture and taxis. We distribute the majority of
our Specialist Sectors products directly through our experienced
and expert teams. Leveraging the significant lending and sector
experience of our sales teams, we build and develop relationships
with our clients by providing specialist insight and advice.
We continued to develop our current product set throughout
2016, recently entering adjacent markets such as marine leisure,
technology and agriculture. Whilst we have achieved loan book
growth of 5% across the range of our Specialist Sectors offerings,
success in the various markets has been mixed, with challenges
arising primarily from internal market dynamics – notably in the
taxi market. However, these challenges have been counteracted
by sustainable growth in areas such as marine and aviation, as our
knowledge and relationships continue to deliver growth in both
originations and the overall loan book.
In late 2016, we recruited Adam Dawson, a very experienced
banker, to develop and head up our product offering in Jersey.
As with all our markets, we identified a poorly served market with
an opportunity to fulfil the needs of SMEs and consumers in the
vicinity. We have started to establish our brand and develop our
relationships, and initiated underwriting in Q4 2016.
Financials and KPIs
The 2016 financial year has been a successful one for the Business
Finance Division with the loan book reaching £1.1 billion, a 17%
increase from 31 December 2015. The Division achieved originations
of £636 million, driven by strong originations in Structured Finance.
This was partly offset by the negative impact on asset finance
originations of uncertainty surrounding Brexit and the removal
of certain delegated authorities following the identification of
the controls breach in this Division.
Cost of risk for the Division was 137bps. Excluding the controls
breach, this was 31bps – a 14bps reduction compared with 2015),
which is in line with management’s expectations and reflective
of the benign credit environment. In addition, the net interest
margin of 6.6% generated on the Business Finance portfolio in 2016
gave more than adequate coverage of the heightened cost of risk,
resulting in a positive contribution of £39.5 million.
Shawbrook Group plc Annual Report & Accounts 2016 31
Outlook
Looking further into 2017, we will continue with the roll-out of our
RBCs, with current plans to have seven fully operational centres by
the end of 2017. Whilst we remain mindful of the economic climate,
we have yet to experience any material deterioration in credit quality
following Brexit. We firmly believe our credit risk appetite remains
appropriate through the cycle; however, we continuously monitor
this, making minor changes where necessary. The current forecasts
by independent researchers are far less severe than initially thought
post Brexit; however, should the economy soften, the diversity of our
product offering provides a degree of protection, given the counter-
cyclical nature of our invoice discounting portfolio.
Within Structured Finance, we will continue to leverage the benefits
of integrating our block discounting and wholesale teams through
the sharing of knowledge and expertise. Growth in Structured
Finance will be primarily driven by continued development and
enhancement of our current product set, along with further
identification of opportunities.
As we go into 2017, we will continue to identify opportunities
in specialist sectors where SMEs are being poorly served as
mainstream banks and other lenders continue to deal with
internal issues, taking their attention away from customer needs.
This will allow us to achieve strong returns while maintaining our
conservative risk appetite, through exceptional service as well as
speed and certainty of delivery.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 32
Specialist Sectors Business Finance
GOOD SENSE
IS hELPING
bUSINESSES
SUCCEED
Shawbrook Business Finance has a
simple philosophy – to be an enabler
for our SME customers’ success by
possessing a real understanding
of their business and providing the
right financial support to allow them
to achieve their ambitions.
We achieve this by deploying
handpicked local specialists who
understand the markets and sectors
in which our SME customers operate.
Shawbrook story
Our dedication to the healthcare
sector goes beyond the assets
we finance. We get to know our
customers and their requirements. It is
important for us to build a partnership
based on a sound understanding
of the businesses we work with and
help them in achieving their business
aspirations.
Understanding Baddow Hospital,
a privately run acute hospital, their
business model and what they were
trying to achieve for their customers
allowed our team of specialists
to support their efforts. Baddow
specialises in day care cases and is
rapidly growing through the contracts
it holds with the NHS and major
private medical insurance providers.
Shawbrook Group plc Annual Report & Accounts 2016 33
Customer story
Baddow Hospital has been developed
by a team of specialist surgeons and
architects who share the vision of
establishing a specialist, state-of-the-
art day case hospital which excels in
providing outstanding levels of patient
care, comfort and convenience.
We knew Shawbrook had tremendous
insight across the healthcare sector.
This proved invaluable when we
wanted to expand and purchase
specialist equipment to enhance our
areas of treatment. They understood
our needs. They understood our
existing operation. They were very
supportive of our efforts in building
a new hospital, and they wanted to
help us grow and be part of our team.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 34
Business review
Consumer
Activity
The Consumer Division has an extensive product range, enabling us
to provide unsecured loans for a variety of purposes, in addition to
a range of savings products for consumer and business customers.
Consumer lending operates through relationships with major home
improvement firms, in-store and online retailers, carefully selected
holiday ownership companies, loan broker partners, affinity partners
and through our newly launched direct to consumer channel.
Savings products are available directly to personal and business
customers. The Division is managed in three lending sub-divisions:
Home Improvement/Holiday Ownership (HIL/HOL), Retail Finance
and Personal Loans, alongside the Savings sub-division.
Differentiation
Shawbrook has a specialist and deep understanding of the
consumer market, both in lending and savings. Our key differentiator
is our commitment to offer fair and transparent products and pricing
to all customers.
The Division’s lending proposition has significant potential to grow
through our Retail Finance and Personal Loan offerings, as well as
through entering adjacent markets. We provide innovative solutions
to our partners and customers enabling a seamless process for the
provision of credit. Our advanced risk management and scoring
techniques combined with our expert judgement allow us to
make sensible lending decisions whilst providing the best possible
outcome for our partners and customers.
In Savings, we maintain consistently competitive rates across our
broad range of simple and straightforward retail deposit offerings,
providing exceptional levels of service from our UK call centre.
Our savings franchise is not an advised service, and has no sales
incentives. Our deposit book is fully administered in-house, which
offers the advantage of rapid execution of decisions on pricing
and service.
Home Improvement/Holiday Ownership (HIL/HOL)
The HIL/HOL sub-division provides financing for home
improvement and holiday ownership. We distribute our products
through carefully selected partners, working closely with them to
understand their needs and key customer demographics to ensure
alignment with our own target markets. We continue to develop
innovative solutions to enhance end-customers’ experiences and
deliver a seamless and timely service.
We provide tailored finance and
savings products directly to
consumers and through strategic
partners. We use efficient systems,
combined with human oversight
to underwriting and the latest
technology to give fast and fair credit
decisions with transparent pricing.
Pre-tax RoLA walk 2016
10.6%
(2.4%)
(2.7%)
(1.9%)
2016 Gross
Asset Yield
Liability
Yield
Operating
Expenses
Cost of
Risk
3.6%
2016
RoLA
Shawbrook Group plc Annual Report & Accounts 2016 35
The HIL/HOL growth strategy was designed to counter the fall in the
solar market following the feed-in tariff changes in early 2016, whilst
achieving increased originations year on year. We have successfully
achieved this by continuing to execute on our proven approach
and growing our loan book through building new, and enhancing
existing, relationships. In the lead-up to the EU referendum, activity
in the home improvement market was marginally suppressed
as consumers adopted a ‘wait and see’ approach to investment;
however, following the referendum activity in this market returned
to expected levels.
Retail Finance
The Retail Finance sub-division provides point-of-sale consumer
finance in partnership with recognised retail brands both in-store
and online. This is a rapidly growing sector and we have a strategy
built on maintaining and developing strong relationships with SMEs,
ensuring that their product offerings and target markets are aligned
to our values.
During 2016, we focused on a significant repositioning of the Retail
Finance proposition, as we ended partnerships with a number of
underperforming retailers and brokers in the early part of the year at
the same time as investing further in our experienced Retail Finance
team. We achieved significant growth during 2016 by developing
our strategic partnerships and bringing new retailers on board.
Personal Loans
The personal loans market in the UK is dominated by extremely
low representative teaser rates which are subsidised, in many cases,
by a group of customers being offered much higher rates than
those advertised. Shawbrook’s Personal Loans offering is built on
the principles of fairness and transparency, providing a risk-based
pricing solution to consumers who may be unable to obtain the
super-prime loss-leading rates available in the mainstream personal
loans market.
Our personal loans are primarily distributed through affinity
partnerships and specialist broker partners. In H2 2016, we
launched a direct-to-consumer proposition to further expand our
distribution capabilities and grow originations in this sector. Through
our website, a consumer can obtain a fair and transparent price
quotation which is tailored to them as an individual, and which they
receive upon successful completion of a full credit application. We
have partnered with ClearScore to promote our products directly to
our target market (see case study on page 38) and we continue to
be optimistic about the growing potential of digital intermediaries.
In addition to the successful launch of our direct-to-consumer
proposition, we have continued to develop strategic partnerships
with third parties where our propositions are aligned. We
announced in our Q3 2016 Interim Management Statement the
agreement of a partnership with Saga plc and have subsequently
launched a bespoke personal loan product to their customers.
In Q4 2016, we agreed a four-year strategic partnership with RAC
to offer personal loans exclusively to their customer base, with our
products being successfully launched in Q1 2017. We continue
to work closely with all our strategic partners to develop our
relationships and enhance our offerings.
Savings
The Savings sub-division provides a wide range of cash savings
solutions, primarily targeting affluent UK consumers. The broad
product range, which includes notice, fixed rate, cash ISAs, and
the more recently launched Easy Access products, has driven
sustainable deposit growth by meeting a wider range of customer
savings needs. It has increased our addressable market as we have,
and continue to develop, an active presence in all key UK savings
categories, for example, our growing easy access and shorter term
product sets. Whilst the business attracts deposits from all customer
demographics, a significant proportion of the customer deposit
base continues to be sourced from affluent customers, with a wide
range of savings needs and high average balances.
Our exceptional levels of customer service and satisfaction
combined with a wide product range have translated into deeper
relationships with our customers, resulting in 20% of new account
openings in 2016 being made by existing customers. In addition,
our fair and transparent pricing across both our existing and new
customer segments has driven continued strong fixed rate retention
performance.
Whilst we continue to generate new deposits predominantly
through our direct online offering, we have also built a distribution
capability with three affinity partners, who work alongside us to
market Shawbrook’s Savings offerings to our target markets. Focus
on this area will continue through 2017 as we develop additional
affinity relationships with selected partners and explore other
potential markets.
The transition towards a fully digitised savings business that is
supporting the progressive growth of the balance sheet continued
throughout 2016, with 66% of all applications made online (2015:
61%) and 68% of customers being registered for online servicing
as at 31 December 2016. Further investment into digital capability,
including an enhanced online banking and application experience
and increased ‘straight-through’ self-service, will take place
during 2017.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 36
Business review continued
Consumer
Consumer lending KPIs
Originations (£bn)
£0.3bn 2016
2015
2014
Customer loans (£bn)
£0.5bn 2016
2015
2014
0.2
0.3
0.5
0.2
0.2
0.3
Profit contribution (£m)
£14.6m 2016
2015
2014
5.5
14.6
11.8
Pre-tax RoLA (%)
3.6%
2016
2015
3.6
4.4
2014
3.1
Financials and KPIs
The Consumer loan book was £0.5 billion at 31 December 2016, up
39% on 2015 driven by originations of £291 million. The mix change
towards personal loans has offset competitive pressures resulting
in a stable gross yield of 10.6%. The cost of risk increased to 1.9%
compared with 0.7% in 2015 as we continue to grow our higher
yielding personal loan portfolio and following some changes to our
impairment methodologies to include customer-based probabilities
of default. The 1.9% cost of risk for 2016 is in line with management’s
expectations and the average expected through the cycle cost of
risk of 2.0% that we articulated to the market in the H1 2016 results
presentation.
The Consumer deposit book increased by 24% in 2016 to reach
a balance of £3.9 billion at 31 December 2016, as the Group
continues to be predominantly retail deposit funded. The loan to
deposit ratio at 31 December 2016 was 102.7%, down marginally
from 104.2% at 31 December 2015. The highly liquid market
following the Bank of England’s base rate reduction in August 2016
and the announcement of the Term Funding Scheme resulted in
significant pricing reductions to savings products across the entire
deposit market. Our in-house operational capabilities allowed us
to manage our deposit pricing strategy actively, giving us flexibility
and agility to control deposit inflows whilst still offering consistently
competitive rates. The decline in market interest rates, combined
with Shawbrook’s greater product diversity as our Easy Access
proposition continues to strengthen, has resulted in a lower than
anticipated cost of funding, with further tailwinds expected as our
higher-costing fixed term deposits mature and we continue to
realign our back book in line with the market, whilst maintaining
fairness in customer pricing.
Outlook
The consumer credit market has continued its expansion since 2012,
buoyed by low interest rates and record levels of employment.
Despite this, a number of external factors continue to present a
mixed message and uncertain outlook. In particular, the continued
uncertainty relating to the UK’s vote to leave the EU has manifested
in fragile consumer confidence. Levels of personal indebtedness are
also at record levels, and affordability may be squeezed by forecast
rises in inflation. The personal loans industry also continues to be
subject to intense competition, with teaser rates at all-time low
levels and a number of new fintech disruptors entering and working
with the market.
Shawbrook Group plc Annual Report & Accounts 2016 Nevertheless, we are well placed to deliver against our strategic
plan by continuing to focus on specialist lending segments, building
new strategic affinity partnerships and diversifying our portfolios
through strong credit risk management, optimised pricing and
market expertise.
The HIL/HOL sub-division is the most mature element of our
Consumer lending proposition, and our growth going forward will
be delivered through maintaining existing business by deepening
our supplier relationships and through long-term strategic deals
with our key partners.
We will further grow the Retail Finance portfolio by working with our
current partners and creating new partnerships in the sectors and
industries where we currently operate. In addition, we will look to
expand our proposition through offering our products to emerging
retail markets such as the legal and funeral services sectors.
We plan to expand the distribution channels for our Personal Loans
offerings and continue to enhance our decision-making capabilities,
to enable further growth in our existing segments and adjacent
ones. We will further develop our broker channel by gaining,
maintaining and deepening relationships, building on the progress
we made in 2016. We will also enhance customer-level pricing, credit
risk and automated decision-making, thus optimising acceptance
rates and customer journeys.
37
95
75
3.9
3.2
2.2
2.3
2.9
2.0
2.2
2.5
Consumer savings KPIs
Savings customers (’000)
95,000
2016
2015
2014
55
Deposit balance (£bn)
£3.9bn
2016
2015
2014
2.4
Group cost of funds (%)
2.2%
2016
2015
2014
Retail cost of funds (%)
2.0%
2016
2015
2014
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 38
Personal Loans Consumer
GOOD SENSE
IS SEEING PEOPLE
AS INDIvIDUALS
At Shawbrook we take a refreshingly
different approach to personal loans.
We make sure that our customers have
complete clarity and certainty from
the outset to help them balance their
budgets. Clear and simple, with
great service to match.
Shawbrook story
When you compare deals for a loan,
it seems obvious that the thing to do
is to apply for the product with the
lowest interest rate. Unfortunately,
after you’ve applied and been told
the good news that you’ve been
accepted, sometimes there’s a nasty
shock when you find out the APR
you’ll have to pay is actually far higher
than the rate you saw advertised.
Where a loan advertises a representative
APR, the lender must give that rate
to just 51% of applicants who are
accepted – often with the remaining
49% getting a much higher rate.
At Shawbrook, we want to turn the
market on its head and provide
transparent solutions to everyone
applying. We will offer customers the
ability to check their eligibility for a
loan, along with an exact rate, before
carrying out a full application, without
it having an impact on their credit
rating. The challenge for Shawbrook
is in educating customers on how the
market works and what they need
to do in order to find the best option
for them. Partnering with ClearScore
allows customers to see exactly how
the industry views them from a risk
perspective and provides them with
a true view of the rate available to them.
Shawbrook Group plc Annual Report & Accounts 2016 39
Partner story
ClearScore exists to make finances
simple, and to get people to the right
financial products. Giving people
access to their credit score and report
for free allows them, no matter what
their circumstances, to understand
more about how they are viewed
in the financial industry.
Having access to soft search criteria
with businesses such as Shawbrook
allows ClearScore to show people
the best rates available to them.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 40
Risk management report
The Group seeks to manage the risks
inherent in its business activities and
operations through close and disciplined
risk management which quantifies the
risks taken, manages and mitigates them
as far as possible and prices appropriately
for the residual level of risk carried in
order to produce an appropriate
commercial return through the cycle.
The Group’s approach to risk management continues to evolve and
has benefited from further investment during 2016 to ensure that it
remains comprehensive, consistent and scalable to accommodate
the Group’s growth plans. The embedding of the new Risk
Management Framework was substantively completed in 2016
with further enhancement of testing and quality assurance planned
for completion during 2017.
The strategic risk management objectives are to:
Identify material risks arising in the day-to-day
activities and operations of the Group
Quantify the risks attaching to the execution
of the Group’s business plans
Set an appropriate risk appetite with calibrated
measures and tolerance levels
Optimise the risk/reward characteristics
of business written
Set minimum standards in relation to the
acquisition, incurring and management of risk
This enterprise-wide Risk Management Framework is underpinned
by the following key elements:
Secure and organise the required level and
capability of risk infrastructure and resources
Risk strategy
The risk strategy sets out the risk management objectives which
support the achievement of the Group’s commercial goals and
the operation of business activities which seek to deliver those
objectives. The risk strategy sets out which risks are to be acquired
or incurred and how they will be managed by the organisation.
Risk appetite
The level of risk that the Group is willing to tolerate in operating
the various elements of its business is defined in the risk appetite
statement, which is agreed by the Board and reviewed on a regular
basis. This articulates qualitative and quantitative measures of risk
which are cascaded down through various areas of the Group’s
operations, calibrated by reference to the Group’s absolute capacity
for risk absorption, limit of appetite and target thresholds. During
2016 the Group completed a full annual review of the Group Risk
Appetite Framework incorporating enhancements in the assessment
of concentration risk, information security and the development
of divisional risk appetite statements.
Undertake remedial action where any
weaknesses are identified
Scan the external horizon for emerging risks
Risk Management Framework
All the Group’s business and support service activities, including
those outsourced to third-party providers or originated via
brokers and other business intermediaries, are executed within
the parameters of a single comprehensive Risk Management
Framework. This sets out minimum requirements and ensures
consistent standards and processes are set across the organisation.
Risks are identified, measured, managed, monitored, reported and
controlled using the Risk Management Framework. The design and
effectiveness of the framework is overseen and reviewed by the
Board Risk Committee. The key elements of the framework are set
out later in this report.
Shawbrook Group plc Annual Report & Accounts 2016 41
Governance
All the Group’s risk activities are subject to detailed and
comprehensive governance arrangements which set out how
risk-based authority is delegated from the Board to executive
management and the various risk committees and individuals.
These bodies and senior officers are accountable and responsible
for ensuring that day-to-day risks are appropriately managed within
the agreed risk appetite and in accordance with the requirements
of the Risk Management Framework. Escalation and reporting
requirements are set out in risk policies and by the risk appetite
thresholds.
Culture
The Group is led by an experienced senior team with a combination
of significant underwriting expertise and institutional and regulatory
banking experience at various major financial institutions and
specialist lenders. This heritage provides the platform for a set
of values and behaviours where the client is at the heart of
the decision-making process and business areas are held fully
accountable for risk performance. At the individual level this process
begins with job descriptions and the induction program and job
descriptions; it is carried through into the setting of individual
objectives and performance reviews, and ultimately is reflected
in the compensation and reward structure.
Risk appetite statement
The risk appetite statement (RAS) is a detailed and granular
expression of the level of risk the Group is willing to accept in relation
to the pursuit of its business strategy. The RAS is not static and will
evolve to both reflect and support the Group’s business objectives,
the operating environment and risk outlook.
Whilst the RAS provides an aggregated measure of risk temperature
and performance, it is not just a reporting tool. Just as importantly,
it also provides a framework which is used dynamically to inform
strategic and operational management decisions, as well as
supporting the business planning process.
The RAS is reviewed periodically by the Board Risk Committee
and agreed with the Board on an annual basis as a minimum.
A dashboard with the status of each metric is monitored monthly.
Management and the Board exercise their judgement as to the
appropriate action required in relation to any threshold trigger
breach, dependent on the scenario at the time.
The RAS identifies four groups of risk appetite objectives which
are further subdivided into 21 appetite dimensions as set out
diagrammatically below. A suite of qualitative statements and
quantitative measures have been set for each dimension, with
hard risk limits calibrated by reference to absolute capacity,
maximum risk tolerance and a threshold trigger level.
Risk appetite objectives and dimensions
Risk appetite
objectives
Risk appetite
dimensions
Business performance
Infrastructure
Conduct
Reputation
Profit volatility
Financial strength
Growth and
concentration
Systems
People
Product design
Sales
Data quality
Post-sales service
Customers
Regulators
Shareholders and
market
Funding and liquidity
Processes
Culture
People
Transformation projects
Intermediaries
Outsourcing
Third parties
Information security
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 42
Risk management report continued
Risk Management Framework
Responsibility for risk management sits at all levels, both across the
Group and from the Board and Executive Committee down through
the central functions, and in turn to each divisional head and their
business managers and risk officers.
In 2016 the Group continued to invest in enhancing the design
and build of its integrated Risk Management Framework to support
its strategic and commercial objectives. This activity will continue
into 2017 as the framework is further embedded across the Group
and supported by further enhancements to testing and quality
assurance.
The Group’s Risk Management Framework describes the various
activities, techniques and tools which are mandated to support
the identification, measurement, control, management, monitoring,
reporting and challenge of risk across the Group. It is designed
to provide an integrated, comprehensive, consistent and scalable
structure which is capable of being communicated to and clearly
understood by all our employees, and is shown diagrammatically
below.
The Risk Management Framework also incorporates the
organisational arrangements for managing risk, with specific
responsibilities distributed to certain functions. This ensures that
there is clear accountability, responsibility and engagement at
appropriate levels within the organisation which can provide robust
review and challenge as well as be challenged. Operationally, the
Risk Management Framework is organised around the key risk
categories.
Risk strategy
Risk Management Framework Principles
Risk appetite
Key Risk Categories
Credit &
Concentration
Risk
Market &
Liquidity
Risk
Operational
Risk
Conduct,
Legal &
Compliance
Risk
Strategic Risk
Systems &
Change Risk
Policies
Process & Procedures
Shawbrook Group plc Annual Report & Accounts 2016 43
These bodies and senior officers are accountable and responsible
for ensuring that the risks are appropriately managed within the
agreed risk appetite and in accordance with the requirements of the
Risk Management Framework. Individuals are encouraged to adopt
an open and independent culture of challenge which is essential to
ensuring risk issues are fully surfaced and debated with views and
decisions recorded. Risk governance and culture is reinforced by the
provisions of the FCA’s Senior Managers Regime.
Formal risk escalation and reporting requirements are set out in risk
policies, individual committee terms of reference and the approved
risk appetite thresholds and limits.
Risk governance
Risk governance describes the architecture through which the Board
allocates and delegates primary accountability, responsibility and
authority for risk management across the organisation.
Responsibility for risk oversight is delegated from the Board to the
Board Risk Committee and Board Audit Committee. The ultimate
responsibility for risk remains with the Board.
Accountability, responsibility and authority for risk management are
delegated to the Chief Executive Officer (CEO) and Chief Risk Officer
(CRO), who in turn allocate responsibility for oversight and certain
approvals across a number of management committees.
Authority and responsibility for material operational risk
management, decision-making and risk assurance is vested in
the CRO and the Group Risk function. Lesser levels of authority
are cascaded to senior management within the support functions
and divisions.
Board/Board Risk Committee
Oversight
Board Audit Committee
Risk Category
First Line
Second Line
Third Line
Credit Risk
Credit Management
in Business Areas
and Treasury
Credit Risk
Enterprise Risk
Management
Committee
Liquidity and
Market Risk
Treasury
Market and Liquidity
Risk and Finance
Asset & Liability
Committee
Operational Risk
All divisions and
functional areas
Operational Risk
Conduct, Legal and
Compliance Risk
All Business divisions
and functional areas
Compliance
Strategic Risk
Executive Directors and
Senior Management
Finance
Systems and
Change Risk
IT/Change
Management
Operational Risk
Enterprise Risk
Management
Committee
Enterprise Risk
Management
Committee
Executive
Committee
Enterprise Risk
Management
Committee
Internal Audit
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
44
Risk management report continued
Committee structure and risk responsibilities
An abbreviated Board and management committee structure is set out below, highlighting those Risk Committees with primary
risk-related duties:
Board Nomination
Committee
Board Remuneration
Committee
NomCo
RemCo
Board
Disclosure
Committee
DisCo
Board Risk
Committee
BRC
Board Audit
Committee
BAC
Executive Committee (ExCo)
Operations
Committee
Asset & Liability
Committee
Group Product
Committee
Enterprise Risk
Management
Committee
OpCo
ALCo
GPC
ERMC
Credit Approval
Committee
Model Management
Group
CAC
MMG
Impairment
Committee
ImpCo
Policy Review
Group
PRG
The monitoring and controlling of risk is a fundamental part of the
management process within the Group. The Board oversees the
management of the key risk categories across the organisation.
The Board delegates specific powers for some matters to committees,
details of which are set out in the Corporate Governance section
of our website at investors.shawbrook.co.uk.
69 Read more about our
Leadership structure
During 2016 the Group made a number of changes to enhance
its risk governance. These included the launch of its Enterprise Risk
Management Committee (ERMC), which takes an enterprise-wide
view of the risk profile of the Group and is the senior risk committee
within the Group. The ERMC replaced the Group Credit Committee
(GCC) and the Conduct and Operational Risk Committee (CORC).
To support the ERMC in embedding the Risk Management
Framework and to reflect the Group’s development of credit
grading, the ERMC implemented two new groups. The Model
Management Group (MMG) oversees the development, approval
and monitoring of the Group’s models and the Policy Review
Group (PRG) oversees the consistent development, approval
and monitoring of the Group’s policies.
Shawbrook Group plc Annual Report & Accounts 2016 45
Three lines of defence model
The Group’s approach to risk management is underpinned by the three lines of defence model, which is summarised in the
diagram below.
> Board establishes risk appetite and risk strategy
> Approves frameworks, methodologies, policies and roles and responsibilities
Board
Senior Management
Board Risk Committee
Board Audit Committee
Business divisions
CFO
COO
HR
Group Risk
Led by the CRO
Internal Audit
Performed by
Deloitte LLP
First line of defence
Second line of defence
Third line of defence
> Owns the risk management
> Designs, interprets and develops
process and regulatory
compliance
> Identifies, measures, manages,
monitors and reports on risks
overall Risk Management
Framework, and monitors
‘business as usual’ adherence
> Maintains overview of and
monitors top risks
> Develops compliance policies,
leads on requirements for
regulatory change and monitors
horizon for risks and regulatory
issues
> Independently tests and verifies
the Group’s business model,
policies, processes and business
line compliance
> Provides independent assurance
to the Board and regulator that
the risk management process is
functioning as designed
E
x
t
e
r
n
a
l
A
u
d
i
t
R
e
g
u
a
t
o
r
l
First line of defence
Responsibility for risk management resides in the front-line
business divisions and functions, and line managers are directly
accountable for identifying and managing the risks that arise in their
business or functional area. They are required to establish effective
controls in line with the Group risk policy and act within the risk
appetite parameters set and approved by the Board. The first line
of defence comprises each of the three lending divisions. The first
line of defence also includes the Finance function led by the Chief
Financial Officer (CFO), Operations led by the Chief Operating Officer
(COO) and Human Resources (HR) led by the Group HR Director as,
although they are not customer-facing themselves, they provide
support and back-up to the customer-facing divisions and have
insight into many operational factors that could ultimately impact
on the Group’s exposure to market, liquidity, credit, regulatory, legal,
conduct, compliance and operational risk.
Each division and functional area operates to set risk policies to
ensure that activities remain within the Board’s stated risk appetite
for that area of the Group. The risk policies are approved by the
appropriate Committee in accordance with its terms of reference
and reviewed annually, with any material changes requiring approval
at Committee level.
The first line of defence has its own operational process and
procedures manuals to demonstrate and document how it
conforms to the approved policies and controls. Likewise, it develops
quality control programmes to monitor and measure adherence to
and effectiveness of procedures. All employees within a customer-
facing unit are considered to be part of the first line of defence. Each
employee is aware of the risks to the Group of their particular activity
and the divisional and function heads are responsible for ensuring
there is a ’risk- aware‘ culture within the first line of defence. For
certain key policies, divisional staff complete regular online training
programmes to ensure knowledge is refreshed and current.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
46
Risk management report continued
Second line of defence
The second line of defence comprises the Group’s central and
independent risk management and compliance function led by
the Chief Risk Officer, who reports to the Chairman of the Board Risk
Committee and to the CEO. It also includes the General Counsel &
Company Secretary (who is also the Money Laundering Reporting
Officer), who reports to the CEO. The high-level risk structure is
shown below:
Board Risk Committee Chairman
Chief Executive Officer
Chief Risk Officer
General Counsel
& Company
Secretary
Conduct &
Compliance Risk
Enterprise Risk
Group Portfolio
Risk Analytics
Market &
Liquidity Risk
Credit Risk
Legal
Department
Operational Risk
The second line of defence is necessarily and deliberately not
customer-facing and has no responsibility for any business targets
or performance. It is primarily responsible for:
> the design and build of the various components of the
Group’s Risk Management Framework and embedding these,
together with the risk strategy and risk appetite, throughout
the organisation;
> independent monitoring of the Group’s activities against the
Board’s risk appetite and limits, and provision of monthly analysis
and reporting on the risk portfolio to the ExCo and the Board;
> issuing and maintaining the suite of Group risk policies;
> undertaking physical reviews of risk management, controls and
capability in the first-line units and providing risk assurance reports
to the ExCo and the Board on all aspects of risk performance and
compliance with the Risk Management Framework;
> providing advice and support to the first line of defence in relation
to risk management activities;
> credit approvals between divisional and the threshold for Credit
Approval Committee; and
> undertaking stress testing exercises and working with Finance
and Treasury on the production of the ICAAP, ILAAP, Recovery Plan
and Resolution Pack.
Third line of defence
The third line of defence – Internal Audit (currently outsourced to
Deloitte LLP) – provides independent assurance on the activities
of the Group and the effectiveness of the Group’s Risk Management
Framework and controls directly to the Board and Board Audit
Committee. Internal Audit reports directly to the non-executive
Chairman of the Board Audit Committee as well as the CEO and
is independent of the first and second lines of defence.
The third line of defence has access to the activities and records of
both the first and second lines of defence. It can inspect and review
adherence to policy and controls in the first line, the monitoring of
activity in the second line and the setting of policy and controls in
the second line. The third line of defence does not independently
establish policy or controls itself, beyond those necessary to
implement its recommendations with respect to the other two lines
of defence. The third line may in some cases use as a starting point
the reports and reviews compiled by the second line, but is not
restricted to them or necessarily influenced by their findings.
Shawbrook Group plc Annual Report & Accounts 2016 47
The third line of defence’s scope of work is agreed with the Board
Audit Committee to provide an independent assessment of the
governance, risk management and internal control frameworks
operated by the Group and to note the extent to which the Group
is operating within its risk appetite. It does this by reviewing aspects
of the control environment, key processes and specific risks and
includes review of the operation of the second line of defence.
The effectiveness of and compliance with the risk policy
framework is evaluated on a continuous basis through the
monthly reporting requirements (including risk policy exceptions
reporting). Additionally a quarterly control self-certification process,
supplemented by a programme of audits, thematic risk assurance
reviews and quality control testing, is undertaken by each of the
three lines of defence.
The Group’s engagement of Deloitte LLP to carry out the functions
of the third line of defence provides the Group with access to
specialist capabilities beyond its current scale and provides insight
into best practice. The performance of Deloitte in this role is
reviewed by the Board Audit Committee. The Group is considering
transitioning to an ‘in-house’ model in 2017, when the current
arrangements will be up for review.
Risk policies and controls
The Risk Management Framework is enacted through a
comprehensive suite of control documents and risk policies,
setting out minimum requirements and standards in relation to the
acquisition and management of risk assets as well as the control of
risks embedded in the Group’s operations, activities and markets.
The Group’s high-level control documents and risk policies are
owned and managed by the Group Risk function, headed by
the Chief Risk Officer (CRO) and approved by the Board or, where
delegated, the appropriate Risk Committee. The suite of policies
is grouped according to importance and key risk categories.
Group-level risk policies are supplemented as required by divisional
risk processes and procedures, where more specific and tailored
criteria are detailed. Divisional processes and procedures are
required to be compliant with Group policy and dispensations
or waivers are required where gaps are identified. These process
and procedures manuals provide staff at all levels with day-to-day
direction and guidance in the execution of their duties.
The Group set up a Policy Review Group (PRG) in 2016 to assist the
ERMC in the oversight of the Group’s policy inventory, the review
and challenge of the waiver and dispensation process, and the
tracking of actions to deliver compliance.
Asset class policies
The Group’s lending policies are contained in 16 asset class policies.
These have been arranged to operate on a Group-wide basis rather
than based upon divisional products. This is considered to provide
a more stable, consistent risk standard and control across the Group’s
portfolio of loan assets. Asset classes can also be aligned more
readily with risk weightings, probability of default, loss given default
and expected loss metrics, which facilitates risk reporting, risk-
adjusted profitability analysis and modelling for stress testing and
capital adequacy purposes.
Asset class policies are structured on the basis of policy rules, which
must be adhered to, and guidelines, where an element of controlled
discretion is permitted. All planned exceptions to policy rules require
approval at the Group Risk function level and both planned and
unplanned exceptions to policy rules are reported monthly to the
relevant Risk Committee.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 48
Risk management report continued
Key risk categories
The key risk categories faced by the Group are as follows:
Risk Category
Definition
Credit Risk (including concentration
and single name risk)
> Credit Risk is the risk that a borrowing client or treasury counterparty fails to repay
some or all of the capital or interest advanced to them. This category also includes
Credit Concentration risk.
Liquidity and Market Risk
Operational Risk
Conduct, Legal and
Compliance Risk
Strategic Risk
> Liquidity Risk is the risk that the Group is unable to meet its current and future
financial obligations as they fall due, or is only able to do so at excessive cost.
> Market Risk is the risk of financial loss through unhedged or mismatched asset
and liability positions that are sensitive to changes in interest rates or currencies.
> Operational Risk is the risk of loss resulting from inadequate or failed internal
processes, people and system failures, or from external events including strategy
and reputational risks.
> Conduct Risk is the risk that the Group’s behaviour will result in poor customer
outcomes and/or that our people fail to behave with integrity.
> Legal and Compliance Risk is the risk of regulatory enforcement and sanction, material
financial loss, or loss to reputation the Group may suffer as a result of its failure to
identify and comply with applicable laws, regulations, codes of conduct and standards
of good practice.
> Strategic Risk is the risk that the Group is unable to meet its objectives through the
inappropriate selection or implementation of strategic plans. This includes the ability
to generate lending volumes inside risk appetite.
Systems and Change Risk
> Systems and Change Risk is the risk that transition changes in the business will be
improperly implemented.
A more detailed summary of each principal risk is contained in the
following sections.
Credit risk
This risk has two main components:
> customer risk (from core lending activity); and
> treasury credit risk (from treasury activity).
The Group’s treasury credit risk exposure is limited to short-term
deposits placed with leading UK banks.
Credit risk approval process
The Group operates a hierarchy of lending authorities based
principally upon the size of the aggregated credit risk exposure
to counterparties, group of connected counterparties or, where
applicable, a portfolio of lending assets that are subject to a single
transaction. In addition to maximum amounts of credit exposure,
sole lending mandates may stipulate sub-limits and/or further
conditions and criteria.
During 2016, the Group implemented as part of its improving Risk
Management Framework a number of changes to its hierarchy of
lending mandates. Each division has a maximum authority level
allocated, with exposures above these levels requiring approval from
an approver in the second line of defence or the Credit Approval
Committee (CAC). In each lending division, at least one signatory to
the loan must be a segregated first line of defence credit approver
who has no responsibility for, or remuneration arrangements
linked to, sales targets, or ongoing sales origination or relationship
responsibility with the borrower.
Shawbrook Group plc Annual Report & Accounts 2016 49
The maximum divisional mandate for the Regional Business Centres,
Specialist Sectors and Commercial sub-divisions is £1.25 million.
The maximum divisional mandate for residential lending in the
Property Finance Division is £300,000 and in the Consumer
Division £75,000. Exposures beyond these limits up to £5 million
may be approved by an approver in the second line of defence,
and exposures above this figure, up to the Group single name
concentration limit of £25 million, must be approved by the
CAC. In addition, where transactions involve financing portfolios
of lending assets in excess of £15 million Board approval is
also required.
Lending is advanced subject to Group lending approval policy
and specific credit criteria. When evaluating the credit quality
and covenant of the borrower, significant emphasis is placed on
the nature of the underlying collateral. This process also includes
a review of the Board’s appetite for concentration risk.
Controls breach in the Business Finance Division
Throughout 2015 and 2016, the Group implemented upgrades to
its risk management systems and controls that included, amongst
other things, improvements in quality assurance activity. Following
this implementation, irregularities were identified in relation to
a number of asset finance facilities originated from one of the
Group’s offices. The irregularities related to a controls breach in
the underwriting process for these facilities that did not meet the
Group’s strict lending criteria and were originated over a period
of several years, particularly between 2012 and 2015. The Group
engaged external forensic accountants to undertake an investigation
to provide assurance on both the scale of the impacted facilities and
an assessment of the adequacy of the revised control framework.
Following this external investigation, the Group announced that
it would be recognising a charge of c.£9 million on a £14.7 million
portfolio of impacted facilities. The Group has continued to monitor
and assess the collateral supporting the impacted facilities and,
as a result, has increased the impairment charge to £11.2 million.
Associated costs amounted to £0.8 million. The Group has simplified
its business model into three divisions with clear management lines
and has continued to implement and embed its upgraded Risk
Management Framework into the divisions. The Group believes that
the steps taken to strengthen risk controls, including the removal
of certain delegated authorities and appropriate segregation of
origination and operations, should minimise the risk of a further
breach. In addition, the results of the external forensic investigation
and the ongoing stability of the £14.7 million impaired portfolio give
confidence that the entirety of the affected portfolio has been fully
identified and that the contagion risk is limited.
Credit monitoring
Approval and ongoing monitoring control is exercised both within
the businesses and through oversight by the Group Credit Risk
function. This applies to individual transactions as well as at the
portfolio level by way of monthly credit information reporting,
measurement against risk appetite limits and testing via risk quality
assurance reviews.
The divisions operate timely collections and arrears management
processes. It is recognised that the credit environment is currently
benign and we plan in 2017 to develop our operational arrangements
and capabilities for non-performing loan management to ensure
that the Group is capable of operating in a more challenging
environment where interest rates are rising and there is lower
demand and liquidity in property markets.
Liquidity and Market Risk
Liquidity risk is the risk that the Group is unable to meet its current
and future financial obligations as they fall due, or is only able to
do so at excessive cost.
Market risk is the risk associated with adverse changes in the fair
value of positions held by the Group as a result of movement
in market factors such as interest rates, currencies, volatility and
credit spreads.
The Group has, therefore, developed comprehensive funding and
liquidity policies to ensure that it maintains sufficient liquid assets
to be able to meet all its financial obligations and maintain public
confidence.
The Group’s Treasury function is responsible for the day-to-day
management of the Group’s liquidity and wholesale funding.
The Board sets limits over the level, composition, and maturity
of liquidity and deposit funding balances, reviewing these at least
annually. Compliance with these limits is monitored daily by Finance
and Risk function personnel independent of the Treasury function.
Additionally, a series of liquidity stress tests are performed weekly
by the Risk function and formally reported to ALCo and the Board
to ensure that the Group maintains adequate liquidity for business
purposes even under stressed conditions.
The Group reports its liquidity position against its liquidity coverage
ratio, net stable funding ratio and other key regulatory ratios for
regulatory purposes.
A liquid asset buffer of government Treasury Bills acquired under
the FLS, and reserves with the Bank of England, are maintained as
a source of high-quality liquid assets that can be called upon to
create sufficient liquidity in order to meet liabilities on demand.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 50
Risk management report continued
Operational Risk
The Board Risk Committee receives regular reports across the
spectrum of operational risks and information security. These
reports cover incidents that have arisen to allow the Committee
to assess management’s response and proposed remedial actions.
Although a number of incidents were raised during the course of
2016, none of these were material in nature and the Committee
was satisfied that the actions taken were appropriate and that the
control of operational incidents continued to improve. In response
to the growing threat posed to information security, a full review
of information security risk appetite was undertaken, in addition to
a cyber crime risk assessment. A test of the Group’s Cyber Incident
Response Plan was also undertaken to assess the adequacy of
the Group’s internal control framework to respond to this threat,
and a review of the Group’s strategy to manage increasing levels
of cyber risk in the marketplace. The operational risk reports were
also developed throughout 2016 to include more focus on forward-
looking risks, which permits a more strategic discussion at Board
Risk Committee level.
Conduct, Legal and Compliance Risk
The Group continually reviews its risk management approach
to reflect the regulatory and legal environment in which the
Group operates.
The Group has no appetite for knowingly behaving inappropriately,
resulting in unfair outcomes for its customers. During 2016
the Group further reviewed its risk appetite for conduct risk to
introduce measures across the conduct risk lifecycle, which includes
product design, sales or aftersales processes, and culture. It also
added new measures to support annual product reviews and risk
appetite to support the management of brokers, intermediaries
and outsource partners. These measures are reported to the Board
monthly and provide the basis for demonstrating that the Group
is operating within its risk appetite. Where the Group identifies
potential unintended outcomes for customers the Group uses its
risk management process to proactively escalate the issue, agreeing
appropriate actions and communicating clearly with its customers
to ensure a fair outcome is achieved.
Strategic Risk
Strategic Risk focuses on large, long-term risks that could become
a material issue for the delivery of the Group’s goals and objectives.
Management of Strategic Risk is primarily the responsibility of the
Executive. The management of Strategic Risk is intrinsically linked
to the corporate planning and stress testing processes and is
further supported by the regular provision of consolidated business
performance and risk reporting to the ExCo and the Board. The
Board received and approved a number of reports during 2016
including the Strategy Update and the Group’s annual review of
risk appetite. It has also been engaged actively in the formation
of the Group’s ICAAP and ILAAP, which are critical tools for the
management of Strategic Risk.
Systems and Change Risk
Customer expectations for service availability are rising, with the
rapid evolution of new technologies leading to a significantly
lower tolerance for service disruption. The Group recognises that in
order to continue to be recognised for very high levels of customer
satisfaction it needs to continually monitor systems risk and ensure
that change is delivered with minimum disruption to customers.
During 2016 the Group reviewed its approach to managing change,
and plans in 2017 to review and further enhance its business
continuity and disaster recovery capability in line with its Target
Operating Model and, in particular, its location requirements, to
deliver its commitments as outlined in the Strategy Update.
Top and emerging risks
The Group’s top and emerging risks are identified through the
process outlined in the Risk Management Framework section and
are considered regularly by management and subsequently by the
Board Risk Committee. The Group sees six themes as its top and
emerging risks:
1 Economic and competitive environment;
2 Pace of regulatory change;
3 Intermediary and outsourcing;
4 Pace, scale of change and management stretch;
5 Credit impairment; and
6 Information security.
Shawbrook Group plc Annual Report & Accounts 2016 51
Risk
Mitigation
Change
The UK economy remains resilient with
near-term momentum slightly to the
upside of immediate post-referendum
expectations. However, the Board expects
there to be a period of uncertainty
following the UK government formally
triggering Article 50 expected to be by
the end of Q1 2017.
>
1 Economic and
competitive environment
A reversal in UK economic conditions,
particularly in England where the
majority of the Group’s operations
are based, could affect the Group’s
performance in a number of ways
including:
> lower demand for the Group’s
products and services;
> changes in funding costs resulting
from ongoing political uncertainty
accompanied by a loss of confidence;
> rising competition compressing
Group margins below sustainable
levels; and
> higher impairments through
increased defaults and/or reductions
in collateral values.
£
16 Read more about
Our strategy
The Group uses its expertise and deep
understanding of its customers’ needs
to drive customer service and long-term
relationships with its customers through
the cycle.
