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ONESAVINGS BANK PLC (OSB)

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Thursday 19 March, 2020

ONESAVINGS BANK PLC

Preliminary results for the year ended 31 December 2019

Preliminary results for the year ended 31 December 2019

LEI: 213800WTQKOQI8ELD692  

19 March 2020

OneSavings Bank plc
Preliminary results for the year ended 31 December 2019

Due to the Combination with Charter Court Financial Services Group plc (CCFS) this press release includes results on both a statutory and a pro forma underlying basis. The statutory basis reflects 12 months of OSB’s results and CCFS’ results from 4 October 2019 while the pro forma underlying basis assumes that the Combination occurred on 1 January 2018 and includes 12 months of results from CCFS and excludes exceptional items, integration costs and other acquisition-related items.

Financial highlights

  • Statutory profit before tax increased 14% to £209.1m (2018: restated £182.8m1). Pro forma underlying profit before tax increased 9% to £381.1m (2018: £350.8m)
     
  • The net loan book grew 105% to £18.4bn (2018: £9.0bn) on a statutory basis and increased 16% to £18.2bn (2018: £15.6bn) on a pro forma underlying basis, or 23% excluding the impact of structured asset sales. Statutory gross originations grew by 36% to £4.1bn (2018: £3.0bn) and increased 10% on a pro forma underlying basis to £6.5bn (2018: £5.9bn)
     
  • On a statutory basis, the cost to income ratio increased to 32%2 (2018: 28%). On a pro forma underlying basis, the cost to income ratio remained excellent at 29% (2018: 28%), due to strong income growth alongside continued focus on cost discipline and efficiency
     
  • Net interest margin (NIM) was 2.43% on a statutory basis (2018: restated 3.05%3) and 2.66% on a pro forma underlying basis (2018: 2.86%)
     
  • Impairments remain low with a loan loss ratio4 of 13bps (2018: 10bps) on a statutory basis and 10bps (2018: 7bps) on a pro forma underlying basis
     
  • Statutory return on equity (RoE)5 fell to 18% (2018: restated 25%5), however, on a pro forma underlying basis, RoE remained strong at 25% (2018: 28%). Statutory Common Equity Tier 1 (CET1) capital ratio increased to 16.0% (2018: 13.3%)
     
  • Statutory basic earnings per share6 (EPS) fell 5% to 52.6 pence (2018: 55.5 pence), however pro forma underlying basic EPS increased 9% to 64.9 pence (2018: 59.4 pence)
     
  • Recommended final dividend7 of 11.2 pence per share gives a full year dividend of 16.1 pence per share. Together with the pre-Combination CCFS interim dividend of 4.3 pence per share, this is in line with our target dividend payout ratio

             

Andy Golding, CEO of OneSavings Bank, said:

“I am delighted with OneSavings Bank’s achievements in 2019. I am particularly pleased that we successfully completed our Combination with Charter Court, and that both businesses maintained momentum and delivered strong results whilst the transaction progressed. The rationale behind the Combination remains compelling and I am pleased with progress to date on integration.

The combined Group delivered excellent shareholder returns in 2019. Both Buy-to-Let and Residential segments continued to grow, with strong demand from professional landlords and owner-occupiers. The Group’s organic originations grew by 36% to £4.1bn, including three months of Charter Court’s business, supporting 14% growth in statutory profit before tax to £209m.

Our funding model has been enhanced through the Combination. Securitisations since 2013 across the combined Group now total £5.7bn and during 2019 CCFS generated a gain on sale of £59m on three structured asset sales and OSB completed an inaugural securitisation of £500m of organically originated mortgages. We continued to take advantage of high demand and attractive market pricing with additional deals completed early this year. In January, the Group disposed of its remaining notes under the Canterbury securitisation, generating a gain on sale of c. £18m and the notes in PMF 2020-1B resulting in a gain of c. £2m on a statutory basis and a £15m gain on an underlying basis. Retail funds remain the primary source of funding for the combined Group, reaching £16bn at the end of 2019. Both Banks achieved exceptional customer Net Promoter Scores which we are very proud of.

The UK and global economies are currently experiencing unprecedented uncertainty stemming from COVID-19. Whilst we entered the year with a robust pipeline, strong application levels in our core businesses and stable margins, it is too soon to say what the impact will be and we therefore consider it imprudent to provide forward guidance for 2020.

We enter this period of uncertainty as an enlarged business with the strength of our combined lending and funding franchises, robust capital position, secured loan book and strong risk management capabilities.”

Key metrics

   2019  2018
OSB 3 months + arrears (%)8  1.3  1.5
CCFS 3 months + arrears (%)  0.3  0.2
OSB customer Net Promoter Score  +66  +63
CCFS customer Net Promoter Score  +72  +39

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  1. Profit before tax was restated to recognise interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity.
  2. Administrative expenses as a percentage of total income
  3. To align calculation methods post Combination, OSB amended NIM calculation to include average interest earning assets on a 13 point average from a simple average. The comparative NIM was restated.
  4. Loan loss ratio is defined as impairment losses as a percentage of 13 point average gross loans and advances.
  5. Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, as a percentage of a 13 point average shareholders’ equity (excluding £60m of AT1 securities). The comparative return of equity ratio was restated to include average shareholders’ equity on a 13 point average.
  6. Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, divided by the weighted average number of ordinary shares in issue.
  7. Representing 25% of pro forma underlying profit attributable to ordinary shareholders which will be paid on 13 May 2020, subject to approval at the Annual General Meeting on 7 May 2020, with a record date of 27 March 2020.
  8. Portfolio arrears rate of accounts for which there are missed or overdue payments by more than three months.


Enquiries:

OneSavings Bank plc:              Alastair Pate t: 01634 835728

Brunswick Group:                   Robin Wrench / Simone Selzer t: 020 7404 5959

Analyst presentation

A webcast presentation for analysts will be held at 9:30am on Thursday 19 March. The presentation will be webcast or call only and available on the OneSavings Bank website at www.osb.co.uk. The UK dial in number is 020 3936 2999 and the password is 215969. Registration is open immediately.

About OneSavings Bank plc

OneSavings Bank plc (OSB) began trading as a bank on 1 February 2011 and was admitted to the main market of the London Stock Exchange in June 2014 (OSB.L). OSB joined the FTSE 250 index in June 2015. On 4 October 2019, OSB acquired Charter Court Financial Services Group plc (CCFS) and its subsidiary businesses. OSB is a specialist lending and retail savings Group authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority.

OneSavings Bank

OSB primarily targets market sub-sectors that offer high growth potential and attractive risk-adjusted returns in which it can take a leading position and where it has established expertise, platforms and capabilities. These include private rented sector Buy-to-Let, commercial and semi-commercial mortgages, residential development finance, bespoke and specialist residential lending, secured funding lines and asset finance.

OSB originates mortgages organically via specialist brokers and independent financial advisers through its specialist brands including Kent Reliance for Intermediaries, InterBay Commercial and Prestige Finance. It is differentiated through its use of highly skilled, bespoke underwriting and efficient operating model.

OSB is predominantly funded by retail savings originated through the long-established Kent Reliance name, which includes online and postal channels as well as a network of branches in the South East of England. Diversification of funding is currently provided by securitisation programmes, the Term Funding Scheme and the Bank of England Indexed Long-Term Repo operation.


Charter Court Financial Services Group

CCFS focuses on providing Buy-to-Let and specialist residential mortgages, mortgage servicing, administration and credit consultancy and retail savings products. It operates through its three brands – Precise Mortgages, Exact Mortgage Experts and Charter Savings Bank.

It is differentiated through risk management expertise and best-of-breed automated technology and systems, ensuring efficient processing, strong credit and collateral risk control and speed of product development and innovation. These factors have enabled strong balance sheet growth whilst maintaining high credit quality mortgage assets.

CCFS is predominantly funded by retail savings originated through its Charter Savings Bank brand. Diversification of funding is currently provided by securitisation programmes, the Term Funding Scheme and the Bank of England Indexed Long-Term Repo operation.

