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Paragon Banking Grp (PAG)

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Tuesday 08 June, 2021

Paragon Banking Grp

Half-year Report

RNS Number : 0910B
Paragon Banking Group PLC
08 June 2021
 

Under Stock Exchange Embargo Until 7.00am, Tuesday 8 June 2021

 

Strategic progress delivers record profits and strong new business pipelines

Paragon Banking Group PLC ('Paragon' or the 'Group'), the specialist banking group, today announces its half-year results for the six months ended 31 March 2021.

 

Nigel Terrington, Chief Executive of Paragon said:

"I am incredibly proud of these results. They reflect the hard work of our people during a challenging period as well as the success of our longstanding strategy to build a technology-enabled specialist banking group. We have delivered record half-year profits and go into the second half of 2021 with strong momentum, healthy new business pipelines and enhanced margins.

Our people continue to excel, maintaining both productivity and flexibility as we look to develop options for the future operating model of the Group. We look forward to the second half with strong capital ratios, prudent liquidity and with growing confidence as the UK emerges from the Covid crisis."

 

Financial highlights:

· Underlying profits increased 44.9% to a record high at the half-year of £82.9 million*

· Statutory profit before tax up 68.8% at £96.4 million (2020 H1: £57.1 million)

· Structural NIM enhancement resumed, up 3 basis points year-on-year to 232 basis points

· Underlying EPS increased 43.2% to 25.2 pence, while statutory EPS increased 66.5%*

· Capital base strengthened - CET1 now 16.0% (2020 H1: 14.4%)

· Impairment coverage ratio remains at 64 basis points, supported by higher post‑model adjustments

· Interim dividend declared at 7.2p, being 50% of 2020's final dividend, in line with policy (2020 H1: nil)

· Share buy-back of up to £40.0 million announced

Operational highlights:

· New lending levels up 45.1% from H2 2020, now just below pre-pandemic run-rate

· Strong new business pipelines support momentum into the second half:

Buy-to-let pipeline up 17.3% from March 2020 at £0.93 billion

Development finance pipeline up 65.2% from March 2020 at £0.32 billion

· Retail savings deposits up 24.9% to £8.6 billion (2020 H1: £6.9 billion)

· First UK bank to issue a Green Capital Bond, replacing existing Tier-2 Bond. Total Capital Ratio 18.2% (2020 H1: 16.7%)

· Covid-related payment holidays reduced to negligible levels

· Further progress in digital platform change programme

* For underlying basis, see Appendix A

For further information, please contact:

Paragon Banking Group PLC
Nigel Terrington, Chief Executive
Richard Woodman, Chief Financial Officer
Tel: 0121 712 2000

 

Headland
Lucy Legh - 0778 857 7637
Del Jones - 0789 407 7816

 

The Group will be holding a meeting for sell-side analysts on 8 June 2021 at 9:30am, a recording of which will be available on the Group's website at www.paragonbankinggroup.co.uk/investors from 2:00pm. The presentation material will be available on the website from 7:00am on the same day.

 

Cautionary statement

Your attention is drawn to the cautionary statement set out at the end of this document.

 

 

 

 


Paragon Banking Group PLC

OVERVIEW AND OUTLOOK

Overview

The six months to March 2021 saw a strong recovery in our trading volumes following the Covid-driven reductions in the second half of 2020, with the business trading efficiently through the latest lockdowns and restrictions. Volumes have increased, margins widened, and impairment charges reduced during the period. The Group's NIM has been widening over a number of years due to a changing business mix, stable yields and a developing savings deposit franchise. The loan portfolio has demonstrated strong resilience, but despite this, uncertainties remain about the prospects for SMEs and retail customers once Government Covid support schemes are unwound. The Group has therefore taken a prudent approach and as such impairment coverage levels have been maintained. Notwithstanding this continued cautious approach, the six months to March 2021 generated our highest ever interim operating profit.

 

Financial performance

Underlying profits (Appendix A) increased by 44.9% from £57.2 million in 2020 to £82.9 million in 2021. Total income rose 3.3%, net interest margin increased by 3 basis points to 232 basis points and costs increased by 5.3%. The higher share price has led to a normalisation of accruals for share-based remuneration which had been significantly reduced by Covid-related impacts last year.

Impairment coverage ratios remain at their 2020 year-end level (64 basis points), despite improvements in underlying modelled results. The approach to making post-model adjustments ('PMAs') to our IFRS 9 models has remained unchanged from the 2020 year-end position, however, an additional overlay has been added to reflect continued uncertainties. This resulted in an impairment charge of £6.0 million for the period, which compares to £30.0 million in the same period in 2020. The Board will keep the IFRS 9 models, PMAs and scenario weightings under review as the macro-economic position reflects the nature of the UK's emergence from the Covid period.

Fair value movements, which tend to zero over time, contributed a £13.5 million gain in the period, taking reported profit before tax to £96.4 million (68.8% higher than in 2020 H1).

 

Operational highlights

Whilst not fully recovering to pre-Covid levels, originations across the Group rose by 45.1% from their second half 2020 levels to £1.13 billion (2020 H1: £1.27 billion). Despite our risk appetite remaining tighter than pre-Covid levels throughout the six months, the period closed with strong new business pipelines in buy-to-let and development finance. These, coupled with a normalisation of risk appetites after the period end, support continued and increasing momentum into the second half.

Buy-to-let advances were 5.0% lower than the first half of 2020 at £714.9 million, although were 57.8% up on the second half of that year, with the period end pipeline rising 17.3% from its March 2020 level to £926.7 million.

Our buy-to-let portfolio increased by 4.7% year-on-year to £10.9 billion as redemptions fell 8.6% to £359.2 million, representing an annualised attrition rate of 6.8% (2020 H1: 7.8%) as customer retention rates continued to improve.

Within the Commercial Lending division, motor, SME and structured lending volumes all fell year‑on‑year as they adapted to the pandemic in different ways. Development finance, which was less affected by the lockdowns, saw volumes grow 16.0% to £229.5 million and had a strong pipeline at 31 March 2021.

 

Credit and payment holidays

We have seen no material arrears or write-off changes in our various business lines since the 2020 year end and each portfolio is demonstrating improved behavioural scores when compared to March 2020. Approximately £40 million of customer balances remain subject to payment holidays, compared to £2.5 billion at the peak in 2020. The loan-to-value position of the buy-to-let portfolio continues to improve, reflecting strong house price appreciation since September 2020. The average loan-to-value has fallen to 64.4% from 67.7% in March 2020 and the loans with balances above 80% now represent just 2.9% of the book compared to 8.6% a year earlier.

 

Capital and funding

Paragon's strong savings deposit growth has been maintained, at increasingly attractive pricing, underpinning the margin improvement in the period and fully unwinding the adverse impacts of the 2020 base rate reductions. We remain excited about the development of the savings franchise and our potential to reduce the premium paid for deposit costs relative to the big UK banks.

We have also continued to refinance our legacy securitisations and fully retain new transactions, utilising the collateral created to support drawings on the Bank of England's TFSME programme. At the same time the original TFS drawings have largely been refinanced.

In March 2021, Fitch reaffirmed our corporate rating at BBB, and we were the first UK bank to see Fitch remove the negative watch comment. This had been added for all UK banks at the onset of the Covid pandemic.

During March, we became the first UK bank to issue a Green Capital Bond, demonstrating our commitment to sustainable finance. This replaced our existing Tier-2 Bond, which reaches its call date in September 2021. We believe the 2.875% reduction in the interest rate provides good evidence of the debt markets' increased confidence in our franchise, risk, diversification and strong financial position.

In addition to the recovery in earnings growth, a reduction in the deficit on our defined benefit pension scheme and risk weight reductions from refinancing legacy securitisations have also contributed to an increase in our CET1 ratio to 16.0% (2020 H1: 14.4%). Our total capital ratio has increased to 18.2%, and both ratios reflect an accrual for a 7.2 pence per share interim dividend, being half the level of the final dividend for 2020. This capital strength has also supported our decision to announce a share buy-back of up to £40.0 million.