The Group monitors its chosen markets on
a regular basis and regularly reviews
adjacent markets where it has expertise,
and also reviews opportunities for
inorganic growth. The Group operates in
specialist areas where management and
staff have significant expertise and a deep
understanding of customer needs that
delivers superior service. As a result all loans
are written only after thorough, bespoke
underwriting to SMEs and consumers with
a proven ability to repay and, in the main,
sufficient security.
The Group undertakes a comprehensive
assessment of its risk appetite to ensure
that it can meet its objectives in severe
but plausible economic conditions.
The Group completes comprehensive stress
testing of its lending and deposit portfolios
to test resilience to severe but plausible
economic conditions.
The Group also establishes a prudent
balance sheet strategy with robust levels of
capital and liquidity and a prudent funding
structure. The Group maintains risk appetite
and pricing discipline.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 52
Risk management report continued
Risk
Mitigation
Change
2 Pace of regulatory change
The prudential and conduct regulatory
regimes are subject to change and
could lead to increases in the level
and quality of capital that the Group
needs to hold to meet regulatory
requirements.
£
16 Read more about
Our strategy
The regulatory environment continues
to evolve and change. The Group actively
engages with regulators, industry bodies
and advisors in consultation processes.
UK financial services businesses remain
subject to significant scrutiny and the
current level of risk remains stable
compared to last year.
The Group adopts the Standardised
Approach to its assessment of credit risk
regulatory capital. The Group remains
exposed to any potential future changes
to the risk weightings under the
Standardised Approach that could lead
to an increase in capital requirements.
The Group remains on track to deliver its
IFRS 9 programme during 2017 in time to
support a period of parallel run by Q3 2017
and adoption from 1 January 2018.
3 Intermediary and
outsourcing
The Group is a specialist lending and
savings bank for SMEs and consumers.
The specialist nature of some of
its lending through intermediaries
and brokers could mean that some
customers find themselves with an
increased risk of an unfavourable
outcome. For the Group this could
also lead to increased conduct-related
redress, additional fraud or credit
risk impairments.
The Group works with carefully selected
intermediary and broker partners who take
on the role of advising SMEs and consumers.
The Group recognises that it is ultimately
accountable for the lending it originates
through its partners and continually
undertakes reviews of their performance.
In addition, experienced underwriters
perform thorough checks on each
application. The Group continually
reviews its risk management approach
to intermediaries, brokers and outsource
partners to reflect the regulatory
environment in which the Group operates.
The Group implemented a new policy and
suite of monitoring controls to manage
its exposure to intermediaries, brokers
and outsource partners during 2016 and
believes that it has improved its risk profile.
The Group saw one of its strategic
outsourcing partners, Target Group,
acquired by Tech Mahindra, a global
specialist in digital transformation, in
May 2016. The global support and
resources provided by Tech Mahindra
combined with the Group’s continued
investment in its strategic relationship
is expected to further improve its
outsourcing risk profile.
£
16 Read more about
Our strategy
>
Shawbrook Group plc Annual Report & Accounts 2016
53
Risk
Mitigation
Change
4 Pace, scale of change
and management stretch
The scale and pace of change could
create delivery challenges and could
lead to disruption of the Group’s plans
and in the delivery of its objectives.
16 Read more about
Our strategy
5 Credit impairment
At 31 December 2016 the Group had
customer loans (including operating
leases and net of provisions) of
£4.1 billion, and is exposed to credit
impairment if customers are unable
to repay loans and any outstanding
interest and fees.
In addition the Group has exposure to
a small number of counterparties with
which it places surplus funding.
16 Read more about
Our strategy
The Group continues to invest in its
change management processes to
increase the pace and scale of change
without impacting on the Group’s
operations and customer service.
However, the Group has a strong appetite
for change and the risk of an impact
on its operations remains.
The Group understands the need to
manage change without disrupting
the Group’s operating environment
and impacting customer service. These
operational risks are managed through a
strong focus on change governance and
programme management disciplines
and are led by a dedicated Executive
member. The risks are further mitigated
by the Group’s strengthening of the senior
management team.
The Group has a formal Operations
Committee that was set-up to prioritise
change and provide effective oversight
of the change portfolio to ensure that
requirements are delivered within budget
and on time.
The Group recognises that it will experience
credit impairment in connection with
its lending activities, but manages its
exposure by:
Underlying Group credit impairment
has remained low, reflecting favourable
market conditions in the UK and the
Group’s approach to lending.
> undertaking a prudent assessment of
through-the-cycle losses in pricing,
forecasting and stress testing;
> maintaining consistent and conservative
loan-to-value ratios and avoiding material
weakening of credit quality to drive
volumes;
> lending predominantly on a secured basis
against identifiable and accessible assets;
> operating strong controls and governance
with effective oversight by a centralised
Group credit team; and
> maintaining a prudent Treasury
counterparty policy with surplus funding
placed with the Bank of England and UK
clearing banks.
The Group’s counterparty exposure has
remained broadly unchanged with the
majority of surplus funding placed with
the Bank of England and balances with
UK clearing banks.
The Group believes that the potential
for additional credit impairment has
increased with uncertainty following the
referendum vote and the decision to
trigger Article 50 no later than Q1 2017.
The Group also believes that accounting
developments, with the parallel run of
IFRS 9 in 2017, will to lead to an increase
in the Group’s credit impairment
requirement.
>
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
54
Risk management report continued
Risk
Mitigation
Change
The Group continually reviews its control
environment for information security to
reflect the evolving nature of the threats
to which the Group is exposed.
The Group’s strategy for mitigating
information security risk is comprehensive,
including: a documented cyber-strategy,
ongoing threat assessments, regular
penetration testing, the wide deployment
of detective controls and a programme
of education and training.
The Group continues to invest in its
capabilities to reduce its exposure to a
cyber attack and has further developed
its risk appetite and controls with respect
to information security. However, the risk
of information security breaches, threats
from cyber crime and the impact of new
technology on the Group’s businesses
remains.
6 Information security
The pace of technological development
is changing the way in which SMEs and
consumers want to engage with the
Group, leading to a number of risks:
> increasing customer demand could
exceed the Group’s ability to provide
highly reliable and widely available
systems and services;
> the evolving nature and scale of
criminal activity could increase the
likelihood and severity of attacks
on the Group’s systems; and
> franchise value and customer trust
could be significantly eroded by
a sustained hack of the Group’s
systems leading to a diversion of
funds or the theft of customer data.
16 Read more about
Our strategy
Shawbrook Group plc Annual Report & Accounts 2016 55
ICAAP, ILAAP and stress testing
Recovery plan and resolution pack
The ICAAP, ILAAP and associated stress testing exercises represent
important elements of the Group’s ongoing risk management
processes. The results of the risk assessment contained in these
documents is embedded in the strategic planning process and risk
appetite to ensure that sufficient capital and liquidity are available
to support the Group’s growth plans as well as to cover its regulatory
requirements at all times and under varying circumstances.
The ICAAP and ILAAP are reviewed at least annually, and more often
in the event of a material change in capital or liquidity. Ongoing
stress testing and scenario analysis outputs are used to inform
the formal assessments and determination of required buffers,
the strategy and planning for capital and liquidity management,
and the setting of risk appetite limits.
The Board and senior management have engaged in a number
of exercises which have considered and developed stress-test
scenarios. The output analysis enables management to evaluate
the Group’s capital and funding resilience in the face of severe but
plausible risk shocks. In addition to the UK variant test on capital
prescribed by the Regulator, the stress tests have included a
range of Group-wide, multi-risk category stress tests, generic and
idiosyncratic financial shocks, and operational risk scenario analyses.
Stress testing is an integral part of the adequacy assessment
processes for liquidity and capital, and the setting of tolerances
under the annual review of Group risk appetite.
The Group also performed reverse stress tests to help management
understand the full continuum of adverse impact and therefore the
level of stress at which the Group would breach its individual capital
and liquidity guidance requirements as set by the Regulator under
the ICAAP and ILAAP processes.
The Group has prepared and submitted a Recovery Plan and
Resolution Pack (RP&RP) in accordance with Prudential Regulatory
Authority (PRA) Supervisory Statements SS18/13 and SS19/13 and
submitted it to the PRA following Board approval.
The plan represents the Group’s ‘Living Will’ and examines in detail:
> the consequences of severe levels of stress (i.e. beyond those
in the ICAAP) impacting the Group at a future date;
> the state of preparedness and contingency plan to respond
to and manage through such a set of circumstances; and
> the options available to management to withstand and recover
from such an environment.
This plan is prepared annually, or more frequently in the event of
a material change in the Group’s status, capital or liquidity position.
The Board of Directors and senior management are fully engaged in
considering the scenarios and options available for remedial actions
to be undertaken.
The Board considers that the Group’s public status, its business
model and the diversified nature of its business markets provide
it with the flexibility to consider selective business or portfolio
disposals, loan book run-off, equity-raising or a combination of these
actions. The Group would invoke the Recovery Plan and Resolution
Pack if required.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 56
Risk management report continued
Group Viability Statement
The Directors have assessed the outlook for the Group over
a longer period than the 12 months required by the ‘Going
Concern’ statement in accordance with the 2014 UK Corporate
Governance Code.
The assessment relied on:
> the Board-approved Strategic Update presented to the capital
markets in May 2016 and the 2017 Budget that outlines the
Group’s business plans and financial projections;
> the Internal Capital Adequacy Assessment Process (ICAAP);
> the Internal Liquidity Adequacy Assessment Process (ILAAP);
> a review and evaluation of the Group’s top and emerging
risks (as reported upon earlier in this section);
> consideration of the effect of a moving regulatory landscape
on the Pillar 2A, Pillar 2B and the CRD IV Combined Buffer
requirements, together with the effect of the Group’s Capital
Contingency Plan to restore the capital position in scenarios
of capital headwinds;
> the assumption that the Group has ongoing access, if required,
to the debt capital markets as we consider the optimal capital
composition of the Group; and
> the effect of the implementation of the IFRS 9 ‘Financial
Instruments’, taking into account the phase-in arrangements
proposed by the Basel Committee on Banking Supervision.
The Group is not large enough to participate in the annual Bank of
England concurrent stress testing programme but has, as part of
its ICAAP, performed a variety of equivalent stress tests and reverse
stress tests of its business. These include two market-wide stress
tests and two Group-specific (idiosyncratic) stress tests. The stress
tests were derived through discussions with senior management
and the Board, after considering the Group’s principal risks. The
Group also considered its funding and liquidity adequacy in the
context of the reverse stress testing. The risk of the UK leaving
the EU had been considered and the Board believes this risk was
captured within its stress testing scenarios. The Board expects
there to be a period of uncertainty following the UK Government
triggering Article 50 and will keep this under review.
The stress tests enable the Group to assess the impact of a number
of severe but plausible scenarios on its business model. In the case
of reverse stress testing, the Board is able to assess scenarios and
circumstances that would render its business model unviable,
thereby identifying business vulnerabilities and ensuring the
development of early warning indicators and potential mitigating
actions.
The Board aims to build a sustainable lending and savings bank
for SMEs and consumers over the medium to long term. The Board
monitors a five year Strategic Plan that provides a robust planning
tool against which strategic decisions are made. Whilst the Board
has no reason to believe that the Group will not be viable for a
five year period, given the inherent uncertainty involved, the Board
concluded that a three year period is an appropriate length of time
to perform a viability assessment with a greater level of certainty.
Based on the results of the above mentioned assessments, the
Directors have a reasonable expectation that the Group will be able
to continue in operation and meet its liabilities as they fall due over
a period of at least three years.
Shawbrook Group plc Annual Report & Accounts 2016 Corporate social responsibility
During 2016 Shawbrook developed
its corporate social responsibility (CSR)
programme to better reflect how we
operate as a company and how we
position ourselves in the communities
we operate in. We recognise the
importance of social responsibility
and are committed to maintaining
the highest standards and conducting
business in a responsible way.
Shawbrook is committed to maintaining high ethical standards,
adhering to laws and regulations, conducting business in a
responsible way and treating all stakeholders with honesty and
integrity. These principles are reflected in our culture throughout
the organisation and are adhered to by our employees.
The Shawbrook approach to CSR addresses both how we deal
with our employees and our customers, and how we manage
our ethical and environmental responsibilities. Our approach to
CSR and sustainability focuses on four main stakeholder areas:
> Environment;
> Marketplace;
> Workplace; and
> Community.
57
Our approach to CSR
Environment
Shawbrook is dedicated to responsible
business through its financial activities,
by protecting the environment in which
we operate and working sustainably.
58 Read more about our
Environment
Marketplace
Our traditional values and culture of
respect, care, good sense and thoughtful
judgement underpin our approach
to working with our supply chain.
59 Read more about our
Marketplace
Workplace
We pride ourselves in being a bank that
is ‘specialist in good sense’; however,
this can only be achieved if we embed
this philosophy with our people.
60 Read more about our
Workplace
Community
At Shawbrook we are committed to
supporting local causes that are close
to the hearts of our employees and the
communities in which we work, aspiring
to make a difference.
62 Read more about our
Community
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 58
Corporate social responsibility continued
Environment
Shawbrook is dedicated to responsible business through its financial
activities, by protecting the environment in which we operate
and working sustainably. We are committed to creating a strong
business that is not achieved at the expense of the environment.
Our Environmental Management defines responsibilities and
processes in relation to waste, energy, water and travel at our offices
across the UK. Our head office is also ISO 14001 compliant. Smart
meter technology is installed across the business and we are able to
track the individual performance of our properties. This allows us to
monitor ongoing consumption profiles, and alter plant operational
times in line with the requirements of each property, reducing
energy wastage. We are pleased with our 2016 results but realise this
is a journey requiring continual improvement, and have committed
to reducing energy consumption in 2017 and beyond across the
estate and to increasing the recycling of paper, plastic, aluminium
and general waste produced at our offices.
Greenhouse Gas emissions: The main greenhouse gas (GHG)
generated as a result of running our business is carbon dioxide,
generated from our use of fuels in heating, cooling and lighting
our offices, and through business travel. We are committed to
reducing carbon dioxide emissions.
We have measured our GHG footprint since 2014 and have set
ourselves a target of reducing this figure by 20% by 2020, reflecting
our continued efforts to reduce energy consumption and improve
efficiency overall.
Using the internationally recognised Greenhouse Gas framework,
we have calculated the GHG emissions associated with our Scope 1
and 2 operations using DEFRA Environmental Reporting Guidelines
conversion factors. Scope 1 includes fuel emissions from buildings
and company vehicles, and Scope 2 includes our emissions from
purchased electricity.
Total Scope 1
CO2e emissions (t)
Scope 2
C02e emissions (t)
Brentwood
Croydon
Dorking
Glasgow
London
Wisbech
Total Scope 2
CO2e emissions (t)
Total Scope 1 & Scope 2
CO2e emissions (tonnes)
Total emissions per FTE (t)
2016
49.5
2015
61.5
284.7
268.1
57.5
86.7
47.9
24.6
n/a
95.8
88.7
47.7
n/a
21.3
501.4
521.6
550.9
1.0
583.1
1.1
Change 2015
to 2016 (%)
(19.5)
6.2
(40.0)
(2.3)
0.4
n/a
n/a
(3.9)
(5.5)
(9.1)
Transport: Measures to reduce the impact of transportation
across the business, for both commuting and business travel,
has been a focus throughout 2016. Promotion of tele- and video-
conferencing facilities has helped improve take-up of these facilities
as an alternative to travel. The Group also provides a shuttle bus
covering various nearby locations for employees at its head office
in Brentwood, thereby reducing the use of personal vehicles.
Total Scope 1 CO2e emissions
Change between 2015 to 2016 (%)
-19.5
(2016: 49.5 t, 2015: 61.5 t)
Shawbrook Group plc Annual Report & Accounts 2016 Marketplace
Our traditional values and culture of respect, care, good sense
and thoughtful judgement underpin our approach to working
with our supply chain. We recognise the importance of collaborative
relationships when doing business and Shawbrook strives to
work with suppliers who subscribe to, operate on and promote
similar principles.
We take seriously our responsibilities to customers, employees,
shareholders, business partners and to the local community.
We conduct all business relationships with respect, honesty
and integrity, and we promote equitable working relationships
throughout the supply chain.
Shawbrook relies on an extensive number of external suppliers
and expects all suppliers and staff to behave, and to be seen to
behave, ethically at all times during the sourcing and supply of
goods and services. In 2017, we will further review our supply
chain management and request that our suppliers report their
GHG emissions to us, allowing us to collectively monitor and
meet shared environmental goal.
59
Smiles and Memories (SAM) Fund:
The SAM Fund is a small Essex-based
charity that was initially set up to
provide children with life-limiting
illnesses and disabilities and their
families the opportunity to
experience cherished memories in
the time they had left. The Fund’s
’not for profit’ status means that every
single penny it raises goes towards
the provision of help.
Over the past couple of years the Fund, whilst still
concentrating on cherished memories, has also expanded
the help it provides by purchasing specialist equipment: for
example, state-of-the-art computer equipment and specialist
disability programs for the special needs department of a
local primary school, and a series of books called ’All About
Me’ which have been given to severely disabled children who
had no previous means of communication.
Shawbrook’s donations have helped to provide equipment
and create happy and lasting memories.
“ I have a variety of reasons
for getting involved with
SAM, not least the fact that
I have seen the result of the
vital work they do having
seen a child of one of my
close friends benefit from
help provided.”
Stephen Connelly
Change Programme Manager
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
60
Corporate social responsibility continued
Workplace
We pride ourselves in being a bank that is ‘specialist in good sense’;
however, this can only be achieved if we embed this philosophy
with our people. The key to this is having a workplace that provides
excellent opportunities for career progression and that encourages
accountability and teamwork.
We work hard to create a business where we can attract and retain
talented, customer-focused people who can do their best work
and grow fulfilling careers.
We aim to attract and reward the most talented and dedicated
individuals with first-class development and training programmes,
in a workplace that encourages ambition, with a vision of providing
first-class customer service. In 2016 we commenced our relationship
with specialist resourcing partner Cielo, a leading global provider
of talent acquisition services. This partnership will allow us greater
scope to accommodate our business growth and further promote
the Shawbrook employer brand to a wider market.
Colleague interaction: The 2016 employee survey, urging
employees to offer their opinions of the Group.
The survey achieved a 78% response rate, surpassing the previous
76%. It also achieved an 81% overall engagement score: 7% above
the financial services benchmark demonstrating our employees’
enthusiasm for their workplace.
We also believe in giving back to our employees and offering them
the opportunity to be a greater part of our growing organisation.
As a result we have continued running our employee Sharesave
scheme, which gives permanent and fixed-term-contract colleagues
the opportunity to join a tax-free savings scheme and buy shares
at a 20% discount.
Training and development: We have devoted considerable efforts
to ensuring that all colleagues are supported in their training
requirements, enabling them to be the best they can be. In 2016
we invested over £635,000 in employee learning and development.
This included both internal training and external qualifications,
all with the aim of educating and improving our talent.
The Shawbrook ‘Learning Bank’, launched in March 2016, also plays
a significant part in our training programme and acts as a go- to
tool for all training needs and records. The Learning Bank includes
both face-to-face and eLearning modules, allowing for individual
and independent development. Each staff member is encouraged
to complete a minimum of 35 hours continuing professional
development per year.
Future talent: This initiative, designed to attract and teach the
Shawbrook employees of tomorrow, was launched over summer,
intending to entice new talented individuals whose core values
and prospects are similarly aligned to that of Shawbrook.
“From day one I had a real job to do and the opportunity to contribute.
My ideas are listened to despite the limited experience I had in the
financial field; I genuinely feel like part of the team with the ability
to influence the outcomes of the bank.”
Georgina Griffin, Graduate.
Workforce diversity: We believe in supporting diversity and creating
an inclusive culture where all our people feel valued and able to
fulfil their potential. During 2016, we signed up to the HM Treasury
Women in Finance Charter, in support of our commitment to gender
equality, particularly in relation to senior management. Currently,
33% of our Executive Committee members are female – well above
the industry average of 14%.
Communication and consultation: We continue to involve
and inform employees on matters that affect them. Through
our intranet, team meetings, regional/divisional conferences and
national conferences, we keep employees informed of news and
strategic developments. Through initiatives such as ‘My Shawbrook
Idea’ we seek to harness the ideas of our people to build on
this work.
Shawbrook Group plc Annual Report & Accounts 2016 61
Gender equality
Our gender demographics
are set out below.
Board
82%
Male (9)
ExCo
67%
Male (6)
All colleagues
58%
Male (374)1
18%
Female (2)
33%
Female (3)
42%
Female (271)1
1 Headcount of 645 in January 2017.
“ This is a very good result
when compared with our
benchmark group.”
People Insight.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 62
Corporate social responsibility continued
Community
At Shawbrook we are committed to supporting local causes that
are close to the hearts of our employees and the communities in
which we work, aspiring to make a difference. Dedication to the
community is embedded in our core values, and we understand
the importance of investing our time and contributions in non-
profit organisations.
Charitable partnerships: Over the past three years we have put
our time and energy into our charitable partnerships ensuring that
they are looked after and rewarded with the greatest achievable
donations. Throughout 2016 we continued to develop our charity
programme, based on an approach to social investment grounded
in the local communities where our employees and customers live.
Our two principal chosen organisations are the educational charity
Future First, and Contact the Elderly, which supports older people
and combats loneliness. During 2016 we contributed over £102,000
to community groups across the country.
Over the past financial year these contributions allowed us to
support the building of and roll-out of a mentoring portal that
Future First provides to teenagers preparing for life after school,
and have helped Contact the Elderly continue its excellent work
tackling loneliness and social isolation among older people.
Shawbrook also operates a Communities Committee which provides
grants to UK registered charities, particularly in communities where
Shawbrook operates. Through its grant programmes focused on
education, local and employee-nominated charities, it was able
to support more than 30 charities over the year.
Employee fundraising: Working with multiple charitable partners
over the years has been deeply satisfying; however, Shawbrook’s
approach to investing in the community goes much further than
donations. We encourage staff to nominate causes that would
benefit from our support, so that our contributions can reflect
their wishes and concerns. We also recognise that our employees
volunteer their time and energy to such causes; acknowledging
this, we aim to match any funds they raise.
In this way, over the past financial year we have been able to
support over 30 good causes through financial donations and staff
fundraising, ranging from our most popular employee initiative,
‘dress-down Fridays’, to a 10,000ft parachute jump.
The Strategic Report was approved by the Board and signed on
its behalf by the Chief Executive Officer.
Steve Pateman
Chief Executive Officer
6 March 2017
Little Havens Hospice
Little Havens Hospice focuses on
the individual needs of children with
terminal illnesses, offering short
respite breaks and care for children
at the end of their lives.
Volunteers play an integral role in every aspect of care, and
care is offered not just for patients but for their families, friends
and neighbours too.
The team at Little Havens aims to make each child’s journey –
and that of their family – as comfortable as possible, creating
special memories along the way.
Shawbrook’s donation of £15,000 has helped the charity
continue to provide respite breaks, symptom control and end-
of-life care to youngsters not expected to reach adulthood.
Lydia Plews, one of Little Havens Hospice’s fundraisers, said,
“Having a child with a life-limiting illness, or coping with
the death of a child, is something most of us couldn’t even
contemplate. Whether a child is in our care for years, months,
weeks or sometimes just hours, it’s about making every
second count for them and their families. Little Havens is a
special place but it could not exist without support from the
community and businesses like Shawbrook. I can’t thank you
enough for all the fundraising you have undertaken this past
year. Thanks to this generosity we can continue caring for
children and families across Essex when they need us most.”
Shawbrook Group plc Annual Report & Accounts 2016
Strategic report
Corporate governance
Financial statements
63
Corporate
GovernanCe
Corporate governance
64 Corporate governance report
66 Board of Directors
91 Directors’ remuneration report
105 Directors’ report
110 Statement of Directors’ responsibilities
111 Independent Auditor’s report
Shawbrook Group plc
Annual Report & Accounts 2016
64
Corporate governance report
Chairman’s introduction
“ Good governance is essential
in supporting the development
of a sustainable and successful
business.”
Dear Shareholders
This was a busy year for the Board – its first full year as a listed
company – as we continued our journey of ensuring that we have
governance appropriate for a growing bank operating in a heavily
regulated environment.
We recognise that good governance supported by a strong culture
is vital to the successful delivery of Shawbrook’s strategy and a key
underpinning to our continued ability to grow the bank, to deliver
returns to shareholders in a safe and sustainable way and to serve
the interests of our customers and our people. We are committed
to adhering to principles of the 2014 UK Corporate Governance
Code (the Code).
The Board effectiveness review we carried out during the year
confirmed the good progress we have made in strengthening
the governance framework and more detail on the review is set
out on page 74 of this report.
Full details of the Group’s governance arrangements are also set
out in this report. In addition to its ongoing oversight activities, the
key issues on which the Board focused time during 2016 included:
> consideration (in one of two strategy days) of the 2020 strategy
which was presented at the Capital Markets Day in May;
> deep-dives into each of the business divisions, considering
both current performance and future opportunities and plans;
> the evolution of the Target Operating Model and infrastructure
required to support the future development of the Group;
> consideration of the competitive environment and future
opportunities in a second strategy day;
> a 2016 governance plan to improve the operation of the
Board and ensure it focuses on the main issues;
> the people strategy for the business;
> a number of training and briefing sessions on particular topics,
including ICAAP, ILAAP, an overview of IFRS 9 requirements, the
Mortgage Credit Directive and Consumer Credit Act, the Market
Abuse Directive, remuneration overview and the FCA’s regulation
of conduct;
> capital and liquidity adequacy, including approval of the ICAAP
and ILAAP documents, with specific sessions held to ensure the
Board had sufficient opportunity to consider the key elements
of both;
> oversight of the Group’s response to the controls breach in the
Business Finance Division (see page 49 in the Risk management
report for further details);
> participation in a review of its own effectiveness facilitated by an
independent third party; and
> oversight of the implementation of the Senior Managers Regime.
Shawbrook Group plc Annual Report & Accounts 2016 65
The Nomination Committee considered the appropriateness of the
Board’s composition during the year and concluded that it has the
appropriate mix of skills and experience to fulfil its responsibilities.
There were a number of changes during the year. Both Graham
Alcock and Tom Wood stood down and Andrew Didham joined
the Board in February 2017, taking over from Roger Lovering as
Chair of the Board Audit Committee. Dylan Minto was also
appointed CFO in February 2017, after holding the interim position
for the past eight months. Profiles of all the Directors are set out
on pages 66 to 68. I believe that Shawbrook has a strong and
highly committed Board with the mix of expertise, experience and
character that the business requires to go on being successful.
We look forward to welcoming shareholders to our second Annual
General Meeting on 6 June 2017.
Iain Cornish
Chairman
6 March 2017
Key areas of Governance
in this section:
Leadership
The Directors believe that the Board has an appropriate
balance of skills, experience, knowledge and independence
to satisfy the requirements of good corporate governance.
Compliance
Significant time and resource is given to governance matters
by the Board and within the everyday operations of the
Group. This ensures compliance within the framework
of regulations but is also central to delivering sustainable
business success.
Effectiveness
The Board understands that an effective corporate
governance framework is an inherent part of running
a business.
Accountability
A key element of ensuring sound governance is guaranteeing
an appropriate system of controls and accountability.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 66
Corporate governance report continued
Board of Directors
A
Audit Committee
N
Nomination Committee
R
Remuneration Committee
RI
Risk Committee
Committee Chair
Role
Iain Cornish
Chairman and Non-Executive Director
Steve Pateman
Chief Executive Officer
Dylan Minto
Chief Financial Officer
Appointed to the Board in July 2015
Appointed to the
Board in January 2016
Appointed to the
Board in February 2017
Skills and
experience
Iain was a founding member of
the PRA Board at its formation in
2013. He holds a degree in Business,
Economics and Statistics from
Southampton University.
Other external
directorships
Iain is currently senior independent
director of both Arrow Global Group
PLC and St James’s Place plc. Iain
also serves as a Trustee of Macmillan
Cancer Support.
Steve joined Shawbrook from
Santander UK, where he was
Executive Director and Head of
UK Banking, running the bank’s
Corporate, Commercial, Business
and Retail Banking operations as well
as Wealth Management. He joined
Santander in 2008 with responsibility
for building an SME franchise. He is
a Fellow of the Chartered Institute
of Bankers in Scotland.
Dylan spent eight months as Interim
CFO at Shawbrook. He previously
spent 11 years with KPMG (amongst
other things, providing advice on the
original Northern Rock restructure in
2009, and RBS’s participation in the
Asset Protection Scheme) and joined
Shawbrook in 2013. He has extensive
experience in the UK banking and
finance sector. He is ACA qualified
and holds a dual BA Honours degree
in German and Business Studies from
Sheffield University.
None.
None.
Former
appointments
Iain spent 19 years (between 1992
and 2011) at Yorkshire Building
Society, including eight as Chief
Executive Officer (between 2003
and 2011).
None.
Before joining Santander UK, Steve
spent eight years at RBS, where
he was Chief Executive Officer of
Business Banking, Retail Markets and
Managing Director of Commercial
Banking and Corporate Banking,
Corporate Markets.
Committees
RN
Shawbrook Group plc Annual Report & Accounts 2016 67
Stephen Johnson
Deputy Chief Executive Officer and
Managing Director Property Finance
Robin Ashton
Senior Independent Director
Andrew Didham
Independent Non-Executive Director
David Gagie
Independent Non-Executive Director
Appointed to the
Board in May 2015
Appointed to the
Board in March 2015
(Appointed to the Board of
Shawbrook Bank Limited in
December 2011)
Appointed to the
Board in February 2017
Appointed to the
Board in January 2016
Stephen has 14 years’ experience
in building specialist lending
businesses, across commercial and
consumer lending markets in the
UK. He is qualified as a chartered
accountant.
Robin has extensive experience of
retail financial services both in the UK
and internationally. He is a chartered
accountant and holds a Bachelor
of Arts (Hons) degree in Economics
and Law from Durham University.
Andrew has extensive financial
services experience. He is a qualified
accountant, having enjoyed a
successful career at KPMG, becoming
a partner in 1990 and specialising
in financial services.
Stephen is a Director
of Latchglen Ltd.
Robin has been a Non-Executive
Director of Leeds Building Society
since April 2011 and Chairman since
March 2013.
Stephen was part of the founding
team at Shawbrook Bank and was
also a founding member of the
management team at Commercial
First. Prior to this Stephen worked
in corporate finance advisory.
Robin spent 24 years at Provident
Financial plc, joining the Board in
1993 initially as Finance Director,
then Deputy Chief Executive in 1999
and Chief Executive in 2001, leaving
in early 2007. He was Non-Executive
Chairman of the original holding
group for what is now the Group’s
secured lending business, and was
previously a Non-Executive Director
of Albemarle & Bond Holdings plc
and Non-Standard Finance plc.
Andrew is currently an Executive
Vice-Chairman for Rothschild and
also a Non-Executive Director
of Charles Stanley PLC and is
Non-Executive Chairman of its
principal operating company
Charles Stanley & Co Ltd.
Andrew was Group Finance Director
at Rothschild from 1997 to 2012,
before becoming Executive Vice-
Chairman.
David has global experience
in consumer lending, banking,
credit card payments and risk
management. Whilst a Senior
Advisor at the Financial Conduct
Authority and member of the
Payments Systems Regulator
Executive he focused on regulatory
conduct issues relating to retail
banking, consumer credit and
payments.
David is a Non-Executive Director
of Lowell GFKL Group and of
MWS Technologies Ltd. He is also
a Non-Executive Director of Populus
Consulting Ltd.
David was a Senior Advisor at the
Financial Conduct Authority and a
member of the Payments Systems
Regulator Executive Committee. He
was also an Advisory Board Director
for ING Direct, Managing Director of
Consumer Lending for Lloyds TSB,
Chairman of MasterCard UK, and
a director of Visa UK and of Link Ltd.
NA
RI
R
A
RI
A
RI
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 68
Corporate governance report continued
Board of Directors continued
Sally-Ann Hibberd
Independent Non-Executive Director
Paul Lawrence
Independent Non-Executive Director
Roger Lovering
Independent Non-Executive Director
Lindsey McMurray
Non-Executive Director
Appointed to the
Board in November 2015
Appointed to the
Board in August 2015
Paul was formerly Global Head
of Group Internal Audit for HSBC.
Sally-Ann has a broad financial
services background having
worked in Life Assurance, Asset
Management, Retail Banking,
Bancassurance and General
Insurance. Her particular strengths
are in Operations, Technology and
Business Transformation.
Sally-Ann is currently a Non-
Executive Director of Equiniti Group
plc and NFU Mutual, and sits on the
Governing Body of Loughborough
University.
None.
Appointed to the
Board in March 2015
(Appointed to the Board of
Shawbrook Bank Limited in
January 2013)
Roger has over 25 years of
experience in the consumer finance
industry, focussing on lending
to individuals. He has extensive
knowledge of secured and
unsecured lending, both fixed and
revolving term via credit cards. Roger
is a member of ICAEW and has a
degree in Accountancy and Financial
Analysis from Warwick University.
Roger is a Non-Executive Director of
Caswell Consultancy Limited, Logical
Glue Limited and Amigo Loans
Limited. He is also a Non-Executive
Director of Harrods Bank Ltd.
Sally-Ann has held senior roles at
Prudential, Lloyds TSB and Willis
Group. Prior to becoming a Non-
Executive Director she worked
for Willis where she served in two
separate roles over a six year period,
firstly as COO of the International
division and latterly as Group
Operations and Technology Director.
During a 31 year career with HSBC,
Paul was CEO of HSBC Bank, North
America, Head of Global Banking &
Markets USA, CEO of HSBC Singapore,
and CEO of HSBC Philippines.
Roger was Chief Executive Officer at
Santander Cards UK Limited, Head
of European cards at HSBC and Chief
Operating Officer and Director at
HFC Bank Limited.
R
RI
RI
A
N
A
RI
Appointed to the
Board in April 2010
(Appointed to the Board of
Shawbrook Bank Limited in
January 2011)
Lindsey has over 20 years of
experience as a private equity
investor with a particular focus on
the financial services sector. She
holds a first class honours degree
in Accounting and Finance from
Strathclyde University.
Lindsey is managing partner of
private equity fund manager Pollen
Street Capital, an affiliate of the SOF
General Partner (Guernsey) LP. She is
also currently an Executive Director
of Pollen Street Capital Limited and
a Director of Freedom Acquisitions
Limited, Honeycomb Holdings
Limited, Honeycomb Finance plc
and Capitalflow Holdings Limited.
Prior to her time at Pollen Street
Capital, Lindsey was head of RBS
Equity Finance where she led the
management of the RBS Special
Opportunities Funds, a £1.1 billion
private equity fund. Prior to this she
was at Cabot Square Capital, Ltd for
six years where she was a partner.
Shawbrook Group plc Annual Report & Accounts 2016 69
Leadership structure
The primary role of the Board is to provide leadership to the Group, to set the Group’s
long-term strategic objectives and to develop robust corporate governance and risk management
practices. The Board delegates specific powers to some committees, details of which are set out below.
The Board
Nomination Committee
Audit Committee
Disclosure Committee
> Recommends Board appointments
> Plans successions
> Oversees financial reporting
> Monitors internal control
> Monitors internal and External Auditors
> Monitors disclosure controls
> Reviews and advises on the scope and content
of the disclosure
Remuneration Committee
> Monitors the level and structure of Remuneration
for the Senior Executives
Risk Committee
> Reviews the design and implementation
of risk management
> Approves annual performance objectives
> Reviews the Group’s ICAAP
The Executive Committee is responsible for developing the business and delivering against a Board-
approved strategy, putting in place effective monitoring, control mechanisms and setting out a framework
for reporting to the Board.
Executive Committee
Operations Committee
> Provides operational oversight
> Assures quality and performance
management
Group Product Committee
> Approves the Product Approval
and Management policy
Asset and Liability
Committee
> Identifies, manages and controls
> Reports to ERMC as necessary
balance sheet risks;
> Oversees and monitors Liquidity
control frameworks;
> Oversees and monitors of Capital
control frameworks;
> Recommends Liquidity, Funding,
Market and Counterparty Risk
policy for approval; and
> Recommends Liquidity and
Market Risk Appetite Statements
and limits for approval and
monitoring.
Impairment Committee
> Oversees impairment forecasts
and budgets
> Monitors impairment from
lending portfolios
Credit Approval Committee
> Considers and approves individual
credit proposals submitted by
the business units of the Group
which fall outside their permitted
delegated lending authority
Model Management Group
> Ensures that the Group has in
place, and operates effective,
appropriate and robust procedures
and business processes for
managing the Group’s models
and model risk policy.
> Accountable for the overall model
maintenance and governance
across the Group
> Approves/ratifies the model
inventory
Enterprise Risk Management
Committee
> Oversees the design and
implementation of the Risk
Management Framework; and
conduct of business issues
including fair outcomes for
customers
> Oversees regulatory reporting
requirements and the Financial
Crime and Anti-Money
Laundering (AML) regime
> Defines detailed risk appetite
Limit and statements and limits
and recommends to Board Risk
Committee material risk appetite
limits and statements
Policy Review Group
> Ensures that the Group has in
place, and operates effective
and appropriate policies
> Maintains policies and governance
across the Group
> Oversees the Group Policy
Inventory including the annual
refresh of the Group risk policies
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 70
Corporate governance report continued
The Board
The Board has responsibility for ensuring that the Group is managed
effectively and in the best interests of its shareholders, customers,
employees and other stakeholders (including regulators) and its
principal banking subsidiary, Shawbrook Bank Limited. The Board
operates within a formal schedule of matters reserved, which can
be found on the website at investors.shawbrook.co.uk and which
is reviewed and updated on a regular basis.
The Board delegates specific powers for some matters to
Committees, details of which are set out below. The outputs from
each Committee meeting are reported to the Board, thus ensuring
the Board maintains the necessary oversight. More detail on
the Committees and their work is described in the Committees
section below.
Roles and responsibilities
Chairman (Iain Cornish)
Responsible for leadership of the Board, ensuring its effectiveness in
all aspects of its role as well as being responsible for its governance.
Sets the tone for the Group and ensures that the links between the
Board and management and between the Board and shareholders
are strong. Sets the Board agenda and ensures that sufficient time
is allocated to important matters.
Key responsibilities:
> Promote effective flow of information between Board members.
> Provide entrepreneurial leadership.
> Ensure effective communication between Executive Directors
and Non-Executive Directors.
> Chair Board and Nomination Committee meetings.
> Handle relationships with the government, authorities, regulators
and stakeholders.
Chief Executive Officer (Steve Pateman)
Responsible for the day-to-day management of the Group’s
operations, for recommending the Group’s strategy to the
Board and for implementing the strategy agreed by the Board.
Accountable to the Board for the Group’s operational and financial
performance. Supported in decision making by the Executive
Committee comprising of senior managers. The CEO chairs the
Executive Committee, which meets three times a month to provide
oversight and scrutiny of the Group’s business and consider matters
that need to be escalated to the Board.
Key responsibilities:
> Maintain a good working relationship with the Chairman
and Board members.
> Assess the principal risks of the Group.
> Lead communications with shareholders and other stakeholders.
> Ensure effective internal controls and management information
systems are in place.
Senior Independent Director (Robin Ashton)
Provides a sounding board for the Chairman and serves as an
intermediary for the other Directors when necessary. Available to
shareholders if they have concerns, which the normal channels
of Chairman, Chief Executive Officer or other Executive Directors
have failed to resolve, or for which such contact is inappropriate.
Key responsibilities:
> Chair the Nomination Committee when considering
the succession of the Chairman to the Board.
> Meet with other Non-Executive Directors to appraise
the Chairman’s performance.
> Provide feedback to the Board on the Independent Non-Executive
Directors’ views.
Non-Executive Directors
Provide constructive challenge to executive management, and
bring experience and objectivity to the Board’s discussions and
decision making. Monitor the delivery of the Group’s strategy
against the governance, risk and control framework established
by the Board. Led by the Senior Independent Director, the
Non-Executive Directors are also responsible for evaluating
the performance of the Chairman.
Further responsibilities:
> Scrutinise management performance.
> Ensure the integrity of financial information and ensure that the
financial controls and systems of risk management are effective.
> Seek independent professional advice if needed.
Company Secretary (Daniel Rushbrook)
All Directors have access to the services of the Company Secretary
in relation to the discharge of their duties. Responsible for working
with the Chairman to develop Board and Committee agendas and
to ensure that all Board procedures are complied with. Advises the
Board on corporate governance, legal, regulatory and compliance
matters and developments.
Additional duties:
> Ensure the Group’s governance framework is maintained.
> Organise Directors’ training and induction.
> Oversee Board and Committee administration and record-keeping.
Division of responsibilities
There is a clear division of responsibility at the head of the Group.
The roles of the Chairman and the Chief Executive Officer are
separate, clearly defined in writing and have been agreed by
the Board.
Shawbrook Group plc Annual Report & Accounts 2016 71
Board Committees
The Board has a number of Committees: Audit, Risk, Nomination
and Remuneration. The written terms of reference of the
Committees, including their objectives and the authority
delegated to them by the Board, are available upon request
from the Company Secretary or via the Group’s website at
investors.shawbrook.co.uk. All Committees have access to
independent expert advice and the services of the Company
Secretary. The Chairman of each Committee reports to the Board.
The constitution and terms of reference of each Committee
are reviewed annually to ensure that the Committees are
operating effectively and any changes considered necessary
are recommended to the Board for approval.
The Board also has a Disclosure Committee, which is responsible
for monitoring, evaluating and enhancing disclosure controls and
procedures within the Group. In particular, responsibilities set out in
its terms of reference include the identification of inside information
and maintenance of insider lists, the design, implementation and
evaluation of disclosure procedures and the resolution of any
questions concerning the materiality of certain information. The
Disclosure Committee is also required to help the Group make
timely and accurate disclosure of all information where disclosure
is required to meet legal and regulatory obligations.
The Board delegates daily management responsibility for the
Group to the Executive Committee, which meets three times a
month. The Executive Committee is responsible for developing the
business and delivering against a strategy approved by the Board
and ensuring effective monitoring and control mechanisms. There
are also a number of executive sub-committees (a table showing
the governance structure is set out on page 69) which assist the
Executive Committee in discharging its responsibilities.
Composition, meetings and attendance
The Board currently consists of 11 members, namely the Chairman,
six Independent Non-Executive Directors, three Executive Directors
and one Non-Independent Non-Executive Director. Biographical
details of all Directors are given on pages 66 to 68.
The Non-Executive Directors have strong and relevant experience
across all aspects of banking and specifically have relevant skills in
financial management, regulatory, credit assessment and pricing,
liability management and conduct matters. To ensure the Board
continues to have an appropriate balance of skills, these skill sets
are reviewed annually through the completion of a skills matrix
which is considered by the Nomination Committee and the Board.
The Board holds meetings at regular intervals, at which standing
items such as the Group’s financial and business performance,
risk, compliance, IT, human resources and strategic matters are
reviewed and discussed. There is a comprehensive Board pack and
agenda which is circulated beforehand so that Directors have the
opportunity to consider the issues to be discussed, and detailed
minutes and any actions are documented.
The below list shows some of the other noteworthy matters
considered by the Board in the year:
> Review of executive governance.
> Membership of Board Committees.
> Risk Management Framework and risk policies.
> Enterprise Wide Risk Management Report.
> Capital and liquidity adequacy, including ICAAP.
> Target Operating Model.
> Creation of Jersey subsidiary.
> Regulatory developments, in particular the Senior Managers
Regime and IFRS 9.
> Corporate development opportunities.
> Information security.
> HR and people strategy.
> The historical controls breach in the Business Finance Division.
In addition, the Board also held two strategy workshops where,
amongst other matters, the competitive environment and the
impact of Brexit were discussed.
Regular meetings are scheduled up to a year in advance, and if
any Director is unable to attend then they may provide comments
on the papers to the Chairman before the meeting. Meetings are
structured so that appropriate time is devoted to all agenda items.
In addition to these regular, scheduled meetings, ad hoc Board
meetings are held outside the published cycle where circumstances
require – for example, to approve appointments to the Board, any
material transactions or the approval of regulatory submissions.