Important disclaimer

This document should be read in conjunction with the documents distributed by OneSavings Bank plc (OSB) through the Regulatory News Service (‘RNS’). This document is not audited and contains certain forward-looking statements, beliefs or opinions, including statements with respect to the business, strategy and plans of OSB and its current goals and expectations relating to its future financial condition, performance and results. Such forward-looking statements include, without limitation, those preceded by, followed by or that include the words ‘targets’, ‘believes’, ‘estimates’, ‘expects’, ‘aims’, ‘intends’, ‘will’, ‘may’, ‘anticipates’, ‘projects’, ‘plans’, ‘forecasts’, ‘outlook’, ‘likely’, ‘guidance’, ‘trends’, ‘future’, ‘would’, ‘could’, ‘should’ or similar expressions or negatives thereof. Statements that are not historical facts, including statements about OSB’s, its directors’ and/or management’s beliefs and expectations, are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that may or may not occur in the future. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by OSB or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in exchange rates, stock markets, inflation, deflation, interest rates and currencies; policies of the Bank of England, the European Central Bank and other G8 central banks; the ability to access sufficient sources of capital, liquidity and funding when required; changes to OSB’s credit ratings; the ability to derive cost savings; changing demographic developments, and changing customer behaviour, including consumer spending, saving and borrowing habits; changes in customer preferences; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the potential for countries to exit the European Union (the EU) or the Eurozone, and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural and other disasters, adverse weather and similar contingencies outside OSB’s control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts; geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards or practices, including as a result of an exit by the UK from the EU; regulatory capital or liquidity requirements and similar contingencies outside OSB’s control; the policies and actions of governmental or regulatory authorities in the UK, the EU or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; market relating trends and developments; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and the success of OSB in managing the risks of the foregoing.

Accordingly, no reliance may be placed on any forward-looking statement and no representation, warranty or assurance is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved.  Any forward-looking statements made in this document speak only as of the date they are made and it should not be assumed that they have been revised or updated in the light of new information of future events. Except as required by the Prudential Regulation Authority, the Financial Conduct Authority, the London Stock Exchange PLC or applicable law, OSB expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this document to reflect any change in OSB’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. For additional information on possible risks to OSB’s business, please see the “Risk Review” section of the OSB 2019 Annual Report and Accounts. Copies of this are available at www.osb.co.uk and on request from OSB.

Nothing in this document and any subsequent discussion constitutes or forms part of a public offer under any applicable law or an offer to purchase or sell any securities or financial instruments. Nor does it constitute advice or a recommendation with respect to such securities or financial instruments, or any invitation or inducement to engage in investment activity under section 21 of the Financial Services and Markets Act 2000. Past performance cannot be relied on as a guide to future performance. Nothing in this document is intended to be, or should be construed as, a quantified financial benefits statement for the purposes of Rule 28 of the City Code on Takeovers and Mergers or a profit forecast or estimate for any period.

Liability arising from anything in this document shall be governed by English law, and neither the Company nor any of its affiliates, advisors or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. Nothing in this document shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.

Certain figures contained in this document, including financial information, may have been subject to rounding adjustments and foreign exchange conversions. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this document may not conform exactly to the total figure given.

Non-IFRS performance measures                                     

OneSavings Bank believes that the non-IFRS performance measures included in this document provide valuable information to the readers as they enable the reader to identify a more consistent basis for comparing the business' performance between financial periods, and provide more detail concerning the elements of performance which the Group is most directly able to influence or are relevant for an assessment of the Group. They also reflect an important aspect of the way in which operating targets are defined and performance is monitored by OneSavings Bank’s Board. However, any non-IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well. Refer to Alternative performance measures in the Financial review for further details, reconciliations and calculations of non-IFRS performance measures included throughout this document, and the most directly comparable IFRS measures. 


Chief Executive’s Statement

I am delighted with OneSavings Bank’s achievements in 2019 and particularly pleased that we successfully completed our Combination with Charter Court Financial Services Group plc (‘CCFS’), whilst delivering strong results for the year, in both Banks. We are in the early stages of integration, however, I am pleased with progress so far and I am particularly happy to have so many talented staff from both organisations working really well together to benefit the combined Group. I am also pleased with progress to date on integration.

The logic for the Combination remains compelling: to create a leading specialist lender, focused on providing fair financial solutions to our customers, with greater scale and resources to deploy on growth opportunities.

Statutory pre-tax profit was up 14% to £209m for 2019, as a result of strong growth at attractive margins and the inclusion of CCFS’ profits from the date of Combination, more than offsetting the impact of exceptional items, integration costs and other acquisition-related adjustments. Despite the increase in profit, statutory basic earnings per share decreased by 5% to 52.6 pence per share, due to the increased share count post Combination. On a pro forma underlying basis, profit before tax and basic earnings per share increased both by 9%, due to strong growth at attractive margins and continued cost-efficiency and discipline.

Statutory net interest margin (‘NIM’) for 2019 reduced to 243bps (2018: restated 305bps1), primarily due to the dilutive impact of including CCFS’ results post Combination and the impact of the changing mix of the OSB loan book, despite broadly stable asset pricing.

The CCFS business has a lower NIM than the OSB business and statutory NIM in 2019 was also negatively impacted by the amortisation of the fair value uplift on acquisition of the CCFS loan book. The mix of the OSB loan book continued to change as the higher yielding back book refinanced onto front book pricing. The impact of this mix effect had largely run its course by the end of the first half, assuming stable mortgage pricing, cost of funds and swap spreads going forward.

On a pro forma underlying basis NIM was 266bps (2018: 286bps) and reflected the changing asset mix of the OSB loan book and marginally higher cost of funds of CCFS’ business.

Our customer-focused propositions are designed to position the Group as a credible partner of choice with intermediaries in the specialist mortgage markets in which we operate. The complementary nature of OSB’s bespoke, manual underwriting approach and CCFS’ automated risk assessment, together with strong risk management and enhanced stress testing, give us a deep understanding of our lending market segments.

We strengthened our funding model during the year as OSB returned to the securitisation market with our inaugural transaction under the self-originated Canterbury Finance programme, and CCFS successfully executed a transaction in its Buy-to-Let PMF programme. The expertise in securitisation funding and balance sheet management is a capability that has been enhanced through the Combination and demonstrates efficiency in accessing the capital markets. I am pleased that in early 2020, we had the opportunity to execute further transactions, demonstrating our agility in this market by selling notes we held from the Canterbury securitisation generating a gain on sale of c. £18m. In addition, the Group sold its entire economic interest in PMF 2020-1B resulting in a gain of £2m on a statutory basis and £15m on an underlying basis.

An award-winning secured lender
Through the Combination and underlying growth, the Group’s statutory loan book more than doubled in 2019 to £18.4bn. On a pro forma underlying basis, it grew by 16% from £15.6bn in 2018, or 23% excluding the impact of structured asset sales in CCFS.

Mortgage originations in the year were £6.5bn for the combined Group on a pro forma underlying basis. Such strong new business volumes reflect the attractiveness of our lending propositions to borrowers, particularly to professional landlords, and the excellent levels of customer service the Banks provide.

Our Buy-to-Let businesses grew in the year as landlords continued to professionalise and look for a reliable lender with specialism and expertise in lending to limited companies and portfolio landlords. Both OSB and CCFS have distinct, but complementary, propositions in their target lending market segments, meaning different customer and intermediary preferences can be satisfied, ensuring the Group can maximise its share of new originations. We intend to preserve and build on the value of OSB’s and CCFS’ individual lending brands through a multi-brand lending strategy.

OSB and CCFS have further strengthened broker networks and relationships with mortgage intermediaries in the year, especially amongst those that support borrowers with more complex needs. The Combination allows us to underwrite a wider range of customer cases than would have been possible as standalone businesses. On a pro forma underlying basis, the Group sustained its market share as industry-wide gross Buy-to-Let advances reached £41bn2 in the year.

For 2019, the Group reported under two segments; OSB and CCFS.

The OSB’s Buy-to-Let/SME sub-segment performed well during 2019, with new Buy-to-Let/SME mortgage originations of £2.8bn, as we continued to target both professional, large portfolio landlords and those investing in commercial and semi-commercial property.