During the period we received the outcome from the 2020 capital review process ('C-SREP') undertaken by the PRA, which saw our Pillar 2A requirement falling to 0.86% at 31 March 2021 (31 March 2020: 2.96%). The surplus over our regulatory capital requirement exceeded £0.4 billion at the period end.

Our IRB process continues, with the Phase 2 documents for our buy-to-let application currently with the PRA for review.

 

Operational management

Whilst our people have largely worked from home during the reporting period, we have started a number of pilot exercises to determine the best way for Paragon to operate in the future, aimed at optimising the relationship between flexibility for our people and operational control and efficiency. We do not believe there will be a one-size-fits-all solution, and plan to update the market on our progress with our full-year results announcement.

 

Sustainability

In addition to issuing our first Green Bond and embedding its associated reporting framework, we have made further progress in rolling out sustainable products during the period. These initially focus on our largest asset class, buy-to-let, and include initiatives such as further advances for improving energy efficiency in homes in the private rented sector and increasing loan-to-value limits for the most efficient properties.

 

Technology

To support our growing business franchises, the Group has commenced a multi-year series of incremental development programmes to significantly enhance customer and intermediary engagement, thereby improving accessibility. In our retail deposit operation, we on-boarded the Mambu system during the period. This provides a digital cloud-based capability that we will use to supplement our existing systems and provide optionality as the savings market becomes increasingly digitised. Our replacement digital SME origination system is currently operating in pilot-mode, and we anticipate a full roll-out of this tech-enabled approach later in the year, together with upgraded development finance systems. The delivery of business-improving change projects, alongside growing organic activity, is a testament to the efforts and capabilities of our people. Investment in new digital capabilities to improve the customer journey and experience, as well as improving efficiency and enhancing decision-making processes, forms a crucial element of our strategy.

 

Outlook

The strong performance in the first half of the year reflects the resilience of the business model both financially and operationally as the economy recovers from the Covid pandemic, with the Group being prudently provisioned should further macro shocks occur. The markets in which we operate have seen healthy quarter-on-quarter improvements in activity and our business has been building momentum, whilst maintaining our traditional prudent risk appetite. The Group has a strong capital base, high levels of liquidity and is well-positioned to capitalise on any opportunities that may emerge in the future. The Group is prudently managed and we continue to explore opportunities to develop the business further, building on the established strategy of a diversified and increasingly technology‑enabled specialist bank.


Paragon Banking Group PLC

INTERIM MANAGEMENT REPORT

1.  BUSINESS REVIEW

The Group's operations are organised into three divisions, based on product types and origination and servicing capabilities. Customer loan balances at 31 March 2021 and advances in the period for each of those divisions are summarised below:

 

Advances
in the period

Loans to customers
at the period end

 

Six months ended

Six months ended

Year

ended

 

 

 

 

31 March

2021

31 March

2020

30 September
2020

31 March

2021

31 March

2020

30 September
2020

 

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

Mortgage Lending

724.6

792.8

1,259.7

11,130.6

10,676.1

10,819.5

Commercial Lending

401.7

481.3

790.8

1,427.1

1,494.3

1,514.8

Idem Capital

-

-

-

258.6

335.7

297.1

 

1,126.3

1,274.1

2,050.5

12,816.3

12,506.1

12,631.4

The first six months of the financial year have seen a 1.5% growth in the total loan book with a 2.5% year-on-year increase. This increase was despite the continuing impact of Covid on the UK economy. New advances were lower than their level in the comparative period but saw a 45.1% increase compared to the second half of the 2020 financial year as the impacts of the pandemic began to ease.

 

1.1  MORTGAGE LENDING

The core products of the Group's Mortgage Lending division are buy-to-let residential property mortgages, targeted at specialist landlords in the UK. During the period the Group also offered limited numbers of owner-occupied first and second charge mortgages on residential property. However, following the period end it withdrew from the second charge market entirely, to increase its buy-to-let focus. In all its offerings, the Group targets niche markets where its focus on detailed case-by-case underwriting and its robust and informed approach to property risk differentiate it from both mass market and other specialist lenders.

 

Housing and mortgage market

During the period the UK housing market continued to be impacted by the Covid pandemic and the associated relief schemes including payment holidays, effective prohibitions on some forms of enforcement action and the continuing availability of stamp duty holidays, which were extended until June 2021 in the March 2021 budget. While the period over which payment holidays were available was extended, the maximum relief was capped at six months and the impact of such holidays began to reduce as borrowers reached their maximum allocation. Lockdowns and social distancing requirements also put practical constraints on the operation of the housing market.

Despite this adverse climate, transaction volumes improved considerably with HM Land Registry reporting 775,000 residential property transactions in the six months, compared to 416,000 in the preceding half year. At the extreme, April 2020 saw 37,000 transactions, which had increased to 181,000 in March 2021. In their March 2021 Residential Market Survey RICS also note increased activity levels in the market and a positive outlook for property sales.

House prices rose steadily in the period, in contrast to the previous expectations of some forecasters, with the Nationwide House Price Index recording a year-on-year improvement of 5.7% to March 2021. Both Nationwide and RICS are forecasting continuing growth in the short term, although some caution remains as to the medium-term outlook as reliefs unwind.

This pattern was reflected in the mortgage market, where the Bank of England reported new approvals of £157.7 billion in the six months ended 31 March 2021, a substantial increase on the £111.7 billion reported for the previous six months. Particularly high volumes were reported in the last quarter of the 2020 calendar year as the transaction backlog from the summer lockdown worked through the system.

Across the mortgage market arrears and possessions reported by UK Finance ('UKF') remain at historically low levels, with the continuing availability of Covid reliefs helping mortgage holders to avoid financial distress. Based on their research, published in May 2021, UKF have concluded that the availability of payment holidays has fulfilled the purpose of enabling borrowers to stay out of arrears through the pandemic.

 

The private rented sector ('PRS') and the buy-to-let mortgage market

Specialist landlords form the largest part of the Group's target market. Such landlords will typically let out four or more properties and will generally run their portfolio as a business and have a high level of personal day-to-day involvement.

The Group considers that the experience of its customers, their level of involvement and the diversification of their income streams across properties make them less vulnerable to cash flow shocks in the event of a downturn and better able to cope when faced with an adverse economic situation. This proved to be the case through the Covid pandemic where customers engaged quickly to address the issues they faced.

The Group is amongst a small number of specialist lenders addressing this sector, which is underserved by many of the larger lenders and which has seen supply constrained through the pandemic.

New issuance of buy-to-let mortgages followed the trend in the wider mortgage market, responding to the property market as a whole. New advances reported by UKF, at £21.5 billion for the six months ended 31 March 2021, were 31.1% higher than for the previous half year (2020 H2: £16.4 billion). This increase was principally driven by increased levels of advances for house purchase which comprised 38% of the total, compared to 23% in the previous six months. The level of new buy-to-let remortgages remained relatively stable.

In the lettings market RICS, in its March 2021 UK Residential Market Survey, forecast increasing levels of tenant demand, outstripping supply and leading to upward pressure on rents, with an expectation of average increases of 3% over the next twelve months, which will benefit affordability and cash flows for the Group's landlord customers.

Sentiment within the landlord community is positive. Independent research carried out for the Group in the first quarter of the 2021 calendar year suggested that, for the first time in four years, the percentage of landlords intending to increase the size of their portfolio in the next twelve months was greater than the percentage intending to reduce their investment, by 19% against 17% respectively. Amongst larger scale landlords this sentiment was more pronounced, with the number planning expansion at around 30%.

At the same time in the Group's tracking of sentiment amongst mortgage intermediaries for the quarter ended March 2021, 47% of brokers reported demand for buy-to-let mortgages as 'strong' or 'very strong', with only 12% reporting 'weak' or 'very weak' demand.

The UKF analysis of arrears and possessions published in May 2021 also provided analysis of buy-to‑let cases, showing a similar picture to the wider mortgage market, with a significant uptake of payment holidays serving to keep arrears and possessions low, even nine months after these reliefs first became available.