Throughout the relevant period, the Chairman has held a number
of meetings with Non-Executive Directors, without the Executive
Directors being present. The Senior Independent Director has held
meetings with Non-Executive Directors, without the Chairman
being present.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 72
Corporate governance report continued
The Board has reviewed the independence of each of the Non-
Executive Directors who have served on the Board throughout
the financial year and the relevant period and concluded that
Robin Ashton, David Gagie, Roger Lovering, Paul Lawrence,
Sally-Ann Hibberd and Andrew Didham are independent.
Lindsey McMurray, who represents the Group’s largest shareholder,
is not considered independent. During the relevant period, the
Board has satisfied the Code requirements that at least half the
Board, excluding the Chairman, should comprise Non-Executive
Directors determined by the Board to be independent.
The Non-Executive Directors are considered to be of sufficient
calibre and experience to bring significant influence to bear on the
decision-making process. The Board has satisfied itself that Robin
Ashton is independent notwithstanding his interest in shares in the
Group. It has done this by observing the way he has discharged
his duties as Chairman of the Board Remuneration Committee, his
contribution to and challenge in Board and Committee meetings
and the way he interacts with the Chairman in his role as Senior
Independent Director, including conducting an evaluation of the
Chairman’s effectiveness at the end of 2016.
The Board has also considered the independence of Roger Lovering
who is a Non-Executive Director of Amigo Loans, which has
a wholesale facility from the Group and Sally-Ann Hibberd who
is a Non-Executive Director of Equiniti, which is the Group’s share
registrar and concluded that these outside interests do not affect
their independence. This is based on observations of the way both
have discharged their duties as members of the Board Committees,
their contribution to and challenge in Board meetings.
The terms of appointment of the Non-Executive Directors specify
the amount of time they are expected to devote to the Group’s
business. They are currently required to commit to at least four
days per month which is calculated based on the time required to
prepare for and attend Board and Committee meetings, meetings
with shareholders and training.
In 2016, a total of 13 Board meetings were held, 11 of which were
scheduled and two of which were ad hoc meetings. Attendance
at meetings is shown below:
Director
Iain Cornish
Graham Alcock
Robin Ashton
David Gagie
Sally-Ann Hibberd
Stephen Johnson
Paul Lawrence
Roger Lovering
Lindsey McMurray
Steve Pateman
Tom Wood1
Date appointed
or resigned in the year
Meetings attended/
meetings eligible to
attend as a Director
Resigned
9 June 2016
Appointed
1 January 2016
Appointed
1 January 2016
Resigned
30 June 2016
13/13
3/4
13/13
13/13
12/13
13/13
12/13
13/13
11/13
13/13
4/6
1 Dylan Minto was appointed Interim Chief Financial Officer on 30 June 2016 following
Tom Wood’s resignation.
Since the year-end Andrew Didham was appointed as an
Independent Non-Executive Director on 1 February 2017 and
Dylan Minto as Chief Financial Officer and Executive Director
on 6 February 2017.
Board balance, independence and time commitment
The Board considers that the balance of skills and experience is
appropriate to the requirements of the Group’s business and that
the balance between Executive and Non-Executive Directors allows
it to exercise objectivity in decision-making and proper control.
Each member of the Board has had access to all information relating
to the Group, the advice and services of the Company Secretary
(who is responsible for ensuring that Board procedures are followed)
and, as required, external advice at the expense of the Group.
The Board has reviewed the structure, size and composition of the
Board (together with an evaluation of the Board’s balance of skills,
knowledge and experience); the membership of the various Board
committees and the expected time commitment; and the policy
for Board appointments for Executive and Non-Executive Directors
throughout the year.
Shawbrook Group plc Annual Report & Accounts 2016 73
Conflicts of interest
All Directors have a duty to avoid situations that may give rise to
a conflict of interest. Formal procedures are in place to deal with
any conflict of interest. Directors are responsible for notifying the
Chairman and the Company Secretary as soon as they become
aware of any actual or potential conflict of interest for discussion
by the members of the Board who will take into account the
circumstances of the conflict when deciding whether to permit
potential conflict or to impose conditions on the Director in the
interests of the Group. Any actual or potential conflicts of interest
are recorded in a central register and Directors are also required,
on an annual basis, to confirm that they are not aware of any
circumstances which may affect their fitness and propriety and
therefore their ability to continue to serve on the Board. In addition,
Directors are required to seek the Board’s approval of any new
appointments or changes in commitments.
Induction, training and professional development
On appointment, all new Directors receive a comprehensive
and tailored induction, having regard to any previous experience
they may have as a director of a public company or otherwise.
The Company also provides additional induction materials and
training for those Directors who are also Committee chairs. The
content of our Director induction programmes is designed, and
the timing planned, with input from the new Director. The induction
information is delivered in a variety of formats; these include face
to face meetings with the Chairman, Board members and senior
management and input from external advisers and training courses
as appropriate. These elements are supplemented by the provision
of our key governance documents as reading material, including
policies, procedures, Board and Committee minutes, the Board
meeting schedule and plans, Group structure charts and copies
of the Listing Rules, Disclosure and Transparency Rules, the Code
and information on directors’ duties and responsibilities under the
Companies Act 2006.
Appropriate training is made available to any newly appointed
Director, having regard to any previous experience they may
have as a director of a public company or otherwise. An on-going
programme of training is available to all members of the Board
which includes professional external training, internal on-line
training and bespoke Board training on relevant topics such as
regulatory developments, changes to the Companies Act 2006 or
accounting requirements. Directors are also encouraged to devote
an element of their time to self-development. This is in addition
to any guidance that may be given from time to time by the
Company Secretary.
The Chairman is responsible for reviewing the training needs of
each Director, and for ensuring that Directors continually update
their skills and knowledge of the Group. All Directors are advised
of changes in relevant legislation, regulations and evolving risks,
with the assistance of the Group’s advisers where appropriate.
Dedicated Board training sessions are held and scheduled around
Board meetings. During 2016 training was provided in this format
on ICAAP, ILAAP, an overview of IFRS 9 requirements, the Mortgage
Credit Directive and Consumer Credit Act, the Market Abuse
Directive, a remuneration overview and the FCA’s regulation
of conduct.
The Board receives detailed reports from executive management on
the performance of the Group at its meetings and other information
as necessary. Regular updates are provided on relevant legal,
corporate governance and financial reporting developments and
Directors are encouraged to attend external seminars on areas of
relevance to their role.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 74
Corporate governance report continued
Board performance evaluation
The Board carried out an externally facilitated evaluation, using Praesta Partners, an independent facilitator with no links to the Group, at
the end of 2016. The assessment was conducted according to the guidance set out in the Code.
Given the changes within the organisation since the IPO in April 2015, the review sought to address whether the Board does the
right work, to the right agenda, using the right information, with the right people, and operating the right culture.
The evaluation was based around a number of key areas:
✓ Board composition, role, skills, diversity, balance and experience
✓ Board leadership and culture
✓ Interaction between the work of the Board and the work of the executive; and
✓ Strategic risk and the wider risk framework.
This review explored the Board’s journey to date, looked at its trajectory and considered how Board effectiveness could be enhanced further.
The Review was based on data collected between September and December 2016 and comprised of:
Stage 1
Comprehensive questionnaire
and review of papers
Stage 2
Interviews and
one-on-one discussion
Stage 3
Observation
Stage 4
Evaluation
and reporting
Stage 5
Discussion
Stage 1 (Comprehensive questionnaires and review of papers)
> Analysis of two electronic questionnaires completed by Directors.
One assessed how the Board spent its time and energy to date
and how it would like to continue. The other looked at the role
and culture of the Board.
> Desk-top reviews of the Board and Committee packs over the
past 12 months. This helped determine what the Board looked
at in its annual cycle and how the value chains between the
Board and the Board sub-committees and between the Board
and the Executive Committee operated.
Stage 2 (Interviews and one-on-one discussion)
> Structured, one on one interviews with all Directors, the Interim
CFO and the General Counsel to whom the Company Secretariat
reports.
> This involved a structured, round table discussion with other
Executive Committee members.
Stage 3 (Observation)
> Observation of the Board Risk Committee and Board Audit
Committee meetings held in October and November and
of the Board meeting held on 2 November 2016.
Stage 4 (Evaluation and reporting)
Production of a report with findings based on:
> Evaluating the documentary, observation, questionnaire and
interview data.
> Using the Code and the PRA’s Supervisory Statement SS5/16
‘Corporate governance: Board responsibilities,’ as points
of reference.
> Utilising reviewer insights into how other boards work.
Stage 5 (Discussion)
Discussion with the Chairman, Board and Executive Committee.
Shawbrook Group plc Annual Report & Accounts 2016 75
Board Review and Insights
The review found that:
✓ overall the Board provided effective oversight to the business whilst also:
> commissioning and being highly engaged in the drafting, approval and implementation of robust risk policies and frameworks; and
> providing guidance and input to the Executive Committee’s determination of longer term strategies and plans for the Group.
✓ progress had been made in terms of:
> membership;
> the focus of its work;
> its delegation to Committees and to the Executive Committee; and
> culture.
The report found that the conditions are in place to sustain a strong rate of progress.
Follow up:
The results of the evaluation will be discussed with the Chairman, Board and Executive Committee to formulate a plan against which
progress will be assessed.
The Senior Independent Director held discussions with other members of the Board to assess the performance of the Chairman. They are
satisfied that the Chairman devotes a significant amount of time to the Group’s business and that he had performed effectively during 2016.
In particular they are satisfied that the Chairman has ensured that the Board focused on the key issues facing the Group.
Internal control
The Board has overall responsibility for the Group’s system of internal
control and for monitoring its effectiveness. The Audit Committee
and Risk Committee have been in operation throughout the
relevant period and oversee the Group’s system of internal control.
Material risk or control matters, which this year included the controls
breach in the Business Finance Division (see page 49 in the Risk
management report for further information), together with the
appropriate remedial action, are reported by the Audit Committee
and Risk Committee to the Board. The Board monitors the on-going
process by which ‘top risks’ to the Group are identified, measured,
managed, monitored, reported and challenged. This process is
consistent with both the Group Risk Management Framework and
with internal control and related financial and business reporting
guidance issued by the Financial Reporting Council in September
2014, and has been in place for the relevant period under review
and up to the date of approval of the Annual Report & Accounts.
The key elements of the Group’s system of internal control
include regular meetings of the Executive and Risk Management
Committees, together with annual budgeting, and monthly financial
and operational reporting for all businesses within the Group.
Conduct and compliance are monitored by management, the
Group’s Risk function, Internal Audit and, to the extent it considers
necessary to support its audit report, the External Auditor.
The Board assesses the effectiveness of the Group’s system of
internal controls (including financial, operational and compliance
controls and risk management systems) on the basis of:
> established procedures, including those already described,
which are in place to manage perceived risks;
> reports by management to the Audit Committee and Risk
Committee on the adequacy and effectiveness of the Group’s
system of internal control and significant control issues;
> under the direction of the Chief Risk Officer, the continuous
Group-wide process for formally identifying, evaluating and
managing the significant risks to the achievement of the Group’s
objectives; and
> reports from the Audit Committee on the results of internal
audit reviews and work undertaken by other departments.
The Group’s system of internal control is designed to manage, rather
than eliminate, the risk of failure to achieve the Group’s objectives
and can only provide reasonable, and not absolute, assurance
against material misstatement or loss. In assessing what constitutes
reasonable assurance, the Board considers the materiality of financial
and non-financial risks and the relationship between the cost of, and
benefit from, the system of internal control. During 2016 the Group
continued to invest in its risk management capability to ensure that
it remains relevant, appropriate and scalable to support the Group’s
objectives over the duration of the strategic plan, and embedded
these improvements into the Group’s Risk Management Framework.
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76
Corporate governance report continued
The Board regularly reviews the actual and forecast performance
of the business compared against the annual plan, as well as other
key performance indicators.
Lines of responsibility and delegated authorities are clearly defined.
The Group’s policies and procedures are regularly updated and
distributed throughout the Group. The Audit Committee and
Risk Committee receive reports on a regular basis on compliance
with the Group’s policies and procedures.
Shawbrook Bank Limited (the main operating subsidiary of the
Group) is subject to regulation by the Prudential Regulation
Authority (PRA) and the Financial Conduct Authority (FCA) and as
such undertakes an Internal Capital Adequacy Assessment Process
(ICAAP) and an Internal Liquidity Adequacy Assessment Process
(ILAAP) on a regular basis. These processes benefited from ongoing
improvements in risk assessment during 2016 including, in the case
of the ICAAP, an update to reflect the latest guidance from the PRA
on approaches to the calculation of Pillar 2 capital. The ICAAP and
ILAAP are reviewed by the Board from time to time. The process
involves an assessment of all the risks that the Group faces in its
operating environment, the likelihood of those risks crystallising
and their potential materiality and the effectiveness of the control
framework in mitigating each risk. This includes a thorough
evaluation of how the Group would be impacted by severe,
but plausible, periods of stress in its stress testing programme.
The purpose of the process is to establish the level and quality
of capital resources that the business should maintain, both
under current market conditions and under a range of stressed
scenarios, in order to ensure that financial resources are sufficient
to successfully manage the effects of any risks that may crystallise.
Relationships with shareholders
The Board remains committed to maintaining good relationships
with shareholders. There is a good dialogue with institutional
shareholders. The Chief Executive Officer and the Chief Financial
Officer meet with institutional shareholders on a regular basis.
Institutional shareholders will in future be given the opportunity
to meet with the Chairman and/or other Non-Executive Directors
if they have concerns that have not, or cannot, be addressed
through the Chief Executive Officer or the Chief Financial Officer.
The Chairman is responsible for ensuring that appropriate channels
of communication are established between the Chief Executive
Officer (and the other Executive Directors) and shareholders and
ensuring that the views of the shareholders are made known to
the Board; this includes feedback prepared by the Group’s brokers
on meetings held with institutional shareholders.
The Group recognises the importance of ensuring effective
communication with all of its shareholders. An annual financial
report is distributed to all shareholders and to other parties, who
may have an interest in the Group’s performance. This report,
together with a wide range of other information, including the
half-yearly financial report, interim management statements,
regulatory announcements and current details of the Group’s
share price, are made available on the Investor section of the
Group’s website at investors.shawbrook.co.uk.
Shawbrook Group plc Annual Report & Accounts 2016 Corporate Governance Report continued
Report of the Nomination Committee
77
“ The Committee is responsible
for ensuring that appropriate
succession and development
plans are in place.”
Dear Shareholder
I am pleased to present the report of the Nomination Committee.
The Committee’s primary focus in 2016 has been on Board
succession and development plans. This has included considering
plans for the continued development of key personnel within the
business to ensure a pipeline of executive talent, and we have
worked with the Group Human Resources Director to monitor the
implementation of these plans. We remain committed to ensuring
that our succession and development plans are robust and position
us well to deal with any future requirements at Board and senior
management levels. Succession planning and talent development
will therefore continue to be an area of particular focus for the
Committee in 2017 and future years.
During the year the Committee recommended the appointment
of Andrew Didham as Chairman of the Board Audit Committee
and Dylan Minto as Chief Financial Officer to the Board.
The Board also undertook an externally facilitated Board
effectiveness review which found that significant progress had been
made in terms of the Board’s membership, the focus of its work,
its delegation to Committees and to its executive and its culture.
The outcomes of the review (further details of which can be found
on page 74) will be considered and reviewed throughout 2017.
We have also continued to strengthen our belief in the benefits of
a diverse and inclusive working environment and remain committed
to seeing that in our workforce. We have signed the Government’s
Women in Finance Charter, an initiative by HM Treasury which
seeks to increase the representation of women in financial services,
particularly at senior levels. We have set our own targets in line with
the Charter to achieve a third of women on our Board and 40%
in senior management positions by 2020. Our diversity policy is
described on page 78.
Further information on the activities of the Committee is provided
in the following report.
Iain Cornish
Chairman of the Nomination Committee
6 March 2017
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Corporate governance report continued
Report of the Nomination Committee continued
Role of the Nomination Committee
The Nomination Committee’s principal function is to keep the
Board’s governance, composition, skills, experience knowledge
and independence and succession plans under review and to
make appropriate recommendations to the Board.
Appointments
The Committee ensures that a diverse pool of candidates is
considered for any vacancy which arises and any appointments
are made based on merit, having regard to the skills, competencies
and experience of the candidate.
During the year, the Committee recommended to the Board
the appointment of Andrew Didham as an Independent
Non-Executive Director, and Dylan Minto as an Executive Director.
These appointment processes involved the services of two
executive search agencies, Odgers Berndston and Ridgeway
Partners, both of which have no other connection with the Group.
In each case, the executive search agencies provided a shortlist
of candidates who were compared against the role profile and
candidate brief and interviewed by members of the Nomination
Committee, following which recommendations to appoint Andrew
and Dylan were submitted to and approved by the Board.
Diversity
The Group is committed to improving diversity in its membership
and whilst new appointments continue to be based on skill,
experience and knowledge, careful consideration is given to
diversity. During the year, the Board approved the introduction
of a formal Diversity Policy, as recommended by the Nomination
Committee.
When searching for candidates for Board appointments, the
Nomination Committee takes into account a number of factors,
including the benefits of diversity, including gender diversity,
and the balance of the composition of the Board. The overriding
requirement is to ensure that recommendations for appointments
are made on merit against objective criteria, and that the best
candidates are put forward for Board appointments.
Succession planning
The Committee is responsible for ensuring that appropriate
succession and development plans are in place for appointments
to the Board. We are satisfied that the succession planning
structure in place is appropriate for the size and nature of the
Group. Succession planning arrangements will be kept under
regular review in the future.
As part of the identification and nomination process for Board
approval, the Committee carries out a formal selection process for
Executive and Non-Executive Directors and subsequently proposes
to the Board any new appointments. Ultimate responsibility for
the appointment of Directors resides with the Board.
The Committee also oversees succession planning for Directors
and senior managers below Board level. The Nomination Committee
also has oversight of recruitment activity in relation to anyone
designated a Senior Manager under the Senior Managers Regime.
The Chairman of the Committee reports to the Board on the
outcome of meetings.
A full copy of the terms of reference of the Nomination Committee
can be found on the Group’s website at investors.shawbrook.co.uk.
Membership, composition and meetings
The Nomination Committee is chaired by Iain Cornish (the Chairman
of the Group) and its membership comprises three Non-Executive
Directors, a majority of whom are Independent Non-Executive
Directors in line with provision B.2.1 of the Code.
Meetings are held at least four times per year. The Nomination
Committee met on seven occasions during 2016 to discuss
proposed appointments, succession and development and
to evaluate the balance of skills, experience, independence and
knowledge on the Board. Individual meeting attendance during
2016 is set out below. The number of meetings held during the
period, and the number of meetings that each Director was eligible
to attend as a member is shown below:
Date joined or
stepped down
in the year
Meetings attended/
Meetings eligible to
attend as a member
Member
Iain Cornish
Robin Ashton
Graham Alcock
Stepped down
3 March 2016
Paul Lawrence
Joined 3 March 2016
7/7
7/7
1/ 1
6/6
At the invitation of the Chairman of the Nomination Committee,
on occasion, other attendees included the Chief Executive Officer,
Human Resources Director and Lindsey McMurray (Non-Executive
Director).
Shawbrook Group plc Annual Report & Accounts 2016 79
Election of Directors
Having reviewed the findings of the Board effectiveness process,
the Nomination Committee is satisfied that the Board continues to
be effective and has recommended to the Board that each of the
Directors should stand for re-election (in accordance with provision
B.7.1 of the Code) at the 2017 Annual General Meeting.
Primary areas of focus during the year
During the relevant period the Nomination Committee considered
the following principal items:
> a review of the current structure, size and composition
of the Board;
> the time commitment expected of Non-Executive Directors
> leadership and succession planning;
> the proposed election and re-election of Directors at the
forthcoming Annual General Meeting;
> the appointment of new Non-Executive Director;
> the appointment of a new CFO;
> responsibilities under the Senior Managers Regime;
> the Board effectiveness review, and
> the implementation of the Group’s Diversity Policy.
CEO Induction
All Directors are required to take part in an induction process.
This includes comprehensive training in line with the Senior
Managers Regime as prescribed by the PRA and FCA. In
addition, Directors are required to undertake training in the
regulatory and compliance frameworks, and are also required
to gain an understanding of relevant legal requirements
such as the Market Abuse Directive and Money Laundering
legislation. Training is tailored to the requirements of each
Director’s role.
Steve Pateman joined Shawbrook in 2016 and undertook
comprehensive training related to his senior function. He had
sessions with the Chairman to gain insight into the purpose
and scope of the CEO role. Further training included:
> understanding his involvement in sub-committees;
> gaining an overview of Board Director duties,
responsibilities and protocols;
> reviewing past Board packs, Committee packs and minutes;
> gaining an understanding of current issues relevant to the
CEO, including through an appropriate handover from the
previous jobholder;
> understanding the strategic implementation of the Board’s
policies in relation to corporate governance across the
Group and amongst the management team;
> receiving a full briefing on the UK Corporate Governance
Code;
> meeting with divisional heads to consider, in depth, the
key challenges facing their businesses;
> meeting key Group advisers; and
> holding discussions with the Chairman and Company
Secretary.
In accordance with Provision B.4 of the UK Corporate
Governance Code, in addition to providing an induction when
Directors join the Board, care is taken to ensure they update
and refresh their skills and knowledge.
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Corporate governance report continued
Report of the Audit Committee
We have an annual work plan framed around the Group’s financial
reporting cycle which ensures that the Committee considers
all matters delegated to it by the Board and covers significant
accounting estimates and judgments – which are set out in a
table on page 82.
During the year the Financial Reporting Council (FRC) reviewed the
2015 Annual Report & Accounts and raised a number of points to the
Board. The resolution of the actions was overseen by the Committee
and I am pleased to report that all matters were successfully
resolved. The majority of the points related to enhancing disclosures
to improve the quality of our Annual Report & Accounts.
Inevitably there are also one-off matters which require the
Committee’s attention which this year included the impairment
relating to the controls breach in the Business Finance Division (see
page 49 in the Risk management report for further details). The
Committee worked closely with management and the Internal
Audit function to scope the size of the issue and determine the
appropriate impairment.
Another key area of focus was the roll-out of the IFRS 9
implementation programme. Particular focus in 2016 was on our
preparedness for IFRS 9 and parallel run in 2017, which aims to
ensure we understand the impacts and are ready ahead of the
effective date. Progress has been made in developing our Expected
Credit Loss (ECL) models, including our Credit Grading Framework.
The IFRS 9 programme sponsored jointly by the Chief Financial
Officer and Chief Risk Officer and managed by a single steering
committee is within its build phase with the bulk of the testing and
implementation due to take place in early 2017.
During the year the Committee received regular reports on the
progress of this project, and has challenged management to ensure
its implementation runs smoothly.
Looking ahead to 2017, in addition to the routine audit schedule,
the key areas of focus for the Committee will be IFRS 9 and giving
consideration to the transition towards our own ‘in-house’ Internal
Audit function.
“ The Committee has both members
with a longstanding knowledge
of the business and those who
can provide fresh perspectives.”
Dear Shareholder
I am pleased to present my first report as Chairman of the Audit
Committee, a role which I assumed on 1 February 2017, having
succeeded Roger Lovering, who remains a Committee member.
As a Committee, we possess, as required by provision C.3.1 of the
UK Corporate Governance Code (the Code), recent and relevant
financial expertise.
It was a busy year for the Committee in 2016, being the first full
financial year following the IPO of the Group. During the year,
David Gagie joined the Committee and Graham Alcock stepped
down. As a result of these changes, we feel that the Committee
has both members with a longstanding knowledge of the business
and those who can provide fresh perspectives.
Andrew Didham
Chairman of the Audit Committee
6 March 2017
Shawbrook Group plc Annual Report & Accounts 2016 81
Accountability
Role of the Audit Committee
The Audit Committee is responsible on behalf of the Board,
for, amongst other things:
Membership and meetings
The Audit Committee comprises four members. In accordance
with provision C.3.1 of the Code, all members of the Committee
are Independent Non-Executive Directors of the Group.
The Committee meets as required, but holds at least six meetings
a year. The Committee met formally seven times last year, and met
on another five occasions to discuss other matters. The number of
meetings held during the period that the Director was a member
and therefore eligible to attend is shown below.
Date joined
or stepped down
Joined
1 February 2017
Stepped down
3 March 2016
Joined
3 March 2016
Meetings attended/
Meetings eligible to
attend as a member
7/7
2/2
7/7
4/5
7/7
Andrew Didham
Roger Lovering
Graham Alcock
Robin Ashton
David Gagie
Paul Lawrence
The Company Secretary acts as secretary to the Committee.
Other individuals attend at the request of the Committee Chairman.
During the year, the External Auditor, Chairman of the Board,
Chief Executive Officer, Chief Financial Officer, Chief Risk Officer,
Internal Audit and other senior managers as appropriate would
usually attend meetings to report to the Committee and provide
clarification and explanations where appropriate. The Committee
also met with the external and internal auditors without executive
management on regular occasions in 2016.
The Board is satisfied that Andrew Didham and his predecessor,
Roger Lovering, have recent and relevant financial experience,
as referred to in the Code.
A full copy of the terms of reference for the Audit Committee can
be obtained by request to the Company Secretary or via the Group’s
website at investors.shawbrook.co.uk.
> monitoring the integrity of the Annual Report & Accounts and
Member
Financial reporting process
> the significant areas of judgement and their application to the
results of the Group;
> reviewing the Group’s Annual Report & Accounts and the Group’s
Interim Report to ensure that, taken as a whole, based on the
information supplied to it and challenged by the Committee
and on its judgement is fair, balanced and understandable and
advising the Board to that effect;
the Interim Report and reviewing the critical accounting policies,
disclosure obligations and changes in accounting requirements;
> reviewing and challenging the going concern and viability
assessment undertaken by management, further details of
which can be found on page 83; and
> reviewing the Group’s Pillar III disclosures to ensure compliance
with prescribed requirements.
Internal controls and risk management
> considering the process used to evaluate the effectiveness of
internal controls, financial reporting and risk management;
> considering the extent of the work undertaken by the finance
function and ensuring the finance teams have adequate resources
to ensure that the control environment continues to operate
effectively; and
> continuously considering any findings of internal investigations
into control weaknesses, fraud or misconduct and management’s
responses to any deficiencies identified.
External audit
> making recommendations to the Board in relation to the
appointment, re-appointment and removal of the External
Auditor and approving the auditor’s remuneration and terms
of engagement; and
> reviewing the findings of the External Audit and the
level of challenge produced by the External Auditor and
considering management’s responsiveness to the findings
and recommendations.
Internal audit
> monitoring the activity, role and effectiveness of the Internal
Audit function and their audit programme;
> approving the audit plan and budget and monitoring the progress
against it at regular intervals, confirming that appropriate resource
and capability is in place to execute the plan effectively; and
> considering the internal audit reports, including thematic and
routine reviews on prudential and regulatory compliance.
Whistleblowing
> continuously considering the Group’s whistleblowing policies
and procedures, including the protection of whistleblowers.
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Corporate governance report continued
Report of the Audit Committee continued
Significant areas of judgement
During 2016 the following significant issues and accounting judgements were considered by the Committee in relation to the 2016
Annual Report & Accounts:
Significant financial
and reporting issue
Impairment of loans and advances
Effective interest rate
Impairment assessment of goodwill
How the Committee addressed the issue
The Committee received presentations from management explaining the provisioning
methodology across the Group’s lending operations ahead of both the interim and full
year results. The Committee considered and challenged the provisioning methodology
applied by management, including the inputs to the statistical loan loss models
prepared by the Group Risk function. The Committee also considered the calibration of
model parameters in the light of economic indicators, including house price movements
and underlying book performance.
The Committee concluded that the impairment provisions, including management’s
judgements, were appropriate. The disclosures relating to impairment provisions are
set out in Note 14 to the Financial statements.
Interest earned on loans and receivables is recognised using the Effective Interest
Rate (EIR) method. EIR is calculated on the initial recognition of loan lending through
a discounted cash flow model that incorporates fees, costs and other premiums or
discounts. There have been no changes to the EIR accounting policies during the year.
The Committee considered and challenged the EIR methodology applied by
management, including expected future customer behaviours, redemption profiles and
changes to existing redemption profiles and concluded that the EIR methodology was
appropriate as at 31 December 2016. The disclosures relating to EIR are set out in Note 3
to the Financial statements.
The Committee considered and challenged the annual assessment of the carrying value
of goodwill as well as a paper during the year setting out the final goodwill impairment
review of the Business Credit cash generating unit (CGU) prior to the integration of the
Business Credit and Asset Finance CGUs into a single Business Finance CGU.
Following the review and challenge of the Group’s value-in-use calculations and key
assumptions, the Committee agreed with management’s conclusion that the carrying
value of the Business Credit goodwill prior to integration into Business Finance, and the
Group’s carrying value of goodwill as at 31 December 2016 was reasonably stated.
In addition to the matters described above, the Committee
considered issues relating to the IFRS 9 implementation process
and the acquisition of loan books. The Committee was regularly
updated on the progress of the IFRS 9 programme against
the programme plan. Areas of focus include the review and
interpretation and of technical accounting opinions, policy setting
and operational changes required in the Finance function to
implement IFRS 9.
The build phase of the IFRS 9 programme is near completion
and the Committee will oversee the parallel run in 2017.
At the end of 2015, the Group made a Property portfolio
acquisition. During 2016, the Committee considered and
challenged the assumptions used in determining the unwind of
the fair value discount and concluded that the fair value adjustment
as at 31 December 2016 was reasonably stated.
Shawbrook Group plc Annual Report & Accounts 2016 83
Financial reporting process
During the year, the Audit Committee reviewed and discussed
the financial disclosures made in the Annual Report & Accounts,
half-yearly financial report, interim management statement and
the other trading statements made by the Group together with
any related management letters, letters of representation and
reports from the External Auditors. Significant financial reporting
issues and judgments were considered together with any significant
accounting policies and changes proposed to them.
Going concern and long-term viability
The Committee reviewed a detailed paper presented by
management setting out the assumptions underlying the going
concern statement. The paper covered the capital position of the
Group, improvements to the Group’s Risk Management Framework
and governance, and the work performed on the Group’s ICAAP.
Based on the work performed, the Committee concluded that
the Group will have adequate resources to continue in operational
existence for the period of assessment of 12 months from the
date of signing the accounts. The Committee reported accordingly
to the Board, which also considered Going Concern in detail.
In order to support the Board’s approval of the statement on
page 56 as to the longer term viability of the Group, the Committee
reviewed papers from management setting out the intended
approach to the disclosures and providing details in support of
the statement based in particular on the Group’s medium term
plan and the results of stress testing.
During the relevant period the Audit Committee discharged its
responsibilities by performing the following activities:
Internal controls and risk management
Together with the Group’s Risk Committee, the Audit Committee has
performed a robust assessment of the Risk Management Framework
and principal risks and uncertainties. Details of the risk management
systems in place and principal risks and uncertainties are provided
within the Risk management report on pages 40 to 56.
The Group Risk and Internal Audit functions review the extent to
which the system of internal control is effective; is adequate to
manage the Group’s principal risks; safeguards the Group’s assets;
and, in conjunction with the Company Secretary and the Group’s
Legal and Compliance functions, ensures compliance with legal
and regulatory requirements. It provides independent and objective
assurance on risks and controls to the Board Audit Committee and
senior management.
Internal Audit’s work is focused on areas of greatest risk to the Group,
as determined by a structured risk assessment process involving
executive directors and senior management. The output from the
process is summarised in an annual audit plan, which is approved
by the Audit Committee.
The role of the Internal Audit function and the scope of its work
continue to evolve to take into account of changes within the
business and emerging best practice.
On behalf of the Board, the Committee through discharging
its responsibilities under its terms of reference undertakes
regular reviews of the effectiveness of the Group’s systems of
internal control as set out on page 75. In addition, following the
implementation of upgrades to the Group’s risk management
systems and controls throughout 2015 and 2016 and the subsequent
identification of the controls breach in the Business Finance Division,
the Group engaged external forensic accountants to provide
assurance on the adequacy of the revised control framework.
Internal Audit
The Group has outsourced the Internal Audit function to Deloitte
LLP since June 2013. The Committee is satisfied that in 2016 this
continued to be the most appropriate way of managing the delivery
of internal audit services, however as the size and nature of the
business has changed, the Audit Committee has considered the
need and suitability of transitioning to an ‘in-house’ Internal Audit
function, on the subject of which it will make a recommendation
to the Board in 2017.
The Group’s system of internal control has been designed to
manage risk and whilst risk cannot be eliminated, the new system
improvements assist in providing reasonable assurance against
material misstatement or loss.
The Audit Committee receives reports on a regular basis on
compliance with the Group’s policies and procedures and the
effectiveness of the Group’s systems and controls. The Group’s
Internal Audit function as the third line of defence is outsourced to
Deloitte LLP providing assurance to the Group that the specialist
nature of the Group’s activities can be fully assessed.
The terms of reference of the Internal Audit function are set out
in the Internal Audit Charter. The Audit Committee approves the
annual audit plan and audit methodology for Internal Audit and
monitors progress against the plan during the year. The Internal
Audit Partner agrees the programme of work and reports directly
to the Committee on the outcomes. Special reviews are carried
out as required.
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Corporate governance report continued
Report of the Audit Committee continued
Internal Audit carried out a significant number of audits during
2016 of varying size and complexity. Thematic audits focused on,
amongst other things, new business processes, capital and liquidity
and the Risk Management Framework. Audit reports are circulated
to the Audit Committee members prior to each scheduled meeting
and the Committee monitors progress against actions identified
in these reports.
External Audit independence and objectivity
The Committee is responsible for reviewing the independence
of the Group’s External Auditor KPMG LLP and making a
recommendation to the Board on their engagement. KPMG LLP
has a policy of partner rotation which complies with regulatory
standards, and the audit partner changed with effect from March
2016, in line with this requirement.
The Committee used a questionnaire to monitor and review
Internal Audit’s effectiveness using feedback from the Board,
senior management and regular attendees. The Audit Committee
also assesses annually the resources available to Internal Audit to
complete its remit. Internal Audit has unrestricted access to all Group
documentation, premises, functions and employees as required to
enable it to perform its functions. The appointment and removal
of Internal Audit staff is the responsibility of the Audit Committee.
External Audit
The Audit Committee oversees the relationship with the External
Auditor and considers the External Auditor’s engagement (including
remuneration), their effectiveness, their continued independence
and their objectivity. The Committee also considers audit and
audit strategy (including the planned levels of materiality). The
External Auditor attends the Committee meetings as appropriate
and meets at least annually with the Committee without executive
management. The Chairman of the Committee also meets privately
with the External Auditor before each Committee meeting.
During the year, the Committee received regular detailed reports
from the External Auditor including formal written reports dealing
with the audit objectives; and reports on: the auditors’ qualifications,
expertise and resources; the effectiveness of the audit process;
procedures and policies for maintaining independence; and
compliance with the ethical standards issued by the Auditing
Practices Board. The External Auditor’s management letter is
reviewed, as is management’s response to issues raised and
progress is monitored against actions identified in these reports.
The Committee monitors the latest ethical guidance regarding
rotation of audit partners. Non-audit services provided by the
External Auditor is regularly monitored by the Committee.
Maintaining an independent relationship with the Group’s auditor
is a critical part of assessing the effectiveness of the audit process.
The Committee has a formal policy on the use of the Auditor for
non-audit work and ensures that work is only awarded when, by
virtue of the Auditor’s knowledge, skills or experience are a decisive
factor and when the Auditors are clearly to be preferred over
alternative suppliers.
The Committee receives and reviews each year an analysis of all
non-audit work and reviews the level of audit and non-audit fees
paid to KPMG LLP and also ensures that significant assignments
are not awarded without first being subject to the scrutiny of the
Committee. The fees paid to KPMG for audit and non-audit services
are set out in note 7 of the Financial statements. The key principles
of the policy on non-audit services are:
Summary of non-audit services policy
The Committee reviewed payment for non-audit services in 2016.
Prohibited services include services remunerated on a success
(i)
fee or participation in activities normally undertaken by
management.
(ii) The Committee approved a list of permitted audit related
reviews of the Group’s interim results or any other review of
its accounts for regulatory purposes. (Details of the services
provided by the External Auditors can be found in note 7
of the Financial statements).
(iii) The Committee maintains a list of prohibited services which
is aligned to the ‘black-list’ of services set out in the EU Audit
regulations and directives.
(iv) Pre-approved services up to £100,000 require approval by the
CFO/CEO or the Chairman of the Audit Committee. All services
that are not pre-approved, or are discretional or exceed the
monetary threshold of £100,000 should be referred to the
Audit Committee for approval.
The Committee confirms that no prohibited services were
provided by the External Auditor and it is satisfied that the
policy on the supply of non-audit services could not lead to
audit objectivity and independence being compromised.
In order to comply with the policy, the External Auditor ceased
the provision of tax advisory services from 1 January 2017.
Shawbrook Group plc Annual Report & Accounts 2016 85
In December 2016 the Committee assessed the effectiveness of the
External Auditor and the audit process. The review included seeking
the views of Audit Committee members, Executive Directors and
senior executives. The review concluded that the external audit
process was effective.
The Committee is satisfied with the performance of the External
Auditor in 2016 and the policies and procedures in place to maintain
their objectivity and independence, and has recommended that
they be re-appointed at the forthcoming Annual General Meeting.
Audit tender
The Group appointed KPMG Audit Plc as External Auditor from
2011 to 2014, and KPMG LLP thereafter. The Group did not carry out
a formal tender process in the year as it sought to embed stability
in the year following the IPO. KPMG LLP has continued as External
Auditor. However, the Committee has adopted the transitional
provisions under the EU Statutory Audit Directive permitting the
Group to put the external contract out to tender no later than
2021. The Group will keep under review regulatory and legislative
developments around the tenure of the Auditors and will undertake
a formal competitive tender at the appropriate time. Following
discussions with KPMG LLP and consideration by the Committee
Chairman and the Chief Financial Officer of possible candidates,
approval was given to the appointment of John Ellacott as the
Group’s new audit partner from March 2016.
The Group has complied with the provisions of the Statutory Audit
Services for Large Companies Market Investigation (Mandatory
Use of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014.
Whistleblowing
A formalised whistle-blowing policy and procedure for staff to
raise issues regarding possible improprieties in matters of financial
reporting or other matters has been established and was reviewed
during the year. The Committee is responsible for monitoring the
effectiveness of the Group’s whistle-blowing procedures and any
notifications made. The Committee is charged with ensuring that
appropriate arrangements are in place for employees to be able to
raise matters of possible impropriety in confidence and performing
suitable subsequent follow-up action. An alternative reporting
channel also exists whereby perceived wrongdoing may be
reported via telephone to an external third party.
The Audit Committee has access to the services of the Company
Secretarial function and is authorised to obtain independent
professional advice if it considers it necessary.
Governance
The Committee has undertaken a review of its own performance,
focussing on the Code requirements for Audit Committees, as part
of the Board effectiveness review. The results were positive.
FRC Review
During the year the Financial Reporting Council (FRC) performed
a review of Shawbrook’s 2015 Annual Report & Accounts and
invited comments on a number of reporting areas. The 2015
Annual Report and Accounts was Shawbrook’s maiden set of
accounts as a FTSE 250 listed organisation and we welcomed
the opportunity to improve the quality of our reporting.
All issues raised by the FRC have been discussed by the
Committee and, in consultation with the External Auditor have
been cleared with the FRC with no points outstanding at the date
of this report and where applicable, we enhanced our disclosures.
Fair, balanced and understandable
The Committee considered on behalf of the Board whether the
2016 Annual Report & Accounts taken as a whole is fair, balanced
and understandable, and whether the disclosures are appropriate.
The Committee is satisfied that the 2016 Annual Report & Accounts
meets this requirement, and in particular, that appropriate disclosure
has been made with respect to any developments in the year. In
justifying this statement the Committee has considered the robust
procedures around the preparation, review and challenge of the
Report and the consistency of the narrative sections with the
Financial statements. The Annual Report & Accounts is drafted by
the Executive with overall governance and co-ordination provided
by the Annual Report & Accounts Working Group comprising a team
of cross-functional senior management.
Assurances are sought by the Audit Committee on each section
of the Annual Report in advance of final sign-off by the Audit
Committee and ultimately the Board.
Following its review, the Committee is satisfied that the Annual
Report is fair, balanced and understandable, and provides the
information necessary for shareholders and other stakeholders to
assess the Group’s position and performance, business model and
strategy and has advised the Board accordingly.
Andrew Didham
Chairman of the Audit Committee
6 March 2017
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 86
Corporate governance report continued
Risk Committee Report
“ We have continued to strengthen
our Risk Management Framework
and controls in line with the Group’s
aspirations and risk appetite.”
Dear Shareholder
I am pleased to present the report of the Risk Committee, our
second as a listed Group. This year we have continued to strengthen
our Risk Management Framework and controls in line with the
Group’s aspirations and risk appetite.
The following report explains in further detail how the Committee
has discharged its responsibilities and highlights the key matters
discussed by the Committee in 2016. This has involved balancing
the agenda to include standing areas of risk management whilst
ensuring key risks which have emerged during the course of the year
are appropriately addressed. Considerable time has also been spent
contributing to documents such as the ICAAP and ILAAP before
making recommendations to the Board.
Good progress has been made during 2016 in further understanding
underlying risks and enhancing risk management. We are now
well positioned to further embed the revised Risk Management
Framework and further enhance testing and quality assurance
in 2017.
The environment in which the Group operates continues to evolve
and I believe the Committee is well placed to review inherent and
emerging risks and embed an appropriate risk culture.
Paul Lawrence
Chairman of the Risk Committee
6 March 2017
Shawbrook Group plc Annual Report & Accounts 2016 87
Role of the Risk Committee
A full copy of the terms of reference of the Risk Committee can be
obtained by request to the Company Secretary or via the Group’s
website at investors.shawbrook.co.uk.
The purpose of the Committee is to assist the Board in its
oversight of risk within the Group, with particular focus on the
Group’s risk appetite, risk culture, risk profile and the effectiveness
of the Group’s Risk Management Framework. As well as reviewing
the Group’s risk assessment processes and methodology it
identifies and manages new risks, alongside advising on proposed
transactions and reviewing reports on any material breaches of
risk limits. The Committee is also responsible for monitoring and
reviewing the effectiveness of the risk function and the capital
adequacy requirements of the Group’s relevant subsidiaries on
an on-going basis.
Over the course of 2016, the Committee considered a wide range
of risks facing the Group, both standing and emerging, across all
areas of risk management in addition to the risk appetite and culture.
Below is an outline of these risks, with a summary of the material
factors considered by the Committee, including the conclusions
that were ultimately reached.
Committee membership
The Risk Committee comprises six members, all of whom are
Independent Non-Executive Directors of the Group.
Meetings are held at least bi-monthly. Individual meeting
attendance during 2016 is set out below. The number of meetings
held during the period and those that each Director was eligible
to attend as a member of the Committee are shown below.
Member
Paul Lawrence
Robin Ashton
Graham Alcock
David Gagie
Sally-Ann Hibberd
Roger Lovering
Andrew Didham
Date joined
or stepped down
in the year
Meetings attended/
meetings eligible to
attend as a member
7/7
6/7
3/3
4/6
6/6
7/7
Stepped down
9 June 2016
Joined
3 March 2016
Joined
3 March 2016
Joined
1 February 2017
During the year, the members of the Committee were
Paul Lawrence, Robin Ashton, Graham Alcock, David Gagie and
Roger Lovering, who each also served on the Audit Committee
throughout the reporting period. Sally-Ann Hibberd does not
sit on the Audit Committee. Andrew Didham was appointed
to the Committee on 1 February 2017.
The Company Secretary acts as secretary to the Committee.
Other individuals attend at the request of the Risk Committee
Chairman and during the year the External Auditors, Chairman
of the Board, Chief Executive Officer, Chief Financial Officer,
Chief Risk Officer, staff from the Internal Audit function and other
senior managers as appropriate would usually attend meetings
to report to the Committee and provide clarification and
explanations where appropriate. During the year, the Committee
met on seven occasions.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 88
Corporate governance report continued
Risk Committee Report continued
Key matters considered in detail by the Committee in 2016
Significant risks
Board Risk Committee review
Enterprise risk
management
> The Committee received and recommended for the Board’s approval the 2016 Risk Plan which
included the key areas of focus for the Group Risk function.