Our target market of professional/multi-property landlords accounted for 81% of completions by value for OSB during 2019, with a continued high proportion of professional landlords choosing to remortgage with us as their existing mortgage reaches maturity. This performance demonstrates the success of our Choices programme and the sustainable strength of OSB’s proposition, in particular our specialist, manual underwriting, as well as our deep and historical relationships with mortgage intermediaries.

The OSB Buy-to-Let sub-segment gross loan book grew by 19% to £7,727m from £6,518m in 2018.

The commercial sub-segment of Buy-to-Let/SME, which lends through the InterBay brand had a very successful year, with the loan book reaching £888m at 31 December 2019 (2018: £548m), an increase of 62%. We used our strong understanding of this sub-segment and our investment in products, service and innovation to build a proposition that proved increasingly popular with commercial borrowers. In 2019, we further increased distribution among our intermediaries who focus more on this market sub-segment. This business lends at sensible loan to values (‘LTVs’), and generates strong returns on a risk-adjusted basis.

We continue to be cautious in our approach to asset finance, however, InterBay Asset Finance performed well in the year as we saw high-quality opportunities.

OSB’s Heritable Development Finance business provides development finance to small and medium-sized residential developers operating in areas of the UK where demand for housing is consistently strong. The business had commitments to finance the development of just over 2,000 residential units as at the end of 2019.

The Bank’s secured funding lines business in both Buy-to-Let/SME and Residential segments continued to grow, with cautious risk fundamentals applied. Total commitments have increased by 31% to £571m, with total loans outstanding of £234m. This increase was due to increased commitments with certain existing customers and three new funding lines were added during the year.

The OSB residential net loan book grew by 14% to £1,837m (2018: £1,616m) largely through increased originations, as we saw attractive opportunities in more complex prime and second charge segments and the products we introduced in 2018 continued to prove popular with our borrowers.

CCFS originated £1.9bn of new Buy-to-Let mortgages on a pro forma underlying basis, an increase of 15% from £1.6bn in 2018. This growth reflects the continuing demand, whilst maintaining a disciplined approach to underwriting. As with OSB, CCFS observed a continued trend that is supportive of professional landlords, with increased use of limited company structures and a move towards higher yielding property types. CCFS proactively improved service standards early in the year, which was well received by intermediaries. As a result, CCFS was ranked highly according to research by BVA BDRC, as the lender mortgage intermediaries are most likely to recommend to portfolio landlords.

The CCFS residential net loan book grew by 27% to £2,167m on a pro forma underlying basis, despite a small reduction in originations, as no portfolio asset sales took place in the year and there were fewer maturities in the portfolio. We focused on segments of residential lending where competitive pressure has not seen significant margin erosion, such as self-employed applicants. CCFS’ second charge originations performed strongly with an increase of 44% in the year on a pro forma underlying basis, as both products and distribution were enhanced.

CCFS bridging finance activities maintained their focus on high-quality lending in the year, and as a consequence saw strong repayments as well as originations, leading to a reduction in net loans of 12% to £214m during the full year on a pro forma underlying basis. We chose to be cautious and did not react to increased price competition during the year.

Both segments concentrate on new and existing customers, investing in and improving our sales capability across our brands. We continued to gain recognition from mortgage customers and intermediaries, and in 2019 we won multiple awards. For OSB these included Best Buy-to-Let Lender and Best Specialist Lender from Mortgage Strategy Awards. I am particularly pleased that Kent Reliance was awarded Best Specialist Lender from the UK’s largest mortgage distributor: L&G Mortgage Club. Our more specialist businesses were also recognised with Bridging Funding Partner of the Year award from Bridging and Commercial Awards. CCFS was recognised by Mortgage Introducer, being named as both Mortgage Lender of the Year and Specialist Lender of the Year.

Through OSB’s mortgage product transfer scheme, Choices, the proportion of borrowers who choose a new product within three months of their initial product ending, remained strong at around 69% by December 2019. This is driven by success in highlighting opportunities available to borrowers who might otherwise leave the Group and enables them to actively choose appropriate mortgage pricing and features.

We are excited about opportunities arising from the Combination with CCFS and continue to believe in the advantages that will come from more resilient, diversified funding platform, together with greater scale and resources. We now have a larger footprint in the UK Buy-to-Let and residential markets, with an enhanced proposition to the broker community to ensure we remain at the forefront of UK specialist mortgage lending.

Sophisticated funding model
Through the Combination with CCFS we brought together OSB’s established Kent Reliance retail deposit franchise with Charter Savings Bank’s savings deposit platform, and CCFS’ sophisticated securitisation funding and balance sheet management. These capabilities create a more resilient and diversified funding platform to support our future growth, with cost efficient funding for the combined Group.

The combined Group remained predominantly retail funded in 2019 and we had £16bn of retail deposits at the end of 2019. On a pro forma underlying basis, retail deposits were up 23% from £13bn at the end of 2018. We offer a competitive retail savings proposition, which allows the Group to raise significant funds as we require them. Over 40,000 new savings customers joined Kent Reliance in 2019 and Charter Savings Bank grew customer numbers by nearly 27,000 for the full year of 2019. Our vision remains to become our customers’ favourite bank and we continue to put our customers at the heart of everything we do. This was reflected in a retention rate of 91% amongst Kent Reliance customers with maturing fixed rate bonds and ISAs and a Net Promoter Score (‘NPS’) of +66 for the year. 97% of Charter Savings Bank’s customers had a good or excellent experience with the Bank3 and the NPS was exceptional, at +72 for 2019. Charter Savings Bank had a retention rate of 88% at the end of 2019. 

I am delighted that Kent Reliance was highly commended with Savers’ Choice Award by Savings Champion and we won Best Business Easy Access Account Provider also from Savings Champion.

CCFS won ISA Provider of the Year and Best Bank Savings Provider from Moneyfacts and Best Savings Provider from Savings Champion amongst others.

Our enhanced wholesale funding platforms enable us to maintain optionality and benefit from the potential to execute structured balance sheet management transactions across the combined Group’s enlarged balance sheet. Our track record in 2019 was impressive; CCFS successfully executed a £734m securitisation transaction of Buy-to-Let mortgages and took advantage of a strong residuals market, generating gains of £59m on three structured asset sales prior to the Combination. In July, OSB completed an inaugural transaction of £500m of organically originated Buy-to-Let mortgages.

We have further demonstrated our expertise in the securitisation market post Combination, with additional deals completed in early 2020, benefiting from high demand and attractive market pricing. In January 2020, the Group disposed of its remaining notes under the Canterbury securitisation and the notes in PMF 2020-1B. The capability and experience of CCFS in sophisticated securitisation funding and balance sheet management have been adopted across the Group and pave the way for future transactions.

Retail savings and securitisation funding were complemented in the year by the Bank of England’s funding schemes; drawdowns under the Term Funding Scheme remained unchanged for OSB and CCFS at £1.5bn and £1.1bn, respectively, and Indexed Long-Term Repo borrowings were £160m and £130m for OSB and CCFS, respectively as at 31 December 2019.

In addition, through the Combination, the Group now has access to contingent wholesale funding, with a total of up to £600m available to it through warehouse facilities, £94m of which was utilised at the year end.

Our strong and sustainable business
The Combination provides opportunities to create centres of excellence for core processes and capabilities on a best-in-class basis across OSB’s and CCFS’ existing locations in Chatham, Wolverhampton and India. This work is fully under way and we will report on progress later in the year.

The combined Group achieved a statutory cost to income ratio of 32% for the year, 29% on a pro forma underlying basis, reflecting our efficient and scalable operating platform, despite additional investment in the business, including our ongoing Internal Ratings-Based (‘IRB’) projects. We also continued with improvements to our technology infrastructure. As ever, we focus on delivering further efficiencies in the cost of running the Bank on a ‘business as usual’ basis, through continued disciplined cost management, benefits of scale and leveraging our unique operating platform in India (‘OSBI’), as well as delivering on the synergies identified due to the Combination. 

OSBI undertakes a range of primary processing services at a significantly lower cost than an equivalent UK-based operation, whilst delivering consistently high-quality service levels. I am especially pleased that we continue to achieve this whilst maintaining our focus on our customer-led vision, borne out by an increase in customer NPS to an outstanding +66 in 2019 (2018: +63).