All these factors provide a strong indication of the current strength of the buy-to-let mortgage market and the opportunities for the Group going forward.

 

Lending activity

The primary mortgage lending activity of the Group continues to be the provision of buy-to-let mortgages to specialist landlord customers. While the Group does provide other product types within the buy-to-let market and beyond, these are largely ancillary to the main thrust of lending. Consequently, the main focus of the division's lending operations through Covid has been in supporting its buy-to-let specialist customers.

The total amounts of the division's lending in the six month period are set out below.



Six months ended 31 March
2021

Six months ended 31 March
2020

Year
ended 30 September 2020



£m

£m

£m

 

 

 

 

 

Specialist buy-to-let

 

686.2

694.6

1,119.0

Simple buy-to-let

 

28.7

57.8

86.4

Total buy-to-let

 

714.9

752.4

1,205.4

Owner-occupied

 

1.0

0.3

0.3

Second charge

 

8.7

40.1

54.0

 

 

724.6

792.8

1,259.7

Total lending in the segment declined by only 8.6% compared to the same period in the previous financial year, which was only impacted by Covid to a limited extent. Mortgage lending in the period was 55.2% higher than in the second half of 2020, as the property market began to recover, despite the ongoing Covid-based restrictions.

 

Buy-to-let

Buy-to-let lending overall fell by 5.0%, year-on-year, with specialist lending falling only 1.2%, despite the impact of Covid, particularly around the turn of the year. Volumes strengthened towards the end of the period, with the new business pipeline closing at £926.7 million, 17.3% higher than a year earlier (30 September 2020: £868.1 million, 31 March 2020: £789.8 million). Restrictions in lending imposed during the pandemic had all been reversed by the end of the period, with further developments introduced, helping to drive volumes.

Almost all of this pipeline (97.0%) related to specialist business (31 March 2020: 92.9%). With a more promising economic outlook for the UK and for the housing market in particular, prospects for the conversion of pipeline cases to actual loans also look more promising than at 31 March 2020. When coupled with the higher overall pipeline, this is likely to deliver strong volumes going into the second half of the financial year.

Specialist intermediaries are the principal source of the Group's buy-to-let business, and it continues to develop its service proposition to ensure its business partners receive the service levels that they require. Regular research is carried out to monitor satisfaction levels and during the period this showed that 88% were satisfied with the ease of obtaining a response from the Group (2020 H1: 91%, 2020 full year: 91%), delivering a net promoter score at offer stage of +46 (2020 H1: +65, 2020 full year: +56), despite the impact of Covid. This drop is at least partly attributable to a sharp increase in applications ahead of the anticipated end of stamp duty relief and a desire from intermediaries for a particularly rapid response to beat the expected cut-off date.

The Group's relationship with its intermediaries was enhanced by its response to the pandemic, with research in the period finding that 66% of the intermediaries who responded believed that its response to the Covid crisis was better than that of other lenders (2020 H2: 70%).

During the period the business launched a long-term, in-depth, end-to-end transformation programme to restructure processes and enhance systems, increase the effectiveness of the operation and upgrade the offering to customers and intermediaries. This represents a significant commitment of time and resources to the future of the business, with enhancements starting to come online from the 2022 financial year.

The Group understands the potential for climate change to impact its mortgage business and seeks to mitigate risk through careful consideration of the properties on which it will lend. It also continues to develop systems and refine data to allow its overall position to be measured and the behaviour of its security portfolio under climate-related stresses to be better understood.

During the period the Group launched its first range of green buy-to-let mortgages. These market-leading products have a maximum 80% loan-to-value ratio and are restricted to properties with an Energy Performance Certificate ('EPC') rating of C or higher. Green further advance products are also available on a similar basis.

The UK Government has identified the provision of more energy efficient housing as a principal objective in its response to climate change, with EPC levels being set as one of the principal benchmarks to be used. It has announced a target of upgrading as many homes as possible in the PRS to an EPC rating of C or higher. In order to achieve this, there is an expectation that lenders will set minimum quality thresholds, and to advantage customers with more energy efficient properties, as is the case with the Group's green mortgage products.

The Group has also designated EPC grades as a principal metric for evaluating climate change risk in its mortgage book and has continued to develop systems to analyse this data and to ensure that it has reliable and up-to-date information on as much of its book as possible, including legacy cases. It is unfortunate that some public information sources are not currently configured in a way which easily facilitates in-life monitoring and analysis or the targeting of customers in need of support in improving their properties.

The Group's latest analysis identified EPC grades for 87.6% of its mortgage book by value at 31 March 2021 (30 September 2020: 85.1%). Of these 98.0% were graded E or higher (30 September 2020: 98.1%) with 36.8% rated A, B or C (30 September 2020: 37.7%). The slight reductions are principally a result of refining the data, with 39.7% of new originations in the six months having one of the top three grades (90.3% coverage).

The Group also monitors the potential physical risks to security values arising from climate change. This includes the assessment of a property's flood risk as part of the underwriting process. At 31 March 2021 approximately 2.3% by number of properties securing the Group's buy-to-let mortgages in England and Wales were considered to be at medium or high risk of flooding from the sea or rivers, based on data from the Environment Agency (30 September 2020: 2.2%).

The Group continues to refine and develop its use of both internal and external data to manage climate change risk. However, it recognises the important part that the development of reliable and easily accessible information sources by the UK authorities must play in quantifying these exposures. It would therefore welcome any initiatives by the UK Government to enhance national reporting as part of its own response to climate change.

The business is currently working with the Green Finance Institute on a number of industry initiatives to develop standards for mortgage products which would encourage energy and carbon efficiency for the future, and this work continues to inform the development of the Group's own buy-to-let product range.

 

Other lending

The division's other first and second charge mortgage lending is generally ancillary to the main buy‑to‑let focus and is carefully managed to ensure that only lending with appropriate risks and returns is undertaken, and that such lending provides an appropriate return on the Group's capital.

Lending in the Group's second charge mortgage operation was scaled back in summer 2020 in response to Covid, with people transferred to provide support to other business areas, and lending remaining low in the half year. Completions in the half year were £8.7 million compared to £40.1 million in the first half of 2020, and £13.9 million in the second half of that financial year. The Group took this opportunity to review the long-term strategic potential of second charge lending in light of its capital requirements and the Group's overall risk appetite and announced its withdrawal from this market in May 2021. Pipeline cases will generate a modest level of completions in the second half of the financial year.

The Group's exposure to first charge residential lending is strictly limited, given the yields available in this market at acceptable levels of risk, and a limited demand for products where its specialist approach is cost-effective and adds value. The opportunities for the Group in this area principally relate to complex propositions, which will arise on an opportunistic basis, including lending to the existing professional landlord customer base.

 

Performance

The outstanding first and second charge mortgage balances in the segment at 31 March 2021 are set out below, analysed by business line.



31 March

2021

31 March

2020

30 September 2020



£m

£m

£m

Post-2010 assets

 

 

 

 

Buy-to-let

 

6,702.9

5,926.5

6,202.5

Owner-occupied

 

42.0

58.8

51.2

Second charge

 

168.6

186.2

182.6

 

 

6,913.5

6,171.5

6,436.3

Legacy assets

 

 

 

 

Buy-to-let

 

4,216.1

4,502.6

4,381.3

Owner-occupied

 

1.0

2.0

1.9

 

 

11,130.6

10,676.1

10,819.5

Balances within the mortgage portfolio have continued to increase steadily. At 31 March 2021 loan balances in the division were 4.3% higher than a year earlier. Within this balance the overall buy-to‑let portfolio had increased 4.7% year-on-year to £10,919.0 million (30 September 2020: £10,583.8 million, 31 March 2020: £10,429.1 million), with post-2010 originated assets now representing 61.4% of the total (31 March 2020: 56.8%).

The annualised redemption rate on buy-to-let mortgage assets remained stable in the six months to 31 March 2021 at 6.8% (2020 H1: 7.8%, 2020 Full Year: 6.6%). While this low level of redemptions may be attributable in some part to the Covid crisis, it maintains a pre-pandemic trend generated by the Group's careful management of its customer base as accounts reach the end of their fixed rate period.