> The Committee recommended Board approval of the Group’s new Risk Management Framework
in January 2016 which set out the Group’s approach to managing the enterprise wide risks that
the bank faces. This includes culture, governance, the three lines of defence system and clear roles
and responsibilities throughout the Group.
> The Committee received regular summaries of the enterprise risk profile of the Group through the
Chief Risk Officer’s report.
> The Committee received an independent review of the strategic plan.
Risk governance
> The Committee recommended to the Board approval of revisions to risk governance, including the
establishment of an Enterprise Risk Management Committee in March 2016.
Board risk appetite
The Committee received a number of reports during the year including (but not limited to):
> a new overarching risk appetite statement for the Group;
> an annual review of the Board Risk Appetite statements covering all principal risks;
> consideration of new risk appetite statements in the strategic areas of information risk and
concentration risk; and
> consideration of divisional risk appetite limits.
Credit risk
> The Committee received a report on changes to delegated authorities which aligns to the three lines
of defence system, ensures segregation of duties and supports escalation to the Credit Approval
Committee where appropriate.
> The Committee received via the Board regular updates on the Group’s preparations for IFRS 9.
Operational risk
> The Committee received updates on changes to the Group’s product management policy and
annual reviews.
> The Committee received updates on the Group’s investment in an information security risk
management framework, controls and risk appetite.
> The Committee received updates on Business Continuity testing and a test of the Cyber Incident
Response Plan.
Conduct, legal and
compliance risk
> The Committee received the Group’s Annual Compliance Monitoring Plan and updates on performance.
> The Committee received a revised intermediary and broker risk management framework.
Liquidity and
market risk
Stress testing and
capital
Recovery and
resolution plan
> The Committee received and recommended to the Board approval of the Internal Liquidity Adequacy
Assessment Process (ILAAP).
> The Committee received and recommended to the Board approval of the Contingent Liquidity Plan (CLP).
> The Committee received the Group’s Internal Capital Adequacy Assessment Process (ICAAP) in March
2016 and was actively engaged in the oversight of the macroeconomic stress testing, the development
of idiosyncratic stress tests and reverse stress testing.
> The Committee received the Capital Contingency Plan (CCP) in July 2016.
> The Committee received the Group’s updated Recovery Plan and Resolution Pack in November 2016.
Remuneration
> The Risk Committee received a report from the Chief Risk Officer on the progress made on risk
management in early 2016. The report formed a key part of the Remuneration Committee’s assessment
of remuneration.
Shawbrook Group plc Annual Report & Accounts 2016 89
Primary areas of focus during the year
> ICAAP – The Board was actively engaged in the development
of the Group’s ICAAP. Activities included workshops to review
and approve recommendations of the Group’s assessment
of its Pillar 2A risks and the review and approval of the
macroeconomic scenarios used to assess the Group’s risks over
a three to five year period. The Committee was also involved
in identifying and reviewing risks the Group’s business model
through the development of idiosyncratic scenarios and the
reverse stress testing scenario.
> ILAAP – the Group undertook a comprehensive review of its
ILAAP, with the Board Risk Committee with the Board actively
involved throughout. This included workshops to enhance
and refine the Group’s liquidity stress testing framework; review
the Group’s liquidity risks and resources; and ensure the Group’s
overall liquidity adequacy.
> Risk Management Framework – continued development and
investment to ensure business development and transformation
programmes are properly supported.
> Group’s risk profile and risk appetite – continually reviewed
to ensure they remain appropriate to the current and future
strategy of the Group.
> Brexit assessment – continually monitored and reviewed
preparedness before the Brexit vote and in light of the
referendum result.
> Regulatory and legislative change – continually assessed
and monitored.
> Review of internal controls and risk management systems.
> Regular review of strategic, operational and credit risk events.
> Technology infrastructure – considered the adequacy and
effectiveness of the technology infrastructure supporting the
Risk Management Framework.
> Risk Culture – monitored the training and development
requirements of the Group to ensure the requisite skills are in
place to control risk and promote an effective risk culture.
> Recovery and Resolution Plan – monitored and developed the
preparedness and contingency plan to respond to and manage
levels of severe stress.
Other matters considered in detail by the Committee in 2016
> Block Discount Lending Policy.
> 2016 Business Continuity Test Plan.
> Intermediary and Broker Management policy.
During 2016 the Group has enhanced its three lines of defence
model, as outlined on page 45 in the Risk management report.
This model has been implemented through the creation of a
comprehensive suite of risk policies, embracing all aspects of the risk
management agenda, including the credit, operational, reputational
and conduct risk arenas under the auspices of Program Horizon,
which is the program initiated in March 2015 to upgrade the risk
architecture of the Group.
During 2016 the Group made a number of changes to enhance
its risk governance. These included the launch of its Enterprise Risk
Management Committee (ERMC), which provides an enterprise wide
view of the risk profile of the Group and is the senior risk committee
within the Group. The ERMC replaced the Group Credit Committee
(GCC) and the Conduct and Operational Risk Committee (CORC).
To support the ERMC in embedding of the Risk Management
Framework and to reflect the Group’s development of credit
grading, the ERMC implemented two new groups. The Model
Management Group (MMG) to oversee the development, approval
and monitoring of the Group’s models and the Policy Review
Group (PRG) to oversee the consistent development, approval
and monitoring of the Group’s policies.
The Risk Committee received a number of reports from
management that provide strong evidence that the Group’s
regulatory documents are being embedded into the way the Group
does business including in the setting of strategy and risk appetite.
The Group has also undertaken a comprehensive and wide ranging
review of credit risk approval governance. The change in framework
seeks to deliver under the following key principles:
> providing the required level of independence, governance and
assurance in relation to both material individual risks and the
profile of the portfolio overall;
> maintaining service standards by way of prompt turnaround times
and commercial responses to financing proposals; and
> preserving the 1st Line’s culture of accountability for, and focus
on, risk.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 90
Corporate governance report continued
Risk Committee Report continued
Priorities for 2017
The Group will continue to invest in its risk management
capability during 2017 with a key priority being to fully embed a
risk aware culture throughout the Group. During 2017 the Group
will complete an update on many of the items delivered in 2016
and deliver/support the transformation agenda.
The key projects which the Group Risk function are accountable
for delivering in 2017 include:
> operationalising the Group’s new Credit Grading System into
key front-end decision systems;
> delivery of IFRS 9 compliance;
> delivery of the Enhancing Operational Risk project to systemise
the management and oversight of operational risk including
embedding risk and control assessments and key indicators;
> development of a problem loan management strategy;
> launch of a credit risk application system; and
> delivery of a plan to support the bank’s consideration of
Advanced Internal Ratings Based (AIRB) permission.
During the year, revised authority levels were proposed based
upon a balanced consideration between risk profile and current
practice, namely:
> the Group operates a hierarchy of lending authorities based
principally upon the size of the aggregated credit risk exposure
to counterparties, group of connected counterparties or, where
applicable, a portfolio of lending assets that are subject to a single
transaction. In addition to maximum amounts of credit exposure,
sole lending mandates may stipulate sub-limits and/or further
conditions and criteria;
> the Group implemented as part of its improving Risk Management
Framework a number of changes to its hierarchy of lending
mandates during 2016. Each Division has a maximum authority
level allocated, with exposures above these levels requiring
approval from an approver in the second line of defence, or the
Credit Approval Committee (CAC). In each Division, at least one
signatory to the loan must be a segregated first line of defence
credit approver who has no responsibility for, or remuneration
arrangements linked to, sales targets or, on-going sales origination
or relationship responsibility with the borrower;
> the maximum divisional mandate for the Regional Business
Centres, Business Finance Specialist Sectors and Commercial
Property in the Property Division is £1,250,000. The maximum
divisional mandate for residential lending in the Property Division
is £300,000 and £75,000 in Consumer. Exposures beyond these
limits up to £5 million may be approved by an approver in the
Second Line of Defence and exposures up to the Group single
name concentration limit of £25 million must be approved by the
Credit Approval Committee (CAC). In addition, where transactions
involve portfolios of lending assets in excess of £15 million Board
approval is also required; and
> lending is advanced subject to Group lending approval policy
and specific credit criteria. When evaluating the credit quality and
covenant of the borrower, significant emphasis is placed on the
nature of the underlying collateral. This process also includes a
review of the Board’s appetite for concentration risk.
This revised framework was approved by the Committee and
implemented towards the end of the year.
Shawbrook Group plc Annual Report & Accounts 2016 Corporate Governance Report continued
Statement by the Remuneration Committee Chairman
91
“ The Committee has reviewed the
current policy to ensure it remains
fit for purpose.”
Dear Shareholder
On behalf of the Board, as Chairman of the Remuneration
Committee, I am pleased to present our 2016 Directors’
Remuneration Report.
This report is my first as Chairman of the Committee and sets out
how we have implemented the Directors’ Remuneration Policy
(approved by shareholders at the 2016 AGM) in 2016 and outlines
our intentions with regards to remuneration in 2017. The Directors’
Remuneration Policy can be found in the 2015 Annual Report &
Accounts available on the Group’s website at www.shawbrook.co.uk.
During 2016 the Committee has, in addition to its regular activities,
reviewed the current policy to ensure that it remains fit for purpose.
It also considered the leaving arrangements for Tom Wood who
left Shawbrook in June 2016 and, in early 2017, approved the
remuneration arrangements for his successor, Dylan Minto.
I have set out below a summary of the key decisions that the
Committee has taken during the year including with respect
to determining the 2016 bonus outcomes, changes to the
implementation of the remuneration policy during the year and
a summary of how the policy will be implemented in 2017.
Board changes
At the start of 2016, we welcomed Shawbrook’s new Chief Executive
Officer (CEO), Steve Pateman, to the Group. His remuneration
arrangements were set out in the 2015 Directors’ Remuneration
Report and are again disclosed in this report.
Tom Wood, the Chief Financial Officer, left Shawbrook at the end
of June 2016. The terms of his departure are set out on page 100
and the treatment is in line with the shareholder approved Directors’
Remuneration Policy, the terms of his contract and the relevant
share plan rules.
In February 2017, we appointed Dylan Minto as Chief Financial Officer
(CFO) and Executive Director. His remuneration arrangements will
therefore be in line with the approved Directors’ Remuneration
Policy and are set out on page 102.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 92
Corporate governance report continued
Statement by the Remuneration Committee Chairman
continued
2016 bonus outcomes
With the exception of the identification of the controls breach
referred to below, 2016 has been a positive year for Shawbrook. With
continuing demand and strong risk-adjusted returns in our selected
markets, financial performance has aligned well to our Strategic
Pillars. As a result, the Group has delivered against its 2016 guidance
and remains well placed to deliver its 2020 vision.
The 2016 bonus outcomes for Executive Directors were based
on a scorecard of financial measures and non-financial measures
as well as individual performance.
Financial performance (55% weighting)
The financial element of the 2016 bonus assessment was based
on profit before tax (35%) return on tangible equity (10%) and cost
to income ratio (10%).
The Committee considered Shawbrook’s financial performance
against these metrics and also the impact of exceptional
items, which may be excluded from the calculation of financial
performance under the bonus plan design.
During 2016, a controls breach was identified in the Business
Finance Division which led to an income statement charge of
£12 million being recognised in 2016 (see page 49 in the Risk
management report for further details). This related to a number
of loans, originated over a period of several years particularly
between 2012 and 2015, that did not meet the Group’s strict lending
criteria. Following the identification of the controls breach, a full
review of the underlying facts was undertaken and the Committee
reviewed the findings when considering the implications for
remuneration for 2016. The Committee considered the current
Executive Directors’ oversight and management responsibilities
for the Business Finance Division at the time the issues arose and
considered that the charge should be treated as an exceptional item
when calculating the bonus outcome for the Executive Directors.
The Committee noted that Steve Pateman had joined the Group as
Chief Executive Officer (CEO) on 1 January 2016 after the majority
of the identified transactions had been originated and ensured that
appropriate management focus was provided to the improved Risk
Management Framework and controls that enabled the controls
breach to be identified, and that Stephen Johnson did not have
oversight or management responsibilities for the Business Finance
Division at any time during his employment by the Group.
On this basis and following adjustment for the controls breach
(but not adjusting for the underlying adjustments described on
pages 2 and 3), the Group achieved profit before tax of £100.2 million,
return on tangible equity of 21.3% and a cost to income ratio of
45.9%. Overall, this resulted in a score of 38.6 out of 55 in respect
of the financial measures.
Whilst the Committee concluded that Executive Directors’ bonus
outcomes should not be impacted by the charge relating to the
controls breach, in order to ensure alignment of the interests of the
Executive Directors with the long-term interests of shareholders,
it determined that in light of the charge, an exceptional increase to
deferral levels for Executive Director annual bonuses was warranted
for the 2016 financial year only. As such, 75% of the total bonus
awarded for 2016 will be deferred into Shawbrook shares under
the Deferred Share Bonus Plan, which will vest in equal tranches
over three years.
Non-financial performance (25% weighting)
The non-financial element of the 2016 bonus assessment was based
on risk management (15%), customer (5%) and culture and employee
engagement (5%).
During 2016, the Group continued to embed its Risk Management
Framework leading to increased first-line risk management
capability and much improved oversight, monitoring and reporting.
In relation to customer, a Net Promoter Score (NPS) of 27 was
achieved, which was a good outcome given external factors and
in particular the impact of the current interest rate environment
on savings customers. On culture and employee engagement,
the maximum score was awarded reflecting the significant work
undertaken by senior management in the transformation of the
culture of the Group as well as high employee engagement scores.
Given this level of performance, the Committee determined that
a score of 18.5 out of 25 should be awarded in respect of the non-
financial measures.
Individual performance (20% weighting)
The remaining 20% of the bonus was based on individual
performance. Since his appointment as CEO in January 2016,
Steve Pateman has substantially achieved all his agreed objectives
ensuring an appropriate balance between risk, return and customer
needs in the delivery of strong financial performance in 2016 as well
as driving continued focus on the Group’s 2020 strategy. Stephen
Johnson has continued to lead the Property Finance business to
success with outperformance on margin, costs and contribution
leading to an excellent return on tangible equity, whilst maintaining
high standards of professionalism, risk management, ethics and
team work.
As a result of this performance, the overall bonus outcome for 2016
was 77.1% of maximum for Steve Pateman and 75.1% of maximum
for Stephen Johnson. Further details can be found on pages 96 to 98.
Shawbrook Group plc Annual Report & Accounts 2016 93
Changes to remuneration arrangements during 2016
In our 2015 Directors’ Remuneration Report, we highlighted
that a review of pension arrangements for Executive Directors,
other than the CEO, was being undertaken against wider market
practice and pension provision within the Group. With effect from
1 September 2016, the Committee determined that the pension
contribution of 7.5% of salary for Executive Directors should be
amended to a pension allowance of 15% of salary to ensure the
offering remains appropriate, particularly given internal relativities
with other senior management. Having made this one-off
adjustment, the Committee does not intend to review pension
levels again in the foreseeable future.
During 2016, we also reviewed and strengthened our clawback
provisions such that deferred bonus awards granted in respect
of the 2016 performance period onwards may be subject to
clawback at any time prior to the third anniversary of vesting.
In relation to the PSP, the Committee has decided to retain the
relative total shareholder return (TSR), earnings per share (EPS)
and risk management measures, as well as including a scorecard
of customer and employee metrics. The TSR peer group has been
updated to ensure it continues to provide a robust assessment
of performance, with the additions to the group being challenger
banks. The customer and employee metrics reflect Shawbrook’s
long-term strategic priorities and goals in this area. For example,
during 2016, Shawbrook signed up to HM Treasury’s Women in
Finance Charter, and therefore the PSP scorecard will measure
progress towards our aspirations in this area.
Closing remarks
I welcome any comments from shareholders on the remuneration
arrangements set out on the following pages and will be available
to answer any queries regarding our remuneration policy at the
forthcoming Annual General Meeting.
Robin Ashton
Chairman of the Remuneration Committee
6 March 2017
2017 implementation and looking ahead
There will not be any significant changes to the implementation of
the Remuneration Policy in 2017 for Executive Directors. The salaries
of Steve Pateman and Stephen Johnson will not be increased in 2017,
as it was decided that the salary increase budget should be targeted
at the wider employee base. The annual bonus opportunity will
remain the same as 2016. Performance Share Plan (PSP) awards
to Executive Directors in 2017 will be granted at a level of 100%
of salary.
The Committee has reviewed the performance measures,
weightings and targets for the 2017 bonus plan and PSP awards.
The 2017 bonus measures are unchanged from 2016, using a
scorecard of financial, non-financial and individual performance
metrics. Within this scorecard, the customer and employee aspects
have been combined for 2017, and the underlying customer and
employee metrics have been updated to include a wider range
of key goals for Shawbrook, including overall customer satisfaction
as well as employee engagement, talent management, diversity
and inclusion.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 94
Corporate governance report continued
Directors’ Remuneration Report
Annual Remuneration Report
This section summarises how Shawbrook implemented the
Remuneration Policy in 2016, and how it is intended to be
operated in 2017. This Annual Remuneration Report will be
submitted to shareholders for an advisory vote at the 2017 AGM.
Where required, sections of the Annual Remuneration Report have
been audited by KPMG LLP and this is indicated where appropriate.
The Directors’ Remuneration Policy can be found in the 2015
Annual Report & Accounts available on the Group’s website at
www.shawbrook.co.uk.
Consideration by the Directors of matters relating to
Directors’ remuneration
The Board Remuneration Committee comprises three members
including the Board Chairman. Meetings are held at least four times
per year. Individual meeting attendance during 2016 is set out
below. The number of scheduled meetings held during the period
that the Director was a member and therefore eligible to attend
is shown below.
Deloitte LLP provided independent advice to the Committee
on executive remuneration matters, including a review of the
Group’s remuneration policy, advice on incentive design and
performance measurement, provision of current market trends data
and regulatory updates, and support in relation to the Directors’
Remuneration Report. In respect of these services, Deloitte was
paid fees totalling £79,000. Deloitte LLP also provided risk advisory,
internal audit and forensic advisory services to Shawbrook during
2016. Deloitte LLP is a member of the Remuneration Consultants
Group and is a signatory to its Code of Conduct. The Committee
is satisfied that the advice received from Deloitte LLP was objective
and independent.
Single total figure of remuneration (audited)
The tables below set out the single total figure of remuneration for
Executive and Non-Executive Directors for the financial year ended
31 December 2016.
Year ended 31 December 2016
Member
Robin Ashton1
Iain Cornish
Sally-Ann Hibberd
Graham Alcock2
Date joined
or stepped down
Appointed
Committee Chairman
9 June 2016
Joined
23 May 2016
Stepped down
from Committee
9 June 2016
1 Robin Ashton assumed the role of Chairman of the Committee in June 2016
following Graham Alcock’s retirement from the Board.
2 Graham Alcock was Chairman of the Remuneration Committee until the AGM
on 9 June 2016 when he stepped down from the Board.
A full copy of the terms of reference of the Remuneration
Committee can be found on the Group’s website at
www.shawbrook.co.uk.
During the year the Chief Executive Officer, Chief Financial Officer,
Chief Risk Officer, Group HR Director, Head of Reward and Non-
Executive Director, Lindsey McMurray, all attended Committee
meetings by invitation. In addition, the General Counsel and
Company Secretary and Head of Secretariat provided secretariat
support to the Committee during the year. No individual was
present for discussions relating to their own remuneration.
Meetings attended/
Meeting eligible
to attend
Executive Director
Salary (£000)
Taxable benefits3 (£000)
8/8
Pension4 (£000)
Annual bonus (£000)
Total (£000)
Recruitment award5
Total (£000)
8/8
5/5
4/4
Steve
Pateman1
Stephen
Johnson
Tom
Wood2
625
2
219
482
1,328
2,184
3,512
260
2
26
195
483
–
483
213
1
16
–
230
–
230
1 Assumed role of CEO on 1 January 2016.
2 Tom Wood stepped down from the Board with effect from 30 June 2016. The
amounts set out above include amounts received up to this date, but exclude
payments for loss of office as set out below under ‘Payments for loss of office’.
3 No Executive Directors participated in the 2016 SAYE offering.
4 Pension contributions or cash allowances.
5 Upon recruitment, Steve Pateman received awards over shares in respect of
remuneration forfeited on leaving his previous employment. This included:
– A one-off grant of awards over 552,623 ordinary shares of Shawbrook Group plc
by Special Opportunities Fund (Guernsey) LP as compensation for bonus and
awards arising from his previous employment which he forfeited on joining the
Group. These awards are subject to clawback and malus provisions. Other
shareholders have not suffered any dilution as a result of this award. The first tranche
of 64,267 shares vested on 27 January 2016; the second tranche of 256,631 shares
vested on 18 February 2016; the third tranche of 149,681 vested on 18 February 2017
and the final tranche of 82,044 shares will vest on 18 February 2018, subject to
continued service. The full value of these awards is included in the value above,
given that they are not subject to further performance conditions. The closing share
price on 31 December 2015 of 350.1p has been used to calculate the award level,
being the last trading day before the award was made.
– A further award over 71,408 ordinary shares was granted by the Group to
compensate him for the reduction in fixed remuneration from his previous
employment. This award vested immediately and the resulting net shares are
subject to a three-year holding period. This award is included in the value above.
The closing share price on 31 December 2015 of 350.1p has been used to calculate
the award level, being the last trading day before the award was made.
Shawbrook Group plc Annual Report & Accounts 2016
95
Non-Executive Director
Fees (£000)
Total (£000)
Iain
Cornish
190
190
Graham
Alcock6
Robin
Ashton
Sally-Ann
Hibberd
Paul
Lawrence
Roger
Lovering
Lindsey
McMurray7
35
35
93
93
73
73
92
92
90
90
–
–
David
Gagie8
73
73
6 Graham Alcock stepped down from the Board on 9 June 2016.
7 Pollen Street Capital was paid £30,000 for the services of Lindsey McMurray for the year ended 31 December 2016.
8 David Gagie was appointed on 1 January 2016.
The tables below set out the single total figure of remuneration for Executive and Non-Executive Directors for the financial year ended
31 December 2015, reflecting remuneration received from appointment to the Shawbrook Group plc Board in 2015:
Year ended 31 December 2015:
Executive Director
Salary (£000)
Taxable benefits (£000)
Pension5 (£000)
Annual bonus (£000)
SAYE6 (£000)
Total (£000)
Legacy share plan7 (£000)
Total (£000)
Richard Pyman1,3
Stephen Johnson2 ,6
Tom Wood1,4,6
251
2
20
–
–
273
3,425
3,698
171
1
12
235
3
422
–
422
423
10
23
424
3
883
7,954
8,837
1 Appointed on 20 March 2015.
2 Appointed on 21 May 2015.
3 Richard Pyman stepped down as CEO on 2 October 2015.
4 Inclusive of additional allowance of £110,000 (based on annualised allowance of £175,000) for acting as Interim CEO for the period 21 May to 31 December 2015.
5 Pension contributions or allowances.
6 Eligible employees were invited to subscribe for options over ordinary shares of 1p (ordinary shares) with an exercise price of 259.76p per share, a 20% discount to the
average closing middle market quotation of an ordinary share for the three dealing days immediately preceding the date on which the invitation to participate was made
on 7 September 2015. The options have a savings contract start date of 1 December 2015 and are exercisable between 1 December 2018 and 1 June 2019. On 2 October 2015,
some of these options to buy ordinary shares were granted under the terms of the Sharesave scheme to certain Executive Directors of the Group. During 2016, Tom Wood’s
options lapsed upon his departure from Shawbrook and Stephen Johnson surrendered the options he was granted in 2015 on 29 September 2016. Stephen Johnson did not
participate in the 2016 SAYE offering.
7 Richard Pyman and Tom Wood had previously subscribed for B and/or C ordinary shares in the Group, the terms of which provided for their conversion into ordinary shares
upon the IPO on a basis determined by reference to the IPO price. As a result of this conversion, Richard Pyman held 1,181,164 ordinary shares and Tom Wood held 2,742,841
ordinary shares.
Non-Executive
Director
Sir George
Mathewson8
Iain
Cornish9
Graham
Alcock10
Robin
Ashton10
Sally-Ann
Hibberd11
Paul
Lawrence12
Roger
Lovering10
Lindsey
McMurray13
James
Scott14
Fees (£000)
Total (£000)
Legacy share
plan (£000)15
Total (£000)
31
31
3,590
3,621
94
94
–
94
56
56
–
56
61
61
2,308
2,369
10
10
–
10
32
32
–
32
64
64
–
64
–
–
–
–
–
–
–
–
8 Appointed on 20 March 2015 and stepped down from the Board on 6 July 2015.
9 Appointed on 6 July 2015.
10 Appointed on 20 March 2015.
11 Appointed on 5 November 2015.
12 Appointed on 24 August 2015.
13 Pollen Street Capital was paid £30,000 for the services of Lindsey McMurray for the year ended 31 December 2015.
14 James Scott was a Director of Laidlaw Acquisitions Limited prior to Admission. He resigned on 20 March 2015. He received no fee for this position.
15 Sir George Mathewson and Robin Ashton had previously subscribed for B and/or C ordinary shares in the Group, the terms of which provided for their conversion into ordinary
shares upon the IPO on a basis determined by reference to the IPO price. As a result of this conversion, Sir George Mathewson held 1,237,874 ordinary shares and Robin Ashton
held 795,776 ordinary shares.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
96
Corporate governance report continued
Directors’ Remuneration Report continued
Notes to the single total figure of remuneration table (audited)
Taxable benefits and pension
Taxable benefits comprise private medical insurance for all Executive Directors and a living allowance for the CFO (ceased from April 2015).
In our 2015 Directors’ Remuneration Report, we highlighted that a review of pension arrangements for Executive Directors, other than the
CEO, was being undertaken, against wider market practice and pension provision within the Group. With effect from 1 September 2016, the
Committee determined that the pension contribution of 7.5% of salary for Executive Directors should be amended to a pension allowance of
15% of salary to ensure the offering remains appropriate, particularly given internal relativities with other senior management. Having made
this one-off adjustment, the Committee does not intend to review pension levels again in the foreseeable future. The pension provision
for the CEO which was agreed on appointment remains at 35% of salary, in line with the opportunity offered by his previous employer.
All-employee share plans
No Executive Directors participated in the 2016 SAYE offering.
Annual bonus
Executive Directors were eligible to participate in the annual bonus in 2016, with a maximum opportunity of 100% of salary.
For each Executive Director, the 2016 annual bonus outcome was based on performance against a scorecard of measures, weighted 55%
on financial measures, 25% on non-financial measures reflecting the strategic goals of the Group and 20% on individual objectives.
The table below illustrates performance against the targets set for each measure.
Measure
Financial measures
Profit before tax
Return on tangible equity
Cost to income ratio
Non-financial measures
Risk management
Customer (NPS)
Culture and employee engagement
Individual measures
Individual performance
Weighting
Threshold
Target
Maximum
Actual
performance
Bonus
outcome
35%
10%
10%
15%
5%
5%
£85.6m
£100.7m
£104.5m
£100.2m
20.7%
48.0%
21.8%
45.7%
22.1%
45.1%
21.3%
45.9%
27.0%
4.5%
7.1%
Remuneration Committee judgement
See below
12.5%
26
30
34
27
Remuneration Committee judgement
See below
1%
5%
20%
Remuneration Committee judgement
See below See below
Shawbrook Group plc Annual Report & Accounts 2016 97
The Committee also reviewed performance against the ‘culture
and employee engagement’ measure, taking into account input
from the Group HR Director, and determined a payout of 100%
of maximum was warranted. In reaching this conclusion, the
Committee took into consideration the strong scores obtained from
two employee engagement surveys undertaken during 2016 as
well as the significant work undertaken to further embed structured
learning and performance management and to improve employee
communication across the Group. The Committee also noted
the significant work undertaken to progress the corporate social
responsibility agenda and the role this has played in developing
the Group’s culture.
20% of the 2016 bonus is based on Individual measures
The Committee also assessed the individual performance of the
Executive Directors over the year.
The Committee concluded that Steve Pateman substantially
achieved all his agreed personal objectives for 2016 and performed
at a high level in the discharge of his duties. In delivering
strong financial performance, Steve has ensured an appropriate
balance between risk, return and customer needs in maximising
opportunities in our carefully selected markets. Having driven the
appropriate embedding of our risk management framework, Steve
has also championed a strong risk culture throughout the Group
that will support the continued growth of the business and allow
us to maintain a strong capital position. Steve’s personal focus on
living the Group’s values and good sense approach has helped
us to deepen relationships with our customers, community and
business partners as well as establish a highly engaged leadership
team and wider workforce that is focused on delivering the Group’s
2020 strategy. Given this assessment, the Committee determined a
payout of 100% in respect of the individual measure (being a score
of 20 out of 20).
In assessing Stephen Johnson’s individual performance, the
Committee determined a payout of 90% under the individual
measure (being a score of 18 out of 20). In reaching this conclusion,
the Committee noted the strong performance of the Property
Finance Division under his leadership, with outperformance on
margin, costs and contribution leading to an excellent return on
tangible equity. The Committee also recognised the high standards
of professionalism, risk management, ethics and teamwork that have
been the hallmark of Stephen’s leadership as well as his passion and
commitment to the Group, its people and customers.
Of the 2016 bonus, 55% is based on financial measures before any
exceptional profits or losses as determined by the Committee.
The Committee concluded that an income statement charge of
£12 million should be treated as exceptional for 2016 bonus
purposes for the continuing Executive Directors, Steve Pateman,
CEO, and Stephen Johnson, Deputy CEO and Managing Director
of the Property Finance Division. This charge arose following the
controls breach identified in the Business Finance Division and
related to a number of loans, originated over a period of several
years particularly between 2012 and 2015, that did not meet the
Group’s strict lending criteria. The controls breach was identified and
accounted for in 2016. In concluding that the charge arising from the
controls breach should not impact the amount of the 2016 bonus
earned by the two Executive Directors, the Committee noted that:
a) Steve Pateman had joined the Bank as CEO on 1 January 2016 after
the majority of the identified transactions had been originated
and ensured that appropriate management focus was provided
to the embedding of the improved Risk Management Framework
that enabled the controls breach to be identified; and
b) Stephen Johnson had only been appointed to the Board in
May 2015 and his responsibilities did not extend to management
or oversight of the Business Finance business. Stephen’s primary
role is as Managing Director of the Property Finance Division.
Stephen’s responsibilities prior to joining the Board were also for
the Property Finance Division and he has not had oversight or
management responsibilities for the Business Finance business
at any time during his employment by the Group.
The Group believes that the steps it has taken to strengthen risk
controls, including the removal of certain delegated authorities
and appropriate segregation of origination and operations, should
minimise the risk of a further breach in the future.
In order to ensure alignment of the interests of the Executive
Directors with the long-term interests of shareholders, the
Committee has determined that the above treatment warrants an
exceptional increase to deferral levels for Executive Director annual
bonuses for the 2016 financial year only. Of the total bonus awarded
for 2016, 75% will be deferred into share awards under the Deferred
Share Bonus Plan (DSBP).
25% of the 2016 bonus is based on non-financial measures
Following a review of the Group’s risk management performance
over the year and based on input from the Chief Risk Officer and the
Chairman of the Board Risk Committee, the Committee determined
a payout of 83.33% (being a score of 12.5 out of 15) under the risk
management element of the scorecard. This outcome reflects the
Group’s continued journey towards the embedding of a robust Risk
Management Framework in 2016 including increased first line risk
management capability, positive regulatory interactions, strong
credit risk performance and improved oversight, monitoring and
resourcing. In reaching this conclusion, the Committee noted that
the improved Risk Management Framework had helped to uncover
the controls breach outlined above.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 98
Corporate governance report continued
Directors’ Remuneration Report continued
Of the annual bonus earned, 25% has been paid in cash, with the other 75% deferred under the DSBP, which will vest in equal tranches after
one, two and three years in March 2018, 2019 and 2020. The bonus outcome for each Executive Director is summarised in the table below:
Director1
Steve Pateman
Stephen Johnson
Bonus
outcome
(% of
maximum)
Amount
paid
in cash
Amount
deferred
into shares2
77.1%
75.1%
£120,469
£361,406
£48,815
£146,445
1 Tom Wood stepped down from the Board with effect from 30 June 2016 and will not receive any bonus in respect of 2016.
2 The clawback provisions have been strengthened such that amounts deferred into shares under the 2016 annual bonus may be subject to clawback at any time prior to the
third anniversary of vesting.
Performance Share Plan
No PSP awards vested in 2016.
Scheme interests awarded during the financial year (audited)
Deferred Share Bonus Plan awards
Awards were made under the DSBP on 9 March 2016 in respect of 50% of the 2015 annual bonus. These are not subject to any further
performance conditions.
Director
Stephen Johnson
Type of award
Plan
Date
of award
Number
of shares
awarded
Face value
of award2
Vesting date
Nil-cost options
DSBP 9 March 2016
38,377
£117,500
1/3rd – March 2017
1/3rd – March 2018
Tom Wood1
Nil-cost options
DSBP 9 March 2016
69,079
£211,500
1/3rd – March 2019
1 Tom Wood stepped down from the Board with effect from 30 June 2016. His Deferred Share Bonus Plan award relating to the 2015 annual bonus will subsist and vest on the
usual dates.
2 306.17p per share, i.e. the average of the mid-market closing price on the three consecutive business days immediately preceding the date of grant.
Performance Share Plan awards
PSP awards were granted to the Executive Directors on 9 March 2016. To the extent that these vest following the end of the performance
period, the awards will be subject to a two-year holding period.
Director
Type of award
Plan
Date
of award
Number
of shares
awarded
Face value
of award2
Face value
of award
Steve Pateman
Nil-cost options
PSP 9 March 2016
204,135
£625,000
Stephen Johnson
Nil-cost options
PSP 9 March 2016
84,920
£260,000
Tom Wood1
Nil-cost options
PSP 9 March 2016
138,812
£425,000
100%
of salary
100%
of salary
100%
of salary
Performance period
1 January 2016
to 31 December 2018
1 January 2016
to 31 December 2018
1 January 2016
to 31 December 2018
1 Tom Wood stepped down from the Board with effect from 30 June 2016. He was treated as a good leaver under the Performance Share Plan and as such his award will
be subject to time pro-rating to 31 December 2016 and will vest on the usual dates.
2 306.17p per share, i.e. the average of the mid-market closing price on the three consecutive business days immediately preceding the date of grant.
Shawbrook Group plc Annual Report & Accounts 2016 99
The 2016 PSP awards vest subject to the achievement of a balanced scorecard of measures, as set out in the table below:
Measure
Financial measures
Relative TSR
Earnings per share
Non-financial measures
Customer (NPS)
Risk management
Weighting
Target performance
requirement
Maximum performance
requirement
20%
40%
20%
20%
Median against
peer group
Upper quartile against
peer group
20% growth p.a.
30% growth p.a.
26
34
Judgmental assessment against a number
of factors (see below)
TSR for the 2016 PSP awards will be measured relative to a group of selected peers as set out in the table below:
Aldermore Group
HSBC
Paragon Group of Companies
Standard Chartered
Arrow Global
Barclays
Close Brothers
International Personal Finance
Provident Financial
Virgin Money
Lloyds Banking Group
The Royal Bank of Scotland
OneSavings Bank
Secure Trust Bank
The risk management measure will include an assessment of risk and compliance factors by the Committee at the time of vesting, and
which include: Board risk appetite metrics, material regulatory breaches, and completion of actions arising from regulatory/audit/control
effectiveness reviews, regulatory change programmes and customer complaints.
Recruitment awards
Upon recruitment, Steve Pateman received awards over shares in respect of remuneration forfeited on leaving his previous employment.
These awards are not subject to performance conditions, however, they will only vest if he remains in employment. The awards are subject
to malus and clawback provisions. Full details of Steve’s joining arrangements are provided on page 79 of the Annual Report & Accounts for
the year ended 31 December 2015.
Director
Type of award
Date
of award
Conditional share award
4 January 2016
Conditional share award
4 January 2016
Number
of shares
awarded
71,408
64,267
Face value
of award1
£250,000
£225,000
Vesting date2
4 January 2016
27 January 2016
Steve Pateman
Conditional share award
4 January 2016
256,631
£898,466
18 February 2016
Conditional share award
4 January 2016
149,681
£524,033
18 February 2017
Conditional share award
4 January 2016
82,044
£287,236
18 February 2018
1 Based on the closing share price on 31 December 2015 of 350.1p used to calculate the award size, being the last trading day before the award was made.
2 The award of 71,408 shares is subject to a three-year holding period following award, save for those shares that have been sold to cover tax liabilities.
Payments to past Directors (audited)
There were no payments made to past Directors during 2016.
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100
Corporate governance report continued
Directors’ Remuneration Report continued
Payments for loss of office (audited)
Tom Wood resigned as a Director of Shawbrook Group plc with
effect from 30 June 2016 and his employment with the Group
ended on this date. Remuneration arrangements in respect of his
departure were determined by the Remuneration Committee in
line with the Shawbrook Directors’ Remuneration Policy approved
by shareholders in June 2016.
Tom Wood’s salary, pension and benefits were paid until 30 June
2016. He has received an amount of £228,437.50, less any necessary
withholdings for income tax or national insurance contributions,
being a sum equal to the value of his salary and employer pension
contributions for a period of 6 months in lieu of his contractual
notice provision of 12 months. Tom Wood will continue to be
provided with private medical healthcare until 30 June 2017.
Tom Wood’s unvested awards under the Shawbrook DSBP will be
released in accordance with the original timetable in March 2017,
March 2018 and March 2019 and remain subject to malus and,
where applicable, clawback provisions. He remains entitled to
two outstanding deferred bonus cash awards of £16,667 relating
to the 2014 performance year, which will be released in accordance
with the original timetable in March 2017 and March 2018.
Tom Wood will retain his outstanding 2016 award under the
Shawbrook PSP and this will be subject to time pro-rating to
31 December 2016. The original performance conditions will
continue to apply to this award. This award will vest on the original
vesting date in March 2019 to the extent that the performance
conditions are met. This award will remain subject to malus and,
where applicable, clawback provisions. Tom Wood will not receive
any bonus in respect of 2016.
Statement of Directors’ shareholding and share interests
(audited)
As set out in the Remuneration Policy table, Executive Directors are
expected to build and maintain, within five years, a shareholding in
the Group equivalent to at least 200% of salary. Until this is achieved,
Executive Directors must retain at least 50% of shares acquired on
vesting of PSP awards (net of tax).
Unvested shares, including shares under the DSBP, are not taken
into account when assessing achievement against the shareholding
requirement.
Interests in shares
The table below summarises the shareholdings as at 31 December
2016, and achievement against the shareholding requirements,
of the Executive Directors.
Director
Steve Pateman
Stephen Johnson
Tom Wood
Shares
owned
outright1
207,543
2,713,538
1,371,421
Shareholding
(% of salary)2,3
Requirement
met?
91%
2,851%
n/a
No
Yes
n/a
1 Directors’ beneficial holdings in the ordinary shares of the Group, including holdings
of connected persons.
2 Current shareholding valued using the three-day average closing share price to
31 December 2016 of 273.13p.
3 There have been no changes in the shareholdings of the current Directors between
31 December 2016 and 6 March 2017 other than 79,154 shares which were
transferred to Steve Pateman following the vesting of 149,681 shares under his
recruitment award, and the sale of 70,527 shares to cover tax withholding
requirements.
Scheme interests
The table below summarises the scheme interests of the Executive
Directors as at 31 December 2016.
Share awards
Share options
Unvested and
not subject to
performance
conditions1
Unvested and
subject to
performance
conditions2
Unvested and
not subject to
performance
conditions3
Director
Steve Pateman
231,725
Stephen Johnson
Tom Wood
–
–
204,135
84,920
37,651
–
38,377
69,079
1 The share award of 231,725 for Steve Pateman relates to the third and final tranches
of the one-off grant of awards over ordinary shares of Shawbrook Group plc by
Special Opportunities Fund (Guernsey) LP as compensation for bonus and awards
arising from his previous employment which he forfeited on joining the Group.
Of the 231,725 shares, 149,681 shares vested on 18 February 2017 and 82,044 will
vest on 18 February 2018.
2 Granted under the PSP. In respect of Tom Wood, this represents the number of
options remaining following time pro-rating.
3 Granted under the DSBP.
The table below summarises the shareholdings of Robin Ashton
as at 31 December 2016. The other Non-Executive Directors have
not been included in the table as they currently hold no shares
in the Group.
Director
Robin Ashton
Shareholding
at 31 December 20161
596,693
1 There have been no changes in the share interests between 31 December 2016
and 6 March 2017.
Shawbrook Group plc Annual Report & Accounts 2016 101
Change in remuneration of the CEO compared to the wider
employee population
The table below sets out the increase in salary, benefits (excluding
pension) and bonus of the CEO compared to that of the wider
employee population.
The table below summarises the single total figure of remuneration
and annual bonus payout as a percentage of maximum for the CEO
for the period used above. Please note that in future years, once the
first tranche of PSP awards have vested, the table will also include
PSP vesting as a percentage of maximum.
% change
in salary
(2015 to 2016)
% change
in annual
bonus
(2015 to 2016)
% change
in benefits
(2015 to 2016)
Single figure1
Period to
31 December
2016
Period to
31 December
2015
£3,512,261
£6,694,417
Interim Chief Executive
Officer/Chief Executive
Officer1
All employees2
Annual bonus payout (% of maximum)
77.1%
100%
44%
7%
14%
14%
-6%
-6%
1 Based on the total remuneration of Richard Pyman for the period between January
and May 2015 and Tom Wood (including an allowance as Interim CEO) for the period
between June and December 2015.
Relative importance of spend on pay
The table below illustrates the total staff costs and dividends paid
to shareholders over the relevant financial year and immediately
preceding financial year.
Year ended
31 December
2016
Year ended
31 December
2015
£54,091,439 £46,611,275
n/a
n/a
%
16%
n/a
Total staff costs
Dividends paid1
1 No dividends were paid in 2015 and 2016.
External appointments for Executive Directors
Executive Directors are permitted to hold external board
appointments. External appointments (and the treatment of any
related fees) are subject to prior approval of the Board.
Stephen Johnson is a Director of Latchglen Limited, but does not
receive any fees in respect of this appointment. At the time of this
report, Steve Pateman did not have any external appointments.
1 The percentage change in salary is based on the salary of Richard Pyman for the
period between January and May 2015 and Tom Wood (including an allowance
as Interim CEO) for the period between June and December 2015 compared
to the salary of Steve Pateman during 2016. Steve Pateman’s salary was set at
a level which reflects the wealth of experience he brings to the Group and his
outstanding track record in the sector. His salary will not be increased for 2017.
The percentage change in annual bonus is based on the 2015 annual bonus
awarded to Tom Wood and the 2016 bonus awarded to Steve Pateman.
2 Figures for ‘All employees’ have been calculated using data for all relevant
colleagues except the CEO, which is considered to be the most appropriate
group of colleagues for these purposes. This has been adjusted for movements
in colleague numbers and other impacts to ensure a like-for-like comparison.
Historical TSR performance and CEO remuneration outcomes
The chart below illustrates the value at the end of 2016 of
£100 invested in Shawbrook shares at IPO compared with a
similar investment in the FTSE 250. The Remuneration Committee
considers the FTSE 250 to provide the most relevant comparison
as Shawbrook is currently a constituent of this index.
£150
£100
£50
31 M ar 15
30 Jun 15
30 Sept 15
31 Dec 15
31 M ar 16
30 Jun 16
30 Sept 16
31 Dec 16
Shawbrook
FTSE 250
Source: DataStream
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Corporate governance report continued
Directors’ Remuneration Report continued
The overall weightings applicable to financial, non-financial and
individual measures for the 2017 annual bonus structure remain
unchanged against 2016.
The customer and employee measures used in 2016 have been
combined for 2017 and the underlying metrics have been updated
to include a wider range of key goals for Shawbrook, including
overall customer satisfaction as well as employee engagement,
talent management, diversity and inclusion. This will include an
assessment of the Group’s progress towards its commitments under
the HM Treasury’s Women in Finance Charter.
For each Executive Director, individual performance will continue
to be assessed against a personal scorecard of financial and non-
financial metrics (including financial, strategic, risk, customer, and
people measures).