Both OSB and CCFS are working towards IRB applications and we remain pleased with the progress made and are seeing benefits from using the enhanced risk models developed as part of the process. We remain of the view that achieving IRB will be beneficial to the Group’s capital requirements especially under the new calibrations and final IRB output floors as outlined in Basel III.

The Group continued to exercise strong diligence over loan and customer assessment. The Group’s statutory loan loss ratio of 13bps as at 31 December 2019 (2018: 10bps) includes an additional provision due to the initial recognition of expected credit losses on CCFS’ loan book and reflects an alignment of IFRS 9 modelling methodologies. It also includes the impact of a number of high-value Buy-to-Let cases in OSB having Law of Property Act (‘LPA’) receivers appointed during the first half of 2019, which attracted higher provision requirement under the IFRS 9 modelling approach. During the second half of 2019, the number of LPA appointments stabilised.

The weighted average LTV of OSB’s mortgage book remained low at 68% at the end of 2019, with an average LTV of 70% on new origination during the year. CCFS had similarly low LTVs with the overall book weighted average LTV of 70% and 71% for new origination in the year on a pro forma underlying basis.

2019 was a year of significant change for the Group and I would like to thank my colleagues for their hard work and continued commitment throughout the year. I look forward to us all working together for a successful future.

Looking forward to 2020
I am delighted that the Combination with CCFS was successfully completed and that all the hard work to achieve it did not distract the OSB and CCFS teams from continuing to develop, manage and grow the underlying businesses, achieving strong levels of originations during the year. We have made good progress to date on the integration.
       
The UK and global economies are currently experiencing unprecedented uncertainty stemming from COVID-19. Whilst we entered the year with a robust pipeline, strong application levels in our core businesses and stable margins, it is too soon to say what the impact will be and we therefore consider it imprudent to provide forward guidance for 2020.

We enter this period of uncertainty as an enlarged business with the strength of our combined lending and funding franchises, robust capital position, secured loan book and strong risk management capabilities.

Andy Golding

Chief Executive Officer

19 March 2020

1. To align calculation methods post Combination, OSB amended NIM calculation to include average interest earning assets on a 13 point average from a simple average. The comparative NIM was restated.

2. UK Finance, New and outstanding buy-to-let mortgages, 6 Feb 2020.

3. Based on the Charter Court Savings Bank Customer Satisfaction Survey conducted throughout 2019.


Operating review

Group highlights

2019 was not only a year of continued strong business performance, but also a year when we advanced on our strategic objective to create a leading specialist lender of scale in the UK, through the Combination with CCFS. The Combination provides us with the scale and resources to deploy on growth opportunities across the economic cycle, to deliver long-term value for our shareholders. We are committed to delivering on that strategy, by leveraging our complementary strengths across products, brands, distribution, underwriting, funding and team culture.

Against the backdrop of a competitive mortgage market, organic originations in 2019 proved resilient at £4.1bn on a statutory basis (2018: £3.0bn) with £0.8bn contributed by CCFS in the final three months of the year. On a pro forma underlying basis, organic originations were £6.5bn in 2019, compared with £5.9bn in 2018.

During 2019, 69% of Kent Reliance borrowers chose a new product within three months of their initial product ending, totalling £885m (2018: 69%, £722m). This performance demonstrates the success of our Choices programme.

Buy-to-Let performed strongly in both businesses, due to continued activity from professional landlords. OSB also saw exceptional growth in lending through its InterBay Commercial brand and a strong performance from its first charge residential sub-segment, where new product ranges launched in 2018 proved popular and continued to gain momentum during 2019. CCFS’ residential segment also benefited from an improved product range, with the gross loan book up 27% in the year on a pro forma underlying basis. 

During 2019, OSB’s net loan book increased by 20% to £10,785.0m (2018: £8,983.3m) and CCFS’ net loan book grew by 15% to £7,661.8m (2018: £6,661.5m), or 27% excluding the impact of structured assets sales, both on a statutory basis. The combined Group’s net loan book reached £18,446.8m by the end of 2019 on a statutory basis. Buy-to-Let comprised approximately 67% of the Group’s total gross loan book at the end of 2019.

The combined Group remained predominantly retail funded in 2019 with £16,255.0m of retail deposits on a statutory basis (2018: £8,071.9m). On a pro forma underlying basis, retail balances were up 23% from £13,166.4m as at 31 December 2018. The savings proposition offered by the Kent Reliance brand continued to be in demand, as we welcomed over 40,000 new retail customers in the year. Excellent customer service was reflected in a +66 customer Net Promoter Score and retention rate for maturing fixed term bond and ISA balances of 91% in 2019. Charter Savings Bank saw customer numbers grow by almost 27,000 during the year as savings customers continued to value the competitive interest rates and excellent customer service it provides. CCFS also achieved an exceptional Net Promoter Score of +72 and a retention rate of 88% for 2019.

Diversification of funding was provided by access to the securitisation market and Bank of England funding. Both Banks were active in the securitisation market during the year. OSB completed an inaugural transaction of c.£500m of organically originated mortgages under the Canterbury Finance RMBS programme in July 2019. CCFS successfully executed a £734m securitisation transaction of Buy-to-Let mortgages and recognised gains of £58.7m on three structured asset sales in the year, prior to the Combination. For further information on the Group’s securitisation platforms.

As at 31 December 2019, drawings under the Term Funding Scheme remained unchanged at £1.5bn for OSB and £1.1bn for CCFS. In addition, the Group had £290m of borrowings under the Bank of England’s Indexed Long-Term Repo across the two Banks at base rate +15bps, a total of 90bps, as at 31 December 2019 (2018: OSB £80m, CCFS £nil). 

Through the Combination, the Group now has access to contingent wholesale funding, with up to £600m available to it through the CCFS warehouse facilities, £94m of which were utilised at year end.

Statutory pre-tax profit was up 14% to £209.1m for 2019 (2018: restated £182.8m1), as a result of strong growth at attractive margins and the inclusion of CCFS’ profits from the date of Combination, more than offsetting the impact of exceptional items, integration costs and other acquisition-related items. On a pro forma underlying basis, profit before tax increased by 9% due to strong growth at attractive margins and continued cost efficiency and discipline.

Profitable lending and cost discipline and efficiency contributed to a return on equity of 18% on a statutory basis (2018: restated 25%2) and 25% on a pro forma underlying basis (2018: 28%).

The Group ended the year with a CET1 ratio of 16.0% (2018: 13.3%), demonstrating the strength of the capital generation capability of the business to support significant growth through profitability and the beneficial impact of the fair value uplift on CCFS’ net assets on Combination. The Group’s total capital ratio of 17.3% and leverage ratio of 6.5% remained strong (2018: 15.8% and 5.9% respectively).

1. Net interest income and profit before tax were restated as a result of the recognition of interest expense on the £22m of Perpetual Subordinated Bonds previously classified as equity.

2. To align calculation methods post Combination, OSB amended its calculation of return on equity to include average equity on a 13 point average from a simple average. The comparative return on equity ratio was restated.

Segment review

Following the Combination, the Group segmented its lending business into two segments: OSB and CCFS.

Segment review – OneSavings Bank (‘OSB’)

The following tables show the OSB segment’s statutory loans and advances and contribution to profit:

  BTL/SME
£m
Residential
 £m
Total
£m
Year ended 31-Dec-2019      
Gross loans and advances to customers 8,983.2 1,837.4 10,820.6
Provision for impairment losses (21.6) (14.0) (35.6)
Loans and advances to customers 8,961.6 1,823.4 10,785.0
       
Risk-weighted assets 4,244.0 846.0 5,090.0
       
Profit or loss for the year      
Net interest income 253.5 62.7 316.2
Other expense (8.0) (4.9) (12.9)
Total income 245.5 57.8 303.3
Impairment losses (13.8) 1.9 (11.9)
Contribution to profit 231.7 59.7 291.4
 

 
 

BTL/SME
£m
 

Residential
£m
 

Total
£m
Year ended 31-Dec-2018      
Gross loans to customers 7,389.2 1,616.0 9,005.2
Provision for impairment losses (11.0) (10.9) (21.9)
Net loans to customers 7,378.2 1,605.1 8,983.3
       
Risk weighted assets 3,453.8 758.0 4,211.8
       
Profit or loss for the year      
Net interest income1 219.5 66.8 286.3
Other expense (1.0) (4.2) (5.2)
Total income1 218.5 62.6 281.1
Impairment losses (5.7) (2.4) (8.1)
Contribution to profit1 212.8 60.2 273.0
 

 
     

1. In 2019, the Group restated the prior year comparatives to recognise interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity.