Since March 2020, payment reliefs have been granted to 14,006 of the Group's buy-to-let accounts, with 5,347 of these requiring an extension. At 31 March 2021 only 270 accounts remain on payment relief, representing 0.4% of the book by number.

Arrears on the buy-to-let book remained low and broadly stable in the six months at 0.22%, despite the expiry of payment holiday arrangements (30 September 2020: 0.15%, 31 March 2020: 0.16%). These arrears remain very low compared to performance in the national buy-to-let market, with UKF reporting arrears of 0.54% across the sector at 31 March 2021 (30 September 2020: 0.52%, 31 March 2020: 0.41%).

While the performance metrics of the buy-to-let mortgage portfolio have remained positive throughout the period, the extent to which these have been influenced by UK Government interventions, such as furlough payments and other income supports underpinning tenant rental payments, funding from government-backed loan schemes accessed by landlords and the stamp duty holiday, cannot be established from data available. Therefore, the long-term prospects for the book, once these initiatives begin to be withdrawn remains subject to a significant level of uncertainty.

The Group's approach focusses its underwriting on the credit quality and financial capability of its customers, underpinned by its assessment of the available security. This approach relies on a detailed and thorough assessment of the value and suitability of the property as security and this robust approach to valuation, including the use of a specialist in-house valuation team, provide it with significant security in the face of economic stress.

The loan-to-value coverage in the Group's buy-to-let book, at 64.4% (31 March 2020: 67.7%) provides a considerable buffer in the event of default. The levels of interest cover and stressed affordability in the portfolio suggest that its customers are also well placed to manage Covid-related impacts on their businesses in the longer term.

Second charge mortgage arrears increased marginally to 1.00% (31 March 2020: 0.51%, 30 September 2020: 0.62%) as the book continued to season, with performance remaining satisfactory. In the second charge portfolio 525 payment reliefs were granted, of which 281 were extended. At 31 March 2021, 37 of these accounts remain on payment relief, 1.3% of the accounts in that portfolio.

The Group continues to operate a receiver of rent process for buy-to-let assets, which helps to reduce the level of loss incurred by both it and, in turn, its landlord customers. This process gives the Group direct access to the rental flows from the underlying properties, while allowing tenants to stay in their homes. At 31 March 2021, 557 properties were managed by a receiver on the customer's behalf, a year-on-year reduction of 14.0% (31 March 2020: 648 properties). Almost of the current receivership arrangements relate to pre-2010 lending, with cases being resolved on a long-term basis to ensure the best outcome for the Group, its customers and their tenants. There were relatively low numbers of cases entering receivership in the period.

 

Outlook

While the division's performance was affected by Covid in the half year, the buy-to-let mortgage portfolio continued to grow, and credit quality remained strong. The business enters the second half of the year with a record pipeline and growing momentum and with enhancements to its proposition due to come on stream. At the same time, the combination of increasing transaction volumes, strong tenant demand and rental yields and positive landlord and broker sentiment point to a positive outlook in the Group's target market.

The Mortgage Lending business is well placed to accelerate out of the pandemic and generate high quality assets and returns for the Group, while contributing to the development and renewal of the nation's housing stock.

 

1.2  COMMERCIAL LENDING

The Group's Commercial Lending division includes four key specialist business streams lending to, or through, commercial organisations, mostly on a secured basis. This division had been a major source of growth within the Group before the impact of Covid and remains a focus for growth going forward.

The four major strands of the business comprise:

· SME lending, providing leasing for business assets and unsecured cash flow lending for professional services firms, amongst other products

· development finance, funding smaller, mostly residential, property development projects

· structured lending, providing finance for niche non-bank lenders

· motor finance, focussed on specialist parts of the market

Within these sectors the Group's strategy is to target niches (either product types or customer groups) where its skill sets can be best applied, and its capital effectively deployed to optimise the relationship between growth, risk and return.

In each of its markets the division's competitors are principally small banks and similarly sized lenders. They are markets in which the largest lenders have little presence, creating a credit availability issue for customers and significant opportunities for the Group. The division operates through specialist teams in each business area, with a common focus on credit standards, customer service, asset appraisal and collections and recovery linking the operations strategically.

The SME sector has been the focus of government-mandated support programmes throughout the pandemic including payment reliefs from lenders, VAT deferral schemes and the provision of loans under the Coronavirus Business Interruption Loan Scheme ('CBILS') and the Bounce Back Loan Scheme ('BBLS'). These reliefs have resulted in significant increases in cash balances held in the sector, which makes long-term prospects difficult to gauge.

The Group has provided CBILS and BBLS loans, primarily to existing customers, and has also been accredited to provide loans under the new Recovery Loans Scheme ('RLS') with RLS lending commencing in the second half of the financial year.

During the period the Group has continued to enhance operational functionality in this area, developing technological solutions and investing in systems, particularly focussing on administration systems for SME lending and development finance. These enhancements should provide benefits for both customer service and in the procuration processes, enabling potential customers or the brokers they use to access appropriate finance solutions more easily and efficiently, while providing the Group with the information needed to support increasingly technologically advanced decision-making.

The division continues to develop its approach to green financing, where funding can be deployed in support of more climate conscious business activities, such as supporting local authorities in replacing refuse collection fleets with greener vehicles. Work is also in progress to classify the environmental impacts of lending in accordance with the UK's Green Taxonomy, but involvement with 'brown' industries (those with a high environmental impact) has already been assessed as low.

 

Lending activity

During the period, lending levels across the majority of the Commercial Lending business lines began to recover from the impact of Covid seen in the second half of 2020. While new business levels outside development finance had not recovered to the levels seen in the first half of the 2020 financial year, volumes in most areas had grown significantly from those seen in the six months ended 30 September 2020. Recovery was slowed by the impact of the second UK lockdown, which saw volumes particularly depressed in January and February 2021, though activity in March 2021 began to strengthen considerably.

The new lending activity in the segment during the period is set out below, analysed by principal business line. As the structured lending business comprises revolving credit facilities, the net movement in the period is shown below.


Six months
ended

31 March
2021

Six months
ended

31 March
2020

Year

ended

30 September 2020


£m

£m

£m

 

 

 

 

SME lending

155.5 

200.7

288.0

Development finance

229.5 

197.8

385.3

Structured lending

(12.1)

8.0

7.6

Motor finance

28.8 

74.8

109.9

 

401.7 

481.3

790.8

As a result of this new business, and the amortisation of the existing loan book, the overall Commercial Lending balance declined by 5.2% in the period since the last year end.

 

SME lending

The SME lending business contributed a solid performance in the face of Covid-related constraints through the first half of the financial year, with certain business lines particularly affected by either reduced economic activity, logistical difficulties in equipment sourcing, payment deferrals reducing the need for finance or the availability of cost-effective CBILS and BBLS funding. Lending strengthened considerably towards the end of the period, with March seeing the highest level of applications since the impact of Covid and momentum building.

Overall, advances fell by 22.5% compared to the six months ended 31 March 2020, which was largely before the impact of Covid was felt. Compared to the six months ended 30 September 2020, however, advances increased by 78.1% as markets began to reopen and business confidence began to increase.

In the division's core asset leasing business volumes reduced by 14.5% to £106.9 million, compared to the comparative period (2020 H1: £125.0 million). This reflects the performance of the asset finance market in general, with the Finance and Leasing Association ('FLA') continuing to report depressed volumes through most of the period. Almost 15% of the Group's new asset leasing business was supported through CBILS, demonstrating the scheme's effectiveness. This level of business represents a significant recovery from the £41.1 million of new lending recorded in the second half of the 2020 financial year, boosted by an increase in confidence and a return to more normal activity levels in the operation's target industries, such as construction. Investment in operating leases has also continued with £4.6 million of assets acquired in the period (2020 H1: £7.2 million, 2020 full year: £12.9 million).