The Remuneration Committee retains discretion to reduce the
formulaic outcome (including to zero) where the outcome is not
reflective of the overall performance of the Group or as a result of
the risk adjustment process.
The 2017 bonus targets are considered to be commercially sensitive
and have therefore not been disclosed at this time. Performance
against these targets will be provided in next year’s Directors’
Remuneration Report.
Deferred Share Bonus Plan
For DSBP awards granted in 2017 onwards, the clawback provisions
have been strengthened such that the Committee will, in
exceptional circumstances, have the discretion to clawback the
value of DSBP awards at any time prior to the third anniversary of
the normal vesting date of the relevant award. Any operation of
the clawback provisions would be effected in line with the ‘Malus
and Clawback’ section of the Directors’ Remuneration Policy and
would be disclosed to shareholders in the subsequent Directors’
Remuneration Report.
Implementation of the Remuneration Policy for 2017
The Remuneration Policy will be implemented in 2017 in line with
the Directors’ Remuneration Policy as set out in the Annual Report &
Accounts for the year ended 2015, which is available on the Group’s
website at www.shawbrook.co.uk.
Salary
The Committee determined that there would be no change to the
salaries of Steve Pateman and Stephen Johnson as it was decided
that the salary increase budget should be targeted at the wider
employee base. The salaries effective from 1 January 2017 are set out
below. The table also includes the 2017 salary for Dylan Minto who
was appointed Chief Financial Officer and Executive Director on
6 February 2017.
Steve Pateman
Stephen Johnson
Dylan Minto
2017 salary
2016 salary
£625,000
£625,000
£260,000
£260,000
£335,000
–
Pension
In line with the Remuneration Policy, the CEO receives a pension
allowance of 35% of salary. Other Executive Directors receive an
allowance of 15% of salary.
Annual bonus
The maximum annual bonus opportunity remains unchanged at
100% of salary for Executive Directors, with 50% of any bonus earned
subject to deferral under the DSBP.
For 2017, the annual bonus will be based on:
Measure
Financial measures
Profit before tax
Return on tangible equity
Cost to income ratio
Non-financial measures
Risk management
Customer and employee
Individual measures
Individual performance
Weighting
35%
10%
10%
15%
10%
20%
Shawbrook Group plc Annual Report & Accounts 2016
103
Performance Share Plan
PSP grants in 2017 will be equal to 100% of salary for Executive
Directors. Any awards that vest will be subject to a two-year holding
period following the end of the three-year performance period,
during which time Executive Directors will not be able to sell any
shares that have vested.
The PSP awards vest subject to the achievement of a balanced
scorecard of measures, as set out in the table below:
Measure
Financial measures
Relative total shareholder return
Earnings per share
Non-financial measures
Customer and Employee
Risk management
Weighting
Target performance
requirement
Maximum performance
requirement
20%
40%
20%
20%
Median against
peer group
Upper quartile against
peer group
10% growth p.a.
25% growth p.a.
Judgemental assessment against
a number of factors (see below)
Judgemental assessment against
a number of factors (see below)
Total shareholder return will be measured relative to a revised group of peers as set out in the table below:
Aldermore Group
Barclays
Close Brothers
CYBG
Lloyds Banking Group
Provident Financial
Metro Bank
OneSavings Bank
Paragon Group of Companies
The Royal Bank of Scotland
Secure Trust Bank
Virgin Money
The earnings per share (EPS) growth target is based on the average
annual growth rate over the performance period. The Committee
set the targets taking into account the business plan, external
forecasts and anticipated market conditions over the period,
including the potential uncertainty arising from the UK’s decision to
leave the European Union. For the 2017 PSP awards, an EPS growth
rate of 10% per annum is required for threshold vesting under this
element, rising to full vesting for an EPS growth rate of 25% per
annum. The Committee considers these targets to be appropriately
stretching in the above context.
The 2016 EPS figure to be used as the base year for the calculation
will be the Group’s reported EPS excluding the charge relating to the
controls breach in the Business Finance Division, being 29.4p. This is
to ensure that the targets measure true business performance across
the full performance period.
The ’customer (NPS)’ measure used for 2016 has been replaced
with a more rounded judgement based ‘customer and employee’
scorecard that will take into account overall customer satisfaction
and employee engagement as well as diversity and inclusion and
talent management. This will include an assessment of the Group’s
progress towards its commitments under the HM Treasury’s Women
in Finance Charter.
The risk and compliance factors which will be taken into
consideration by the Committee at the time of vesting include:
Board risk appetite metrics, material regulatory breaches, completion
of any actions arising from regulatory/audit/control effectiveness
reviews, regulatory change programmes and customer complaints.
The Remuneration Committee has discretion to reduce the
formulaic outcome (including to zero) where the outcome is not
reflective of the overall performance of the Group or as a result
of the risk adjustment process. In exceptional circumstances, the
Committee may vary any performance condition applicable to a
PSP award in accordance with its terms if anything happens which
causes the Committee to consider it appropriate, provided that it
considers the amended condition to be fair, reasonable and not
materially less challenging but for the event in question.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 104
Corporate governance report continued
Directors’ Remuneration Report continued
Non-Executive Director Fees
The current fees payable to Non-Executive Directors are as set
out below.
Non-Executive Director base fee
Chairman fee
Senior Independent Director fee
Audit and Risk Committee Chairman fee
Remuneration Committee Chairman fee
Audit and Risk Committee membership fee
Remuneration and Nomination Committee
membership fee
Fee from
1 January
2016
£65,000
£190,000
£10,000
£20,000
£5,000
£5,000
£2,500
As the role of Nomination Committee Chairman is performed by
the Chairman of the Board, there is currently no additional fee for
this role. The Chairman of the Board also receives no additional
fee for his membership of the Remuneration Committee.
Statement of voting at AGM
The Directors’ Remuneration Report, including the Remuneration
Policy, was put to shareholders for approval at the Group’s 2016
AGM. The voting outcomes are set out below:
Resolution
% of votes
cast for
% of votes
cast against
Withheld
Report – 2016 AGM
89.57%
10.43%
(193.8m votes)
(22.6m votes)
6.1m votes
Policy – 2016 AGM
98.64%
1.36%
(218.1m votes)
(3.0m votes)
1.4m votes
Approval
This report was reviewed and approved by the Board on 6 March 2017.
Robin Ashton
Remuneration Committee Chairman
6 March 2017
Shawbrook Group plc Annual Report & Accounts 2016 Corporate Governance Report continued
Directors’ Report
105
Corporate Governance Statement
The Strategic report and Corporate governance report found on
pages 1 to 104 and, together with this report of which it forms part,
fulfils section 414C of the Companies Act 2006 and the Financial
Conduct Authority’s Disclosure Rules and Transparency Rules
requirements by including, by cross reference, details of the Group’s
financial risk management objectives and policies, business review,
future prospects and environmental policy.
They consider that the Annual Report & Accounts for the year
ended 31 December 2016 and consider that taken as a whole they
are fair, balanced and understandable and provide the information
necessary for shareholders and other stakeholders to assess the
Group’s position and performance, business model and strategy.
Compliance with the UK Corporate Governance Code
The Directors consider that the Group has been in compliance
with the provisions set out in the Code throughout the year.
Results for the year
The Group made a profit before tax for the year of £88.2 million
(2015: £70.1 million) and a profit after tax of £64.8 million
(2015: £58.5 million). The reconciliation of statutory results to
underlying results is set out in the Basis of Preparation on
pages 2 and 3.
For the purposes of DTR 4.1.5R(2) and DTR 4.1.8 this Directors’
Report and the Strategic report on pages 2 to 62 comprise the
management report.
Dividends
The Board has recommended a maiden final dividend in respect
of the year ended 31 December 2016 of 2.7p per share. Subject
to shareholder approval at the forthcoming AGM, the dividend
is expected to be paid on 30 June 2017 to shareholders on the
register of members as at close of business on 2 June 2017. The
Board continues to target an increase in the dividend payout
ratio to 30% of 2017 post-tax profits subject to the continuing
evolution of regulatory capital requirements, the rate at which
the Group continues to grow, attractive investment opportunities
that may arise and the optimal capital composition of the Group’s
balance sheet.
Directors
The names and biographical details of the current Directors are
shown on pages 66 to 68. Particulars of their emoluments and
interests in shares are detailed in the Directors’ Remuneration
Report on pages 91 to 104. Changes to the composition of the
Board since 1 January 2016 up to the date of this report are shown
in the table below:
Name
David Gagie
Steve Pateman
Graham Alcock
Tom Wood
Andrew Didham
Dylan Minto
Joined the Board
Left the Board
1 January 2016
1 January 2016
1 February 2017
6 February 2017
9 June 2016
30 June 2016
Appointment and retirement of Directors
The Group’s Articles of Association sets out the rules for the
appointment and replacement of Directors. In accordance with the
recommendations of the Code, all Directors shall retire from office
and may offer themselves for re-appointment at the Annual General
Meeting. The Directors’ powers are conferred on them by UK
legislation and by the Group’s Articles of Association.
Changes to the Group’s Articles of Association must be approved by
shareholders passing a special resolution and must comply with the
provisions of the Companies Act 2006 and the FCA’s Disclosure and
Transparency Rules.
Directors’ interests
The Directors’ interests (and those of any Persons Closely Associated
with them) in the share capital of the Group during the course of
2016 are set out on pages 91 to 104 of the Directors’ Remuneration
Report.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 106
Corporate governance report continued
Directors’ Report continued
Directors’ indemnities
The Group’s Articles of Association provide that, subject to the
provisions of the Companies Act 2006, the Group may indemnify
any director or former director of the Group or any associated Group
against any liability and may purchase and maintain for any director
or former director of the Group or any associated Group insurance
against any liability.
The Directors of the Group have entered into individual deeds
of indemnity with the Group which constituted ‘qualifying third
party indemnity provisions’ for the purposes of the Companies Act
2006. The deeds were in force from 1 April 2015 or from the date of
appointment for those Directors appointed after 1 April 2015 and are
in force as at the date of this Directors’ Report. The deeds remain in
force for the duration of a Director’s period of office and thereafter
in respect of any claims made in accordance with the indemnity in
respect of the matters arising during the Director’s period of office.
The Group has maintained appropriate Directors’ and Officers’
liability insurance in place throughout 2016.
Share capital
Shawbrook Group plc is a public company limited by shares.
Details of the Group’s issued share capital, together with details of
the movements in the Group ’s issued share capital during the year,
are shown on page 151 in Note 27.
The Group’s share capital comprises one class of ordinary share with
a nominal value of 0.01p each. At 31 December 2016, 250,500,000
ordinary shares were in issue. 500,000 ordinary shares were issued
under a block listing in December 2015 and will be used for the
award of shares pursuant to the Shawbrook Group Performance
Share Plan. Of the 500,000 shares issued under the December 2015
block listing, 71,408 were used in 2016.
Restrictions on the transfer of shares
According to the articles of association and prevailing legislation
there are no specific restrictions on the transfer of shares of
the Group.
Rights attaching to shares
On a show of hands, each member has the right to one vote at
general meetings of the Group. On a poll, each member would be
entitled to one vote for every share held. The shares carry no rights
to fixed income. No person has any special rights of control over
the Group’s share capital and all shares are fully paid.
New issues of share capital
Under section 551 of the Companies Act 2006, the Directors
may allot equity securities only with the express authorisation
of shareholders which may be given in general meeting, but
which cannot last more than five years. Under section 561 of
the Companies Act, the Board may also not allot shares for cash
(otherwise than pursuant to an employee share scheme) without
first making an offer to existing shareholders to allot such shares to
them on the same or more favourable terms in proportion to their
respective shareholdings, unless this requirement is waived by
a special resolution of the shareholders.
Shareholder authority for the Group to allot shares up to an
aggregate nominal amount of £835,000 for any purposes was
granted at the 2016 Annual General Meeting. No shares were
allotted pursuant to this authority during the year.
The Board considers it would be appropriate to seek a renewal of the
shareholder approval for such authority at the forthcoming Annual
General Meeting. Details of the resolution for such authority will be
included in the Notice of the forthcoming Annual General Meeting.
Purchase of own shares
Under section 701 of the Companies Act 2006 a Group may make
a market purchase of its own shares if the purchase has first been
authorised by a resolution of the Group.
The Directors were granted the authority at the 2016 AGM to
repurchase up to a maximum of 2,505,000 ordinary shares. No shares
were purchased pursuant to this authority during the year. The
Board considers it would be appropriate to seek a renewal of the
shareholder approval for the authority to purchase shares of up to
10% of its issued share capital at the forthcoming Annual General
Meeting.
Details of the resolution renewing the authority are included in the
Notice of the forthcoming Annual General Meeting.
Shawbrook Group plc Annual Report & Accounts 2016 107
Substantial shareholdings
In accordance with the Disclosure and Transparency Rules, DTR
5, the Group as at 6 March 2017 (being the latest practicable date
before publication of this report), has been notified of the following
disclosable interests in its issued ordinary shares.
Disclosure of information under listing rule (LR) 9.8.4r
Additional information, where not already contained in the Directors’
Report, required to be disclosed by Listing Rule 9.8.4R, where
applicable to the Group, can be found in the following sections
of the Annual Report:
Ordinary
shares held
% of voting
rights
Subject matter
Amount of interest capitalised
Page reference
Note 3, page 128
Shareholder
Special Opportunities Fund
(Guernsey) LP
Old Mutual Global Investors
Fidelity Mgt & Research
97,358,600
30,723,970
10,319,310
38.87
12.27
4.11
Interests as at 31 December 2016 were as follows:
Shareholder
Special Opportunities Fund
(Guernsey) LP
Old Mutual Global Investors
Fidelity Mgt & Research
Ordinary
shares held
% of voting
rights
97,358,600
30,294,772
11,540,797
38.87
12.09
4.61
Relationship with major shareholder
On Admission of its shares following the IPO in April 2015, the Group
entered into a relationship agreement (the Relationship Agreement)
with its major shareholder SOF General Partner (Guernsey) LP (the
Major Shareholder). Pursuant to the Relationship Agreement, the
Major Shareholder has been granted the right to appoint up to two
Directors to the Board so long as it holds a substantial interest in 20%
of the Group’s ordinary 0.01 pence shares; one Director if it holds a
relevant interest in 10% of the Group’s ordinary 0.01 pence shares.
Despite the Major Shareholder holding 38.87% in the Group’s shares
(as indicated in the table above), the Major Shareholder currently
only has one appointee at the Board. The Board confirms that, since
the IPO, the Group has complied with the independence provisions
included in the Relationship Agreement and that, so far as the
Group is aware, the Major Shareholder and its associates have also
complied with such provisions.
Publication of unaudited financial information
n/a
Details of any Long Term Incentive Schemes
Pages 98 and 99
Waiver of emoluments
Allotment of equity securities
Significant contracts
n/a
Page 106
n/a
Post-balance sheet events
On 3 March 2017, following share price movement, the Group
announced that it was in discussions with Pollen Street Capital
Limited (Pollen Street) and BC Partners LLP (BC Partners) (together
the Consortium) regarding a possible offer to be made by a new
company to be jointly owned by funds managed or advised by
Pollen Street and BC Partners for the entire issued and to be issued
share capital of Shawbrook Group plc (the Possible Offer).
Under the terms of the Possible Offer, shareholders would receive
330p per ordinary share in cash. In addition, shareholders would be
entitled to retain the final maiden dividend in respect of the year
ended 31 December 2016 referred to in this Annual Report &
Accounts. As at the date of publication of this Annual Report
& Accounts the Board had issued a rejection of the Possible Offer.
Discussions with the Consortium were ongoing and there was
no certainty either that an offer would be made nor as to the terms
of any offer, if made.
There have been no other significant events between 31 December
2016 and the date of approval of the Financial statements which
would require a change to or additional disclosure in the Financial
statements.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 108
Corporate governance report continued
Directors’ Report continued
Change of control
The Group is not party to any significant contracts that are subject
to change of control provisions in the event of a takeover bid.
Research and development activities
During the ordinary course of business the Group develops new
products and services within the business units.
There are no agreements between the Group and its Directors
or employees providing compensation for loss of office or
employment that occurs because of a takeover bid.
Significant contracts
Details of related party transactions are set out in Note 32 to the
Financial statements. There are no contracts of significance in
which a Director is interested.
Employees
The Group is committed to being an equal opportunities employer
and opposes all forms of discrimination. Applications from people
with disabilities will be considered fairly and if existing employees
become disabled, every effort is made to retain them within
the workforce wherever reasonable and practicable. The Group
also endeavours to provide equal opportunities in the training,
promotion and general career development of disabled employees.
Business activities
The Group’s business activities, together with the factors
likely to affect its future development and performance and
its summarised financial position are set out on pages 8 to 39
of the Strategic report.
Branches, future developments and financial risk management
objectives and policies
The Group operates in the United Kingdom and has one branch in
Jersey. Information about future developments, internal control and
financial risk management systems in relation to financial reporting
and financial risk management objectives and policies in relation
to the use of financial instruments can be found in the following
sections of the Annual Report which are incorporated into this
report by reference:
Future developments – please refer to the Strategic Report
(pages 8 to 39).
Internal control and financial risk management systems in relation to
financial reporting – please refer to the Corporate governance report
(page 75).
Financial risk management objectives and policies in relation to the
use of financial instruments – please refer to the Risk management
report (pages 40 to 56) and Note 29 of the Financial statements.
The Group regularly provides employees with information
of concern to them, which incorporates the Group’s current
performance and its future aims and strategies. The Group conducts
an Annual Employee Survey and uses the results of this survey to
improve performance in areas that are important to staff. A monthly
newsletter providing business updates and background information
on the Group is circulated to all staff.
Employee share schemes
All employees may participate in the Group’s Save as You Earn (SAYE)
Scheme. Full details of the Group’s employee share schemes are set
out on pages 131 to 133.
Employee benefit trust
Equiniti Trust (Jersey) Limited is the trustee of the Shawbrook Group
plc Employee Benefit Trust, an independent trust, which holds
shares for the benefit of employees and former employees of the
Group. Unless otherwise directed by the Group, the trustee has
agreed to waive all rights to any dividends which may at any time
be payable on any shares held by the trust. The trustee has agreed
to satisfy a number of awards under the employee share plans.
As part of these arrangements the Group funds the trust, from
time to time, to enable the trustee to acquire shares to satisfy these
awards, details of which are set out in Note 27 on pages 151 and 152
of the Financial statements.
Shawbrook Group plc Annual Report & Accounts 2016 109
Emissions reporting
Details on performance can be found on page 58 of the Strategic
report.
Slavery and human trafficking
In 2016, the Group took the following steps to ensure slavery and
human trafficking did not occur within the organisation or supply
chain:
> identifying and addressing risks: the Group has updated its
processes for evaluating prospective suppliers and reviewing
existing suppliers to understand its suppliers’ self-assessment
of slavery and human trafficking issues;
> developing policy: the Group has and continues to update its
compliance policies to include consideration of slavery and human
trafficking issues (as applicable); and
> training: the Group has made available training to those of its staff
who deal most with its suppliers. Development of an intranet
resources page is also underway which staff will be able to access
to learn about modern slavery and human trafficking.
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 12 months from the reporting date.
In making this assessment, the Directors have considered a wide
range of information relating to present and future conditions,
including the current state of the balance sheet, future projections
of profitability, cash flows and capital resources and the longer term
strategy of the business. The Group’s capital and liquidity plans,
including stress tests, have been reviewed by the Directors.
The Group’s forecasts and projections show that it will be able
to operate at adequate levels of both liquidity and capital for the
12 months from the reporting date, including a range of stressed
scenarios, the availability of alternative sources of capital if required
and appropriate management actions.
After making due enquiries, the Directors believe that the
Group has sufficient resources to continue its activities for the
12 months from the reporting date and to continue its expansion,
and the Group has sufficient capital to enable it to continue
to meet its regulatory capital requirements as set out by the
Prudential Regulation Authority.
Fair, balanced and understandable
The Directors are satisfied that the Annual Report & Accounts, taken
as a whole, are fair, balanced and understandable, and provide the
information necessary for members and other stakeholders to assess
the Group’s position and performance, strategy and business model.
Details of the governance procedures which have been embedded
to support this can be found in the Audit Committee Report.
Disclosure of information to the auditor
The Directors confirm that:
1. so far as each of the Directors is aware, there is no relevant audit
information of which the auditor is unaware; and
2. the Directors have taken all the steps that they ought to have
taken as directors in order to make themselves aware of any
relevant audit information and to establish that the auditor
is aware of that information.
This confirmation is given and should be interpreted in accordance
with the provisions of the Companies Act 2006.
Auditor
Resolutions to reappoint KPMG LLP as the Group’s auditor
and to give the directors the authority to determine the auditor’s
remuneration will be proposed at the forthcoming Annual
General Meeting.
Annual General Meeting
Shawbrook Group plc’s second Annual General Meeting will be
held at Instinctif Partners, 65 Gresham Street, London EC2V 7NQ
on 6 June 2017 at 10:00am.
By order of the Board
Steve Pateman
Chief Executive Officer
6 March 2017
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 110
Statement of Directors’ responsibilities
in respect of the Annual Report & Accounts
Responsibility statement of the directors in respect of the annual
financial report
The Directors as at the date of this statement whose names and
functions are set out on pages 66 to 68 confirm that to the best of
their knowledge:
> the Financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the
Group and the undertakings included in the consolidation taken
as a whole; and
> the Strategic Report and Directors’ Report includes a fair review
of the development and performance of the business and the
position of the Group and the undertakings included in the
consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face.
This responsibility statement was approved by the Board of Directors
and is signed on its behalf by:
Daniel Rushbrook
Company Secretary
6 March 2017
The Directors are responsible for preparing the Annual Report
& Accounts and the Group and Parent Financial statements
in accordance with applicable law and regulations.
Company law requires the directors to prepare Group and Parent
Company Financial statements for each financial year. Under that
law they are required to prepare the Group Financial statements
in accordance with IFRSs as adopted by the EU and applicable
law and have elected to prepare the Group Financial statements
on the same basis.
Under company law the Directors must not approve the Financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Parent Company
and of their profit or loss for that period. In preparing each of the
Group and Parent Company Financial statements, the directors
are required to:
> select suitable accounting policies and then apply them
consistently;
> make judgements and estimates that are reasonable and prudent;
> state whether they have been prepared in accordance with
IFRSs as adopted by the EU; and
> prepare the Financial statements on the going concern basis
unless it is inappropriate to presume that the Group and
the Parent Company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Parent Company and enable them
to ensure that its Financial statements comply with the Companies
Act 2006. They have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of the group
and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance
Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the Group’s
website. Legislation in the UK governing the preparation and
dissemination of Financial statements may differ from legislation
in other jurisdictions.
Shawbrook Group plc Annual Report & Accounts 2016 Independent Auditor’s report
to the members of Shawbrook Group plc only
111
Opinions and conclusions arising from our audit
1. Our opinion on the Financial statements is unmodified
We have audited the Financial statements of Shawbrook Group plc
for the year ended 31 December 2016 set out on pages 117 to 179.
In our opinion:
> the Financial statements give a true and fair view of the state of
the group’s and of the parent company’s affairs as at 31 December
2016 and of the group’s profit for the year then ended;
> the group Financial statements have been properly prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union (IFRSs as adopted by the EU);
> the parent company Financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU and as
applied in accordance with the provisions of the Companies Act
2006; and
> the Financial statements have been prepared in accordance with
the requirements of the Companies Act 2006 and, as regards
the group Financial statements, Article 4 of the IAS Regulation.
2. Overview
When we planned our 2016 audit we began with our knowledge of
the group and the key risks from the audits we have performed in
previous years. This included our assessment of the group’s capital
and liquidity positions, the composition of its balance sheet, its
control environment and the views of the Prudential Regulation
Authority and Financial Conduct Authority. Our assessment of key
risks continued from our initial planning throughout our interim
and final audits and was regularly updated through ongoing
conversations with management, the Board and Audit Committee
and reading pertinent management information. In addition to
our understanding of internal developments we also considered
external developments and the risks they present to the group’s
business model and Financial statements.
We considered that the challenge of meeting market expectations,
the regulatory and tax challenges to the BTL market and the impact
of the result of the EU referendum could all increase the audit risk
in the area of loan impairment. We also considered the impact on
the inherent risk and our audit approach of the breach of lending
controls in the Group’s Scottish operation identified during the
course of 2016. Although the risk is somewhat mitigated through
a lower interest rate environment and a relatively benign but
uncertain credit outlook we concluded that the audit risk in this
area has increased.
We considered that the impact of portfolio seasoning and the
challenge of meeting market expectations on effective interest
rate accounting would increase the audit risk in the area of income
recognition. The risk is mitigated by the limited number of material
new product types and we concluded that the audit risk in this area
has remained broadly consistent.
We considered the change in the Group’s operating structure,
including the impact on the cash generating units identified by
the directors to assess the potential impairment of goodwill.
Other factors we have considered in assessing the audit risks
include the increasing project spend required in relation to
significant projects, including the need to prepare for major financial
reporting changes such as IFRS 9, loan portfolio acquisitions during
the year and the regulatory landscape of ongoing industry-wide
conduct issues.
The final result of our risk consideration is shown in the table, and
we have shown those which have increased or decreased in risk
from the previous year. We are of the view that there are five areas
of significant risk, but three – impairment provisioning, effective
interest rate (EIR) accounting and valuation of goodwill – represent
the greatest significance.
High
Going concern
General IT
controls
Regulatory and
conduct risk
Intermediary
and outsourcing
Fraud
Loans portfolio
acquisition
accounting
Valuation of
goodwill
Management
override of controls
Impairment
provisioning
EIR
accounting
Taxation
Hedge accounting
and derivatives
Financial
control process
Valuation of financial
instruments
derivatives
Residual
value risk
t
c
a
p
m
I
Key
Valuation of financial
instruments – amortised
cost and level 3 fair value
Risk of greater significance
Significant financial statement audit risks
Other business and control risk
Low
Low
Financial
statement
disclosure
Cost
capitalisation
Share option
schemes
Risk direction
Increased from 2015
Consistent with 2015
Likelihood
High
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 112
Independent Auditor’s report
to the members of Shawbrook Group plc only continued
3. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the Financial statements
the risks of material misstatement that had the greatest effect on our
audit, in decreasing order of significance, were as follows:
Impairment provisioning (Balance sheet: 2016 – £24.4 million;
2015 – £13.5 million; Profit and Loss charge: 2016 – £24.3 million;
2015 – £6.5 million)
Refer to page 82 (Report of the Audit Committee), page 138 (accounting
policy, critical accounting estimates and judgements) and financial
disclosures).
The risk is that impairment provisions on loans and advances to
customers are misstated. Loans for which there is objective evidence
that an impairment event has occurred are assessed individually for
impairment. If there is no evidence that an impairment exists on an
individual basis, loans are assessed collectively for impairment.
The Group’s individual provisions are subjective as a result of the
number of judgements needed. The Group’s methodology for
calculating individual provisions is split between those which are
modelled (Consumer Finance and Second charge mortgages,
representing 25% of the Group’s total loans) and those which are
individually assessed (Business Finance and Commercial mortgages,
representing 75% of the Group’s total loans).
For the modelled individual provisions the key judgements are
the probabilities of default (PDs) and loss given defaults (LGDs).
These judgements are particularly subjective because the Group
has limited historical experience to support the assumptions
made due to the relatively unseasoned nature of its loan portfolios
underwritten during a relatively benign economic period.
Business Finance and Commercial loans are monitored and
placed on a watchlist if they are considered to exhibit evidence
of impairment. Provisioning judgements are then made for these
loans based on the individual circumstances of each case and
expectations of future cash flows. These individually assessed
provisions are particularly judgemental for these portfolios where
the specialised nature of collateral and exit strategy selected can
significantly impact the timing and value of cash flows.
The key judgements in the collective provisioning model are the
emergence period, propensity to default and loss given default. The
emergence period is the most difficult judgement to estimate due
to the difficulty of obtaining historical data.
A management overlay is applied to the modelled provisioning
balances to reflect risk factors not taken into account by the models.
This requires judgement in relation to the factors to be reflected as
well as their estimated value.
Our response – In this area our audit procedures included:
> Testing the design, implementation and operating effectiveness of
key controls over the capture, monitoring and reporting of loans
and advances to customers;
> Substantively validating the year end impairment models
for collective and individual provisioning by re-performing
calculations and agreeing a sample of data inputs to source
documentation. We also assessed whether the data used in the
models is complete and accurate through testing a sample of
relevant data fields and their aggregate amounts against data in
the source systems;
> Critically assessing and challenging the assumptions used by the
Group in their impairment models using our understanding of
the Group, the historical accuracy of its estimates, current and
past performance of the Group’s loans and our knowledge of the
industry in respect of similar loan types;
> Benchmarking key assumptions, methodology and overall
provision levels/ratios against the Group’s peers. We also
compared other inputs such as house price inflation to market
information to mitigate the risk of error in collateral valuations;
> Considering the sensitivity of the collective and individual
provisioning models to changes in the key assumptions;
> Undertaking a detailed assessment of a sample of exposures for
individual impairment in the Business Finance and Commercial
mortgage portfolios, taking a risk based approach to focus
on those with the greatest potential impact on the Financial
statements. Our assessment specifically challenged the Group’s
assumptions of expected future cash flows, including the
valuation of collateral, through inquiry with credit managers and
inspecting third party correspondence and independent valuation
reports;
> Assessing the controls within the Group which ensure the
completeness of individual provisioning watchlists. Examining
a sample of performing loans in the Business Finance and
Commercial mortgage portfolios to evaluate if any indicators
of impairment existed to test the completeness of individual
impairment provisions;
> Considering the work of the Second and Third lines of defence
in relation to control failures, improvements instituted to controls
and the possibility of further exposure due to the controls breach
identified in the Scotland office. We also undertook an assessment
of Business Finance accounts which display similar characteristics
to those linked to the Controls breach identified in the Scotland
office, to assess whether there are additional impacted accounts
other than those identified by management.
> Critically assessing the rationale for the inclusion of elements in
the management overlay as well as the value of the overlay with
reference to our own knowledge of the industry; and
> Considering the adequacy of the Group’s disclosures in relation to
impairment about any changes in estimate occurring during the
period and the sensitivity to the key assumptions.
Shawbrook Group plc Annual Report & Accounts 2016 113
Effective Interest Rate (EIR) accounting (Profit and Loss – interest
and similar income: 2016 – £280.2 million; 2015 – £216.9 million)
Refer to page 82 (Report of the Audit Committee), page 128 (accounting
policy, critical accounting estimates and judgements and financial
disclosures
The risk – Interest and fees earned on loans are recognised using the
effective interest rate method which spreads directly attributable
cash flows over the expected lives of the loans. The Directors apply
judgement in deciding which cash flows are spread on an EIR basis
and assessing the redemption profiles used to spread those cash
flows. The most critical element of judgement in this area is the
estimation of the redemption profiles of the loans, informed by
past customer behaviour of when loans have been paid off.
Our response – In this area our audit procedures included:
> Inspecting a sample of new product literature to ensure that
pricing structure, fees and costs are appropriately incorporated
into the EIR models as required by the relevant accounting
standards;
> Agreeing a sample of data inputs to source information from
the systems. We assessed whether the data used in the models
is complete and accurate through testing a sample of relevant
data fields and their aggregate amounts against data in the
source systems;
> Evaluating the accuracy of the models by re-performing the
calculations, testing for model inconsistencies between the
portfolios and comparing the methodology used to the
requirements of the relevant accounting standards;
> Challenging the appropriateness of key assumptions used in the
EIR models, including the expected lives, by comparing these to
historical trends within the Group, the Group’s forecasts and our
own expectations based on our knowledge of the Group and
experience of the industry in which it operates;
> Considering the sensitivity of the model to changes in key
assumptions;
> Benchmarking the Group’s expected life assumptions to peer
data and/or market information for comparable lending where
available; and
> Considering the adequacy of the Group’s disclosures about
any changes in estimate occurring during the period and the
sensitivity to the key assumptions.
Valuation of Goodwill (Balance Sheet – Goodwill: 2016 –
£44.8 million (2015 – £44.8 million); Profit and Loss – nil
impairment charge in 2016 and 2015))
Refer to page 82 (Report of the Audit Committee), page 144 (accounting
policy and critical accounting estimates and judgements and financial
disclosures).
The risk is that goodwill amounts held on the balance sheet are
not supported by future cash flows of the underlying business.
As a result of changes to the operating structure of the Group,
the appropriate identification of each cash generating unit is a
particularly critical element of judgment for the 2016 period end.
The directors have assessed there to be three CGUs at the period
end, rather than the five identified in the prior period. There is
significant judgement in assessing the CGUs and changing them
affects both the recoverable and carrying amounts used in the
impairment testing of goodwill.
The recoverable amounts for each CGU are calculated using
discounted future cash flow forecasts and compared to the carrying
value for each CGU. In calculating the recoverable amounts, the
directors make judgements over certain key inputs including
revenue growth, discount rate and long term growth rates.
£34.7 million of the total goodwill balance relates to Business
Finance, being the area of most significant judgement in light of
the size of the balance and financial performance in the year. Both
the discount rate and the forecast cash flows used in calculating the
recoverable amounts are critical elements of judgement in this area.
Our response – In this area our audit procedures included:
> Assessing whether the CGUs have been appropriately identified
in relation to the requirements of the accounting standards.
Specifically challenging the directors’ conclusion that the
five CGUs identified in the prior period had now merged into
three CGUs;
> Reviewing whether an appropriate final impairment test
was performed on the five CGUs at the point of merger;
> Considering the adequacy of the Group’s disclosures about
the key assumptions, including the sensitivity of the recoverable
amount to those assumptions;
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 114
Independent Auditor’s report
to the members of Shawbrook Group plc only continued
For Business Finance specifically our procedures included:
> Assessing the appropriateness of the Group’s forecasting
approach and the calculation of discount rates with the support
of our valuation specialists;
> Comparing discount rates used to externally available information
for other financial services institutions;
5. Our opinion on other matters prescribed by the Companies
Act 2006 is unmodified
In our opinion:
> the part of the Directors’ Remuneration Report to be audited has
been properly prepared in accordance with the Companies Act
2006; and
> Challenging forecast cash flows and growth rates in the context
of historical experience as well as our knowledge of the market
and wider economic environment;
> 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.
> Considering the consistency of forecast cash flows used in the
impairment model with management forecasts and other key
internal documents; and
> Considering the sensitivity of the recoverable amounts to changes
in key assumptions.
4. Our application of materiality and an overview of the scope
of our audit
The materiality for the Group Financial statements as a whole was
set at £4.2 million (2015: £3.0 million), determined with reference to
a benchmark of Group profit before tax of which it represents 4.8%
(2015: 4.3%). The increased percentage relative to the benchmark
primarily reflects this being the second reporting period for the
Group as a listed entity.
88.2
4.2
£4.2m Whole financial
statements materiality
Profit before tax (£m)
Materiality (£m)
£0.21m Mis-statements
reported to the
Audit Committee
We reported to the Audit Committee any corrected or
uncorrected identified misstatements exceeding £0.21 million
(2015: £0.15 million), in addition to other identified misstatements
that warranted reporting on qualitative grounds.
The Group audit team performed the audit of the Group and its only
material component as if it was a single aggregated set of financial
information. The audit was performed using the materiality levels set
out above and covered 100% of total Group Revenue, Group profit
before tax, and total Group assets.
6. We have nothing to report on the disclosures of principal risks
Based on the knowledge we acquired during our audit, we have
nothing material to add or draw attention to in relation to:
> the Group Viability statement on page 56 concerning the principal
risks, their management, and, based on that, the directors’
assessment and expectations of the group’s continuing in
operation over the 3 years to 31 December 2019; or
> the disclosures in note 1 of the Financial statements concerning
the use of the going concern basis of accounting.
7. We have nothing to report in respect of the matters on
which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if,
based on the knowledge we acquired during our audit, we have
identified other information in the annual report that contains a
material inconsistency with either that knowledge or the Financial
statements, a material misstatement of fact, or that is otherwise
misleading.
In particular, we are required to report to you if:
> we have identified material inconsistencies between the
knowledge we acquired during our audit and the directors’
statement that they consider that the annual report and Financial
statements taken as a whole is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the group’s position and performance, business model and
strategy; or
> the Report of the Audit Committee does not appropriately
address matters communicated by us to the Audit Committee.
Shawbrook Group plc Annual Report & Accounts 2016
115
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
> adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been
received from branches not visited by us; or
> the parent company Financial statements and the part of
the Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
> certain disclosures of directors’ remuneration specified by law
are not made; or
> we have not received all the information and explanations
we require for our audit.
Under the Listing Rules we are required to review:
> the directors’ statements, set out on pages 109 and 56,
in relation to going concern and longer-term viability; and
> the part of the Corporate Governance Statement on page 64
relating to the company’s compliance with the eleven provisions
of the 2014 UK Corporate Governance Code specified for our
review.
We have nothing to report in respect of the above responsibilities.
Scope and responsibilities
As explained more fully in the Directors’ Responsibilities
Statement set out on page 110, the directors are responsible for
the preparation of the Financial statements and for being satisfied
that they give a true and fair view. A description of the scope of an
audit of Financial statements is provided on the Financial Reporting
Council’s website at www.frc.org.uk/auditscopeukprivate.
This report is made solely to the company’s members as a body
and is subject to important explanations and disclaimers regarding
our responsibilities, published on our website at www.kpmg.com/
uk/auditscopeukco2014a, which are incorporated into this report as
if set out in full and should be read to provide an understanding of
the purpose of this report, the work we have undertaken and
the basis of our opinions.
John Ellacott (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square, London, E14 5GL
6 March 2017
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 116
FInancIal
statements
Financial statements
117 Consolidated statement of profit and loss and other comprehensive income
118 Consolidated and Company statements of financial position
119 Consolidated statement of changes in equity
120 Company statement of changes in equity
121 Consolidated and Company statement of cash flows
122 Notes to the financial statements
180 Glossary
Shawbrook Group plc
Annual Report & Accounts 2016
Consolidated statement of profit and loss
and other comprehensive income
For the year ended 31 December 2016
Interest and similar income
Interest expense and similar charges
Net interest income
Operating lease rentals
Other income
Depreciation on operating leases
Net income from operating leases
Fee and commission income
Fee and commission expense
Net fee and commission income
Fair value gains/(losses) on financial instruments
Net operating income
Administrative expenses
Impairment losses on loans and advances to customers
Provisions for liabilities and charges
Total operating expenses
Profit before taxation
Income tax charge
Profit after taxation, being total comprehensive income, attributable to owners
Earnings per share
Basic
Diluted
The notes on pages 122 to 179 are an integral part of these Financial statements.
117
2015
£m
216.9
(63.8)
153.1
14.9
1.1
(12.2)
3.8
13.1
(2.8)
10.3
(0.3)
166.9
(88.7)
(6.5)
(1.6)
(96.8)
70.1
(11.6)
58.5
2015
Pence
24.1
24.0
Notes
3
4
16
5
15
6
14
23
12
Notes
35
35
2016
£m
280.2
(83.1)
197.1
13.5
0.1
(11.3)
2.3
15.4
(5.7)
9.7
0.5
209.6
(96.0)
(24.3)
(1.1)
(121.4)
88.2
(23.4)
64.8
2016
Pence
25.9
25.5
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
118
Consolidated and Company statements of financial position
As at 31 December 2016
Assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Derivative financial assets
Property, plant and equipment
Intangible assets
Current tax assets
Deferred tax assets
Other assets
Investment in subsidiaries
Subordinated loan receivable
Total assets
Liabilities
Customer deposits
Due to banks
Provisions for liabilities and charges
Derivative financial liabilities
Current tax liabilities
Other liabilities
Subordinated debt
Total liabilities
Equity
Share capital
Share premium account
Capital redemption reserve
Retained earnings
Total equity
Group
2016
£m
Company
2016
£m
Group
2015
£m
Company
2015
£m
Notes
13
15
16
17
18
19
20
26
21
22
23
15
24
26
27
429.9
24.1
4,050.4
5.2
42.6
59.9
–
17.9
16.6
–
–
–
–
–
–
–
–
–
–
2.2
277.0
76.1
521.9
30.9
3,319.1
2.8
48.6
54.7
–
14.1
7.9
–
–
4,646.6
355.3
4,000.0
3,943.5
147.7
1.3
0.4
14.2
27.0
75.3
4,209.4
2.5
87.3
183.1
164.3
437.2
–
–
–
–
–
–
75.3
75.3
2.5
87.3
183.1
7.1
280.0
3,186.4
39.9
0.9
–
7.4
323.8
74.0
3,632.4
2.5
87.3
183.1
94.7
367.6
–
–
–
–
–
–
0.1
–
4.2
272.2
75.0
351.5
–
–
–
–
–
1.4
74.0
75.4
2.5
87.3
183.1
3.2
276.1
Total equity and liabilities
4,646.6
355.3
4,000.0
351.5
The notes on pages 122 to 179 are an integral part of these Financial statements.
These Financial statements were approved by the Board of Directors on 6 March 2017 and were signed on its behalf by:
Steve Pateman
Chief Executive Officer
Registered number 07240248
Dylan Minto
Chief Financial Officer
Shawbrook Group plc Annual Report & Accounts 2016
Consolidated statement of changes in equity
For the year ended 31 December 2016
119
Total
equity
£m
218.7
58.5
58.5
4.1
–
90.0
(3.7)
86.3
Share
capital
£m
185.3
Share
premium
£m
1.3
–
–
–
(183.1)
0.3
–
(182.8)
2.5
–
–
–
–
89.7
(3.7)
86.0
87.3
Capital
redemption
reserve
£m
Retained
earnings
£m
–
–
–
–
183.1
–
–
183.1
183.1
32.1
58.5
58.5
4.1
–
–
–
–
94.7
367.6
2.5
87.3
183.1
94.7
367.6
–
–
–
–
–
–
–
–
–
64.8
64.8
4.8
64.8
64.8
4.8
2.5
87.3
183.1
164.3
437.2
Balance as at 1 January 2015
Total comprehensive income for the year
Profit for the year
Total comprehensive income for the year
Share-based payments
Transactions with owners recorded directly in equity
Contributions by and distributions to owners
Cancellation of shares
Issue of shares
Cost of share issue
Total contributions by and distributions to owners
Balance as at 31 December 2015
Balance as at 1 January 2016
Total comprehensive income for the year
Profit for the year
Total comprehensive income for the year
Share-based payments
Balance as at 31 December 2016
The notes on pages 122 to 179 are an integral part of these Financial statements.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
120
Company statement of changes in equity
For the year ended 31 December 2016
Balance as at 1 January 2015
Total comprehensive income for the year
Loss for the year
Dividends received
Total comprehensive income for the year
Share-based payments
Transactions with owners recorded directly in equity
Contributions by and distributions to owners
Cancellation of shares
Issue of shares
Cost of share issue
Total contributions by and distributions to owners
Balance as at 31 December 2015
Balance as at 1 January 2016
Total comprehensive income for the year
Loss for the year
Total comprehensive income for the year
Share-based payments
Balance as at 31 December 2016
Capital
redemption
reserve
£m
Retained
earnings
£m
Share
capital
£m
185.3
Share
premium
£m
1.3
–
–
–
–
(183.1)
0.3
–
(182.8)
2.5
–
–
–
–
–
89.7
(3.7)
86.0
87.3
–
–
–
–
–
183.1
–
–
183.1
183.1
Total
equity
£m
186.2
(4.5)
4.0
(0..5)
4.1
–
90.0
(3.7)
86.3
(0.4)
(4.5)
4.0
(0.5)
4.1
–
–
–
–
3.2
276.1
2.5
87.3
183.1
3.2
276.1
–
–
–
–
–
–
–
–
–
2.5
87.3
183.1
(0.9)
(0.9)
4.8
7.1
(0.9)
(0.9)
4.8
280.0
The notes on pages 122 to 179 are an integral part of these Financial statements.