Buy-to-Let/SME

Buy-to-Let/SME sub-segment: gross loans

  Group
31-Dec-2019
£m
Group
31-Dec-2018
£m
Buy-to-Let 7,727.0 6,517.5
Commercial 888.0 547.8
Residential development 146.1 155.8
Funding lines 222.1 168.1
Total 8,983.2 7,389.2

This segment comprises Buy-to-Let mortgages secured on residential property held for investment purposes by experienced and professional landlords, commercial mortgages
secured on commercial and semi-commercial properties held for investment purposes or for owner-occupation, bridge finance, residential development finance to small and medium-sized
developers, secured funding lines to other lenders and asset finance.

The volume of new organic lending in our Buy-to-Let/SME sub-segment reached £2,847.2m in 2019, an increase of 3% on the prior year (2018: £2,769.7m). Gross loans were £8,983.2m, up 22% from £7,389.2m in 2018. The Buy-to-Let/SME net loan book represented 83% of total OSB loans as at 31 December 2019.

Gross loans in the Buy-to-Let sub-segment increased by 19% to £7,727.0m (2018: £6,517.5m) with lending mostly dominated by professional, multi-property landlords who remained at 81% of completions by value for OSB in 2019. For our Kent Reliance brand, 75% (2018: 70%) of mortgage applications were from landlords borrowing via a limited company, as recent changes to personal taxation favour structuring portfolios in this way.

Refinancing continued to represent 60% of Kent Reliance Buy-to-Let completions and five-year fixed rate mortgages were 52% (2018: 58% and 56%, respectively). This mix reflected the wider market which saw reduced purchases in 2019 and continued demand for five-year fixed rate products. Our retention programme, Choices, continued to be popular, with around 69% (2018: 69%) of existing borrowers choosing a new product with the Bank within three months of their original product ending.

The weighted average loan to value (‘LTV’) of the Buy-to-Let book as at 31 December 2019 was 73% with an average loan size of £260,000 (2018: 70% and £260,000). The weighted average interest coverage ratio for Buy-to-Let origination during 2019 was 187% (2018: restated 185%1).

2019 was an exceptional year for our InterBay business with the commercial and semi-commercial gross loan book up 62% to £888.0m (2017: £547.8m) as we continued to expand our distribution network to reach those brokers who work with borrowers with needs closely aligned to InterBay’s products. Through this brand OSB lends to borrowers investing in commercial, semi-commercial and bridging, reported in the Commercial total, and more complex Buy-to-Let properties, reported in the Buy-to-Let total. Lending was supported by the business’ core strengths in rapid and effective underwriting and our ability to deal with large and complex cases. The weighted average LTV in the commercial sub-segment remained low at 67% and the average loan size was £375,000 in 2019 (2018: 66% and £360,000, respectively).

InterBay Asset Finance, which predominantly targets UK SMEs and small corporates financing business-critical assets was launched in 2018. The gross carrying amount under finance leases was £47.7m as at 31 December 2019 (2018: £7.2m). 

Our Heritable residential development business continues to provide prudent development finance to small and medium-sized residential developers. The preference is to fund house builders who operate outside central London and provide relatively affordable family housing, as opposed to complex city centre schemes where affordability and construction cost control can be more challenging. New applications come primarily from a mixture of repeat business from the team’s extensive existing relationships and referrals.

The residential development funding gross loan book at the end of 2019 was £146.1m, with a further £115.1m committed (31 December 2018: £155.8m and £90.3m, respectively). Since inception through to the end of 2019, the business has written £1,013m of loans of which £534m have been repaid to date. The business had commitments to finance the development of just under 2,000 residential units as at the end of 2019, the majority of which are houses located outside central London.

In addition, OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as bridging finance and asset finance. Total credit- approved limits as at 31 December 2019 were £540.0m with total loans outstanding of £222.1m (31 December 2018: £385.0m and £168.1m, respectively). During 2019, three new funding lines were added and credit approved limits increased by a further £50.0m across three existing funding lines. The pipeline remains robust, however, given the macroeconomic uncertainty, the business continues to adopt a cautious approach.

Buy-to-Let/SME made a contribution to profit of £231.7m in 2019, up 9% compared with the restated value of £212.8m2 in 2018, primarily due to the growth in new lending, partially offset by higher impairment losses of £13.8m (2018: £5.7m). The increase in impairment losses was driven by an increase in the number of Law of Property Act receivers (‘LPA’) appointed in the first half of the year, which attract higher provision requirements under an IFRS 9 approach. During the second half of 2019, the LPA flow stabilised. Alignment of IFRS 9 modelling methodologies and loan book growth also contributed to the increase in loan losses.

The Group remains highly focused on the risk assessment of new lending as demonstrated by the average LTV in the Buy-to-Let/SME segment as at 31 December 2018 of 72% (31 December 2018: 70%) with only 1.8% of loans exceeding 90% LTV (31 December 2018: 0.6%). The average LTV for new Buy-to-Let/SME origination remained at 70%.

1. Interest coverage ratio was restated for 2018 from 171% to 185% due to an improvement in the calculation
methodology.
2. Net interest income and contribution to profit were restated as a result of the recognition of interest expense
on the £22m of Perpetual Subordinated Bonds previously classified as equity.


Residential mortgages

Residential sub-segment: gross loans

  Group
31-Dec-2018
£m
Group
31-Dec-2018
£m
First charge 1,466.6 1,223.9
Second charge 358.6 368.0
Funding lines 12.2 24.1
Total 1,837.4 1,616.0

This segment comprises lending to owner-occupiers, secured via either first or second charges against the residential home. The Bank also provides funding lines to non‑bank lenders who operate in high‑yielding, specialist sub‑segments such as residential bridge finance.

The Residential gross loan book was £1,837.4m as at 31 December 2019, up 14% compared with the previous year (2018: £1,616.0m) with organic originations nearly doubling in the year to £540.5m (2018: £280.1m).

OSB’s first charge gross loan book grew in the year to £1,466.6m, which was 20% up from £1,223.9m in 2018. This strong performance was largely due to new organic lending as the Bank’s ability to make quick underwriting decisions and the product range launched in 2018 proved popular with borrowers.

Our Kent Reliance brand provides bespoke first charge mortgages, typically to prime credit quality borrowers with more complex circumstances, for example, high net worth borrowers with multiple income sources and self-employed borrowers. These circumstances often preclude them from the mainstream lenders, as most favour automated decision-making over manual underwriting. The extended product range launched in 2018 also includes near-prime residential products. Kent Reliance also operates in the shared ownership sector, where borrowers buy a property in conjunction with a housing association and in 2019 the Bank’s share of this sector increased.

Our second charge mortgage brand, Prestige Finance, provides secured finance to good credit quality borrowers who are seeking a loan to raise funds without  refinancing their first charge mortgage. Competitive pressure in the second charge segment kept pricing low and OSB continued to focus on pricing for risk. The second charge residential loan book had a gross value of £358.6m as at 31 December 2019 (2018: £368.0m).

OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as residential first and second charge finance. The Bank continued to adopt a cautious approach to these more cyclical businesses given macroeconomic uncertainty. Total credit approved limits as at 31 December 2019 were £31.0m with total loans outstanding of £12.2m (2018: £51.8m and £24.1m, respectively).

Residential mortgages made a contribution to profit of £59.7m in 2019, broadly flat compared with the restated value of £60.2m1 in 2018, despite growth in the loan book, primarily due to the changing mix of the book and EIR gains on acquired portfolios in the prior year, partially offset by provision releases resulting from falling arrears levels across both first and second charge lending.

The average LTV remained low at 58% (2018: 56%) with only 3.3% of loans by value with LTVs exceeding 90% (2018: 3%). The average LTV of new residential origination during 2019 was 69% (2018: 68%).