During the period, the Group has continued to advance loans under the UK Government-sponsored British Business Bank's CBILS and BBLS programmes to support SMEs potentially affected by the Covid pandemic. In the six months ended 31 March 2021 £26.3 million was advanced under these schemes (2020 H2: £25.9 million), backed by a government guarantee, of which £14.6 million was asset leasing business. The Group is aware of the widely-reported abuses of these schemes but has not so far been impacted itself. It continues to closely monitor its portfolio for any adverse indications.

After 31 March 2021 no new CBILS or BBLS loan applications can be accepted, but at the closing date the Group had a pipeline of loans which can still be completed in the second half year. The Group has been authorised to participate in the follow-on RLS programme, with products launched in April 2021. As with CBILS lending, RLS loans will have the benefit of an 80% government guarantee (after the proceeds of any business assets are applied for leasing balances), but unlike in CBILS lending customers will be required to meet interest payments from the outset of the loan. The Group expects to use the RLS to provide support to SME customers until 31 December 2021, the currently expected end date of the scheme.

Short-term lending to professional services firms outside the government supported schemes fell by 59.3% to £28.6 million (2020 H1: £70.2 million). This resulted from both the deferral of tax balances, where customers had customarily taken out short term loans to spread the impact, and of the wide availability of cheap CBILS and BBLS lending in the market. The availability of CBILS and BBLS also depressed other unsecured SME lending volumes. However, these are short-term effects and the underlying requirement for finance remains in the longer term.

The Group's programme of investment in the generation of system improvements and efficiency gains in this business continued despite the pandemic, with enhancements to the new lending process rolled out in April, offering improvements to customers and brokers. These included the launch of a new broker portal, providing enhanced functionality to business introducers. This programme will continue through the year enhancing controls, operational agility and the customer experience.

With the most recent forecasts from the FLA anticipating a recovery in asset finance lending over the second half of the financial year, the division's new business pipeline strengthening and system developments coming on line, the Group is optimistic for the businesses continuing recovery from the pandemic and its future growth prospects.

 

Development finance

The Group's activity in the development finance market remained robust throughout the period, although the restrictions imposed as a result of the Covid pandemic meant that many projects progressed more slowly than they might have done in normal times. This has, however created an element of pent-up demand moving into the second half of the financial year with advances, pipeline and enquiries all building through March into the new period. Market sentiment appears positive with developers generally optimistic about the future.

The Group's target customer in this market is a small to medium-sized developer of UK residential property. Projects currently in progress have an average development value of £7.8 million against which the Group has extended average facilities of £4.6 million, giving a substantial level of security cover. These projects are generally focussed on the more liquid parts of the residential market (houses and smaller blocks of flats), avoiding developments with high unit values.

While the business has been historically concentrated in the English Home Counties, with 66.3% of balances at 31 March 2021 (30 September 2020: 67.0%) located in London and the South East, the Group's strategic objective is to lend more widely across the UK. Central London property hot-spots have generally been avoided with less than 6% of the balance located in this area.

The Group has recently expanded its range of offerings to include projects in the £400,000 to £1,000,000 range, widening its potential market to include smaller, growing developers as they expand their businesses as well as expanding options for existing customers. It also reintroduced lending of up to 70% of total development value for the highest quality propositions. Together these will expand the range of projects the business is able to consider.

In order to protect its investments, the Group engages independent monitoring surveyors to review project progress and costs on a regular basis through the build phase of each project. The resilience of the Group's customers through the most recent phase of the Covid pandemic has been impressive with delays minimised and completed projects being taken to market.

During the latter part of the period, the volume of new proposals being received increased steadily, with the increased amount of undrawn approvals at the period end likely to lead to a positive start to the second half of the financial year. Undrawn amounts on live facilities at 31 March 2021 at £402.0 million were 5.5% higher than at the year end (30 September 2020: £380.9 million, 31 March 2020: £343.2 million) while the post-offer pipeline of £207.7 million was 21.2% higher (30 September 2020: £171.5 million).

Throughout the period the business invested in both people and systems, while increasing its national and regional coverage with the recruitment of experienced specialist relationship directors and portfolio managers. These initiatives will support the further growth of the business going forward. With the UK Government setting a target of at least 300,000 new homes completed each year and current building levels some 50,000 less than this, there is a clear need for the Group's customers to address this shortfall with its support.

The performance of the Group's development finance operation through the pandemic has demonstrated the attractiveness of the proposition going forward. The need for new housing in the UK will continue into the future and smaller developers, who may struggle with credit availability, will be called on to supply much of this demand. Sentiment in the market looks positive entering the second half of the financial year and the Group's business model, its investment in systems and people and the developments in its product range mean it is well-placed to support the aspirations of its developer customers going forward and to help support housing provision across the country.

 

Structured lending

The Group's structured lending exposure has reduced in the period, with one facility terminating and drawings on others reduced as a result of lower levels of business activity due to Covid. No new facilities were completed in the period, but the Group continues to explore further opportunities in this field.

Structured lending facilities generally fund non-bank lenders, of various kinds, and as such facilities are carefully constructed to provide a buffer for the Group in the event of default in the ultimate customer population, with first loss cover of at least 20% for all current cases. The impact of Covid has varied facility by facility, but the Group's experienced account managers have received regular reporting on the performance of security assets and maintained a high level of contact with the Group's customers throughout the crisis in order to safeguard its position.

The Group has a number of well-progressed additional facilities in the pipeline, with an expectation of new drawings in the second half of the year. These include new asset classes, spreading the risk inherent in such lending. The Group continues to actively seek new opportunities in this field, with a particular interest in facilities linked to green initiatives.

 

Motor finance

Within the motor finance market the Group carefully targets its offerings on those specialist propositions which are not addressed by mass-market lenders, including specialist makes and vehicle types, such as light commercial vehicles, motorhomes and caravans. Levels of activity in the automotive market remained subdued in the period, with UK lockdowns impacting the markets for both new and used vehicles after a short-lived recovery in the last quarter of the 2020 financial year.

The Group's advances continued to decline with £28.8 million of completions, down 17.9% from the £35.1 million achieved in the second half of 2020 and far below the £74.8 million achieved in the six months ended 31 March 2020. This performance follows that of the wider motor finance market, with the FLA reporting falling volumes until February 2021, before a recovery beginning to take hold in March. It also reflects the Group's decision to tighten lending criteria and temporarily divert resources from the new business teams in the area to support the wider Group's customer servicing requirements through the pandemic, including the provision of payment reliefs.

Following the relaxation of UK lockdown restrictions, prospects for the second half of the year appear more positive as dealerships open for business, and economic activity in general increases. The Group is renewing its focus on its motor finance business to take advantage of this, with seconded teams returning to their roles in the motor finance new business area.

 

Performance

The loans within the Commercial Lending division, analysed by product type are set out below.


31 March

2021

31 March

2020

30 September 2020


£m

£m

£m

 

 

 

 

Asset leasing

467.8

513.4

478.0

Professions finance

27.9

49.9

22.3

CBILS and BBLS

50.1

-

25.2

Invoice finance

14.3

20.6

13.5

Unsecured business lending

11.7

22.7

15.0

Total SME lending

571.8

606.6

554.0

Development finance

552.3

502.3

609.0

Structured lending

82.6

95.0

94.9

Motor finance

220.4

290.4

256.9

 

1,427.1

1,494.3

1,514.8

The size of the Commercial Lending book reduced by 5.8% in the six months, principally as a result of restricted activity in some of the division's business lines through the winter lockdowns and the shorter term nature of some of the segment's products, leading to a more rapid run-off.

Credit quality in the development finance book remained good. Overall project progress remains in line with expectations and no significant impact on the disposal of completed developments has been noted. Accounts are regularly monitored and graded on a case-by-case basis by the Credit Risk function. At 31 March 2021 only two accounts had been identified as at risk of loss, both having been similarly identified at 30 September 2020.

While no Covid-specific credit concerns have been identified to date on individual development finance accounts, the Group recognises the potential impact of the current level of economic uncertainty, including the potential impact of the end of Stamp Duty relief on the property market, and execution risk on its portfolio. The Group continues to monitor these issues closely as they develop. The average loan to gross development value for the portfolio at the period end, a measure of security cover, was 62.4% (30 September 2020: 63.1%, 31 March 2020: 64.7%). This gives the Group a significant credit buffer if any of the projects encounter issues, either as a result of the pandemic or for any other reason.