Shawbrook Group plc Annual Report & Accounts 2016
Consolidated and Company statement of cash flows
For the year ended 31 December 2016
121
Cash flows from operating activities
Profit/(loss) for the year before taxation
Adjustments for non-cash items
Cash flows from operating activities before changes
in operating assets and liabilities
Increase/decrease in operating assets and liabilities
Increase in mandatory balances with central banks
Increase in loans and advances to customers
Increase in operating lease assets1
(Increase)/decrease in derivatives
(Increase)/decrease in other assets
(Increase) in subordinated debt receivable
Increase in customer deposits
Increase in provisions for liabilities and charges
(Decrease)/increase in other liabilities
Net change in operating assets and liabilities
Tax (paid)/received
Net cash flow (used by)/generated from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Sale of property, plant and equipment
Purchase of intangible assets
Investment in subsidiaries net of cash and cash equivalents acquired
Dividend received from subsidiary
Net cash used by investing activities
Cash flows from financing activities
Increase/(decrease) in amounts due to banks
Repayment of subordinated debt
Increase in subordinated debt
Payment of subordinated debt interest
Proceeds from the issue of ordinary share capital
Net cash generated from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Notes
28
Group
2016
£m
Company
2016
£m
Group
2015
£m
Company
2015
£m
88.2
51.8
(0.9)
11.3
140.0
10.4
(1.7)
(755.6)
(7.5)
(2.0)
(8.7)
–
757.1
0.4
(296.8)
(314.8)
(20.4)
(195.2)
(0.2)
0.2
(7.9)
–
–
(7.9)
107.8
–
–
(5.2)
–
102.6
(100.5)
550.5
450.0
–
–
–
–
2.0
(1.1)
–
–
(1.4)
(0.5)
0.1
10.0
–
–
–
(4.8)
–
(4.8)
–
–
–
(5.2)
–
(5.2)
–
–
–
70.1
27.1
97.2
(0.6)
(1,040.3)
(7.4)
0.9
(1.1)
–
765.4
0.3
287.2
4.4
(13.8)
87.8
(4.7)
–
(6.1)
–
–
(10.8)
(1.1)
(33.7)
74.0
–
86.3
125.5
202.5
348.0
550.5
(4.6)
4.1
(0.5)
–
–
–
–
(79.2)
–
–
–
1.4
(77.8)
–
(78.3)
–
–
–
(86.2)
4.0
(82.2)
–
–
74.0
–
86.3
160.3
(0.2)
0.2
–
1 The cashflow impact of operating leases is now shown under operating activities and not investing activities. £7.4 million has been reclassified from investing activities to
operating activities for 2015.
The notes on pages 122 to 179 are an integral part of these Financial statements.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
122
Notes to the financial statements
For the year ended 31 December 2016
1. Basis of preparation
1.1 Reporting entity
Shawbrook Group plc is domiciled in the UK. The Company’s registered office is at Lutea House, Warley Hill Business Park, The Drive,
Great Warley, Brentwood, Essex, CM13 3BE. The consolidated Financial statements of Shawbrook Group plc, for the year ended
31 December 2016, comprise the results of the Company and its subsidiaries (together referred to as the Group and individually
as Group entities).
1.2 Basis of accounting
The Group’s Financial statements have been prepared on a historical cost basis and in accordance with International Financial Reporting
Standards (IFRS) as adopted by the EU. The Financial statements are drawn up in accordance with the Companies Act 2006. No individual
profit or loss account or related notes are presented for the Company as permitted by section 408 (4) of the Companies Act 2006.
1.3 Functional and presentation currency
The consolidated Financial statements are presented in Pounds Sterling, which is the Company and its subsidiaries’ functional currency.
Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the dates of the transactions.
Monetary items denominated in foreign currencies are translated at the rate prevailing at the balance sheet date. Foreign exchange gains
and losses resulting from the restatement and settlement of such transactions are recognised in profit or loss. Non-monetary items (which
are assets and liabilities which do not attach to a right to receive or an obligation to pay a fixed or determinable number of units of currency)
denominated in foreign currencies are translated at the exchange rate at the date of the transaction.
1.4 IPO costs
Qualifying costs directly attributable to the issue of share capital were charged directly to equity and other associated costs were charged
to the income statement.
1.5 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 at least 12 months following the year end. In making this assessment, the Directors have considered a wide range of
information relating to present and future conditions, including the current state of the balance sheet, future projections of profitability,
cash flows and capital resources and the longer term strategy of the business. The Group’s capital and liquidity plans, including stress tests,
have been reviewed by the Directors.
The Group’s forecasts and projections suggest that it will be able to operate at adequate levels of both liquidity and capital for at least
12 months following the year end, including in a range of stressed scenarios, assuming the availability of alternative sources of capital if
required and appropriate management actions.
After making due enquiries, the Directors believe that the Group has sufficient resources to continue its activities for at least 12 months
following the year end, and the Group has sufficient capital to enable it to continue to meet its regulatory capital requirements as set out
by the Prudential Regulation Authority.
1.6 Basis of consolidation
Subsidiaries are entities controlled by the Group. The Financial statements of subsidiaries are included in the consolidated Financial
statements from the date that control commences until the date that control ceases.
Entities are regarded as subsidiaries where the Group has the power over an investee, exposure or rights to variable returns from its
involvement with the investee and the ability to affect those returns. Inter-company transactions and balances are eliminated upon
consolidation. Subsidiaries are consolidated from the date on which control is transferred to the Group and are deconsolidated from the
date that power over an investee, exposure or rights to variable returns and the ability to affect these returns ceases. A Special Purpose
Entity (SPE) is an entity which is formed for a single, well-defined and narrow, lawful purpose. The Group did not have any SPEs in the year.
Accounting policies are applied consistently across the Group.
These Financial statements consolidate the results of the subsidiary companies set out in Note 31.
Shawbrook Group plc Annual Report & Accounts 2016 123
1. Basis of preparation continued
1.7 Critical accounting estimates and judgements
The preparation of Financial statements in conformity with IFRS adopted in the EU requires Management to make judgements, estimates
and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the
Financial statements and the reported amounts of income and expenses during the reporting period. Although these estimates are based
on Management’s best knowledge of the amount, actual results may ultimately differ from those estimates.
The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Financial
statements are disclosed within the notes to the Financial statements which the estimate or judgement relates to as follows:
Area of significant judgement or estimate
Effective interest rate
Impairment of loans and advances
Impairment assessment of goodwill
Note
reference
3
14
17
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.
1.8 Other reserves
> Capital redemption reserve
This is a statutory, non-distributable reserve into which amounts are transferred following the redemption or purchase of a company’s
own shares. The provisions relating to the capital redemption reserve are set out in section 733 of the Companies Act 2006.
1.9 New standards and interpretations not yet adopted
A number of International Accounting Standards Board (IASB) pronouncements have been issued but are not effective for this financial year.
The standards considered most relevant to the Group are as follows:
> IFRS 9 ‘Financial Instruments’
Effective from 1 January 2018, the standard replaces IAS 39, addressing recognition, basis of valuation, income recognition methods,
impairment and hedging for financial instruments.
While areas such as the amortised cost basis of valuation and the effective interest rate method of recognition are largely unchanged in
the new standard, the new basis of accounting for impairments is likely to have a significant impact on the Group due to the requirement
for earlier recognition of losses.
The impairment requirements apply to financial assets measured at amortised cost and FVOCI, loan receivables, certain loan commitments
and financial guarantee contracts. At initial recognition, an allowance (or provision in the case of commitments and guarantees) is required
for expected credit losses (ECL) resulting from default events that are possible within the next 12 months (12 month ECL). In the event
of a significant increase in the credit risk, allowance (or provision) is required for ECL resulting from all possible default events over the
expected life of the financial instrument (lifetime ECL). Financial assets where 12-month ECL is recognised are considered to be Stage 1;
financial assets, which are considered to have experienced a significant increase in credit risk are in Stage 2; and financial assets, which
there is objective evidence of impairment so are considered to be in default or otherwise credit impaired are in Stage 3.
The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period by
considering the change in the risk of default occurring over the remaining life of the financial instrument, rather than by considering the
increase in ECL.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
124
Notes to the financial statements continued
For the year ended 31 December 2016
1. Basis of preparation continued
The assessment of credit risk and estimated ECL are required to be unbiased and probability-weighted, and should incorporate all
available information which is relevant to the assessment including information about past events, current conditions and reasonable and
supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time
value of money. As a result, the recognition and measurement of the impairment is intended to be more forward-looking than under IAS
39 and the resulting impairment charge will tend to be more volatile. It will also tend to result in an increase in the total level of impairment
allowances, since all financial assets will be assessed for at least 12 month ECL and the population for financial assets to which lifetime ECL
applies is likely to be larger than the population for which there is objective evidence of impairment in accordance with IAS 39.
During 2016 and continuing into 2017, there has been a particular focus on the Group’s preparedness for IFRS 9 which aims to ensure
that the Group has the necessary systems and processes in place ahead of the effective date. Progress has been made on developing
the Expected Credit Loss models, including our Credit Grading Framework. The IFRS 9 program, which is jointly sponsored by the CFO
and CRO and managed by a dedicated management committee, includes defining the IFRS 9 methodology and accounting policies,
identifying data, reconciliation and system requirements, and the development and establishment of appropriate and compliant
operating models within an appropriate governance framework, is currently within its build phase with testing and implementation due
to take place by the end of 2017. The Group is on track to begin running the Expected Credit Loss models in parallel with the current
risk models in Q2 of 2017. Until such time as the Expected Credit Loss models, encompassing the Credit Grading Framework and future
looking economic scenarios, have been tested, the Group does not plan to quantify the extent of the impacts of IFRS 9.
The classification and measurement categories prescribed in IFRS 9 will remain largely similar to the categorisation under IAS 39. The
Group has also decided to exercise the accounting policy choice to continue applying hedge accounting under IAS 39, which is permitted
under IFRS 9. The Group assessed the impact on the classification and measurement with reference to the ‘solely payments of principal
and interest’ and concluded that the current classification under IAS 39 will remain materially unchanged. The Group is on track to
successfully deliver the changes required to adopt IFRS 9 on 1 January 2018 and will not early adopt any elements of the Standard.
> IFRS 16 ‘Leases’
Effective from 1 January 2019, the standard replaces IAS 17, IFRIC 4, SIC 15 and SIC 27. It applies to all leasing arrangements. The standard
introduces a new recognition model that recognises all leases on a lessee’s balance sheet (subject to certain exemptions), reducing
off-balance sheet financing and increasing balance sheet value and operating profit. Lessor accounting is largely unchanged. Early
adoption is permitted if IFRS 15 ‘Revenue from Contracts with Customers’ has also been applied. The Group is considering the impact
on its Financial statements, although the standard is not anticipated to have a material impact as the Group is mainly a lessor of assets.
The Group is however evaluating the impact this might have on a continuing basis. The Group intends to adopt the standard on the
date it becomes effective.
> IFRS 15 ‘Revenue from Contracts with Customers’
Effective from 1 January 2018, the standard replaces IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18 and SIC 3. IFRIC 18, ‘Transfer of Assets from
Customers’ was applied on 1 July 2009. It applies to contracts with customers but does not apply to insurance contracts, financial
instruments or lease contracts, which fall under the scope of other IFRSs. It also does not apply if two companies in the same line
of business exchange non-monetary assets to facilitate sales to other parties.
IFRS 15 introduces a new revenue recognition model that recognises revenue either at a point in time or over time. The model features
a contract-based five-step analysis of transactions to determine whether, how much, and when revenue is recognised. This is unlikely to
have a material impact on the Group due to the nature of the products and services provided to clients. The Group is however evaluating
the impact this might have on a continuing basis. The Group intends to adopt the standard on the date it becomes effective.
All other significant accounting policies have been discussed in the corresponding notes.
Shawbrook Group plc Annual Report & Accounts 2016
125
2. Operating segments
Accounting policy
The Group determines operating segments according to similar economic characteristics and the nature of its products and services
in accordance with IFRS 8 ‘Operating Segments’. Management reviews the Group’s internal reporting based around these segments
in order to assess performance and allocate resources.
Segment performance is evaluated based on the underlying profit or loss and is measured consistently with underlying profit or loss
in the consolidated Financial statements. Segment results are regularly reviewed and reported to the Board of Directors to allocate
resources to segments and to assess their performance. Operating segments are reported in a manner consistent with the internal
reporting provided to the Board. The Group Executive Committee has been determined to be the Chief Operating Decision Maker
for the Group.
The Group has four reportable operating segments as described below which are based on the Group’s three lending divisions plus
a central segment which represents the savings business, central functions and shared central costs. These segments have changed
since the 2015 Annual Report, in which the Group reported six operating segments (representative of five lending divisions rather than
the current three). The reduced number of operating segments in the year is an operational change that reflects the way the business
is managed and reports at a operational and oversight level. The Commercial Mortgages and Secured Lending divisions have been
amalgamated to form the Group’s Property Finance division. The Asset Finance and Business Credit divisions have been amalgamated
to form the Group’s Business Finance division.
The following summary describes the operations in each of the Group’s reportable segments:
> Property Finance: Provides mortgages for investors, businesses and personal customers. It serves professional landlords and property
traders in residential and commercial asset classes across long-term and shorter-term finance. It lends to trading businesses to fund the
acquisition and refinancing of business premises. The division serves the needs of personal customers through the provision of loans
secured by second charge on the main residence and increasingly through specialist areas of first charge lending.
> Business Finance: Provides the following propositions:
– the Regional Business Centres provide finance solutions to established businesses in UK SME markets, principally through a direct
product offering. The centres primarily provide leasing finance for business-critical assets operated by established UK SME businesses,
and working capital solutions in the form of invoice discounting and asset-based lending;
– the Structured Finance proposition includes lending to SME finance companies with security against receivables within their portfolios.
The Structured Finance product set provides wholesale finance and block discounting to smaller UK financial institutions to allow
customers to release cash and grow their businesses. Loans are secured against receivables within the customers’ portfolios, with the
security given by the ultimate borrower taking the form of a hard asset or a pool of loan receivables; and
– the Specialist Sectors proposition include leasing and hire purchase finance solutions in specialist UK SME market segments such as
marine and aviation, healthcare and taxis. We distribute the majority of our Specialist Sectors products directly through our experienced
and expert teams. Leveraging the significant lending and sector experience of our sales teams, we build and develop relationships with
our clients by providing specialist insight and advice.
> Consumer Lending: Provides unsecured loans for a variety of purposes, primarily focused on home improvements, holiday ownership,
personal loans and certain retailers.
> Central: As well as common costs, Central includes the Group’s Treasury function and Consumer Savings business which are responsible
for raising finance on behalf of the lending segments.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 126
Notes to the financial statements continued
For the year ended 31 December 2016
2. Operating segments continued
Information regarding the results of each reportable segment and their reconciliation to the total results of the Group is included below.
Performance is measured based on the product contribution as included in the internal management reports. All revenue for each operating
segment is earned from external customers. Comparative numbers are recalculated to reflect the four segments. The underlying basis is
the basis on which financial information is presented to the Chief Operating Decision Maker, which excludes certain items included in the
statutory results. The table below includes a reconciliation between the statutory results and the underlying basis:
Year ended 31 December 2016
Interest and similar income
Interest expense and similar charges
Net interest income
Operating lease rentals
Other income
Depreciation on operating leases
Net income from operating leases
Fee and commission income
Fee and commission expense
Net fee and commission income
Fair value gains/(losses) on financial instruments
Net operating income
Administrative expenses
Impairment losses on loans and advances to customers
Provision for liabilities and charges
Statutory profit before tax
Underlying adjustments
Profit before tax on a underlying basis
Income tax charge on an underlying basis
Profit after taxation on an underlying basis
Assets
Liabilities
Net assets/(liabilities)
Property
Finance
£m
Business
Finance
£m
Consumer
Lending
£m
154.9
(52.8)
102.1
–
–
–
–
0.4
(2.7)
(2.3)
–
99.8
(15.2)
(2.1)
–
82.5
–
82.5
75.1
(21.2)
53.9
13.5
0.1
(11.3)
2.3
14.7
(0.6)
14.1
–
70.3
(16.3)
(14.5)
–
39.5
–
39.5
44.7
(9.9)
34.8
–
–
–
–
0.3
(2.0)
( 1.7)
–
33.1
(10.8)
(7.7)
–
14.6
–
14.6
Central
£m
5.5
0.8
6.3
–
–
–
–
–
(0.4)
(0.4)
0.5
6.4
(53.7)
–
(1.1)
(48.4)
3.2
(45.2)
Total
£m
280.2
(83.1)
197.1
13.5
0.1
(11.3)
2.3
15.4
(5.7)
9.7
0.5
209.6
(96.0)
(24.3)
(1.1)
88.2
3.2
91.4
(24.3)
67.1
2,519.1
1,104.4
465.0
558.1
4,646.6
–
–
–
(4,209.4)
(4,209.4)
2,519.1
1,104.4
465.0
(3,651.3)
437.2
Current taxes, deferred taxes and certain financial assets and liabilities are not allocated to segments as they are managed on a Group basis.
Shawbrook Group plc Annual Report & Accounts 2016
127
Total
£m
216.9
(63.8)
153.1
14.9
1.1
(12.2)
3.8
13.1
(2.8)
10.3
(0.3)
166.9
(88.7)
(6.5)
(1.6)
70.1
10.0
80.1
(12.8)
67.3
Property
Finance
£m
Business
Finance
£m
Consumer
Lending
£m
116.4
(37.9)
78.5
–
–
–
–
0.3
(1.8)
(1.5)
–
77.0
(14.1)
(0.9)
–
62.0
–
62.0
67.2
(18.9)
48.3
14.9
1.1
(12.2)
3.8
12.6
(0.5)
12.1
–
64.2
(13.8)
(3.8)
–
46.6
–
46.6
28.9
(6.9)
22.0
–
–
–
–
0.2
(0.5)
(0.3)
–
21.7
(8.7)
(1.8)
–
11.2
0.6
11.8
Central
£m
4.4
(0.1)
4.3
–
–
–
–
–
–
–
(0.3)
4.0
(52.1)
–
(1.6)
(49.7)
9.4
(40.3)
2,083.1
944.5
333.4
–
–
–
2,083.1
944.5
333.4
639.0
(3,632.4)
(2,993.4)
4,000.0
(3,632.4)
367.6
2. Operating segments continued
Year ended 31 December 2015
Interest and similar income
Interest expense and similar charges
Net interest income
Operating lease rentals
Other income
Depreciation on operating leases
Net income from operating leases
Fee and commission income
Fee and commission expense
Net fee and commission income
Fair value losses on financial instruments
Net operating income
Administrative expenses
Impairment losses on loans and advances to customers
Provisions for liabilities and charges
Statutory profit before tax
Underlying adjustments
Profit before tax on an underlying basis
Income tax charge on an underlying basis
Profit after taxation on an underlying basis
Assets
Liabilities
Net assets/(liabilities)
Current taxes, deferred taxes and certain financial assets and liabilities are not allocated to segments as they are managed on a Group basis.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 128
Notes to the financial statements continued
For the year ended 31 December 2016
3. Interest and similar income
Accounting policy
Revenue represents income derived from loans and advances to customers, operating lease rentals and fees and commissions
receivable.
Interest income and expense are recognised in the statement of comprehensive income for all instruments measured at amortised
cost using the effective interest rate method (EIRM).
The EIRM is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or
interest expense over the relevant period. The effective interest rate (EIR) is the rate that exactly discounts estimated future cash flows
through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial
asset or financial liability. When calculating the EIR, the Group takes into account all contractual terms of the financial instrument, for
example prepayment options, but does not consider future credit losses. The calculation includes all fees paid or received between
parties to the contract that are an integral part of the EIR, transaction costs and all other premiums or discounts.
Income from finance lease and instalment credit agreements is recognised over the period of the leases so as to give a constant rate
of return on the net investment in the leases.
Fees and commissions which are not considered integral to the EIR are recognised on an accruals basis when the service has been
provided or received.
Critical accounting estimates and judgements
Effective interest rate
IAS 39 requires interest earned from loans and advances to be measured under the EIRM. Management must therefore use judgement
to estimate the expected life of each instrument and hence the expected cash flows relating to it. Management reviews the expected
lives on a segmental basis, whereby products of a similar nature are grouped into cohorts that exhibit homogenous behavioural
attributes.
The key assumptions applied by management in the EIR methodology are behavioural life of the assets and the quantum of future
early settlement fee income. The expected life behaviours are subjected to changes in internal and external factors and may result
in adjustments to the carrying value of loans which must be recognised in the Statement of Profit and Loss. Management has limited
historical experience of customer behaviours due to the relative immaturity of the portfolios and therefore models expected
behaviour based on market trends and experience. The actual behaviour of the portfolios are compared to the modelled behaviour
on a quarterly basis and the modelled behaviours are adjusted if the modelled behaviour materially deviates from actual behaviour,
with adjustments recognised in the Statement of Profit and Loss.
Management continues to perform sensitivity analyses on the EIR models applied. A decrease in the behavioural life of a loan by
10% per calendar month would result in a net income statement decrease of £1.0 million (2015: £0.6 million). The movement in the
sensitivity can be both attributed to Property Finance and Consumer Lending. Property Finance is expected to show an income
of £0.1 million mainly due to income received from early settlement fees. Consumer Lending is expected to show an expense of
£1.1 million mainly attributable to the acceleration of the amortisation of broker fees.
Interest paid by customers
Interest received from derivative financial instruments
Interest on loans and advances to banks
Interest and similar income
2016
£m
274.8
3.7
1.7
2015
£m
212.7
2.9
1.3
280.2
216.9
The interest income recognised during the year on loans impaired was £2.1 million (2015: £1.0 million). The Group did not capitalise any
interest during the year.
Shawbrook Group plc Annual Report & Accounts 2016
129
2015
£m
59.9
1.0
2.9
–
63.8
2015
£m
8.8
4.3
13.1
2016
£m
73.0
1.2
6.5
2.4
83.1
2016
£m
9.0
6.4
15.4
4. Interest expense and similar charges
Interest paid to depositors
Interest on amounts due to banks
Interest on subordinated debt
Other interest
Interest expense and similar charges
5. Fee and commission income
Fee income on loans and advances to customers
Credit facility related fees
Fee and commission income
6. Administrative expenses
Accounting policy
Staff costs
Staff costs include salaries and social security costs and are recognised over the period in which the payments relate. Cash bonus
awards are recognised to the extent that the Group has a present obligation to its employees that can be measured reliably and are
recognised over the period of service that employees are required to work to qualify for the payment.
The accounting policies for employee share-based payments are set out in Note 10 ‘Employee share-based payment transactions’.
Leases
If a lease agreement in which the Group is a lessee transfers the risks and rewards of the asset, the lease is recorded as a finance
lease and the related asset is capitalised. At inception, the asset is recorded at the lower of the present value of the minimum lease
payments or fair value and is depreciated over the estimated useful life. The lease obligations are recorded as borrowings.
If the lease does not transfer the risks and rewards of ownership of the asset, the lease is recorded as an operating lease.
Operating lease payments are charged to profit and loss on a straight-line basis over the lease term unless a different systematic basis
is more appropriate. Where an operating lease is terminated before the lease period has expired, any payment required to be made
to the lessor in compensation is charged to profit and loss in the period in which termination is made.
Staff costs
Depreciation (excluding operating lease assets)
Amortisation of intangible assets
Operating lease rentals – land and buildings
Other administrative expenses
Administrative expenses
Notes
8
16
17
2016
£m
54.1
2.2
2.7
1.8
35.2
96.0
2015
£m
46.6
1.5
0.9
1.1
38.6
88.7
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
130
Notes to the financial statements continued
For the year ended 31 December 2016
7. Auditor’s remuneration
Audit of these Financial statements
Amounts receivable by the Company’s Auditor and their associates in respect of other services
Audit of the Financial statements of subsidiaries of the Company
Tax compliance services
Other tax advisory services
Audit related assurance services
All other assurance services
Corporate finance services
All other services
8. Employees
The average number of persons employed by the Group (including Directors) during the year was as follows:
Property Finance
Business Finance
Consumer Lending
Central
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Social security costs
Pension costs
2016
£000
100
423
28
101
133
39
–
106
930
2016
No.
122
139
44
264
569
2016
£m
46.9
5.0
2.2
54.1
2015
£000
100
385
86
72
200
30
400
124
1,397
2015
No.
115
146
39
214
514
2015
£m
41.1
3.9
1.6
46.6
Shawbrook Group plc Annual Report & Accounts 2016
131
9. Employee retirement obligations
Accounting policy
The Group does not operate a pension scheme. Pension contributions are paid to staff members’ and Directors’ personal pension
schemes. The costs of the Group’s contributions to defined contribution pension arrangements are recognised as an employee
benefit expense when they are due.
The Group made contributions of £2.2 million (2015: £1.6 million) during the year.
10. Employee share-based payment transactions
Accounting policy
Where the Group engages in share-based payment transactions in respect of services received from certain of its employees, these
are accounted for as equity-settled share-based payments in accordance with IFRS 2. The equity is in the ordinary £0.01 shares.
The grant date fair value of a share-based payment transaction is recognised as an employee expense, with a corresponding increase
in equity over the period that the employees become unconditionally entitled to the awards. In the absence of market prices, the
fair value of the equity at the date of the grant is estimated using an appropriate valuation technique.
The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related services and non-
market vesting conditions are expected to be met such that the amount ultimately recognised as an expense is based on the number
of awards that do 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
award is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.
Taxation on the amount recognised as an expense is charged to the Statement of Profit and Loss. Tax benefits of equity-settled
share-based payment transactions that exceed the tax effected cumulative remuneration expenses are considered to relate to an
equity item and are recognised directly in equity.
Expected volatility is determined by reviewing the share price volatility for the expected life of each option/scheme up to the date
of the grant.
Critical accounting estimates and judgements
Critical accounting estimates and judgements have been discussed below within the various categories of share based payments.
The employee share-based payment charge comprises:
Legacy share plan
SAYE
Performance share plan – 2015
Performance share plan – 2016
At 31 December
Included in the 2016 Performance Share Plan are share options related to new hires as discussed below.
2016
£m
–
0.1
1.6
3.1
4.8
2015
£m
3.4
0.1
0.6
–
4.1
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
132
Notes to the financial statements continued
For the year ended 31 December 2016
10. Employee share-based payment transactions continued
Movements in the number of share-based awards are as follows:
No. of shares
At 1 January
Granted
Vested
Lapsed
At 31 December
SAYE – 2016
SAYE – 2015
PSP – 2016
PSP – 2015
Total
–
1,104,214
–
1,492,901
2,597,115
1,298,794
–
–
–
–
2,181,165
(125,017)
–
–
3,479,959
(125,017)
(944,119)
(263,536)
(215,430)
(1,423,085)
1,298,794
160,095
1,792,612
1,277,471
4,528,972
Save-As-You-Earn schemes (SAYE)
In October 2015 the Save-As-You-Earn scheme was introduced for all employees. The scheme provides employees with the opportunity
to take part in a tax-efficient savings scheme and to acquire Shawbrook Group plc shares at a discount to market value. The shares subject
to this option have no restrictions, save those restrictions applying as a matter of law, regulation and the Company’s dealing code. The SAYE
scheme is governed by the Company’s Articles of Association and is deemed by Management to be an equity-settled scheme and has
been accounted for as such in the Financial statements of both the Company and its subsidiary, Shawbrook Bank Limited.
The fair value of the call options was calculated as £0.71. The awards generally require employees to remain in employment over the vesting
period but are not subject to performance conditions after the grant date. The awards vest over a period of three years.
In October 2016 a further SAYE scheme was introduced for all employees. The scheme’s terms and conditions are the same as those of the
2015 scheme. The fair value of the call options for this scheme was calculated as £0.66. The awards generally require employees to remain
in employment over the vesting period but are not subject to performance conditions after the grant date. The awards vest over a period
of three years.
The call options were valued using the Black-Scholes valuation model. The assumptions used were as follows:
Assumptions
Share price
Expected volatility
Risk-free rate
Dividend yield
Weighted average contractual life (years) at grant date
Exercise price
2016
Scheme
£2.48
2015
Scheme
£3.10
30.80%
25.90%
0.19%
3.31%
3.17
£1.87
0.74%
2.08%
3.17
£2.60
Shawbrook Group plc Annual Report & Accounts 2016 133
10. Employee share-based payment transactions continued
Performance Share Plan (PSP) – 2016 Tranche
During the year 2,181,165 share awards were granted to a set of individuals. These individuals are entitled to acquire ordinary shares in
Shawbrook Group plc, subject to performance conditions. The scheme is deemed to be an equity-settled scheme. This amount included
a number of options related to new hires as discussed below.
The performance conditions for the 2016 tranche relate to the growth in total shareholder return (TSR) over the vesting period for 20%
of each award, the net-promotor score (NPS) at the date of vesting for 20% of each award, the risk performance over the vesting period for
20% of each award and the annual compound growth in the earnings per share (EPS) over the vesting period for 40% of each award. The
outcome of the performance conditions, as assessed by the Remuneration Committee, will determine the vesting outcome of the awards
and the shares available for exercise.
The performance condition relating to the TSR element is measured in relation to the ranking of the Group’s TSR within a comparator group
of companies selected by the Remuneration Committee.
The fair value of the shares in the EPS, NPS and risk performance elements of the awards is based on the share price at the date of the grant
discounted for any expected dividends over the vesting period. The dividend-adjusted fair value of these awards is £2.63.
The fair value of the shares in the TSR award is calculated using a Monte Carlo model with 100,000 simulations. Set out below is a summary
of the key data and assumptions used to calculate the fair value of the TSR award:
Assumptions
Share price at grant date
Volatility
Dividend yield
Risk-free rate of return
The fair value of the shares in the TSR award is £1.46.
£2.87
30% p.a.
2.83% p.a.
0.51% p.a.
Performance Share Plan (PSP) – 2015 Tranche
During 2015 a number of share awards were granted to a set of individuals other than Directors. The individuals are entitled to receive an
award to acquire a specific number of ordinary shares in Shawbrook Group plc, subject to performance conditions. The scheme is deemed
to be an equity-settled scheme and has been accounted for as such in the Financial statements of both the Company and its subsidiary,
Shawbrook Bank Limited. The share awards are subject to performance conditions, namely the Group earning a defined underlying profit
before tax in 2017, and subject to the Group maintaining its threshold capital and liquidity requirements.
The fair value of the shares is based on the share price at the dates of the grant discounted for any expected dividends over the vesting
period. The weighted average fair value of the shares issued is £3.25.
New hires – 2016
During the year a number of senior hires were, under the terms of their employment with the Group, granted options over shares of £0.01
in the Company, in accordance with the Shawbrook Performance Share Plan in order to compensate them for forfeited awards from previous
employment. A total of 897,403 options have been granted that vest over the following two years.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
134
Notes to the financial statements continued
For the year ended 31 December 2016
11. Directors’ remuneration
Directors’ emoluments
Contributions to money purchase scheme
Directors’ remuneration
2016
£000
2015
£000
3,328.9
1,894.3
13.0
55.5
3,341.9
1,949.8
Included in the current year Directors’ emoluments is £1.1 million relating to new hires (refer to Note 10 for more information) and £228,000
relating to termination payments.
12. Taxation
Accounting policy
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the
extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or
substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Recognised in the income statement
Current tax:
Current year
Adjustment in respect of prior years
Total current tax
Deferred tax:
Origination and reversal of temporary differences
Adjustment in respect of prior years
Total deferred tax
Total tax charge
2016
£m
27.4
(0.2)
27.2
(4.0)
0.2
(3.8)
23.4
2015
£m
15.8
0.1
15.9
(3.9)
(0.4)
(4.3)
11.6
Shawbrook Group plc Annual Report & Accounts 2016
135
2015
£m
70.1
14.2
–
(0.3)
0.9
(3.2)
11.6
2016
£m
88.2
17.6
5.4
–
0.4
–
23.4
12. Taxation continued
Tax reconciliation
Profit before tax
Implied tax charge thereon at 20% (2015: 20.25%)
Adjustments:
Banking surcharge
Prior year adjustment
Disallowable expenses and other permanent differences
Effect of tax rate changes
Total tax charge
Reduction in the UK corporation tax rate from 21% to 20% (effective from 1 April 2015) was substantively enacted on 2 July 2013. Further
reductions to 19% (effective from 1 April 2017), and to 17% (effective 1 April 2020) were substantively enacted on 16 March 2016. The deferred
tax asset at 31 December 2016 has been calculated based on an aggregation of a rate of 18% substantively enacted at the balance sheet date
and the additional 8% of tax suffered in relation to the banking surcharge that will unwind over the remaining life of the underlying assets
with which they are associated.
13. Loans and advances to customers
Accounting policy
Loans and advances
The Group’s loans and advances to banks and customers are classified as loans and receivables. Loans and receivables are non-
derivative financial assets with fixed or determinable payments that are not quoted in an active market, whose recoverability is based
solely on the credit risk of the customer and where the Group has no intention of trading the loan or receivable. Loans and receivables
are initially recognised at fair value including direct and incremental transaction costs. Subsequent recognition is at amortised cost
using the effective interest rate method, less any provision for impairment.
Assets acquired in exchange for loans
Included within loans and advances to customers are assets acquired in exchange for loans, instalment credit and finance lease
receivables as part of an orderly realisation. The asset acquired is recorded at the lower of its fair value (less costs to sell) and the
carrying amount of the lease (net of impairment allowance) at the date of exchange. Any subsequent write-down of the acquired
asset to fair value less costs to sell is recognised in the income statement. Any subsequent increase in the fair value less costs to sell,
to the extent this does not exceed the cumulative write-down, is also recognised in the income statement, together with any realised
gains or losses on disposal.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
136
Notes to the financial statements continued
For the year ended 31 December 2016
13. Loans and advances to customers continued
Loans and advances to customers include those classified as loans and advances, finance leases and instalment credit advances as
summarised below:
Loan receivables
Finance lease receivables
Instalment credit receivables
Fair value adjustments for hedged risk
Total loans and advances to customers
2016
£m
2015
£m
3,639.5
2,873.0
93.6
316.9
0.4
114.3
331.8
–
4,050.4
3,319.1
At 31 December 2016, loans and advances to customers of £695.2 million (2015: £612.3 million) was positioned with the Bank of England
for use as collateral under its funding schemes.
Loan receivables
Gross: loan receivables
Less: allowances for impairment losses
Net loan receivables
2016
£m
2015
£m
3,653.1
2,883.5
(13.6)
(10.5)
3,639.5
2,873.0
The Group provides finance lease and instalment credit agreements to customers for a variety of assets including plant and machinery,
taxis, aviation and marine vessels. These assets provide security against the gross receivables. Included within instalment credit receivables
are block discounting facilities of £107.5 million (2015: £105.6 million).
Finance lease receivables
Gross amounts receivable
within one year
in the second to fifth year inclusive
after five years
Less: unearned finance income
Less: allowances for impairment losses
Net investment in finance lease receivables
Amounts falling due:
within one year
in the second to fifth year inclusive
after five years
Net investment in finance lease receivables
2016
£m
59.5
55.2
1.5
116.2
(14.1)
(8.5)
93.6
47.1
45.2
1.3
93.6
2015
£m
55.3
79.9
0.5
135.7
(19.4)
(2.0)
114.3
44.7
69.2
0.4
114.3
Shawbrook Group plc Annual Report & Accounts 2016
137
2015
£m
176.3
198.1
0.8
375.2
(42.4)
(1.0)
331.8
152.4
178.9
0.5
331.8
2015
£m
68.2
170.0
238.2
2016
£m
165.9
182.6
6.6
355.1
(35.9)
(2.3)
316.9
143.3
167.3
6.3
316.9
2016
£m
43.9
128.7
172.6
13. Loans and advances to customers continued
Instalment credit receivables
Gross amounts receivable
within one year
in the second to fifth year inclusive
after five years
Less: unearned finance income
Less: allowances for impairment losses
Net investment in instalment credit receivables
Amounts falling due:
within one year
in the second to fifth year inclusive
after five years
Net investment in instalment credit receivables
Cost of equipment acquired during the year
Finance leases
Instalment credit
Total cost of equipment acquired during the year
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
138
Notes to the financial statements continued
For the year ended 31 December 2016
14. Impairment provisions on loans and advances to customers
Accounting policy
On an on-going basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is
impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective
evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ’loss event’) and
that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that
can be reliably estimated.
The criteria that the Group uses to determine that there is objective evidence of impairment loss include, but are not limited to,
the following:
> delinquency in contractual payments of principal or interest;
> cash flow difficulties experienced by the borrower;
> initiation of bankruptcy proceedings;
> the customer being granted a concession that would otherwise not be considered; and
> observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of assets since the
initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio.
If there is objective evidence that an impairment loss on an individual financial asset has occurred, the amount of the loss is measured
as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial
asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the
amount of the loss is recognised in the income statement. If a loan has a variable interest rate, the discount rate for measuring any
impairment loss is the current effective interest rate determined under the contract.
If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether
significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses
them for impairment. Objective evidence of impairment of a portfolio of receivables exists if objective data indicates a decrease
in expected future cash flows from a collection of receivables and the decrease can be measured reliably but cannot be identified
with the individual receivables in the portfolio in which case a collective provision is applied.
When a loan or receivable is not economic to recover, it is written off against the related provision for loan impairments. Such loans
are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent
recoveries of amounts previously written off are recognised directly in the income statement through the impairment line as post
write-off recoveries. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively
to an event occurring after the impairment was recognised (such as an improvement in the customer’s credit rating), the previously
recognised impairment loss is reversed by adjusting the impairment allowance. The amount of reversal is recognised in profit or loss.
The Group operates a forbearance policy in situations where it becomes aware that an individual customer is experiencing financial
hardship. Repayment options are discussed with the customer that are appropriate to the customer’s specific situation. The Group
seeks to ensure that any forbearance results in a fair customer outcome and will not repossess an asset unless all other reasonable
attempts to resolve the position have failed. Further information is provided on page 158.
Shawbrook Group plc Annual Report & Accounts 2016 139
14. Impairment provisions on loans and advances to customers continued
Critical accounting estimates and judgements
Individual impairment losses on loans and advances are calculated based on an assessment of the expected cash flows and the
underlying collateral. For individual provision, statistical models are used for consumer and second-charge loans, whilst provisions
for first-charge loans, asset finance and business finance are assessed on a loan-by-loan basis. Where models are used for individual
provisions, score cards are used to calculate probability of default (PDs) based on the recent performance of the portfolios. Loss
given defaults (LGDs) are calculated taking into account the valuations of available collateral, and the experienced forced sale
discounts when collateral has been realised. These factors are applied to all the aged portfolios of debt at each balance sheet
date to derive the individual impairment requirement.
For the purpose of collective impairment, financial assets are grouped on the basis of similar risk characteristics. For some portfolios
the collective impairment requirement is based on the forecast cost of risk, being the annualised percentage loss per monetary
unit of loan across the loan portfolios. These loss rates are multiplied by emergence periods, currently six months for all portfolios
(2015: six months), for each class of loan to calculate the amount of loss which is incurred at the balance sheet date but not yet
individually identified.
The key assumptions, being the emergence periods, forced-sale discount (FSD) on the residential portfolio, cost of risk and PD of the
residential and consumer portfolios, are monitored regularly to ensure the impairment allowance is entirely reflective of the current
portfolio. The accuracy of the impairment calculation would therefore be affected by unanticipated changes to the economic
situation and assumptions which differ from actual outcomes. For example, for loans and advances:
> change of one month in the emergence period across all portfolios, would change the collective provision by £0.9 million
(2015: £0.5 million);
> a change in the cost of risk rate of 10 basis points, would change the collective provision by £1.7 million (2015: £1.5 million);
> an increase in the forced sale discount on the residential portfolio of 5%, would increase the individual provisions by £0.5 million
(2015: £0.4 million); and
> an increase in the PD on the residential and consumer portfolios of 10%, would increase the individual provisions by £1.1 million
(2015: £1.0 million).
The movement in the allowances for losses in respect of loans, finance leases and instalment credit agreements during the year was
as follows:
At 1 January
Charge for impairment losses
Provisions utilised
At 31 December
Analysis of impairment type
Loan receivables
Finance lease receivables
Instalment credit receivables
At 31 December
2016
£m
13.5
24.3
(13.4)
24.4
13.6
8.5
2.3
24.4
2015
£m
11.1
6.5
(4.1)
13.5
10.5
2.0
1.0
13.5
A controls breach was identified in the Business Finance Division in H1 2016 following a significant investment in the Risk Management
Framework during 2015 and 2016. The upgraded quality assurance procedures detected a portfolio of facilities that did not meet the
Group’s strict lending criteria. This has resulted in an impairment charge of £11.2 million and associated administrative expenses of
£0.8 million in 2016.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
140
Notes to the financial statements continued
For the year ended 31 December 2016
15. Derivative financial instruments
Accounting policy
Derivatives and hedge accounting
The Group’s derivative activities are entered into for the purposes of matching or eliminating risk from potential movements in
interest rates in the Group’s assets and liabilities.
The Group uses interest rate swaps to hedge its interest rate risks. Such derivative financial instruments are initially recognised
at fair value on the date on which the derivative contract is entered into and are subsequently remeasured at fair value.
Fair values are obtained from quoted market prices in active markets and, where these are not available, from valuation techniques
including discounted cash flow models (at a benchmark interest rate, typically LIBOR or its equivalent) and option pricing models.
Derivatives are measured as assets where their fair value is positive and liabilities where their fair value is negative.
The Group has adopted hedge accounting in accordance with IAS 39 which specifies that the hedge relationship must be clearly
documented at inception and the derivative must be expected to be highly effective in offsetting the hedged risk. Effectiveness
is tested throughout the life of the hedge relationship.
The Group does not apply a credit valuation adjustment (CVA) or debit valuation adjustment (DVA) as the Group’s portfolio is fully
collateralised. The Group does not apply funding fair value adjustment (FFVA) to its derivative exposures as it deems the adjustment
to be immaterial.
The Group undertakes transactions denominated in foreign currencies; consequently exposures to exchange rate fluctuations arise.
Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts.
Fair value hedge
The change in the fair value of a hedging instrument is recognised in the statement of profit or loss. The change in the fair value of
the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised
in the statement of profit and loss.
The Group uses derivatives to reduce exposure to market risks, and not for trading purposes. The Group uses the International Swaps
and Derivatives Association (ISDA) Master Agreement to document these transactions in conjunction with a Credit Support Annex (CSA).
The fair value of derivatives is set out below:
Interest rate swaps:
Assets
Liabilities
Foreign exchange swaps:
Liabilities
At 31 December 2016
Interest rate swaps:
Assets
At 31 December 2015
Notional
amount
£m
485.0
39.0
16.4
540.4
535.0
535.0
Fair
value
£m
5.2
(0.4)
–
4.8
2.8
2.8
Shawbrook Group plc Annual Report & Accounts 2016
141
2016
£m
2.0
(1.5)
0.5
2015
£m
(0.9)
0.6
(0.3)
15. Derivative financial instruments continued
Gains and losses from derivatives and hedge accounting are as follows:
Fair value gain/(loss) on financial instruments
Fair value (loss)/gain on hedged risk
Fair value gain/(loss) on financial instruments
It is the Group’s 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 under
the agreement are aggregated into a single net amount 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 aggregated into a single net amount payable
by one party to the other and the agreements terminated.
Under margining agreements where the Group has a net asset position valued at current market values, in respect of its derivatives with
a counterparty, then that counterparty will place collateral, usually cash, with the Group in order to cover the position. Similarly, the Group
will place collateral, usually cash, with the counterparty where it has a net liability position.
The table below illustrates the amounts that are covered by enforceable netting arrangements (i.e. offsetting agreements and any related
financial collateral). The table excludes financial instruments not subject to offset and those that are subject to collateral arrangements only
(e.g. loans and advances).
Amounts subject to enforceable netting arrangements
Effect of offsetting on balance sheet
Related amounts not offset
Gross
amount
31 Dec
£m
Amount
offset
31 Dec
%
Net amount
reported on
balance
sheet
31 Dec
£m
Cash
collateral
31 Dec
£m
Net
amount
31 Dec
£m
Amounts
not
subject to
enforceable
netting
arrangements
31 Dec
£m
5.2
(0.4)
4.8
2.8
2.8
–
–
–
–
–
5.2
(0.4)
4.8
2.8
2.8
5.2
(0.4)
4.8
2.8
2.8
–
–
–
–
–
–
–
–
–
–
2016
Derivative financial instruments – assets
Derivative financial instruments – liabilities
Total financial instruments
2015
Derivative financial instruments – assets
Total financial instruments
Collateral amounts (cash and non-cash financial collateral) are reflected at their fair value; however, this amount is limited to the net balance
sheet exposure in order not to include any over-collateralisation.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
142
Notes to the financial statements continued
For the year ended 31 December 2016
16. Property, plant and equipment
Accounting policies
Operating leases
Included within property, plant and equipment are assets leased to customers under operating leases. The net book value of
operating leases represents the original cost of the equipment less cumulative depreciation. Rentals are recognised on a straight-line
basis over the lease term. Depreciation is recognised on a straight-line basis to a residual value over the life of the associated agreement.