1. Net interest income and contribution to profit were restated as a result of the recognition of interest expense
on the £22m of Perpetual Subordinated Bonds previously classified as equity.

Segment review – Charter Court Financial Services (‘CCFS’)

The CCFS segment is presented on a pro forma underlying basis which assumes that the Combination occurred on 1 January 2018 and includes 12 months of results from CCFS. It excludes acquisition-related items.

Year ended 31-Dec-2019 Buy-to-Let
£m
Residential
£m
Bridging
£m
Second charge
£m
Other1
£m
Total
pro forma
underlying
£m
Pre-acquisition profits
£m
Acquisition- related
items
£m
Total statutory
£m
 
Gross loans and advances to customers 4,748.5 2,170.8 214.4 218.6 22.1 7,374.4 - 294.7 7,669.1
Provision for impairment losses (3.5) (3.6) (0.5) (0.4) - (8.0) - 0.7 (7.3)
Loans and advances to customers 4,745.0 2,167.2 213.9 218.2 22.1 7,366.4 - 295.4 7,661.8
                   
Risk-weighted assets 2,002.4 934.0 127.9 95.4 8.4 3,168.1 - 124.9 3,293.0
                     
Profit or loss account                
Net interest income 114.3 63.6 15.5 7.1 1.7 202.2 (152.1) (21.6) 28.5
Fees and commissions income 0.1 0.2 0.1 - 3.4 3.8 (3.7) - 0.1
Fair value (losses) /gains - - - - (5.5) (5.5) 13.7 3.3 11.5
Gain on sale of loans - - - - 58.7 58.7 (58.7) - -
Total income 114.4 63.8 15.6 7.1 58.3 259.2 (200.8) (18.3) 40.1
Impairment losses (2.1) (1.7) (0.5) (0.1) - (4.4) 4.3 (3.6) (3.7)
Contribution to profit 112.3 62.1 15.1 7.0 58.3 254.8 (196.5) (21.9) 36.4


Year ended 31-Dec-2018 Buy-to-Let
£m
Residential
£m
Bridging
£m
Second charge
£m
Other1
£m
Total
pro forma
underlying
£m
Gross loans and advances to customers 4,508.3 1,707.0 244.1 184.2 21.5 6,665.1
Provision for impairment losses (1.5) (1.8) - (0.3) - (3.6)
Loans and advances to customers 4,506.8 1,705.2 244.1 183.9 21.5 6,661.5
             
Risk-weighted assets 1,789.2 685.4 141.6 74.0 7.5 2,697.7
             
Profit or loss account            
Net interest income 104.6 54.5 15.0 6.4 - 180.5
Fees and commissions income 1.9 2.2 0.2 0.3 3.4 8.0
Gain on sale of loans - - - - 36.4 36.4
Total income 106.5 56.7 15.2 6.7 39.8 224.9
Impairment losses (0.8) (1.1) (0.2) - (2.1)
Contribution to profit 105.7 55.6 15.2 6.5 39.8 222.8

1. Other relates to the net interest income from acquired loan portfolios and fee income from third party mortgage servicing.

CCFS gross loans

  Group
31-Dec-2019
£m
Group
31-Dec-2018
£m
Buy-to-Let 4,748.5 4,508.3
Residential 2,170.8 1,707.0
Bridging 214.4 244.1
Second charge 218.6 184.2
Other1 22.1 21.5
Total 7,374.4 6,665.1

1. Other relates to the net interest income from acquired loan portfolios and fee income from third party mortgage servicing.

Charter Court Financial Services targets underserved specialist mortgage market segments with a focus on specialist Buy-to-Let, residential, bridging and second charge lending.

The CCFS gross loan book grew 11% to £7,374.4m at the end of 2019 (2018: £6,665.1m). Excluding the impact of structured asset sales, the gross loan book would have been £8,491.9m, 27% higher than in 2018. This growth was supported by organic originations of £3,108.2m at attractive margins (2018: £2,846.1m).

Buy-to-Let sub-segment
During 2019, CCFS’ organic originations in the Buy-to-Let sub-segment were £1,895.2m, an increase of £253.2m versus the prior year (2018: £1,642.0m). The growth reflects continuing demand for the Group’s specialist lending proposition. The net loan book increased 5% in the year to £4,745.0m after structured asset sales and on a pro forma underlying basis, Buy-to-Let mortgages represented 64% of CCFS’ total net loan book.

All CCFS’ Buy-to-Let products proved popular with borrowers, especially with those investing via limited companies, which increased 21% in the year, and those investing in specialist property types including houses of multiple occupation, multi-unit properties and holiday lets which increased 63% in 2019.

In 2019, CCFS enhanced its product range which enabled it to grow in the specialist Buy-to-Let market segments. The Precise branded Buy-to-Let product mix became more diverse during the year, with particular growth in shorter-term fixed rate products, following the introduction of a top slicing proposition for landlords with excess income to contribute towards a stressed affordability assessment. This resulted in a fall in five-year fixed rate products as a percentage of total Buy-to-Let originations to 72% from 77% in 2018.

The business maintained its position in the BVA BDRC’s Project Mercury rankings (effectiveness of lenders intermediary marketing) as the fourth most frequently mentioned lender by intermediaries for Buy-to-Let, reflecting CCFS’ broad product offering across the Buy-to-Let segment.

On a pro forma underlying basis, Buy-to-Let made a contribution to profit of £112.3m in 2019, up 6% compared with £105.7m in 2018. Net interest income increased 9% to £114.3m and fees and commissions income reduced  due to early repayment charges being included in net interest income and not in fees and commisions as in 2018 following an accounting policy change. The increase in impairment losses in 2019 was primarily driven by alignment in
IFRS 9 modelling methodologies post Combination.

On a statutory basis, the Buy-to-Let sub-segment made a contribution to profit of £12.3m.

New lending average loan to value in this segment was 73% with an average loan size of £183,000 (2018: 74% and £169,000). The book loan to value was 71% as at 31 December 2019 (2018: 73%). The weighted average interest coverage ratio for Buy-to-Let origination during 2019 was 202% (2018: 201%).

Residential sub-segment
CCFS’ specialist residential lending decreased in 2019 compared with 2018 albeit still at a high level, with new originations down 3% to £797.2m (2018: £825.4m). CCFS concentrated on lending in areas that had stronger risk-adjusted returns versus mainstream markets, where intense competition reduced residential mortgage rates. The Help to Buy proposition continued to perform particularly well and focus on self-employed borrowers led to an increase in the residential gross loan book of 27% to £2,170.8m in the year.

In 2019, CCFS enhanced its residential proposition with new products targeting zero-hour contracts, Help to Buy in Scotland and Help to Buy remortgages. The Group continues to maintain a strong new product pipeline to support its growth in the specialist residential segment going forward.

The average loan size for the residential sub-segment was £159,000 (2018: £152,000) with average LTV for new lending of 71% (2018: 72%) and book LTV of 67% (2018: 70%) as at 31 December 2019.

On a pro forma underlying basis, residential mortgages represented 28% of CCFS’ total net loan book as at 31 December 2019.

The residential sub-segment made a contribution to profit of £62.1m on a pro forma underlying basis, up 12% compared with £55.6m in 2018 reflecting growth in the loan book partially offset by higher impairment losses due to loan book growth and alignment in IFRS 9 modelling methodologies post Combination.

On a statutory basis, the Residential sub-segment made a contribution to profit of £9.2m.

Bridging sub-segment
Short-term bridging originations increased by 4% in 2019, reaching £333.7m (2018: £321.8m). The business maintained its focus on high-quality lending in regulated and unregulated markets, rather than reacting to increased competition in the short-term lending market. Strong repayments during the year saw the gross loan book reduce to £214.4m compared with £244.1m at the end of 2018.

The Standard and Refurbishment segments both increased along with the Regulated and Non-Regulated segments. The Non-Regulated and Refurbishment segments saw the strongest growth, boosted by the launch of CCFS’ Refurbishment Buy-to-Let product at the end of 2018. These products require strong combined Buy-to-Let and bridging capability, areas of strength for CCFS. In addition, CCFS enhanced its distribution by expanding its reach to direct brokers.