Arrears in the division's finance leasing portfolios remain stable, even with the cessation of the majority of payment reliefs. Arrears on asset leasing business at 31 March 2021 stood at 0.86% (30 September 2020: 1.75%, 31 March 2020: 0.27%) and with those on the motor finance book at 2.25% (30 September 2020: 1.76%, 31 March 2020: 1.32%).

Since March 2020, payment reliefs have been granted to 3,061 of the division's asset finance customers, however only 333 required an extension. At 31 March 2021 only 54 accounts remain on payment relief, representing 0.7% of the book by number. In the motor finance portfolio 1,918 payment reliefs were granted, of which 376 were extended. At 31 March 2021, 96 accounts remain on payment relief, 0.6% of all accounts by number.

Up to the period end all CBILS and BBLS lending remained in its initial twelve-month period where interest payments were met by the UK Government. Payments from customers will begin to fall due in the second half of the financial year and the Group has appropriate systems, processes and resource in place to deal with any issues as they arise. Any emerging payment behaviours will be kept under close scrutiny.

For structured lending accounts, the Group carefully monitors the performance of the underlying asset pool on a monthly basis, to ensure its security is adequate. Performance in the half year has been in line with expectations, with a number of facilities showing improved metrics and with one facility previously assigned to IFRS 9 Stage 2 returning to Stage 1 and another redeeming at par.

 

Outlook

The Commercial Lending division has experienced a challenging twelve months, along with the rest of the UK economy. However, looking forward, sentiment in each of its markets is positive and there are signs of recovering activity levels, both for the Group and its markets more generally.

Work to develop the division's products and proposition have continued throughout the pandemic period and the business is well placed to take advantage of the post-Covid recovery with an increased business pipeline and momentum building.

 

1.3  IDEM CAPITAL

The Idem Capital segment contains the Group's acquired loan portfolios, together with its pre-2010 legacy consumer accounts. These include mostly second charge and unsecured consumer loans.

When considering portfolios for acquisition the Group currently focusses on those specialist loan portfolios which can augment the organic origination activities of the Group.

This model is essentially opportunistic and the flow of appropriate opportunities to the market is sporadic. The Group carefully considers the capital requirements for any potential acquisition, particularly where asset types offered require relatively large amounts of capital to be held. It also evaluates the potential for conduct risk issues to arise in portfolios which may contain more vulnerable customers. The Group will only pursue transactions where its wider capabilities in specialist administration and funding can provide a real benefit and where the projected return is attractive in comparison to the other opportunities for the deployment of its capital.

The Idem Capital back book includes consumer lending portfolios where customers may have historically rescheduled their debt repayments and its processes aim to generate fair outcomes for all customers, recognising any vulnerabilities. This aim has formed a principal focus in the Group's response to Covid in respect of such customers.

The division's success rests on understanding assets, strong analytics, advanced servicing capabilities and the efficient use of funding.

 

New business

Although the UK loan portfolio market remained active in the period, the impact of Covid significantly reduced activity levels, and complicated the pricing and execution of potential deals, discouraging vendors from coming to market. This was particularly the case for the more complex opportunities in which the Group would ordinarily be interested.

During the period, no portfolio acquisitions were completed (2020 H1: none) although the division considered a limited number of reviews of opportunities that were ultimately not progressed.

The main focus of the business throughout the six month period was the careful management of its existing books and ensuring that appropriate processes and systems remained in place to address the impact of the Covid outbreak on its customers, particularly those who are vulnerable or who have developed vulnerabilities as a result of the ongoing pandemic.

 

Performance

The values of the loan balances in the segment are set out below, analysed by business line.



31 March
2021

31 March
2020

30 September 2020



£m

£m

£m






Second charge mortgage loans

 

151.6

191.0

171.9

Unsecured consumer loans

 

98.1

120.3

109.7

Motor finance

 

8.9

24.4

15.5

 

 

258.6

335.7

297.1

With no portfolios acquired in the period, balances in the division's loan books have continued to decline in the period as customers pay down their accounts. 120 month Estimated Remaining Collections on the segment's acquired consumer assets, which measures forecast undiscounted receipts, reduced to £260.1 million at 31 March 2021 from £324.6 million a year earlier, as the portfolios amortised.

Payment performance in the segment remained steady, with no further significant impacts from the ongoing Covid lockdowns.

Arrears on the segment's secured lending business continued to move marginally higher, in line with recent performance at 20.2% (30 September 2020: 18.8%, 31 March 2020: 18.0%). This is an inevitable result of the structure of these portfolios, which include accounts which were making full payments in the period but may have missed payments in the past, and where fully up-to-date accounts are more likely to redeem.

Over the course of the pandemic, payment reliefs were granted to 1,356 of the division's second charge customers, with 744 of these extended. At 31 March 2021 only 62 accounts remain on payment relief, representing only 0.6% of the book. In the motor finance portfolio 697 payment reliefs were granted, of which 177 were extended. At 31 March 2021, 33 accounts remain on payment relief, 0.7% of the total number.

None of the individual Idem Capital purchased loan portfolios were considered as underperforming in the period. The Group monitors actual cash receipts from acquired portfolios against those forecast in the evaluation which informed the purchase price. Up to 31 March 2021, such collections were 110.0% of those forecast to that point (30 September 2020: 109.8%, 31 March 2020: 109.1%), demonstrating the stability in cash flow from these portfolios.

The Group continues to invest in systems and people to ensure that these loans are serviced efficiently and effectively, and that appropriate customer outcomes are achieved, particularly for vulnerable customers.

 

Outlook

The Group will continue to consider portfolio acquisitions where these enhance its overall positioning, provide attractive returns and represent a productive use of capital. There is no requirement for the business to chase volumes and the Group is prepared to wait for appropriate opportunities to arise.

In the meantime, the division will continue to focus on its commitment to providing appropriate outcomes for its existing customers as it has done throughout the Covid pandemic and ensuring any vulnerability issues are carefully addressed.


Paragon Banking Group PLC

INTERIM MANAGEMENT REPORT

2.  FUNDING REVIEW

The Group is principally funded by its retail deposit taking operation but also accesses a variety of other funding sources. This ensures that its funding position is both adaptable and sustainable as the business and its operating environment develop. This approach ensures that the Group can access cost-effective funding despite issues in any particular funding market, as well as raising funding for strategic initiatives on a timely basis.

During the period the Group continued to develop its funding position despite the ongoing impact of Covid. The deposit book has grown, with additional channels to market being added, maturing wholesale borrowings have been refinanced and the Group's first green bond has been issued. In addition, central bank funding has continued to be accessed to support SME lending.

The Group's funding at 31 March 2021 is summarised below.

 

31 March
2021

31 March
2020

30 September 2020

 

£m

£m

£m

 

 

 

 

Retail deposit balances

8,631.2

6,911.9

7,856.6

Securitised and warehouse funding

2,767.0

4,766.5

3,928.3

Central bank facilities

2,244.4

1,199.4

1,854.4

Tier-2 and retail bonds

405.3

446.3

446.6

Repurchase agreements

50.0

-

-

Total on balance sheet funding

14,097.9

13,324.1

14,085.9

Off balance sheet central bank facilities

-

109.0

-

Other off balance sheet liquidity facilities

150.0

150.0

150.0

 

14,247.9

13,583.1

14,235.9

The Group's funding balance has continued to move towards the retail savings market in the period, with an increase of 9.9% in retail deposits and further retirements of legacy securitisation arrangements. At the end of the period retail deposits had grown to form 61.2% of all on balance sheet funding (30 September 2020: 55.8%, 31 March 2020: 51.9%).

The Group has continued to maintain a prudent stance on liquidity through the period, with £1,895.1 million of cash available for liquidity and other purposes at 31 March 2021 (30 September 2020: £1,701.1 million, 31 March 2020: £915.6 million). The appropriate level of cash reserves continues to be monitored as part of the Group's capital and liquidity strategy, which will continue to take a conservative view of the economic outlook, including the future progress of the pandemic.