Depreciation
Tangible fixed assets are stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items.
Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item
of plant and equipment as follows:
> office equipment
> fixtures and fittings
> motor vehicles
> freehold property
> leasehold costs
> operating leases1
3/5 years
5 years
4 years
50 years
life of the lease
life of the lease
1 Operating leases are assets leased to customers.
Depreciation methods, useful lives and residual values are reviewed at each balance sheet date.
Assets acquired in exchange for operating leases
Included within property, plant and equipment are assets acquired in exchange for operating leases as part of an orderly realisation.
The asset acquired is recorded at the lower of its fair value (less costs to sell) and the carrying amount of the lease (net of impairment
allowance) at the date of exchange. No depreciation is charged in respect of assets held for sale. Any subsequent write-down of the
acquired asset to fair value less costs to sell is recognised in the income statement. Any subsequent increase in the fair value less costs
to sell, to the extent it does not exceed the cumulative write down, is also recognised in the income statement, together with any
realised gains or losses on disposal.
Residual values
The residual values of assets under operating leases are reviewed by Management for impairment, taking into account the nature
and condition of the assets. Where the residual value of the assets exceeds the estimated recoverable amount, the assets are
impaired and the impairment charged to the profit and loss account.
Shawbrook Group plc Annual Report & Accounts 2016
16. Property, plant and equipment continued
Cost
At 1 January 2015
Additions
Disposals
Transfer to finance leases
At 31 December 2015
Additions
Disposals
Transfer to finance leases
At 31 December 2016
Depreciation
At 1 January 2015
Depreciation charge for the year
Disposals
Transfer to finance leases
At 31 December 2015
Depreciation charge for the year
Disposals
Transfer to finance leases
At 31 December 2016
Net book value
At 31 December 2015
At 31 December 2016
Freehold
property
£m
Leasehold
property
£m
Fixtures,
fittings and
equipment
£m
Assets on
operating
leases
£m
0.2
–
–
–
0.2
–
(0.2)
–
–
–
–
–
–
–
–
–
–
–
0.2
–
0.1
–
–
–
0.1
–
–
–
0.1
0.1
–
–
–
0.1
–
–
–
0.1
–
–
5.5
4.7
–
–
10.2
0.2
–
–
10.4
2.2
1.5
–
–
3.7
2.2
–
–
5.9
6.5
4.5
77.5
10.1
(14.8)
(5.5)
67.3
11.1
(11.2)
(10.6)
56.6
31.3
12.2
(13.1)
(5.0)
25.4
11.3
(9.9)
(8.3)
18.5
41.9
38.1
143
Total
£m
83.3
14.8
(14.8)
(5.5)
77.8
11.3
(11.4)
(10.6)
67.1
33.6
13.7
(13.1)
(5.0)
29.2
13.5
(9.9)
(8.3)
24.5
48.6
42.6
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
144
Notes to the financial statements continued
For the year ended 31 December 2016
17. Intangible assets
Accounting policies
Goodwill
Goodwill may arise on the acquisition of companies whose businesses become integrated within the Group and reflects the
difference between the consideration paid and the fair value of net assets acquired. Subsequent to initial recognition, goodwill
is stated at cost less any accumulated impairment losses. Goodwill is not amortised but is tested annually for impairment by
reviewing detailed cash flow projections from the Group’s latest approved forecast.
Where impairment is required, the amount is recognised in the income statement and cannot be subsequently reversed. Goodwill
is tested for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to cash generating units (CGUs).
An impairment loss is recognised if the carrying amount of a CGU exceeds its recoverable amount. The recoverable amount of a
CGU is the greater of its value-in-use and its fair value less costs to sell. The estimation of recoverable value is based on value in use
calculations incorporating 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 CGU.
An impairment loss is recognised if the carrying amount of an asset is greater than its recoverable amount. No impairment losses
were recognised during 2016 (2015: £nil).
Computer software
Expenditure on software development activities is capitalised if the following conditions are met: the product or process is technically
and commercially feasible; the Group intends to, and has the technical ability and sufficient resources to, complete development;
future economic benefits are probable; and the Group can measure reliably the expenditure attributable to the intangible asset
during its development. Development activities involve a plan or design for the production of new or substantially improved
products or processes. The expenditure capitalised includes the cost of direct labour and software licence costs. Other development
expenditure is recognised in the income statement as an expense as incurred. Capitalised developments are stated at cost less
accumulated amortisation and less accumulated impairment losses.
Amortisation
Intangible assets are amortised on a straight-line basis through administrative expenses over the estimated useful life of the asset
according to the following timescales:
> computer software and licences
3/7 years
Critical accounting estimates and judgements
The review of goodwill for impairment reflects Management’s best estimate of future cash flows of the CGUs and the rates used
to discount these cash flows, both which are subject to uncertainty as follows:
> the future cash flows of the CGUs are sensitive to projected cash flows based on the forecasts and assumptions regarding the
projected periods and the long-term pattern of sustainable cash flows thereafter.
> the rates used to discount future expected cash flows can have a significant effect on their valuations and are based on the capital
asset pricing model (CAPM), which incorporates inputs reflecting a number of variables. These variables are subject to fluctuations
beyond Management’s control, are also subject to uncertainty and require the exercise of significant judgement.
Shawbrook Group plc Annual Report & Accounts 2016 145
Total
£m
49.5
6.1
(0.9)
54.7
54.7
7.9
(2.7)
59.9
Goodwill
£m
Computer
software
£m
44.8
–
–
44.8
44.8
–
–
44.8
4.7
6.1
(0.9)
9.9
9.9
7.9
(2.7)
15.1
17. Intangible assets continued
The factors and inputs are described in more detail below.
At 1 January 2015
Additions during the year
Amortised in the year
At 31 December 2015
At 1 January 2016
Additions during the year
Amortised in the year
At 31 December 2016
Total cost of computer software amounted to £19.3 million (2015: £11.5 million) while accumulated amortisation amounted to £4.2 million
(2015: £1.6 million), additions of £7.9 million included £7.6 million of internally generated assets.
Impairment testing for CGUs containing goodwill
For the purposes of impairment testing, goodwill is allocated to the Group’s CGUs as follows:
Property Finance
Business Finance
Consumer Lending
At 31 December
2016
£m
9.0
34.7
1.1
44.8
2015
£m
9.0
34.7
1.1
44.8
The recoverable amounts of the CGUs have been calculated based on their value in use (VIU), determined by discounting the cash flows
expected to be generated from the continuing use of the CGUs. No impairment losses were recognised in 2016 (2015: £nil) because the
recoverable amounts of the CGUs were determined to be higher than their carrying values.
The key assumptions used in the calculation of value in use were as follows:
Post-tax discount rate
Property Finance
Business Finance
Consumer Lending
Terminal value growth rate
Cash flow period (years)
12.22%
13.40%
13.99%
2.0%
5
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
146
Notes to the financial statements continued
For the year ended 31 December 2016
17. Intangible assets continued
Following the consolidation of the business units, the goodwill has been re-allocated to three CGUs, namely Property Finance, Business
Finance and Consumer Lending. The CGUs have been identified at what management believe to be smallest group of assets that generate
cash inflows from continuing use and that are largely independent of the cash inflows of other groups. Goodwill was allocated to the CGUs
following an allocation and impairment review performed prior to the interim 2016 reporting. Prior to allocation a final goodwill impairment
test was performed as at 30 June 2016 which concluded that no impairment was needed.
Impairment testing has been performed based on a discounted free cash flow model in line with the accounting policy and no impairment
losses were recognised because the recoverable amounts of the CGUs were determined to be higher than the carrying values.
Discount rate: The discount rate is an estimate of the return that investors would require if they were to choose an investment that would
generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to derive from the asset, which is derived
using CAPM. The CAPM depends on inputs reflecting a number of financial and economic variables including the risk-free rate and a
premium to reflect the inherent risk in the business being evaluated. These variables are based on the market’s assessment of the economic
variables and Management’s judgement. For the 31 December 2016 test, the methodology used to determine the discount rate for the
business was refined to more accurately reflect the risk profile of the Group. In addition, for the purposes of testing goodwill for impairment,
Management supplements this process by comparing the discount rate derived using the internally generated CAPM with costs of capital
rates produced by external sources.
Terminal value growth rate: The terminal value growth rate is an estimate of the rate of growth of future cash flows beyond the cash flow
period of five years. The rate is estimated by Management, taking into account rates disclosed by comparable institutions.
Management’s judgement in estimating the cash flows of CGUs: Five years of cash flows were included in the discounted cash
flow model, which is based on a Board approved plan. A long-term growth rate into perpetuity has been determined as the long term
compound annual profit before tax growth rate estimated by Management.
The dividend discount model (DDM) is used to calculate the recoverable amount of future cash flows. The DDM discounts future cash
flows (post-tax profits) generated by the CGUs, however the cash flows are reduced by any earnings retained to support the growth in the
underlying CGUs loan books through higher regulatory capital requirements. Forecasted post-tax profits were based on expectations of
future outcomes taking into account past experience, adjusted for anticipated revenue growth.
The key assumptions described above may change as economic and market conditions change. The Group has assessed the sensitivity
of the discount rate and identified that an increase of 3.00% in each of the individual CGU discount rates will not result in any impairment
of the goodwill balance.
Shawbrook Group plc Annual Report & Accounts 2016
147
18. Deferred tax
Accounting policy
Deferred tax is provided in full using the liability method on temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based
on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or
substantively enacted at the balance sheet date. A deferred tax asset is recognised for unused tax losses, tax credits and deductible
temporary differences to the extent that it is probable that future taxable profits will be available against which they 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.
Deferred tax assets are attributable as follows:
Accelerated tax depreciation
Deferred tax on acquisition adjustments
Share Based Payments
Bad debt provision
Other
Deferred tax asset
At 1 January
Current period movement – recognised in income
Prior year adjustment
Share Based Payments
Bad debt provision
Effect of tax rate changes
At 31 December
2016
£m
14.9
–
1.1
1.8
0.1
17.9
14.1
1.8
(0.2)
0.9
1.3
–
17.9
2015
£m
13.5
(0.1)
0.1
0.5
0.1
14.1
9.8
0.3
0.4
0.1
0.3
3.2
14.1
The Group had a deferred tax asset of £17.9 million at 31 December 2016 (2015: £14.1 million) resulting primarily from decelerated capital
allowances. The business plan projects profits in future years sufficient to recognise the £17.9 million deferred tax asset. The tax assets will
unwind over the remaining life of the underlying leased assets with which they are associated.
A reduction in the UK corporation tax rate from 21% to 20% (effective from 1 April 2015) was substantively enacted on 2 July 2013. Further
reductions to 19% (effective from 1 April 2017), and to 17% (effective 1 April 2020) were substantively enacted on 16 March 2016. The deferred
tax asset at 31 December 2016 has been calculated based on an aggregation of a rate of 18% substantively enacted at the balance sheet date
and the additional 8% of tax suffered in relation to the banking surcharge that will unwind over the remaining life of the underlying assets
with which they are associated.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 148
Notes to the financial statements continued
For the year ended 31 December 2016
19. Other assets
Other debtors
Prepayments
Total other assets
20. Investment in subsidiaries held at cost
At 1 January
Issue of share capital in Shawbrook Bank Limited
Share-based payments
At 31 December
21. Customer deposits
Instant access
Term deposits and notice accounts
Fair value adjustment for hedged risk
Total customer deposits
22. Amounts due to banks
2016
£m
1.9
14.7
16.6
2015
£m
1.9
6.0
7.9
Company
2016
£m
Company
2015
£m
272.2
–
4.8
277.0
2016
£m
636.6
186.0
82.1
4.1
272.2
2015
£m
102.9
3,301.9
3,080.3
5.0
3.2
3,943.5
3,186.4
Total amounts due to banks of £147.7 million at 31 December 2016 includes £24.8 million (2015: £36.3 million) which are monies arising from
the sale and repurchase of Treasury Bills drawn under the Bank of England’s Funding for Lending Scheme (FLS) and fall due for repayment
in 2017. Also included is £118 million of deposits received from the Bank of England under the Term Funding Scheme (TFS) which fall due
for repayment in 2020. The TFS deposits are collateralised by loan assets of £160 million.
Shawbrook Group plc Annual Report & Accounts 2016
149
2016
£m
0.9
(0.7)
1.1
1.3
2015
£m
0.6
(1.3)
1.6
0.9
23. Provisions for liabilities and charges
At 1 January
Provisions utilised
Provisions made during the year
At 31 December
Financial Services Compensation Scheme
In common with all regulated UK deposit takers, the Group pays levies to the Financial Services Compensation Scheme (FSCS) to enable
the FSCS to meet claims against it. The FSCS levy consists of two parts: a management expenses levy and a compensation levy. The
management expenses levy covers the costs of running the scheme and the compensation levy covers the amount of compensation
the scheme pays, net of any recoveries it makes using the rights that have been assigned to it.
The FSCS meets these current claims by way of loans received from HM Treasury. The terms of these loans were interest only for the first
three years, and the FSCS seeks to recover the interest cost, together with on-going management expenses, via annual management levies
on members, including the Group, over this period.
The Group’s FSCS provision reflects market participation up to the reporting date. The above provision includes the estimated management
expense levy for the scheme year 2015/16. This amount was calculated on the basis of the Group’s current share of protected deposits taking
into account the FSCS’s estimate of total management expense levies for the scheme year.
In addition to the management levies, the FSCS commenced charging for compensation levies over a number of scheme years commencing
1 April 2012 and an instalment of this was paid during the year. No provision in respect of the capital compensation levy is included in the
provision at 31 December 2016.
24. Other liabilities
Other creditors
Accruals
Total other liabilities
2016
£m
12.8
14.2
27.0
2015
£m
306.6
17.2
323.8
Included in other creditors are amounts relating to sundry creditors, deferred incomes and other taxes.
Other creditors in 2015 were at an increased level primarily due to amounts owing to a bank in relation to the purchase of a loan book.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
150
Notes to the financial statements continued
For the year ended 31 December 2016
25. Operating leases
Accounting policy
Operating lease income is recognised in the profit or loss on a straight line basis over the lease term unless a different systematic basis
is more appropriate. Where an operating lease is terminated before the lease period has expired, any payment required to be made
to the lessor in compensation is charged to profit or loss in the period in which termination is made.
Leases as lessee
Non-cancellable operating lease rentals on land and buildings are payable as follows:
Less than 1 year
Between 1 and 5 years
2016
£m
1.5
3.4
4.9
Leases as lessor
Operating lease rentals receivable from agreements classified as property, plant and equipment, as disclosed in Note 16, are receivable
as follows:
Less than 1 year
Between 1 and 5 years
More than 5 years
2016
£m
10.4
16.0
1.0
27.4
2015
£m
1.0
3.6
4.6
2015
£m
12.4
18.3
1.1
31.8
Shawbrook Group plc Annual Report & Accounts 2016
151
26. Subordinated debt
Accounting policy
The subordinated debt is a non-derivative financial liability with fixed or determinable payments. The subordinated debt is recognised
initially at fair value and subsequently measured at amortised cost. Interest costs arising are capitalised in accordance with agreed
terms and incorporated into the total debt payable and recognised on an effective interest rate basis.
Subordinated debt liability:
In 2015, the Group issued £75 million fixed rate reset callable subordinated notes due 2025 with an initial semi-annual coupon of 8.5%, which
was listed for trading on the London Stock Exchange on 28 October 2015. Fees of £1 million were incurred on issuance. On the same date,
the subordinated debt dated 31 October 2013 was cancelled and repaid.
At 1 January
Issued in year
Repaid in year
Interest expense
Repayment of interest
At 31 December
2016
£m
74.0
–
–
6.5
(5.2)
75.3
2015
£m
30.8
74.0
(33.7)
2.9
–
74.0
Subordinated debt receivable:
Following the issue of subordinated debt to the market, subordinated debt was issued from the Bank to the Group on consistent terms
with the listed loan notes.
The subordinated debt ranks behind any claims against the Group from all depositors and creditors.
27. Share capital
On 31 March 2015, the Company underwent a capital restructuring prior to its Admission to the London Stock Exchange. This resulted in
the conversion of certain A, B and C ordinary shares into deferred shares with the remaining shares being converted into ordinary shares
of £1 each. Each ordinary share of £1 was then subdivided into 100 ordinary shares. The deferred shares were repurchased by the Company
and cancelled, generating a capital redemption reserve of £183,067,856.
On 8 April 2015, upon Admission to the London Stock Exchange, the Company issued 31,034,483 £0.01 shares for consideration of
£90,000,000. This generated a share premium of £89,689,655. A further 500,000 £0.01 ordinary shares were issued under a block listing
in December 2015. The market value of shares issued on 8 April 2015 was £2.90 per share.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
152
Notes to the financial statements continued
For the year ended 31 December 2016
27. Share capital continued
Ordinary shares of £0.01 each: issued and fully paid
Ordinary £0.01 shares
On issue at 1 January
Converted from £1 ordinary shares
Issued during the year
On issue at 31 December
2016
No.
2015
No.
250,500,000
250,500,000
2016
No.
2016
£
250,500,000
2,505,000
2015
No.
–
2015
£
–
–
–
–
–
218,965,517
2,189,655
31,534,483
315,345
250,500,000
2,505,000
250,500,000
2,505,000
Each ordinary share of £0.01 has full voting, dividend and capital distribution rights, including on a winding up, but does not have any rights
of redemption. Par value is £0.01 per share.
28. Notes to the cash flow statement
Accounting policy
For the purposes of the statement of cash flows, cash and cash equivalents comprise cash and balances at central banks, loans and
advances to banks and building societies and short-term highly liquid debt securities with less than three months to maturity from
the date of acquisition. Loans to banks and building societies comprise cash balances and call deposits.
Non-cash items in the cash flow statement
Capitalisation of subordinated debt interest
Depreciation
Amortisation of intangible assets
Provisions against loans and advances to customers
Amortisation of share scheme fair value
Profit on sale of operating leased assets
Total non-cash items
Cash and cash equivalents
Cash and balances at central banks
Loans and advances to banks
Less: mandatory deposits with central banks
Cash and cash equivalents
Notes
26
16
17
14
Group
2016
£m
Company
2016
£m
Group
2015
£m
Company
2015
£m
6.5
13.5
2.7
24.3
4.8
–
51.8
Group
2016
£m
429.9
24.1
(4.0)
450.0
6.5
–
–
–
4.8
–
11.3
Company
2016
£m
–
–
–
–
2.9
13.7
0.9
6.5
4.1
(1.0)
27.1
Group
2015
£m
521.9
30.9
(2.3)
550.5
–
–
–
–
4.1
–
4.1
Company
2015
£m
–
–
–
–
Mandatory deposits are not available for use in the Group or Bank’s day-to-day business and are non-interest bearing.
Shawbrook Group plc Annual Report & Accounts 2016
153
29. Financial instruments
Accounting policies
Financial assets
The Group classifies its financial assets in the following categories:
> at fair value through profit or loss; and
> loan receivables.
The Group’s financial liabilities are designated as other financial liabilities at amortised cost and at fair value through profit or loss.
A financial asset is measured initially at fair value plus the transaction costs that are directly attributable to its acquisition. A financial
liability is measured initially at fair value less the transaction costs that are directly attributable to its issue.
Derivative financial assets are classified at fair value through profit or loss.
The Group has not classified any assets or liabilities as held to maturity or as available for sale.
Loan receivables
Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
Loans and advances to banks and building societies are classified as loans and receivables. Loans and advances to customers include
finance leases and instalment credit advances.
Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method, less any
impairment losses.
The net investment in finance leases and instalment credit agreements represents the future lease rentals and instalments receivable
less profit and costs allocated to future periods. Income is recognised throughout the life of the agreement to provide a constant rate
of return on the net investment in each lease or instalment credit agreement.
Where an agreement is classified as an operating lease at inception, but is subsequently reclassified as a finance lease following
a change to the agreement or an extension beyond the primary term, then the agreement is accounted for as a finance lease.
Financial liabilities
Customer deposits and amounts due to banks are non-derivative financial liabilities with fixed or determinable payments. Deposits
and amounts due to banks are recognised initially at fair value and are subsequently measured at amortised cost using the effective
interest method.
Derecognition of financial assets and liabilities
Derecognition is the point at which an asset or liability is removed from the balance sheet. The Group’s policy is to derecognise
financial assets when the contractual rights to the cash flows from the financial asset have expired or when all the risks and rewards
of ownership have been transferred.
The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, or expired.
If the terms of the financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial
difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised. If the net present
value of the cash flows from the original financial asset is substantially different, then the contractual rights to cash flows from the
original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and the new financial
asset is recognised at fair value.
The impairment loss before an unexpected restructuring is measured as follows:
> if the expected restructuring will not result in derecognition of the existing asset, then the estimated cash flows arising from the
modified financial asset are included in the measurement of the existing asset based on their expected timing and amounts
discounted at the original effective interest rate of the existing financial asset; and
> if the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is
treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is then discounted from
the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 154
Notes to the financial statements continued
For the year ended 31 December 2016
29. Financial instruments continued
The Group determines fair value using the following fair value hierarchy that reflects the significance of the inputs used in making
measurements:
Level 1: Quoted prices in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices)
or indirectly (i.e. derived from prices); and
Level 3: Inputs for the asset or liabilities that are not based on observable market data (unobservable inputs).
Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer
price quotations.
The Group uses widely recognised valuation models for determining the fair value of common and simpler financial instruments, such
as interest rate and currency swaps that use only observable market data and require little Management judgement and estimation.
Observable prices and model inputs are usually available in the market for simple over the counter derivatives like interest rate swaps.
Availability of observable market prices and model inputs reduces the need for Management judgement and estimation and also reduces
the uncertainty associated with the determination of fair values. Availability of observable market prices and inputs varies depending
on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.
The consideration of factors such as the scale and frequency of trading activity, the availability of prices and the size of bid/offer spreads
assists in the assessment of whether a market is active. If, in the opinion of Management, a significant proportion of an instrument’s
carrying amount is driven by unobservable inputs, the instrument in its entirety is classified as valued at Level 3 of the fair value hierarchy.
‘Level 3’ in this context means that there is little or no current market data available from which to determine the level at which an arm’s
length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base
a determination of fair value (consensus pricing data may, for example, be used).
Cash and balances with central banks
Fair value approximates to carrying value as cash and balances at central banks have minimal credit losses and are either short-term
in nature or re-price frequently.
Loans and advances to banks, customer deposits, amounts due to banks and derivatives
Fair value is estimated by using discounted cash flows applying either market rates where practicable or rates offered with similar
characteristics by other financial institutions. The fair value of floating rate placements, fixed rate placements with less than six months
to maturity and overnight deposits is considered to approximate to their carrying amount.
Fair values of derivatives are obtained from quoted market prices in active markets and, where these are not available, from valuation
techniques including discounted cash flows.
Loans and advances to customers
Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest
at the balance sheet date, and adjusted for future credit losses if considered material.
Subordinated debt
Fair values are based on quoted prices where available or by discounting cash flows using market rates.
Shawbrook Group plc Annual Report & Accounts 2016
155
29. Financial instruments continued
Fair value hierarchy
The table below analyses the Group’s financial instruments measured at amortised cost into a fair value hierarchy:
Financial assets:
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Financial liabilities:
Customer deposits
Amounts due to banks
Subordinated debt
2016
Level 3
£m
2016
Level 2
£m
–
–
4,050.4
–
24.1
–
–
–
–
3,943.5
147.7
75.3
2016
Level 1
£m
429.9
–
–
–
–
–
2015
Level 3
£m
–
–
3,319.1
–
–
–
2015
Level 2
£m
–
30.9
–
3,186.4
39.9
74.0
2015
Level 1
£m
521.9
–
–
–
–
–
There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the year (2015: £nil).
The table below analyses the Group’s financial instruments measured at fair value into a fair value hierarchy:
Financial assets
Derivative financial instruments
Financial liabilities
Derivative financial instruments
2016
Level 3
£m
2016
Level 2
£m
2016
Level 1
£m
2015
Level 3
£m
2015
Level 2
£m
2015
Level 1
£m
–
–
5.2
(0.4)
–
–
–
–
2.8
–
–
–
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
156
Notes to the financial statements continued
For the year ended 31 December 2016
29. Financial instruments continued
The fair values of all financial assets and financial liabilities by class together with their carrying amounts shown in the balance sheet are
shown in the following table:
At 31 December 2016
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Customer deposits
Due to banks
Subordinated debt
At 31 December 2015
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Customer deposits
Due to banks
Subordinated debt
429.9
24.1
4,050.4
4,504.4
–
–
–
–
521.9
30.9
3,319.1
3,871.9
–
–
–
–
Other
liabilities at
amortised
cost
£m
Loans and
receivables
£m
Total
carrying
amount
£m
429.9
24.1
4,050.4
4,504.4
3,943.5
147.7
75.3
Fair
value
£m
429.9
24.1
4,100.5
4,554.5
3,963.8
147.7
76.0
–
–
–
–
3,943.5
147.7
75.3
4,166.5
4,166.5
4,187.5
–
–
–
–
3,186.4
39.9
74.0
521.9
30.9
3,319.1
3,871.9
3,186.4
39.9
74.0
521.9
30.9
3,351.0
3,903.8
3,189.7
39.9
74.0
3,300.3
3,300.3
3,303.6
Shawbrook Group plc Annual Report & Accounts 2016
157
30. Risk management
The main areas of risk that the business is exposed to are:
> credit risk;
> liquidity risk;
> market risk;
> capital risk and management;
> operational risk; and
> conduct risk.
Credit risk
Credit risk is the risk of suffering financial loss should borrowers or counterparties default on their contractual obligations to the Group.
These risks are managed by the Board Risk Committee and the Asset and Liability Committee. This risk has two main components:
> customer risk (individual and business lending); and
> treasury risk.
The Group’s maximum exposure to credit risk is the carrying value of its financial assets, without taking account of any underlying collateral,
and contractual commitments, which represent agreements entered into but not advanced as at 31 December 2016.
Assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Derivative financial assets
Contractual commitments
Maximum exposure to credit risk
2016
£m
429.9
24.1
2015
£m
521.9
30.9
4,050.4
3,319.1
5.2
4,509.6
459.2
4,968.8
2.8
3,874.7
378.6
4,253.3
The contractual commitments are a combination of loan commitments and committed undrawn facilities.
The amount of collateral held at 31 December 2016 is £3,603.0 million (2015: £2,994.9 million) of which £2,524.3 million
(2015: £2,086.6 million) is in the form of residential and commercial property and £1,078.7 million (2015: £908.3 million) is secured on other
assets and debt receivables. Collateral held in relation to secured loans is capped at the amount outstanding on an individual loan basis.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
158
Notes to the financial statements continued
For the year ended 31 December 2016
30. Risk management continued
Credit quality of assets
Loans and receivables
The Group defines three classifications of credit quality (low risk, medium risk and higher risk) for all credit exposures. These are based
on the following criteria:
> Property Finance: For the residential mortgage portfolio a risk rating scale is applied to the individual loans and weighs the propensity
of non-performance and write-offs. The provisioning methodology within the residential portfolio was amended during the year to utilise
credit scoring to drive loan level probability of defaults. The combined propensity scores are scaled into low risk, medium risk and higher
risk. In the Commercial Mortgages portfolio loans are classified as low risk, medium risk and high risk on a case by case basis based on
the circumstances of every case.
> Business Finance: Loans are classified as low risk, medium risk and higher risk on a case by case basis. Classification is based on
management’s review of the individual circumstances of every case.
> Consumer Lending: Any loans that are 90 days or more past due are deemed to be impaired. Loans that are neither past due nor
impaired are considered by management to be low risk.
The credit quality of assets that are neither past due nor impaired are as follows:
As at 31 December 2016
Low risk
Medium risk
Higher risk
Total neither past
due nor impaired
As at 31 December 2015
Low risk
Medium risk
Higher risk
Total neither past
due nor impaired
Property Finance
Business Finance
Consumer Lending
Total
£m
2,397.5
38.5
7.9
%
98.1
1.6
0.3
£m
986.5
50.3
0.1
%
95.1
4.9
–
£m
460.8
%
£m
100.0
3,844.8
–
–
–
–
88.8
8.0
%
97.5
2.3
0.2
2,443.9
100.0
1,036.9
100.0
460.8
100.0
3,941.6
100.0
Property Finance
Business Finance
Consumer Lending
Total
£m
2,048.6
0.9
5.7
%
99.7
–
0.3
£m
853.2
11.0
9.5
%
97.7
1.2
1.1
£m
331.8
–
–
%
£m
100.0
3,233.6
–
–
11.9
15.2
%
99.2
0.3
0.5
2,055.2
100.0
873.7
100.0
331.8
100.0
3,260.7
100.0
Customer risk
The Group maintains a forbearance policy for the servicing and management of customers who are in financial difficulty and require
some form of concession to be granted, even if this concession entails a loss for the Group. A concession may be either of the following:
> a modification of the previous terms and conditions of an agreement, which the borrower is considered unable to comply with due to
its financial difficulties, to allow for sufficient debt service ability, that would not have been granted had the borrower not been in financial
difficulties; or
> a total or partial refinancing of an agreement that would not have been granted had the borrower not been in financial difficulties.
Forbearance in relation to an exposure can be temporary or permanent depending on the circumstances, progress on financial rehabilitation
and the detail of the concession(s) agreed. A forbearance classification can be discontinued when all of the following conditions have been met:
> the exposure is considered as performing, including, if it has been reclassified from the non-performing category, after an analysis of the
financial condition of the borrower shows it no longer meets the conditions to be considered as non-performing;
> regular payments of more than an insignificant aggregate amount of principal or interest have been made during at least half of the
probation period; and
> none of the exposures to the debtor is more than 30 days past-due at the end of the probation period.
Shawbrook Group plc Annual Report & Accounts 2016
159
30. Risk management continued
As at 31 December 2016, the number of forbearance arrangements in place was 701 (2015: 559), the carrying value of which was £45.5 million
(2015: £19.0 million) against which impairment provisions of £4.6 million (2015: £2.6 million) were held.
Forbearance as at 31 December 2016
Property Finance
Consumer Lending
Business Finance
Total
Forbearance as at 31 December 2015
Property Finance
Consumer Lending
Business Finance
Total
Capital
balances
£m
13.6
1.8
30.1
45.5
Capital
balances
£m
7.7
1.7
9.6
19.0
Provisions
£m
Coverage
%
0.7
0.6
3.3
4.6
5.1%
33.3%
11.0%
10.1%
Provisions
£m
Coverage
%
0.6
1.1
0.9
2.6
7.8%
64.7%
9.4%
13.7%
Number
191
273
237
701
Number
184
249
126
559
There were six property repossessions during the year (2015: five). The total carrying value of these assets was £2.1 million. Of the six
repossessions, five were disposed of by December 2016 and the sixth in January 2017.
Loans and advances to customers are reviewed regularly to determine whether there is any objective evidence of impairment and assets
are categorised as detailed in the tables below:
Type of impairment assessment
Description
Individual impairment
Collective impairment
Where specific circumstances indicate that a loss is likely to be incurred.
Impairment allowances are calculated for each portfolio on a collective basis, given the
homogenous nature of the assets in the portfolio.
Risk categorisation
Description
Neither past due nor impaired
Loans that are not in arrears and which do not meet the impaired asset definition. This segment
can include assets subject to forbearance solutions.
Past due but not impaired
Impaired assets
Loans past due but not impaired consist predominantly of Loans in Property Finance and Business
Finance that are past due and individually assessed as not being impaired. This definition also
includes Unsecured loans in the Consumer division that are past due but not more than 90 days.
Loans that are in arrears or where there is objective evidence of impairment and where the
carrying amount of the loan exceeds the expected recoverable amount. This definition also
includes unsecured loans in the Consumer division that are more than 90 days in arrears and
carry identified impairment.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
160
Notes to the financial statements continued
For the year ended 31 December 2016
30. Risk management continued
The Group enters into agreements with customers and where appropriate takes security. Loan receivables include amounts secured
against property (commercial and residential), or against other assets such as asset backed loans and invoice receivables. Finance lease
and instalment credit is secured on a variety of assets including, but not limited to, plant and machinery.
The profile of the loan receivable book is shown below:
Loan receivables
Finance lease receivables
Instalment credit receivables
Fair value adjustment for hedged risk
Total loans and advances to customers
Loan receivables
Neither past due nor impaired
Past due but not impaired:
Up to 30 days
30-60 days
60-90 days
Over 90 days
Total past due but not impaired
Impaired assets
Fair value adjustment on hedged risk
Less: allowances for impairment losses
Net loan receivables
2016
£m
2015
£m
3,639.5
2,873.0
93.6
316.9
0.4
114.3
331.8
–
4,050.4
3,319.1
2016
£m
2015
£m
3,548.7
2,842.0
18.3
40.2
15.5
15.8
89.8
14.6
5.2
17.3
4.3
5.7
32.5
9.0
3,653.1
2,883.5
0.4
(13.6)
–
(10.5)
3,639.9
2,873.0
The Group enters into agreements with customers and where appropriate takes security. The security for loans to customers is in the form
of a first or second charge over property and debt receivables. Finance leases and instalment credit are secured on the underlying assets
which can be repossessed in the event of a default. The security profile of loans and advances to customers is shown below:
Secured on commercial and residential property
Secured on debt receivables
Secured on finance lease and instalment credit assets
Secured on other assets
Total secured receivables
Unsecured
Gross loan receivables
2016
£m
2015
£m
2,524.3
2,086.6
545.4
421.3
49.3
3,540.3
534.5
4,074.8
386.4
449.1
72.8
2,994.9
337.7
3,332.6
Collateral held in relation to secured loans is capped, after taking into account the first charge balance, at the amount outstanding on
an individual loan basis.
Shawbrook Group plc Annual Report & Accounts 2016
161
2015
£m
101.1
5.6
3.3
1.1
1.7
11.7
3.5
116.3
(2.0)
114.3
2015
£m
317.6
11.3
1.9
0.4
0.7
14.3
0.9
332.8
(1.0)
331.8
2016
£m
82.3
4.6
1.1
0.4
2.3
8.4
11.4
102.1
(8.5)
93.6
2016
£m
310.6
3.6
0.9
0.6
1.3
6.4
2.2
319.2
(2.3)
316.9
30. Risk management continued
Finance receivables
Neither past due nor impaired
Past due but not impaired:
Up to 30 days
30-60 days
60-90 days
Over 90 days
Total past due but not impaired
Impaired assets
Less: allowances for impairment losses
Net loan receivables
Instalment credit receivables
Neither past due nor impaired
Past due but not impaired:
Up to 30 days
30-60 days
60-90 days
Over 90 days
Total past due but not impaired
Impaired assets
Less: allowances for impairment losses
Net loan receivables
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
162
Notes to the financial statements continued
For the year ended 31 December 2016
30. Risk management continued
31 December 2016
Neither past due nor impaired
Past due but not impaired:
Up to 30 days
30-60 days
60-90 days
Over 90 days
Total past due but not impaired
Impaired assets
Fair value adjustment on hedged risk
Less: allowances for impairment losses
Net loan receivables
31 December 2015
Neither past due nor impaired
Past due but not impaired:
Up to 30 days
30-60 days
60-90 days
Over 90 days
Total past due but not impaired
Impaired assets
Less: allowances for impairment losses
Net loan receivables
Property
Finance
£m
Business
Finance
£m
Consumer
Lending
£m
Total
£m
2,443.9
1,036.9
460.8
3,941.6
13.8
33.6
10.7
12.2
70.3
10.1
12.0
4.3
4.2
7.2
27.7
14.1
0.7
4.3
1.6
–
6.6
4.0
26.5
42.2
16.5
19.4
104.6
28.2
2,524.3
1,078.7
471.4
4,074.4
–
(5.2)
–
(12.4)
0.4
(6.8)
0.4
(24.4)
2,519.1
1,066.3
465.0
4,050.4
Property
Finance
£m
2,055.2
Business
Finance
£m
873.7
Consumer
Lending1
£m
Total
£m
331.8
3,260.7
2.6
14.7
3.6
5.5
26.4
5.0
2,086.6
(3.5)
2,083.1
19.0
5.5
1.5
2.4
28.4
6.2
908.3
(5.7)
902.6
0.5
2.3
0.7
–
3.5
2.4
22.1
22.5
5.8
7.9
58.3
13.6
337.7
(4.3)
333.4
3,332.6
(13.5)
3,319.1
1 The Past due but not impaired and impaired balances have been restated as a result of management’s review of the credit quality of the loan portfolios and the refinements
to the definition of impaired assets.
Shawbrook Group plc Annual Report & Accounts 2016
163
Property
Finance
£m
Business
Finance
£m
Consumer
Lending
£m
84.3
75.2
911.6
6.1
38.5
221.0
10.6
157.5
539.8
198.3
57.1
104.1
120.2
71.1
26.9
214.7
0.6
11.3
151.8
3.7
96.9
191.6
107.5
70.1
64.1
68.4
21.1
36.8
48.3
0.1
23.7
55.9
0.8
60.9
80.1
36.8
17.9
47.2
41.8
Total
£m
176.5
138.9
1,174.6
6.8
73.5
428.7
15.1
315.3
811.5
342.6
145.1
215.4
230.4
2,524.3
1,078.7
471.4
4,074.4
Property
Finance
£m
Business
Finance
£m
Consumer
Lending
£m
77.2
55.9
780.4
4.5
25.3
180.5
2.5
108.2
460.3
167.5
39.7
87.1
97.5
59.8
28.7
166.9
0.6
12.3
117.5
2.1
118.5
174.9
63.2
52.6
50.8
60.4
17.8
27.7
30.2
–
19.3
36.2
0.5
46.5
55.5
26.9
12.8
36.9
27.4
Total
£m
154.8
112.3
977.5
5.1
56.9
334.2
5.1
273.2
690.7
257.6
105.1
174.8
185.3
2,086.6
908.3
337.7
3,332.6
30. Risk management continued
The Group’s lending portfolio is geographically diversified across the UK as shown below:
31 December 2016
East Anglia
East Midlands
Greater London
Guernsey/Jersey/Isle of Man
North East
North West
Northern Ireland
Scotland
South East
South West
Wales
West Midlands
Yorkshire/Humberside
31 December 2015
East Anglia
East Midlands
Greater London
Guernsey/Jersey/Isle of Man
North East
North West
Northern Ireland
Scotland
South East
South West
Wales
West Midlands
Yorkshire/Humberside
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
164
Notes to the financial statements continued
For the year ended 31 December 2016
30. Risk management continued
The Group’s lending portfolio falls into the following concentrations by loan size:
31 December 2016
0 – £50k
£50k – £100k
£100k – £250k
£250k – £500k
£500k – £1 million
£1 million – £2.5 million
£2.5 million – £5 million
£5 million – £10 million
£10 million – £25 million
31 December 2015
0 – £50k
£50k – £100k
£100k – £250k
£250k – £500k
£500k – £1 million
£1 million – £2.5 million
£2.5 million – £5 million
£5 million – £10 million
£10 million – £25 million
Property
Finance
£m
Business
Finance
£m
Consumer
Lending
£m
249.6
312.6
622.5
495.8
371.8
283.2
110.1
67.2
11.5
170.3
80.2
106.3
93.2
100.0
118.6
81.2
91.2
237.7
471.3
0.1
–
–
–
–
–
–
–
Total
£m
891.2
392.9
728.8
589.0
471.8
401.8
191.3
158.4
249.2
2,524.3
1,078.7
471.4
4,074.4
Property
Finance
£m
Business
Finance
£m
Consumer
Lending
£m
226.8
273.9
533.1
424.6
311.6
225.7
72.0
18.9
–
183.4
88.1
111.6
89.0
93.9
98.5
84.2
66.5
93.1
337.6
0.1
–
–
–
–
–
–
–
Total
£m
747.8
362.1
644.7
513.6
405.5
324.2
156.2
85.4
93.1
2,086.6
908.3
337.7
3,332.6
Treasury credit risk
Treasury credit risk arises from the wholesale investments made by the Group’s Treasury function, which is responsible for managing this
aspect of credit risk in line with the Board-approved risk appetite and wholesale credit policies. The credit quality of loans and advances
to banks is assessed by rating agency designation as at 31 December 2016, based on Moody’s long term ratings.
Loans and advances to banks
A1
A2
A3
Total credit risk
2016
£m
15.6
1.1
7.4
24.1
2015
£m
9.1
1.1
20.7
30.9
Shawbrook Group plc Annual Report & Accounts 2016
165
30. Risk management continued
The Group only lends to UK high-street banks. Deposits are placed either overnight or for a short term with a duration of less than three
months. No collateral or other credit enhancements are held against loans and advances to banks.
The Group’s exposure to the Bank of England is set out below:
Loans and advances to central banks
Aa1
2016
£m
429.9
2015
£m
521.9
Credit risk derived from derivative transactions is mitigated by collateralising the exposures. Such collateral is subject to the standard
industry CSA and is paid or received on a regular basis. At 31 December 2016, cash collateral of £4.8 million had been received by the Group
(2015: £3.7 million).
Liquidity risk
Accounting policy
Liquidity risk is the risk that the Group is unable to meet its current and future financial obligations as they fall due, or is only able to
do so at excessive cost.
The Group has, therefore, developed comprehensive funding and liquidity policies to ensure that it maintains sufficient liquid assets
to be able to meet all its financial obligations and maintain public confidence.
The Group’s Treasury function is responsible for the day-to-day management of the Group’s liquidity and wholesale funding.
The Board sets limits over the level, composition, and maturity of liquidity and deposit funding balances, reviewing these at least
annually. Compliance with these limits is monitored daily by Finance and Risk function personnel independent of the Treasury
function. Additionally, a combined liquidity stress test is performed daily and a series of other liquidity stress tests are performed
monthly by the Risk function and formally reported to ALCo and the Board to ensure that the Group maintains adequate liquidity
for business purposes even under stressed conditions.
The Group reports its liquidity position against its liquidity coverage ratio, net stable funding ratio and other key regulatory ratios
for regulatory purposes
Funding for Lending Scheme (FLS)
The Group is a participant in the FLS which enables it to borrow highly liquid UK Treasury bills in exchange for eligible collateral.
The Treasury bills issued are for an original maturity of nine months and if delivered back prior to their maturity date can be exchanged
for further nine month Bills. Costs of borrowing are charged directly to the income statement.
The Treasury bills are not recorded on the Group’s balance sheet as ownership remains with the Bank of England. The risks and rewards
of the collateral provided remains with the Group and continue to be recognised in the Group’s Financial statements.
Term Funding Scheme (TFS)
The Term Funding Scheme (TFS) was announced by the Bank of England on 4 August 2016 and became effective from 19 September
2016. The TFS is designed to reinforce the transmission of reductions in the Bank of England’s official interest rate (Bank Rate) to
those interest rates actually faced by households and businesses by providing term funding to banks at rates close to Bank Rate.
It is a monetary policy tool of the Monetary Policy Committee and will be operated as part of the Asset Purchase Facility.