On a pro forma underlying basis, the bridging sub-segment made a contribution to profit of £15.1m in 2019, broadly flat compared with £15.2m in 2018 despite higher impairment losses of £0.5m (2018: £nil) due to IFRS 9 modelling enhancements made during 2019.

On a statutory basis, the bridging sub-segment made a contribution to Group’s profit of £3.4m.

Second charge sub-segment
The second charge gross loan book increased by 19% to £218.6m (2018: £184.2m), supported by strong originations of £82.2m, which were up 44% on 2018.

During the year, CCFS enhanced its product offering and distribution network, whilst maintaining its focus on the quality of lending in this segment.

In response to market feedback, from early 2019, CCFS removed early repayment charges in its residential second charge product range. This brought a significant increase in applications. Distribution was also enhanced in the year, with a focus on direct-to-broker business through major networks and panels, which provides the business with a competitive advantage over smaller players, which generally deal through master brokers.

The second charge sub-segment made a contribution to profit of £7.0m on a pro forma underlying basis, up 8% compared with £6.5m in 2018.

On a statutory basis, the contribution to profit from the second charge sub-segment was a loss of £0.1m as net interest income was more than offset by higher impairment losses.

Wholesale funding overview

Securitisation is a key strategic funding source for the combined Group, with historical issuances across CCFS and OSB since 2013 of £5.7bn.

As well as providing cost-efficient funding through securitisation, the Group has benefited from the capability to accelerate organic capital generation through the sale of residual positions. The Group’s strategy is to be nimble and dynamic rather than deterministic with its securitisation issuance plans, enabling it to take advantage of a strong market with repeat issuances, and utilise other options when market conditions are less favourable. To that end, the Group’s activities in the wholesale markets during 2019 were more limited than was the case during the equivalent period in 2018. The ongoing uncertainty around negotiations of the UK’s exit from the European Union continued to hamper UK residential mortgage-backed securities market (‘RMBS’), with spreads tracking relatively wide throughout the year, as they had through the last few months of 2018.

The introduction of a raft of regulatory changes at the beginning of 2019, together with the market transitioning away from LIBOR as an index, also acted as a brake on new issue supply, particularly during the first quarter of 2019.

Nonetheless, the Group was able to complete a number of strategically important wholesale transactions during the year. In January 2019, despite facing a difficult political backdrop, CCFS was able to sell its residual interest in the PMF 2018-1B and PMF 2018-2B transactions, generating a gain on sale of £29.8m, equivalent to a 5.3% premium on the underlying £564.3m of mortgage assets. This excellent outcome was made possible through the earlier strategic sales of significant components of CCFS’ residual interest in these transactions through 2018, at a time when the market was notably stronger. This strategy minimised the market exposure faced by CCFS when selling its final residual positions in these transactions in January 2019. The trade enabled CCFS to increase its capital headroom and provide the capital capacity to fully take advantage of the commercial opportunities available to the business through its lending activities during the year.

CCFS re-entered the debt securitisation market in May 2019 with the PMF 2019-1B transaction, securitising £733.7m of prime Buy-to-Let mortgages. PMF 2019-1B was the first SONIA-linked UK RMBS transaction to issue mezzanine notes referencing the index, and was well received by the market. The senior fast-pay notes in the transaction were sold at SONIA plus 93bps, equivalent to a spread over LIBOR of c. 80bps; on that basis the tightest such UK Buy-to-Let securitisation achieved by any issuer in 2019.

In July 2019, CCFS sold its remaining junior residual interest in the transaction to generate a further gain on sale of £28.8m, bringing the total gains from such transactions for the year to £58.7m.

In July 2019, OSB issued its inaugural RMBS transaction of own-originated Buy-to-Let mortgage assets, Canterbury Finance No.1. The transaction was well received, with senior funding in the order of SONIA plus 117bps achieved across the £200m of senior notes placed.

In addition to providing the Group with attractively priced term funding, both the PMF and Canterbury transactions were structured in such a way as to provide the Group with a significant portfolio of retained senior bonds. These enhance the contingent funding options available to the Group, and can be used to access commercial as well as central bank repo facilities.

The PMF transaction also enabled CCFS to refinance assets held on its committed warehouse facility. The facility, which provides committed senior finance of up to £350m (31 December 2018: £350m for CCFS only) against both prime residential and Buy-to-Let mortgage assets, was extended during the year for a further 15 months. In combination with a second facility available for such purposes, on a statutory basis, the Group had a total of up to £600m (31 December 2018: £nil) of contingent wholesale funding capacity available to it through its warehouse facilities, £94m of which was utilised at the year end.

The Group maintains commercial repo lines with eight counterparties, as well as the ability to access ordinary course central bank funding facilities, such as the Bank of England’s Indexed Long-Term Repo auctions.


Financial review

Summary statutory results for 2019 and 2018

                                                Restated 1
Group                                      Group
31/12/2019                                31/12/2018
Summary Profit or Loss                                   £m                                           £m

Net interest income                                            344.7                                        286.3
Net losses on financial instruments                    (3.4)                                          (5.2)
Net fees and commissions                                2.2                                            0.6
External servicing fees                                      (0.1)                                          (0.6)
Administrative expenses                                    (108.7)                                      (79.6)
Provisions                                                        -                                               (0.8)
Impairment losses                                             (15.6)                                        (8.1)
Gain on Combination with CCFS            10.8                                          -
Integration costs                                               (5.2)                                          -
Exceptional items                                              (15.6)                                        (9.8)
Profit before taxation                                        209.1                                        182.8
Profit after taxation                                           158.8                                        139.6

Key ratios 
Net interest margin2                                           243bps                                    305bps
Cost to income ratio                                          32%                                          28%
Management expense ratio3                               0.76%                                       0.84%
Loan loss ratio2                                                 0.13%                                       0.10%
Basic EPS, pence per share                              52.6                                          55.5
Return on equity2                                               18%                                          25%
Dividend per share, pence per share                  16.1                                          14.6

Extracts from the Statement of Financial Position

£m                                           £m

Loans and advances                                         18,446.8                                    8,983.3
Retail deposits                                                  16,255.0                                    8,071.9
Total assets                                                       21,417.1                                   10,460.2

Key ratios                                                        

Common equity tier 1 ratio4                                16.0%                                       13.3%
Total capital ratio                                               17.3%                                       15.8%
Leverage ratio                                                     6.5%                                         5.9%

1.  The Group restated the prior year comparatives to recognise interest expense and taxation on the £22m Perpetual
Subordinated Bonds previously classified as equity.
2. To align calculation methods post Combination, OSB amended the NIM, loan loss ratio and return on equity
calculations to include average interest earning assets for NIM, average gross loans for loan loss ratio and average
shareholders equity for return on equity on a 13 point average rather than a simple average. The comparative ratios
were restated.
3. Administrative expenses as a percentage of 13 point average of total assets.
4. Fully-loaded under Basel III/CRD IV.

Strong profit growth
The Group reported 14% growth in statutory profit before taxation to £209.1m (2018: restated £182.8m1) after exceptional items, integration costs and other acquisition-related items of £33.2m2 (2018: exceptional cost of Heritable option of £9.8m) and including £28.0m of profit before taxation from the CCFS business, after exceptional transaction costs of £15.7m.

Statutory profit after taxation in 2019 increased by 14% to £158.8m (2018: restated £139.6m1) including the after tax exceptional items, integration costs and other acquisition-related items of £27.4m2 (2018: exceptional cost of Heritable option of £7.2m) and including £24.8m of profit after taxation from the CCFS business, after post tax pre-combination transaction costs of £15.5m.

The Group’s effective tax rate was 22.8%3 in 2019 (2018: 23.7%), primarily due to a lower proportion of the Group’s profits being subject to the Bank Corporation Tax Surcharge.

Statutory return on equity for 2019 fell to 18% (2018: restated 25%4), primarily due to exceptional items, integration costs and other acquisition-related items. Statutory basic earnings per share fell by 5% to 52.6 pence per share (2018: 55.5 pence per share), due to the 14% increase in profit after taxation being more than offset by the impact of the additional shares issued for the all-share Combination with CCFS.

Net interest margin (‘NIM’)
The Group reported an increase in net interest income of 20% to £344.7m in 2019 (2018: restated £286.3m1), reflecting strong growth in the loan book and the inclusion of CCFS’ net interest income post Combination.