The Group's response to the expected withdrawal of LIBOR at the end of the calendar year is well progressed. While LIBOR had been the principal benchmark rate used by the Group, a transition to other, risk-free rates, notably rates linked to SONIA, has been ongoing for more than two years.

No new LIBOR-linked derivative contracts have been entered into since February 2020 and remaining LIBOR-linked derivatives will transition to SONIA in accordance with the ISDA protocol. Meanwhile, the majority of the Group's LIBOR-linked borrowings have either been retired, transitioned or have an agreed transition process in place. A transition methodology for the Group's principal LIBOR-linked asset class, legacy buy-to-let mortgages, has been agreed and communicated to customers. Overall, the Group considers that it is well placed to meet the withdrawal deadline of 31 December 2021.

 

2.1  RETAIL DEPOSITS

The retail deposit market in the UK is large, deep and well developed. The Group considers it to be a reliable, scalable and cost-effective source of funding, which has remained fully functional throughout the Covid crisis. The Group's offering is centred on sterling household deposits and offers a variety of products including term deposits, ISAs and easy access accounts through a variety of in-house and external channels. The savings proposition is based on competitive rates and value for money, combined with the Group's strong customer service ethic and the protection provided to depositors by the Financial Services Compensation Scheme ('FSCS').

The cost of the Group's retail deposits have reduced in the period, reflecting both market trends and developments in the Group's proposition.

During the six months UK household savings balances reported by the Bank of England continued to increase with balances at 31 March 2021 reaching £1,364.0 billion, an increase of 5.9% in the period and an increase of 9.7% year-on-year. This has resulted from increased saving by consumers during the pandemic and has influenced market interest rates. Some of this increase is likely to be reversed as the UK economy returns to a more normal footing, but as a small participant the Group is less likely to be affected by this than larger banks and building societies.

The Group's savings balances at the period end are analysed below.

 

Average interest rate

Proportion of deposits

 

31 March 2021

30 September 2020

31 March 2021

30 September 2020

 

%

%

%

%

 

 

 

 

 

Fixed rate deposits

1.46

1.69

61.5

63.3

Variable rate deposits

0.46

0.72

38.5

36.7

All balances

1.08

1.34

100.0

100.0

The average initial term of fixed rate deposits at 31 March 2021 remained stable at 26 months (30 September 2020: 27 months). The reduction in funding costs reflects both the development of the Group's proposition and new business channels coming on stream and reductions in market savings rates more generally. Bank of England data shows the quoted average rate for new two-year term deposits at 31 March 2021 at 33 basis points, down from 46 basis points at 30 September 2020, with market easy access rates remaining at 7 basis points.

At 31 March 2021 the proportion of easy access deposits, which are repayable on demand, at 32.6%, increased a little from its level at the beginning of the period (30 September 2020: 30.0%). Easy Access accounts represent £2,817.9 million of the total deposit balance (30 September 2020: £2,359.6 million). This increase is partly a result of the development of the Group's liquidity management processes and strategy, but also a reluctance from savers to commit to longer-term deposits while rates on offer in the market remain low.

The Group has grown its business in the period both through a focus on its in-house channel and through expanding its reach across other platforms. Significant infrastructure investment has enabled it to expand the number of external channels where it has a presence while still providing an effective and efficient service to the third party providers.

Offerings through these third party channels, which include investment platforms and savings marketplaces operated by digital banks, provide access to a different customer demographic to the Group's mainstream customers. This more diversified sourcing offers enhanced opportunities to manage inflows and costs. The Group has added three new relationships in the period, including one with Aviva Savings, bringing the total to seven. These channels now represent around 11% of the total deposit base and the Group has capacity to expand further in this area.

The Group regards the quality of its customer service as a vital component of its savings market strategy and conducts insight surveys throughout the customer journey. In this research 86% of customers opening a savings account with the Group in the period, who provided data, stated that they would 'probably' or 'definitely' take a second product (2020 H1: 88%, 2020 full year: 88%). The net promoter score for new customers in the period was +50, a reduction from the +62 achieved in the first half of the preceding financial year, but still significantly positive (2020 full year: +61). The fall in the NPS is principally attributable to increased volumes generated by sudden sharp rate cuts by NS&I in September 2020 which led to large numbers of their customers seeking alternative investments. The Group's experience was common to many other deposit takers and NPS scores returned to more normal levels later in the period.

Of customers with maturing savings balances in the period, 89% stated that they would 'probably' or 'definitely' consider taking out a replacement product with the Group (2020 H1: 90%) with a net promoter score at maturity of +52, compared to +49 for the first half of the 2020 financial year (2020 full year: +50).

These responses show that the quality of the Group's customer interaction operations position it well to retain customers and deposits in an active and competitive market.

This level of customer satisfaction is also demonstrated by the Group's continuing success in industry awards. During the six month period awards won included 'Best Cash ISA Provider' at the 2021 YourMoney awards, 'ISA Provider of the Year' at the 2020 MoneyAge awards, 'Best Notice Savings Provider' at the 2021 Moneynet awards, 'Best Easy Access Savings Provider' and 'Best Easy Access Cash ISA Provider' in the MoneyComms 2021 Top Performers list and 'Best Cash ISA Provider' in the 2021 Savings Champion Awards.

The Group's savings infrastructure, including its outsourced deposit administration system and its infrastructure supporting external savings platforms, continues to provide a solid and scalable basis for the business. Service standards have been maintained despite the effects of ongoing Covid restrictions, and servicing resources have continued to develop with the business.

The retail deposit funding stream provides a stable principal funding base for the Group's operations where volumes and rates can be effectively and flexibly managed. The operation will continue to develop on a strategic basis, expanding its offerings, addressing wider demographics and expanding its presence on third party platforms. This increasing diversification and the FSCS guarantee are likely to reduce the potential for liquidity impacts and the Group's profiling of its target customers suggests they may be more resilient than average in the event of future economic stresses.

 

2.2  CENTRAL BANK FACILITIES

Throughout the period the Bank of England SME Term Funding scheme ('TFSME') continued to be available to support lenders in providing credit to SME customers through the Covid pandemic. The Group has continued to draw on these funds to support its SME lending activities, particularly in its SME lending and development finance activities.

During the period the Group's drawings under TFSME increased to £2,025.0 million (30 September 2020: £910.0 million). The scheme remains open for further drawings until December 2021 and the Group anticipates making further use of it through the second half of the financial year. As TFSME provides funding at or very close to base rate, it is a particularly cost-effective form of borrowing for lenders which, like the Group, wish to support their SME customers through the economic uncertainties of the pandemic.

Drawings under the Bank of England's original Term Funding Scheme ('TFS') which were due to mature in the current financial year began to be retired early during the period, improving the maturity profile of the Group's borrowings. The remaining TFS borrowings provide £219.4 million of the Group's funding (30 September 2020: £944.4 million, 31 March 2020: £944.4 million), but will be repaid during the next twelve months. The Group retains access to other Bank of England funding channels but did not utilise them in the period.

The Group expects to continue to make use of these facilities going forward, in accordance with the objectives of the schemes. Where using them is appropriate and cost-effective, mortgage loans pre-positioned with the Bank of England are available to act as collateral for future drawings, if and when required. This provides access to potential liquidity or funding of up to £1,929.2 million.

 

2.3  WHOLESALE FUNDING

The Group's wholesale funding includes securitisation funding, warehouse bank debt, retail and Tier‑2 corporate bonds and repurchase transactions, which are each accessed from time to time as appropriate. The Group's Long-Term Issuer Default Rating was affirmed at BBB by Fitch in March 2021, with the outlook upgraded from negative to stable, reversing the change which was applied to all the major UK banks during 2020 as a result of the Covid crisis.

During the six month period capital markets remained active, with activity in most areas of funding. The securitisation markets remained open, but with most volume driven by those lenders without access to central bank facilities.