The TFS allows participants to borrow central bank reserves in exchange for eligible collateral. The Group had drawn £118 million
as at 31 December 2016 which is recorded on the balance sheet.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
166
Notes to the financial statements continued
For the year ended 31 December 2016
30. Risk management continued
The table below analyses the Group’s contractual undiscounted cash flows of its financial assets and liabilities:
Gross
nominal
inflow/
(outflow)
£m
Carrying
amount
£m
Less than
1 month
£m
1-3
months
£m
3 months
to 1 year
£m
1-2
years
£m
2-5
years
£m
More than
5 years
£m
429.9
429.9
425.9
24.1
24.1
24.1
–
–
–
–
–
–
–
–
4.0
–
4,050.4
4,504.4
4,174.9
4,628.9
115.4
565.4
137.6
137.6
561.0
561.0
649.9
649.9
1,213.3
1,213.3
1,497.7
1,501.7
At 31 December 2016
Assets
Cash and balances
at central banks
Loans and advances
to banks
Loans and advances
to customers
Liabilities
Customer deposits
(3,943.5)
(3,887.9)
(791.9)
(250.3)
(1,705.4)
(634.1)
Due to banks
Subordinated debt
(147.7)
(75.3)
(148.9)
(133.5)
(5.3)
–
(0.1)
–
(24.6)
(7.5)
(0.3)
(6.4)
(506.2)
(118.6)
(19.1)
(4,166.5)
(4,170.3)
(797.2)
(250.4)
(1,737.5)
(640.8)
(643.9)
–
–
(100.5)
(100.5)
At 31 December 2015
Assets
Cash and balances
at central banks
Loans and advances
to banks
Loans and advances
to customers
Liabilities
521.9
521.9
519.6
30.9
30.9
30.9
3,319.1
3,871.9
3,453.1
4,005.9
–
–
98.5
98.5
–
–
431.4
431.4
(198.5)
(1,409.2)
–
–
(0.2)
(6.4)
86.3
636.8
(364.3)
(15.5)
–
(3,300.3)
(3,468.2)
(379.8)
(198.5)
(1,415.8)
–
–
440.5
440.5
(912.4)
(24.6)
(25.5)
(962.5)
–
–
2.3
–
1,087.6
1,087.6
1,308.8
1,311.1
(404.7)
–
–
(404.7)
–
–
(106.9)
(106.9)
Customer deposits
(3,186.4)
(3,289.1)
Due to banks
Subordinated debt
(39.9)
(74.0)
(40.3)
(138.8)
Shawbrook Group plc Annual Report & Accounts 2016
167
2016
Carrying
amount
£m
425.9
24.1
213.8
663.8
2015
Carrying
amount
£m
519.6
30.9
270.0
820.5
30. Risk management continued
The following table sets out the components of the Group’s liquidity reserve:
Balances with central banks
Loans and advances to banks
Debt securities
Total liquidity reserve
The total liquidity reserve includes £213.8 million (2015: £270.0 million) of securities issued by the Bank of England through FLS participation
which are not recognised on the Consolidated Statement of Financial Position.
The average liquidity reserve throughout the year was £745.1 million (2015: £510.0 million).
Asset encumbrance
The Group’s assets can be used to support collateral requirements for central bank operations or third party repurchase transactions.
Assets that have been set aside for such purposes are classified as ‘encumbered assets’ and cannot be used for other purposes.
All other assets are defined as ‘unencumbered assets’. These comprise assets that are readily available to secure funding or meet
collateral requirements, and assets that are not subject to any restrictions but are not readily available for use.
The table below sets out the availability of the Group’s assets to support future funding:
Asset encumbrance 2016
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Derivative assets held for risk management
Property, plant and equipment
Non-financial assets
Total assets
Encumbered
(pledged as
collateral)
£m
Unencumbered
(available
as collateral)
£m
Unencumbered
other
£m
4.0
–
–
24.1
695.2
3,355.2
–
–
–
–
38.1
–
699.2
3,417.4
425.9
–
–
5.2
4.5
94.4
530.0
Total
£m
429.9
24.1
4,050.4
5.2
42.6
94.4
4,646.6
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
168
Notes to the financial statements continued
For the year ended 31 December 2016
30. Risk management continued
Asset encumbrance 2015
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Derivative assets held for risk management
Property, plant and equipment
Non-financial assets
Total assets
Encumbered
(pledged as
collateral)
£m
Unencumbered
(available
as collateral)
£m
Unencumbered
other
£m
2.3
–
476.4
–
–
–
–
30.9
2,842.7
–
42.3
–
478.7
2,915.9
519.6
–
–
2.8
6.3
76.7
605.4
Total
£m
521.9
30.9
3,319.1
2.8
48.6
76.7
4,000.0
Liquidity risk – stress testing
Stress testing is a major component of liquidity risk management and the Group has developed a range of scenarios covering a range
of market-wide and firm-specific factors. A comprehensive stress testing exercise is conducted at least annually and the methodology is
incorporated into the Group’s balance sheet risk management model to ensure that stress tests are run on a regular basis. The output of
stress testing is circulated to the Board and to the Asset and Liability Committee (ALCo) who use the results to decide whether to amend
the Group’s risk appetite and liquidity limits.
Market risk
Market risk is the risk that the value of, or income arising from, the Group’s assets and liabilities change as a result of changes in market prices,
the principal element being interest rate risk.
Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk appetite.
The Group’s Treasury function is responsible for managing the Group’s exposure to all aspects of market risk within the operational limits
set out in the Group’s treasury policies. The ALCo approves the Group’s treasury policies and receives regular reports on all aspects of market
risk exposure, including interest rate risk.
The Group has minimal foreign currency exposure and does not engage in any treasury trading operations.
Interest rate risk
Interest rate risk is the risk of loss arising from adverse movements in market interest rates. Interest rate risk arises from the loan and savings
products that we offer. This risk is managed through the use of appropriate financial instruments, including derivatives, with established risk
limits, reporting lines, mandates and other control procedures.
Basis risk
Basis risk is the risk of loss arising from changes in the relationship between interest rates which have similar but not identical characteristics
(for example, LIBOR and the Bank of England base rate). This is monitored closely and regularly reported to the ALCo. This risk is managed
by matching and where appropriate and necessary, through the use of derivatives, with established risk limits and other control procedures.
The Group’s forecasts and plans take account of the risk of interest rate changes and are prepared and stressed accordingly, in line with
PRA guidance.
Shawbrook Group plc Annual Report & Accounts 2016
169
30. Risk management continued
Foreign exchange risk
Foreign exchange risk is the risk that the value of, or net income arising from, assets and liabilities changes as a result of movements
in exchange rates. The Group has low levels of foreign exchange risk which is managed by natural hedging and appropriate financial
instruments including derivatives. The table below sets out the Group’s exposure to foreign exchange risk:
Assets and liabilities in foreign currencies at Sterling carrying values
2016
Loans and advances to banks
Loans and advances to customers
Net position
Assets and liabilities in foreign currencies at Sterling carrying values
2015
Loans and advances to banks
Loans and advances to customers
Amounts due to banks
Net position
Euros
£m
0.4
12.9
13.3
Euros
£m
3.7
8.1
(8.1)
3.7
US
Dollars
£m
Australian
Dollars
£m
(0.9)
6.6
5.7
–
–
–
US
Dollars
£m
Australian
Dollars
£m
(1.6)
6.8
(3.4)
1.8
(0.1)
–
–
(0.1)
Foreign exchange sensitivity
The Group estimates that a 5% movement in exchange rates would have no greater impact on the 2016 profit than an increase or decrease
of £1.0 million.
Interest rate sensitivity gap
The Group considers a parallel 200 basis points (bps) movement to be appropriate for scenario testing given the current economic outlook
and industry expectations. The Group estimates that a +/- 200 bps movement in interest rates paid/received would have impacted the
economic value of equity as follows:
+200 bps – £9.5 million positive (2015: £8.0 million positive)
-200 bps – £12.1 million positive (2015: £24.5 million positive)
In addition, the effect of the same two interest rate shocks are applied to the balance sheet at year-end, to determine how net interest
income may change on an annualised basis for one year, as follows:
+200 bps – £20.0 million positive (2015: £19.9 million positive)
-200 bps – £1.9 million positive (2015: £1.4 million positive)
In preparing the sensitivity analyses above, the Group makes certain assumptions consistent with expected and contractual re-pricing
behaviour as well as behavioural repayment profiles, under the two interest scenarios, of the underlying balance sheet items. The results
also include the impact of hedge transactions.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 170
Notes to the financial statements continued
For the year ended 31 December 2016
30. Risk management continued
The following table summarises the re-pricing periods for the Group’s assets and liabilities at 31 December 2016. Items are allocated to time
bands by reference to the earlier of the next contractual interest rate change and the maturity date.
At 31 December 2016
Assets
Within
3 months
£m
3 months
but less than
6 months
£m
6 months
but less
than 1 year
£m
1 year
but less
than 5 years
£m
More than
5 years
£m
Non-
interest
bearing
£m
Cash and balances at central banks
Loans and advances to banks
425.9
24.1
–
–
–
–
–
–
–
–
4.0
–
Total
£m
429.9
24.1
Loans and advances to customers
2,812.3
117.8
201.1
714.1
254.9
(49.8)
4,050.4
Derivative financial assets
Other non-financial assets
Liabilities
Customer deposits
Due to banks
Derivative financial liabilities
Other non-financial liabilities
Subordinated debt
Total equity
Notional values of derivatives
Interest rate sensitivity gap
Cumulative gap
–
2.9
–
2.9
–
5.3
3,265.2
120.7
206.4
1,191.2
123.3
–
–
–
–
954.8
–
–
–
–
–
1,314.5
524.0
2,474.7
2,474.7
954.8
–
(834.1)
1,640.6
630.7
24.4
–
–
–
–
655.1
(340.0)
(788.7)
851.9
–
23.1
737.2
1,166.8
–
–
–
–
–
1,166.8
(145.0)
(574.6)
277.3
–
4.2
259.1
–
–
–
–
75.3
–
75.3
(39.0)
144.8
422.1
5.2
98.6
58.0
–
–
0.4
42.5
–
437.2
480.1
–
(422.1)
–
5.2
137.0
4,646.6
3,943.5
147.7
0.4
42.5
75.3
437.2
4,646.6
–
–
–
Shawbrook Group plc Annual Report & Accounts 2016
171
30. Risk management continued
The following table summarises the re-pricing periods for the Group’s assets and liabilities at 31 December 2015. Items are allocated to time
bands by reference to the earlier of the next contractual interest rate change and the maturity date.
At 31 December 2015
Assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Other non-financial assets
Liabilities
Customer deposits
Due to banks
Other non-financial liabilities
Subordinated debt
Total equity
Notional values of derivatives
Interest rate sensitivity gap
Cumulative gap
Within
3 months
£m
3 months
but less than
6 months
£m
6 months
but less than
1 year
£m
1 year
but less
than 5 years
£m
More than
5 years
£m
Non-interest
bearing
£m
519.6
30.9
1,971.5
2.7
2,524.7
659.8
15.5
–
–
–
675.3
535.0
2,384.4
2,384.4
–
–
121.1
3.2
124.3
–
–
220.2
5.9
226.1
670.3
624.4
–
–
–
–
–
–
–
–
670.3
–
(546.0)
1,838.4
624.4
(50.0)
(448.3)
1,390.1
–
–
825.5
26.9
852.4
1,231.9
24.4
–
–
–
1,256.3
(485.0)
(888.9)
501.2
–
–
221.0
3.6
224.6
–
–
–
74.0
–
74.0
–
150.6
651.8
2.3
–
(40.2)
85.8
47.9
–
–
332.1
–
367.6
699.7
–
(651.8)
–
Total
£m
521.9
30.9
3,319.1
128.1
4,000.0
3,186.4
39.9
332.1
74.0
367.6
4,000.0
–
–
–
Capital risk management
Overview (unaudited)
Our objective in managing Group capital is to maintain appropriate levels of capital to support our business strategy and meet regulatory
requirements.
Common Equity Tier 1 ratio
Total capital ratio
Leverage ratio
Group
2016
13.3%
16.4%
7.8%
Bank
2016
13.2%
16.3%
7.7%
Group
2015
14.4%
18.0%
7.6%
Bank
2015
14.2%
17.9%
7.5%
The Common Equity Tier 1 capital ratio (CET1) for the Group was 13.3% as at 31 December 2016 (31 December 2015: 14.4%), compared with
a regulatory minimum of 4.5%.
The leverage ratio for the Group (based on the Basel III definition of January 2014, and the revised EU capital requirements directive (CRD
IV) definition of October 2014) is 7.8% (2015: 7.6%). The Group is not required to comply with the PRA leverage ratio framework until its retail
deposits exceed the £50 billion threshold; however the Group maintains a prudent risk appetite for leverage.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
172
Notes to the financial statements continued
For the year ended 31 December 2016
30. Risk management continued
Common Equity Tier 1 ratio
The following shows the regulatory capital resources managed by the Group and Bank:
Share capital
Retained earnings
Share premium account
Merger reserve
Capital redemption reserve
Intangible assets
Foreseeable dividend
Common Equity Tier 1 capital
Subordinated debt
Collective provision
Tier 2 capital
Total regulatory capital
Risk-weighted assets (unaudited)
Property Finance
Business Finance
Consumer Lending
Other
Operational risk
Group
2016
£m
2.5
164.3
87.3
–
183.1
(59.9)
(6.7)
370.6
75.3
8.7
84.0
Bank
2016
£m
175.5
145.8
81.0
1.6
9.2
(38.8)
(6.7)
367.6
76.1
8.7
84.8
Group
2015
£m
2.5
94.7
87.3
–
183.1
(54.7)
–
312.9
74.0
4.6
78.6
Bank
2015
£m
175.5
79.7
81.0
1.6
4.4
(33.6)
–
308.6
75.0
4.6
79.6
454.6
452.4
391.5
388.2
1,107.1
1,107.1
1,019.7
1,019.7
372.9
372.9
66.9
212.0
66.9
212.0
897.8
821.4
263.3
69.0
123.1
897.8
821.4
263.3
69.0
123.1
2,778.6
2,778.6
2,174.6
2,174.6
The regulatory capital reconciles to the total capital in the Group’s Consolidated Statement of Financial Position as follows:
Regulatory capital
Subordinated debt
Collective impairment allowance
Intangible assets
Foreseeable dividend
Total equity
Group
2016
£m
454.6
(75.3)
(8.7)
59.9
6.7
437.2
Bank
2016
£m
452.4
(76.1)
(8.7)
38.8
6.7
413.1
Group
2015
£m
391.5
(74.0)
(4.6)
54.7
–
367.6
Bank
2015
£m
388.2
(75.0)
(4.6)
33.6
–
342.2
As required by Article 26(2) of the Capital Requirements Regulation, a deduction has been made for foreseeable dividends from the
2016 profit.
Shawbrook Group plc Annual Report & Accounts 2016
173
Bank
2015
£m
168.4
63.3
(4.0)
4.1
1.0
81.0
–
(5.2)
–
308.6
Bank
2015
£m
308.6
Group
2016
£m
312.9
64.8
–
4.8
–
–
–
(5.2)
(6.7)
Bank
2016
£m
308.6
66.1
–
–
–
–
4.8
(5.2)
(6.7)
370.6
367.6
Group
2016
£m
370.6
Bank
2016
£m
367.6
Group
2015
£m
169.2
58.5
–
4.1
(182.8)
86.0
183.1
(5.2)
–
312.9
Group
2015
£m
312.9
4,646.6
4,625.0
4,000.0
3,978.1
0.6
171.6
1.3
0.6
171.6
1.3
(59.9)
(38.8)
4,760.2
4,759.7
7.8%
7.7%
–
149.4
3.0
(54.7)
4,097.7
7.6%
–
149.4
3.0
(33.6)
4,096.9
7.5%
30. Risk management continued
The following table shows the movement in Common Equity Tier 1 capital during the year:
Common Equity Tier 1 capital at 1 January
Profit in the period attributable to shareholders
Dividend paid
Other movements in retained earnings
(Decrease)/increase in share capital
Increase in share premium account
Increase in capital redemption reserve
Increase in intangible assets
Increase in foreseeable dividend
Common Equity Tier 1 capital at 31 December
Leverage ratio (unaudited)
Tier 1 capital
Exposure measure
Total regulatory balance sheet assets
Exposure value for securities financing transactions
Off-balance sheet items
Exposure value for derivatives
Other regulatory adjustments
Total exposures
Leverage ratio
Exposure values associated with derivatives and securities financing transactions have been reported in compliance with CRD IV rules.
For purposes of the leverage ratio, the derivative measure is calculated as the replacement cost for the current exposure plus an add-on
for future exposure and is not reduced for any collateral received or grossed up for collateral provided.
Off-balance sheet exposure comprises of pipeline and committed facilities balances which have a medium risk attached to them.
Other regulatory adjustments comprise of net replacement costs of derivatives and securities financing transactions to the leverage ratio
exposure.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
174
Notes to the financial statements continued
For the year ended 31 December 2016
30. Risk management continued
Regulation (unaudited)
CRD IV requires the Group to hold Common Equity Tier 1 capital to account for capital conservation, countercyclical and systemic risk buffers.
A capital conservation buffer of 0.625% was introduced on 1 January 2016 and will increase each year to 2019 in line with regulations.
CRD IV also introduced a new leverage ratio requirement. The leverage calculation determines a ratio based on the relationship between
Tier 1 capital and total consolidated exposure, being the sum of on-balance sheet exposures, derivative exposures, securities financing
transaction exposures and off-balance sheet exposures. This leverage ratio is a risk-based measure that is designed to act as a supplement
to risk based capital requirements.
Minimum Requirements for Eligible Liabilities (MREL) are applicable from 1 January 2016 and will be phased in fully by 1 January 2020.
Prior to 31 December 2019, MREL will be equal to an institution’s minimum regulatory capital requirements. The Bank of England has
provided MREL guidance to the Group, as well as guidance on the transitional arrangements until 1 January 2020.
Policies and processes for managing the Group’s capital (unaudited)
The Group’s approach to capital management is driven by strategic and organisational requirements, while also taking into account the
regulatory and commercial environments in which it operates.
The Group’s principal objectives when managing capital are to:
> address the expectation of the shareholders and optimise business activities to ensure return on capital targets are achieved though
efficient capital management;
> ensure that the Group and Bank hold sufficient risk capital. Risk capital caters for unexpected losses that may arise, protects shareholders
and depositors and thereby supports the sustainability of the Bank through the business cycles; and
> comply with capital supervisory requirements and related regulations.
The Prudential Regulation Authority (PRA) supervises the Group on a consolidated basis and receives information on the capital adequacy
of, and sets capital requirements for, the Group as a whole. In addition, a number of subsidiaries are regulated for prudential purposes by
either the PRA or the Financial Conduct Authority (FCA). The aim of the capital adequacy regime is to promote safety and soundness in the
financial system and embed the requirements of Pillar 3 on market discipline. Under Pillar 2, the Group completes an annual self-assessment
of risks known as the Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP is reviewed by the PRA which culminates in the PRA
setting ’Individual Capital Guidance‘ (ICG) on the level of capital the Group and its regulated subsidiaries are required to hold. Pillar 3 requires
firms to publish a set of disclosures which allow market participants to assess information on that firm’s capital, risk exposures and risk
assessment process. The Group’s Pillar 3 disclosures can be found on the Group’s website.
The Group maintains a strong capital base with the aim of supporting the development of the business and to ensure it meets the Pillar 1
capital requirements and ICG at all times. As a result, the Group maintains capital adequacy ratios above minimum regulatory requirements.
The Group’s individual regulated entities complied with all of the externally imposed capital requirements to which they are subject for the
years ended 2016 and 2015.
Shawbrook Group plc Annual Report & Accounts 2016 175
31. Subsidiary companies
Accounting policy
Subsidiaries
Subsidiaries are entities controlled by the Group. The Financial statements of subsidiaries are included in the consolidated Financial
statements from the date that control commences until the date that control ceases.
The Company has the following subsidiary companies whose results are included in these consolidated Financial statements:
Country of
incorporation
Class of
shares held
Ownership
%
Shawbrook Bank Limited
and its subsidiaries:
Shawbrook International Limited
Shawbrook Buildings and Protection Limited
Singers Corporate Asset Finance Limited
Singers Healthcare Finance Limited
Coachlease Limited
Hermes Group Limited
England and Wales
Jersey
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Singer & Friedlander Commercial Finance Limited
Scotland
Link Loans Limited
Centric Group Holdings Limited
and its subsidiaries:
England and Wales
England and Wales
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Centric Group Finance 2 Limited
England and Wales
Ordinary
Centric Group Finance Limited
and its subsidiaries:
Centric Commercial Finance Limited
Centric SPV 1 Limited
Centric SPV 2 Limited
Resource Partners SPV Limited
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Principal
activity
Banking
Banking
FCA authorised
introducer of insurance
Dormant
Dormant
Dormant
Dormant
Dormant
Non-trading
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
All entities have the same registered address as the Company, except the following:
> Shawbrook International Limited – 1st Floor Kensington Chambers, Kensington Place, St Helier, JE4 0ZE, Jersey; and
> Singer & Friedlander Commercial Finance Limited – 8 Nelson Mandela Place, Glasgow, Scotland, G2 1BT.
Singer & Friedlander Finance Limited was dissolved at Companies House during 2016.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
176
Notes to the financial statements continued
For the year ended 31 December 2016
32. Related party transactions
Related parties of the Group include key management personnel, close family members of key management personnel and entities which
are controlled, jointly controlled or significantly influenced, or for which significant voting power is held, by key management personnel
or their close family members.
Company
Movement in amounts owed by Group companies:
Balance at 1 January
Issue of share capital
Costs of issue of share capital
Investment in subsidiary
Repayment of subordinated debt
Issue of subordinated debt
Dividend received from Shawbrook Bank Limited
Professional fees and other costs
Transfer of funds
Balance at 31 December
2016
£m
2.6
–
–
–
–
–
–
0.3
(1.2)
1.7
2015
£m
–
90.0
(3.7)
(82.0)
33.7
(75.0)
4.0
(0.3)
35.9
2.6
In 2015, Shawbrook Group plc entered into a £75 million subordinated debt with its subsidiary, Shawbrook Bank Limited. The terms and
conditions mirror the subordinated debt listed by the Company on the London Stock Exchange on 28 October 2015 (see Note 26).
Pollen Street Capital is a private equity firm whose shares are held by Special Opportunities Fund (Guernsey) LP acting through its general
partner and manager, SOF General Partner (Guernsey) Limited which holds its shares in Shawbrook through its nominee, SOF Annex
Nominees Limited.
Target Group Limited was an investment of Pollen Street Capital Limited (which was sold by Pollen in 2016). The Group has an amortising
term loan, secured on mortgage assets, to Target Financial Systems Limited, a wholly owned subsidiary of Target Group Limited.
Income earned during the year was £0.2 million (2015: £0.6 million) and the balance outstanding at 31 December 2016 was £1.7 million
(2015: £10.1 million).
The Group has also entered into a contract with Target Servicing Limited, a wholly owned subsidiary of Target Group Limited, for
administration services on various portfolios. Target Servicing Limited services various portfolios, under customary commercial
arrangements, on behalf of the Group. The Group was charged £8.7 million during 2016 for these services (2015: £6.6 million) and no
amounts were due at 31 December 2016. In addition, the Group paid £1.8 million (2015: £1.3 million) for additional services. During 2015
Target paid the Group £0.7 million to settle a contingent liability from 2014 in respect of customer redress.
Iain Cornish is a non-executive director of Arrow Global Limited. The Group has received £0.9 million (2015: £1.0 million) in broker fees
and interest income from Arrow Global Limited. The outstanding balance was settled and the facility was cancelled during the year
(2015: £9.2 million drawn).
Sally-Ann Hibberd is a non-executive director of Equiniti Group Plc. The Group had no material transactions with Equiniti Group Plc
during the year and the outstanding balance at 31 December 2016 is £nil (2015: £nil).
The Group has paid £1.7 million (2015: £1.4 million) in broker fees to Freedom Finance Limited, an investment company of Pollen Street
Capital Limited. Similarly the Group has paid £30,000 in broker commissions to Pay4Later in which Pollen Street Capital Limited has
an investment.
Shawbrook Group plc Annual Report & Accounts 2016
177
32. Related party transactions continued
The Group entered into a revolving credit facility with guarantor lending Amigo Loans Limited (then S&F) in August 2012. Roger Lovering,
a Director of Shawbrook Group plc, was appointed as a Director of Amigo Loans Limited (December 2015 – 20 April 2016) and of its holding
company, Amigo Holdings Limited on 20 April 2016, where he is an active director. The balance outstanding at 31 December 2016 was
£24.4 million with £25 million committed.
Non-Standard Finance plc was established as cash shell (initial equity raise of £102 million followed up by an additional £180 million) and
listed on the LSE (main market) in February 2015 and is backed by a capable management team, including Shawbrook Director, Robin Ashton
(who has stepped down during 2016). The Group has entered into 2 facilities in the business’s structure: Everyday Lending Limited – The
Group supported the acquisition of Everyday Loans by Non-Standard Finance plc in December 2015, which was FCA approved in June 2016.
S.D. Taylor Limited – The Group entered into a revolving credit facility with home collect credit provider S.D. Taylor Limited (trading name
Loansathome), to support the business following being acquired by Non-Standard Finance plc in August 2015. The outstanding balance
at 31 December 2016 was £22.9 million with £25 million committed.
Transactions with key management personnel
Key management personnel are defined as the Executive Committee of Shawbrook Group plc. excluding the Executive and Non-Executive
Directors. The total remuneration which included short-term benefits and employer pension contributions totalled £2.4 million
(2015: £1.5 million).
33. Capital commitments
The Group had capital commitments totalling £0.3 million at 31 December 2016 (2015: £0.9 million).
34. Contingent liabilities and guarantees
Accounting policies
Financial guarantee contracts
Liabilities under financial guarantee contracts which are not classified as insurance contracts are recorded initially at their fair value,
which is generally the fee received or the present value of the fee receivable. Subsequently, financial guarantee liabilities are measured
at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure required to settle the
obligations.
Contingent liabilities
Contingent liabilities, which includes contingent liabilities related to legal proceedings or regulatory matters, are possible obligations
that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain
future events not wholly within the control of Shawbrook Group plc; alternatively they are present obligations that have arisen from
past events but are not recognised because it is not probable that settlement will require the outflow of economic benefits, or
because the amount of the obligations cannot be reliably measured. Contingent liabilities are not recognised in the Financial
statements but are disclosed unless the probability of settlement is remote.
Financial guarantee contracts
In 2015, the Group entered into a financial guarantee contract to an amount of £2.5 million. This contract is a continuous obligation which
may be terminated by the Group on giving three months written notice. The contract is fully collateralised through a first fixed charge over
a blocked deposit account to an amount of £2.5 million.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 178
Notes to the financial statements continued
For the year ended 31 December 2016
34. Contingent liabilities and guarantees continued
Contingent liabilities
Part of the Group’s business is regulated by the Consumer Credit Act (CCA), which contains very detailed and highly technical requirements.
The Group continues to commission external reviews of its compliance with the CCA and other consumer regulations. The Group has
identified some areas of potential non-compliance, although these are not considered to be material. While the Group considers that
no material present obligation in relation to non-compliance with the CCA and other consumer regulations is likely, there is a risk that
the eventual outcome may differ.
The Group’s Consumer Lending Division is exposed to risk under Section 75 CCA, in relation to any misrepresentations or breaches of
conduct by suppliers of goods and services to customers where the purchase of those goods and services is financed by the Group. While
the Group would have recourse to the supplier in the event of such liability, if the supplier becomes insolvent then that recourse would have
limited value. During 2016 at least one supplier has become insolvent and therefore the Group may have an increased exposure to customer
complaints in relation to such suppliers although any such exposure is not considered to be material.
35. Earnings per share
IAS 33 requires that if the number of ordinary shares increases as a result of a capitalisation, bonus issue or share split then the calculation
of basic and diluted earnings per share (EPS) shall be adjusted retrospectively. The tables below are based on the number of shares in issue:
Earnings per share
Basic
Diluted
2016
Pence
2015
Pence
25.9
25.5
24.1
24.0
Basic EPS amounts are calculated by dividing the profit for the year attributable to ordinary equity holders of the parent by the weighted
average number of ordinary shares outstanding during the year, excluding own shares held in employee benefit trusts.
Diluted EPS amounts are calculated by adjusting the profit for the year attributable to ordinary equity holders of the parent and the
weighted average number of ordinary shares outstanding for the effects of all the dilutive potential ordinary shares into ordinary shares,
which comprise share options granted to employees.
There are no discontinued operations during the period (2015: £nil).
Basic EPS computations are based on profit attributable to ordinary equity holders of the parent of £64.8 million (2015: £58.5 million) and
weighted number of ordinary shares of 250.5 million (2015: 242.3 million).
Diluted EPS computations are based on profit attributable to ordinary equity holders of the parent of £64.8 million (2015: £58.5 million) and
weighted number of ordinary shares of 253.7 million (2015: 243.9 million).
36. Ultimate parent company
No single entity or individual has a controlling interest in the Company. The largest company in which the results of the Group are
consolidated is that headed by Shawbrook Group plc, incorporated in England and Wales. No other Financial statements include the results
of the Group.
Shawbrook Group plc Annual Report & Accounts 2016
179
37. Country-by-country reporting (CBCR)
The Capital Requirements (Country-by-Country Reporting) Regulations 2013 came into effect on 1 January 2014 and place certain
reporting obligations on financial institutions that are within the scope of the EU Capital Requirements Directive IV (CRD IV).
The objective of the CBCR requirements is to provide increased transparency regarding the source of the financial institution’s income
and locations of its operations.
Shawbrook Group plc and its subsidiaries are all UK registered entities (except if stated otherwise), the activities of which are disclosed
on page 175 of the Annual Report and Accounts.
The Group’s net operating income, profit before taxation, income tax charge and number of full time equivalent employees were:
Net operating income (£m)
Profit before tax (£m)
Income tax charge (£m)
Tax paid (£m)
Average number of employees on a full time equivalent basis
The Group did not receive any public subsidies.
38. Post-balance sheet events
2016
209.6
88.2
23.4
20.4
569
2015
166.9
70.1
11.6
13.8
514
On 3 March 2017, following share price movement, the Group announced that it was in discussions with Pollen Street Capital Limited
(Pollen Street) and BC Partners LLP (BC Partners) (together the Consortium) regarding a possible offer to be made by a new company
to be jointly owned by funds managed or advised by Pollen Street and BC Partners for the entire issued and to be issued share capital
of Shawbrook Group plc (the Possible Offer).
Under the terms of the Possible Offer, shareholders would receive 330p per ordinary share in cash. In addition, shareholders would be
entitled to retain the final maiden dividend in respect of the year ended 31 December 2016 referred to in this Annual Report & Accounts.
As at the date of publication of this Annual Report & Accounts, the Board had issued a rejection of the Possible Offer. Discussions with the
Consortium were ongoing and there was no certainty either that an offer would be made nor as to the terms of any offer, if made.
There have been no other significant events between 31 December 2016 and the date of approval of the Financial statements which
would require a change to or additional disclosure in the Financial statements.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016
180
Glossary
ALCo
Asset and Liability Committee.
Average Principal Employed
Calculated as the average of monthly closing loans and advances to customers, net of
impairment provision, from the Group’s financial reporting and management information
systems, including operating leases, which are classified as property, plant and equipment
in the Group’s statutory accounts.
BAC
BRC
Basel II
Basel III
Basis Point (bp)
BBA
Board
BoE
Buy-to-let Mortgages
Capital Requirements Regulation (CRR)
Board Audit Committee.
Board Risk Committee.
The capital adequacy framework issued by the Basel Committee on Banking Supervision
in June 2006 in the form of the ‘International Convergence of Capital Measurement and
Capital Standards’.
Global regulatory standard on bank capital adequacy, stress testing and market and
liquidity proposed by the Basel Committee on Banking Supervision in 2010. It aims to
strengthen regulation, supervision and risk management in the banking sector. See also
CRD IV.
One hundredth of a percent (0.01%). 100 basis points is 1%. It is used in quoting interest
rates or yields on securities.
British Bankers Association, the leading trade association for the UK banking sector.
The Board of Directors of Shawbrook Group plc.
Bank of England.
Buy-to-let mortgages are those mortgages offered to customers purchasing residential
property as a rental investment.
The European Union has implemented the Basel III capital proposals through the Capital
Requirements Regulation (CRR) and the Capital Requirements Directive (CRD), collectively
known as CRD IV. CRD IV was implemented on 1 January 2014.
CCA
Code
Consumer Credit Act.
The FRC’s UK Corporate Governance Code (2014 edition).
Common Equity Tier 1 Capital (CET1)
The highest quality form of capital under CRD IV that comprises common shares issued
and related share premium, retained earnings and other reserves excluding the cash flow
hedging reserve, less specified regulatory adjustments.
Common Equity Tier 1 Ratio (CET1 Ratio) The Common Equity Tier 1 ratio is calculated as common equity tier 1 capital divided by
Cost of Risk
Cost to Income Ratio
CRD
CRD IV
risk-weighted assets.
Cost of risk is calculated as impairment losses on financial assets divided by average
principal employed.
Cost to Income Ratio is calculated as administrative expenses plus provisions for liabilities
and charges, divided by net operating income.
Capital Requirements Directive.
In June 2013, the European Commission published legislation for a Capital Requirements
Directive (CRD) and Capital Requirements Regulations (CRR) which form the CRD IV
package. The package implements the Basel III proposals in addition to the inclusion
of new proposals on sanctions for non-compliance with prudential rules, corporate
governance and remuneration. The rules are implemented in the UK via the PRA policy
statement PS7/13 and came into force from 1 January 2014, with certain sections subject
to transitional phase in.
Shawbrook Group plc Annual Report & Accounts 2016 181
Customer Deposits
Customer Loans
Deferred Tax Assets
Earnings at Risk (EaR)
Monies deposited by individuals and companies that are not credit institutions. Such funds
are recorded as liabilities in the Group’s Statement of Financial Position.
Loans and advances to customers, net of impairment provision and including operating leases,
which are classified as property, plant and equipment in the Group’s statutory accounts.
Income taxes recoverable in future periods as a result of deductible temporary differences
(temporary differences between the accounting and tax base of an asset or liability that will
result in tax-deductible amounts in future periods) and the carry-forward of tax losses and
unused tax credits.
Approach set out for the quantification of interest rate risk expressed as the impact of the
sensitivity analysis on the change to net interest income.
EBA
European Banking Authority.
Effective Interest Rate (EIR)
Encumbrance
EPS
European Securities &
Market Authority (ESMA)
Expected Loss (EL)
Exposure at Default
Fair Value
FCA
Financial Services Compensation
Scheme (FSCS)
Forbearance
The effective interest rate method calculates the amortised cost of a financial asset or
financial liability, and allocates the interest income over the relevant period. The effective
interest rate is the rate that exactly discounts estimated future cash receipts through the
expected life of the financial asset or financial liability. Calculation of the effective interest
rate takes into account all contractual terms of the financial instrument but includes all
amounts received or paid that are an integral part of the overall return, direct incremental
transaction costs related to the acquisition or issue of a financial instrument and all other
premiums and discounts.
The use of assets to secure liabilities, such as by way of a lien or charge.
Earnings per share.
An independent European Supervisory Authority with the remit of enhancing the protection of
investors and reinforcing stable and well-functioning financial markets in the European Union.
A measure of anticipated loss for exposures captured under an internal ratings based credit
risk approach. The 12 month expected loss amount is the exposure, arising from a potential
default of a counterparty, over the next 12 months in respect of the amount expected to
be outstanding at default.
An estimate of the amount expected to be owed by a customer at the time of a
customer’s default.
The amount for which an asset could be exchanged, or a liability settled, between willing
parties in an arm’s length transaction.
Financial Conduct Authority.
The Financial Services Compensation Scheme is the UK’s independent statutory
compensation fund for customers of authorised financial service firms and pays
compensation if a firm is unable to pay claims against it. The FSCS is funded by
management expenses levies and, where necessary, compensation levies on the
authorised firms.
Forbearance takes place when a concession is made on the contractual terms of a loan
in response to borrowers’ financial difficulties. Forbearance options are determined by
assessing the customer’s personal circumstances.
FRC
Financial Reporting Council.
Full-Time Equivalent (FTE)
A full-time employee is one that works a standard five-day week. The hours worked by
part-time employees are measured against this standard and accumulated along with
the number of full-time employees and counted as full-time equivalents.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 182
Glossary continued
Funding for Lending Scheme (FLS)
Group
Gross Yield
HIL
HOL
IFRS
Impaired Assets
Impairment Allowance
Instalment credit agreement
Interest Rate Risk
Internal Capital Adequacy Assessment
Process (ICAAP)
Internal Liquidity Adequacy
Assessment Process (ILAAP)
International Organization of Securities
Consensus (IOSCO)
IASB
IMF
IPO
Leverage Ratio
Liability yield
The Bank of England launched the Funding for Lending scheme in 2012 to allow banks and
building societies to borrow from the Bank of England at cheaper than market rates for up
to four years. This was designed to increase lending to businesses by lowering interest rates
and increasing access to credit.
The Company and its subsidiaries.
Gross yield is calculated as the sum of interest and similar income, net income from
operating leases, net fee and commission income and fair value gains/(losses) on financial
instruments divided by average principal employed.
Home Improvement Loan.
Holiday Ownership Loan.
International Financial Reporting Standards.
Loans that are in arrears or where there is objective evidence of impairment and where
the carrying amount of the loan exceeds the expected recoverable amount. This definition
also includes unsecured loans in the Consumer division that are more than 90 days in
arrears and carry identified impairment that is calculated on a collective basis.
The impairment allowance includes allowances against loans that have been individually
impaired and those that are subject to collective impairment.
An instalment credit agreement is an agreement similar in nature to a hire purchase
agreement or otherwise known as a rent-to-own agreement.
The risk of a reduction in the present value of the current balance sheet or earnings
as a result of adverse movement in interest rates.
The Group’s own assessment, based on Basel III requirements, of the levels of capital that
it needs to hold in respect of its regulatory capital requirements (for credit, market and
operational risks) and for other risks including stress events as they apply on a solo level
and on a consolidated level.
The Group’s own assessment of its overall liquidity adequacy and in particular the level
of liquidity resources it requires to meet its liabilities as they fall due even under stressed
conditions, in accordance with the Prudential Regulation Authority’s liquidity rules
under PS11/15.
The international body that brings together the world’s securities regulators and is
recognised as the global standard-setter for the securities sector. IOSCO develops,
implements and promotes adherence to internationally recognised standards for
securities regulation.
International Accounting Standards Board.
International Monetary Fund.
Initial Public Offering.
The leverage ratio is calculated Common Equity Tier 1 capital divided by the sum of total
assets (excluding intangible assets and include adjustments for certain off balance sheet
items such as pipeline and undrawn collateral).
Liability yield is calculated as interest expense and similar charges divided by average
principal employed.
LIBOR (London Inter-Bank Offered Rate) The interest rate participating banks offer to other banks for loans on the London market.
Shawbrook Group plc Annual Report & Accounts 2016 183
Liquidity Coverage Ratio (LCR)
Liquidity Ratio
Loan-to-Deposit Ratio
Loss Emergence Period
Loss Given Default
Management expenses ratio
MCD
MLRO
The ratio of the stock of high-quality liquid assets to expected net cash outflows over the
following 30 days. High-quality liquid assets should be unencumbered, liquid in markets
during a time of stress, and ideally, central bank eligible.
Liquidity ratio is calculated as the liquidity reserve divided by customer deposits. The
liquidity reserve comprises cash and balances at central banks (excluding mandatory
balances held with central banks), loans and advances to banks, off balance sheet T-Bills
but excludes additional available liquidity from pre-positioned assets.
Calculated as loans and advances to customers divided by customer deposits.
The loss emergence period is the estimated period between impairment occurring and
the loss specifically identified and evidenced by the establishment of an appropriate
impairment allowance.
The estimated loss that will arise if a customer defaults. It is calculated after taking account
of credit risk mitigation and includes the cost of recovery.
Management expenses ratio is calculated as administrative expenses plus provisions for
liabilities and charges, divided by average principal employed.
Mortgage Credit Directive.
A Money Laundering Reporting Officer (MLRO) is the officer nominated within a firm or
practice to make disclosures to the Serious Organised Crime Agency (SOCA) under the
Proceeds of Crime Act 2002 and the Terrorism Act 2000.
Neither past due nor impaired
Loans that are not in arrears and which do not meet the impaired asset definition.
This segment can include assets subject to forbearance solutions.
Net Interest Income
The difference between interest received on assets and interest paid on liabilities.
Net Interest Margin (NIM)
Calculated as net operating income divided by average principal employed.
Net Stable Funding Ratio (NSFR)
NPL Ratio
The ratio of Available Stable Funding required to support the assets and activities over
the medium term as set out by the Basel III requirements and implemented by the EBA
and the PRA
The NPL ratio is calculated by adding past due over 90 days loans and advances to
customers and impaired loans and advances to customers and dividing the sum by
total gross loans and advances to customers.
NPL Provision Coverage Ratio
Calculated as Balance sheet Impairment Provision as a percentage of past due over 90 days
loans and advances to customers and impaired loans and advances to customers.
OBR
Past due
Past due but not impaired
Pillar 1
PRA
PSP
Office for Budget Responsibility.
A loan is considered past due when the borrower has failed to make a payment under
the terms of the loan agreement. This may also include loans past maturity where an
outstanding balance exists.
Loans past due but not impaired consist predominently of loans in Property Finance and
Business Finance that are impaired. This definition also included unsecured laons in the
Consumer Division that are past due but not more than 90 days.
The part of the Basel framework that sets outs the rules that govern the calculation of
Minimum capital requirements for credit, market and operational risks.
Prudential Regulation Authority.
Performance Share Plan.
Strategic reportCorporate governanceFinancial statementsShawbrook Group plc Annual Report & Accounts 2016 184
Glossary continued
Recovery Plan and Resolution Pack
(RP&RP)
Repurchase Agreements or ‘Repos’
Return on Lending Assets
Return on Tangible Equity (RoTE)
Risk-weighted Assets
Secured Lending
Standardised Approach
Stress Testing
Term Funding Scheme (TFS)
Tier 1 Capital
Tier 1 Capital Ratio
Tier 2 Capital
The Bank Recovery and Resolution Directive (BRRD) establishes a common approach to the
recovery and resolution of banks and investment firms. The Group’s Recovery Plan enables
the Board and senior management manage a crisis which may threaten the capital and/
or liquidity adequacy of the Bank, or its ultimate viability. The objective of the plan is to
put in place measures (recovery options) to restore capital, liquidity or profitability so that
the Bank can operate sustainably and viably. The Group’s Resolution Pack lays out the
information required to support effective resolution planning. The requirements for
the Recovery Plan and Resolution Pack are set out in supervisory statement SS18/13
and SS19/13 respectively.
An agreement where one party, the seller, sells a financial asset to another party, the buyer,
at the same time the seller agrees to reacquire and the buyer to resell the asset at a later
date. From the seller’s perspective such agreements are repurchase agreements (repos)
and from the buyer’s perspective they are reverse repurchase agreements (reverse repos).
Return on lending assets before tax is calculated as profit/(loss) before taxation divided by
average principal employed.
Return on tangible equity is calculated as profit for the year attributable to owners divided
by average tangible equity. Average tangible equity is calculated as total equity less
intangible assets at the beginning of a period plus total equity less intangible assets at
the end of the period, divided by two. The 2015 opening tangible equity position has been
adjusted to include the £82 million of IPO proceeds to enable like for like comparisons.
A measure of a bank’s assets adjusted for their associated risks. Risk weightings are
established in accordance with PRA rules and are used to assess capital requirements
and adequacy under Pillar 1.
Lending on which the borrower uses collateral such as equity in their home.
In relation to credit risk, a method for calculating credit risk capital requirements using
External Credit Assessment Institutions (ECAI) ratings of obligators (where available) and
supervisory risk weights. In relation to operational risk, a method of calculating the
operational risk capital requirement by the application of a supervisory defined percentage
charge to the gross income of specified business lines.
Stress and scenario testing is the term used to describe techniques where plausible events
are considered as vulnerabilities to ascertain how this will impact the capital or liquidity
resources which are required to be held.
The Bank of England launched the Term Funding Scheme in 2016 to allow banks and
building societies to borrow from the Bank of England at rates close to Bank Base Rate.
This is designed to increase lending to businesses by lowering interest rates and increasing
access to credit.
A measure of banks financial strength defined by the PRA. It captures Common Equity
Tier 1 capital plus other Tier 1 securities in issue, but is subject to a deduction in respect
of material holdings in financial companies.
Tier 1 capital as a percentage of risk-weighted assets.
A further component of regulatory capital defined by the PRA. It comprises eligible
collective assessed impairment allowances under CRD IV.
Total Capital Ratio (TCR)
The Total Capital Ratio is calculated as total regulatory capital divided by risk-weighted assets.
TNAV
Unencumbered Assets
Tangible Net Asset Value.
Assets that are readily available to secure funding or to meet collateral requirements,
and assets that are not subject to any restrictions but are not readily available for use.
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Shawbrook Group plc
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