Net interest income included effective interest rate (‘EIR’) reset gains of £5.0m in 2019 (2018: £5.6m) due to assuming a period spent on standard variable rate (‘SVR’) on additional products, as behavioural trends emerged, and cash out-performance on purchased mortgage portfolios.

Statutory NIM for 2019 reduced to 243bps (2018: restated 305bps1, 4), primarily due to the dilutive impact of including CCFS’ results post Combination and the impact of the changing mix of the OSB loan book, despite broadly stable asset pricing.

The CCFS business has a lower NIM than the OSB business and statutory NIM in 2019 was also negatively impacted by the amortisation of the fair value uplift on acquisition of the CCFS loan book.

The mix of the OSB loan book continued to change as the higher-yielding back book refinanced onto front book pricing. The impact of this mix effect had largely run its course by the end of the first half, assuming stable mortgage pricing, cost of funds and swap spreads going forward.

Losses on financial instruments
The statutory fair value loss on financial instruments in 2019 of £3.4m (2018: £5.2m) includes a net loss of £1.3m from the Group’s hedging activities (2018: £0.3m net loss), £5.5m amortisation of fair value adjustments on hedged assets relating to cancelled swaps (2018: £4.6m) and a gain of £3.3m due to acquisition-related inception adjustments under hedge accounting.

The net gain on hedging activities includes a loss of £4.8m in respect of the ineffective portion of hedges and net gains on unmatched swaps of £3.5m (2018: £2.7m loss and £2.4m gain respectively). The net gains on unmatched swaps, which primarily relate to mortgage pipeline hedges, include the impact of gains in CCFS post Combination due to movements in the LIBOR curve.

The amortisation of fair value adjustments on hedged assets in both years, includes the impact of accelerating the amortisation in line with the run-off of the underlying legacy long-term fixed rate mortgages, due to faster than expected prepayments.

Net fees and commission
Statutory net fees and commission income of £2.2m (2018: £0.6m) comprised fees and commission receivable of £3.4m (2018: £1.7m) partially offset by commission expense of £1.2m (2018: £1.1m).

Fees and commissions receivable doubled in the year mostly as a result of the inclusion of £1.5m of fees and commissions from CCFS.

Fees and commissions payable in 2019 remained broadly flat and related to branch agency fees and commissions paid to the Kent Reliance Provident Society for conducting member engagement activities for OSB.

Efficient and scalable operating platform
Statutory administrative expenses were up 37% to £108.7m in 2019 (2018: £79.6m), due to growth in the balance sheet and the inclusion of £19.2m of CCFS administrative expenses post Combination.

The Group’s statutory cost to income ratio of 32% (2018: 28%) was impacted by the acquisition-related adjustments which reduced total income on a statutory basis and the inclusion of CCFS income and administrative expenses post Combination.

The management expense ratio was 0.76% (2018: 0.84%) reflecting cost efficiencies in the day to day running of the Group on a business as usual basis and further economies of scale, despite continued investment in the business.

Provisions
Statutory regulatory provisions were £nil in 2019 as the provision expense was fully offset by an FSCS refund.  

In 2018, regulatory provisions were £0.8m and included levies due to Financial Services Compensation Scheme and other regulatory provisions on acquired books.

Impairment losses
Statutory impairment losses increased to £15.6m in 2019 (2018: £8.1m) representing 13bps on average gross loans and advances (2018: 10bps).

Impairment losses included a provision relating to the initial recognition of expected credit losses on the CCFS portfolios of £3.6m and the impact of aligning IFRS 9 provision methodologies post Combination. Impairment losses were also impacted by a number of high-value Buy-to-Let cases in OSB having Law of Property Act (‘LPA’) receivers appointed during the first half of 2019, which attracted a higher provision requirement under an IFRS 9 modelling approach. During the second half of 2019, the number of LPA appointments stabilised.

Gain on Combination with CCFS
The Group recorded a gain of £10.8m which represents negative goodwill on the Combination with CCFS. Negative goodwill arose as a result of a decrease in the OSB share price between announcement and completion dates and an increase in the fair value of the loan book acquired due to movements in the LIBOR curve between announcement and completion. For more information, see note 4 to the Financial statements.

Integration costs
There were £5.2m of integration costs incurred in 2019 post completion of the Combination.

Exceptional items
Statutory exceptional items of £15.6m in 2019 comprise transaction costs incurred by OSB in relation to the Combination with CCFS.

The exceptional item of £9.8m in 2018, related to the fair value of the Heritable option.

Dividend
The Board recommends a final dividend for 2019 of 11.2 pence per share. Together with the 2019 interim dividend of 4.9 pence per share and the pre-Combination CCFS interim dividend of 4.3 pence per share, this represents 25% of pro forma underlying profit attributable to ordinary shareholders. For calculation of 2019 final dividend, see Appendix.

The proposed final dividend will be paid on 13 May 2020, subject to approval at the AGM on 7 May 2020, with an ex-dividend date of 26 March 2020 and a record date of 27 March 2020.

Balance sheet growth
Net loans and advances to customers more than doubled in 2019 to £18,446.8m (31 December 2018: £8,983.3m) on a statutory basis, reflecting strong gross originations and the inclusion of the CCFS loan book.

Retail deposits increased to £16,255.0m from £8,071.9m in 2018 on a statutory basis, commensurate with the growth in the loan book.

Drawings under the Term Funding Scheme (‘TFS’) increased from £1.5bn to £2.6bn for the Group, due to the inclusion of CCFS’ drawings of £1.1bn. 

The TFS drawdowns are offered in the form of collateralised cash loans. The scheme closed to new drawings at the end of February 2018 and the Group has four years from the date of drawing to repay the existing loans.

The Group also took the opportunity to complement its retail and TFS funding in 2019 with further borrowing under the Bank of England’s Indexed Long-Term Repo scheme (‘ILTR’) which is an auction with borrowings offered as a collateralised cash loan repayable in six months. At 31 December 2019, the Group had £290.0m (2018: £80.0m) of borrowings under the ILTR scheme at base rate +15bps, a total of 90bps

The Group had up to £600m (2018: £nil) of contingent wholesale funding capacity available to it through the CCFS warehouse facilities, £94m of which was utilised at the year end.

The Group also utilises sophisticated securitisation platforms to complement its funding requirements.

Liquidity
Both OSB and CCFS operate under the Prudential Regulation Authority’s liquidity regime and are managed separately for liquidity risk. Both Banks hold their own significant liquidity buffer of liquidity coverage ratio (‘LCR’) eligible high-quality liquid assets (‘HQLA’).

As at 31 December 2019, OSB had £1,231.8m (2018: £1,354.6m) and CCFS had £1,077.3m (2018: £868.3m) of HQLA LCR eligible assets. CCFS also held a £186.2m (2018: £131.9m) portfolio of RMBS qualifying as Bank of England level 3 collateral.

Both Banks operate within a target liquidity runway in excess of the minimum LCR regulatory requirement, which is based on internal stress testing. Both Banks have a range of contingent liquidity and funding options available for possible stress periods.

As at 31 December 2019, OSB had a liquidity coverage ratio of 199% (2018: 224%) and CCFS 145% (2018: 173%), both significantly in excess of the 2019 regulatory minimum of 100%.

Capital
The Group’s fully-loaded CET1 capital ratio under CRD IV strengthened to 16.0% as at 31 December 2019 (31 December 2018: 13.3%), demonstrating the strong organic capital generation capability of the business to support significant growth through profitability and the beneficial impact of the fair value uplift on CCFS’ net assets on acquisition.

The Group had a total capital ratio of 17.3% and a leverage ratio of 6.5% as at 31 December 2019 (31 December 2018: 15.8% and 5.9% respectively).

The combined Group had a Pillar 2a requirement of 1.67% of risk-weighted assets (excluding a static integration add-on) as at 31 December 2019 (31 December 2018: 1.1% for OSB only).

Summary cash flow statement

   

Group
31-Dec-2019
£m
Restated1
Group
31-Dec-2018
£m
Profit before tax 209.1 182.8
Net cash generated/(used in):  

a d v e r t i s e m e n t