Wholesale pricing has been attractive for issuers, with strong demand for new issuance. Against this backdrop the Group issued a £150.0 million Tier-2 Green Bond in March 2021. This was the first issuance certified under the Group's Green Bond Framework, approved in March 2021, which sets out how the proceeds of the bond will be applied, and which is available on the Group's website at www.paragonbankinggroup.co.uk.

The new bond carries an interest rate of 4.375%, fixed for five years, and will count in full towards tier 2 capital for a five year period. It was rated BB+ by Fitch on issue.

The majority of the Group's £150.0 million 2016 Tier-2 Bond, which bear interest at 7.25% per annum and would begin to be amortised for capital purposes from September 2021, were acquired by the Group in a tender process during March 2021. The remainder will be redeemed at their call date in September 2021.

These transactions have the overall effect of reducing funding costs and placing tier 2 capital on a longer-term footing, as well as accessing the green bond market.

Historically the Group has been one of the principal issuers of UK residential mortgage backed securities ('RMBS'), however its reliance on this funding source has been significantly reduced over recent years, with the most recent issuance held internally rather than issued in the market.

Two mature legacy securitisation transactions have been refinanced during the period, with a third paid down shortly after the period end. Notice of repayment of the final pre-2010 securitisation transaction remaining on the Group's balance sheet, Paragon Mortgages (No. 14) PLC was given in May 2021 and this is expected to be paid down in June 2021.

The only other LIBOR-linked deal, Paragon Mortgages (No. 25) PLC, is expected to transition to SONIA before the year end on a basis set out in the original transaction documents.

These transactions benefit the Group's overall long-term funding position by releasing cash collateral; removing LIBOR-linked liabilities ahead of transition; crystallising derivative positions, thereby reducing the Group's TRE for capital purposes; and releasing loan assets for use in creating eligible securities which can be used to access TFSME and other forms of funding.

A fully-retained securitisation transaction, Paragon Mortgages (No. 28) PLC was completed in the period. In this transaction £703.1 million of rated notes were issued to group companies, which will be used as collateral in other funding transactions, such as TFSME. This repeats the structure of Paragon Mortgages (No. 27) PLC in 2020.

The Group renegotiated its £400.0 million warehouse funding facility during the period reducing the interest margin from 1.05% above LIBOR to 0.60% above LIBOR. This facility is used to provide standby capability, particularly in the event of market disruption elsewhere, where funds need to be deployed rapidly or as an alternative to retail deposit funding for liquidity purposes. The reduced rate will make such funding more cost effective going forward. This borrowing is expected to transition to a SONIA‑linked basis in the second half of the financial year, under a methodology already agreed with the counterparty.

The Group's retail bond issued in 2013 was repaid at maturity in December 2020. The Group also entered into a short-term £50.0 million sale and repurchase ('repo') transaction as part of its liquidity management activities, which was in place at the balance sheet date.

Overall, these activities reduced the Group's dependency on legacy securitisation debt while lowering funding costs and increasing average remaining maturities for its other borrowings. This demonstrates the adaptability of the Group's wholesale funding activities and the Group will continue to access all these funding sources on an opportunistic basis as appropriate.

 

2.4  SUMMARY

The Group's funding strategy has remained consistent through the period and it continues to develop its access to funds while maintaining its principal focus on the retail savings market. Activities in the period have seen maturing borrowings replaced, average rates improved and the green bond market accessed.

The Group is well placed to maintain this diverse, robust and adaptable strategy going forward and expects that this will enable the needs of its developing business into the future.

More details of these borrowings are given in note 15 to the financial information.


Paragon Banking Group PLC

INTERIM MANAGEMENT REPORT

3.  CAPITAL AND LIQUIDITY REVIEW

The Group's capital policy is designed to provide appropriate returns to shareholders, preserve the strength of its balance sheet, maintain strong regulatory capital and liquidity positions to safeguard its depositors and to ensure sufficient capital available to meet strategic objectives in opportunities going forward. The safeguarding of this capital strength has been a fundamental objective of the Group's Covid response over the past twelve months.

Coupled with a favourable result from the most recent regulatory review of the Group's capital position, this has meant that the Group has sufficient available resources to adopt a more normal capital and distribution policy going forward, and has announced both a resumption of the interim dividend and a share buy-back for the second half of the financial year.

For regulatory purposes the Group's capital comprises shareholders' equity and Tier-2 bonds, including the green bonds issued in the period. It has no outstanding AT1 issuance, but has the capacity to issue such securities, if considered appropriate, under an authority renewed by shareholders at the AGM held in February 2021.

 

3.1  REGULATORY CAPITAL

The Group has continued to maintain strong regulatory capital ratios throughout the period, with capital balances building as a result of its prudent approach to capital management through the Covid pandemic. During the period the PRA conducted a supervisory review of the Group's capital requirements, based on the ICAAP analysis. The results of this review were very positive, with the regulator sharply reducing its capital requirement based on its assessment of the Group's risk exposures and management systems.

The Group is subject to supervision by the PRA on a consolidated basis, as a group containing an authorised bank. As part of this supervision, the regulator sets a Total Capital Requirement ('TCR') which the Group must hold in order to safeguard depositors in the event of severe losses being incurred. This requirement includes elements determined based on the Group's Total Risk Exposure ('TRE') together with fixed elements. The TCR is defined under the international Basel III rules, which are currently implemented through the EU Capital Requirements Regulation and Directive ('CRD IV'), but are in the process of being transposed to the PRA Rulebook following Brexit.

Transitional relief on the adoption of IFRS 9 was granted to the Group, with the impact on capital of additional impairments being phased in over a five-year period, with only 30.0% of the effect being recognised in this, the second year (2020: 15.0%). Further measures were enacted in 2020 extending this relief to additional provisions created in that year in response to Covid.

The PRA requires firms to disclose capital measures both on the regulatory basis and as if these reliefs had not been given, referred to as the 'fully loaded' basis. The Group's principal capital measures, CET1 and Total Regulatory Capital ('TRC') are set out below on both bases.

 

Regulatory basis

Fully loaded basis

 

31 March 2021

31 March 2020

30 September 2020

31 March 2021

31 March 2020

30 September 2020

 

£m

£m

£m

£m

£m

£m

Capital

 

 

 

 

 

 

CET1 capital

1,057.3

983.3

991.2

1,015.9

950.8

948.9

TRC

1,203.8

1,133.3

1,141.2

1,161.5

1,100.8

1,098.9

Requirement

 

 

 

 

 

 

TCR

585.9

748.1

749.6

582.4

745.9

745.3

The Group's CET1 capital comprises its equity shareholders' funds, adjusted as required by the CRD IV rules and can be used for all capital purposes. TRC, in addition, includes tier 2 capital in the form of Tier-2 Bonds, including the green bonds issued in the period. This tier 2 capital can be used to meet up to 25% of the Group's TCR. The increase in both capital measures is driven by the positive trading performance over the six months.

The TCR is specific to the Group and is set by the regulator, based on its supervisory reviews. The reduction in TCR on both the regulatory and fully loaded bases shown above has arisen principally as a result of the successful outcome of the most recent review process.

This saw the TCR on both bases reduced to 8.9% of TRE from 10.8% of TRE at 30 September 2020, compared to the minimum TCR allowed under the Basel III framework of 8.0%. This represents a significant benefit to the Group's capital management and reflects the maturity of the Group's systems for the management of capital and risk.

The Group's CET1 capital must also cover the CRD IV buffers, the Counter-Cyclical ('CCyB') and Capital Conservation ('CCoB') buffers. These apply to all firms and are based on a percentage of TRE. During the period the CCoB remained at 2.5%, its long-term rate, while the CCyB remained at 0.0%, the rate set by regulators in response to the Covid pandemic. The long-term rate of the CCyB in normal circumstances is expected to be 2.0%. The capital requirement in respect of these CRD IV buffers reduced in the period to £165.4 million at 31 March 2021 (30 September 2020: £173.7 million) on the regulatory basis.

Further buffers may be set by the PRA on a firm-by-firm basis but may not be disclosed.

The Group's principal capital ratios on both bases, after allowing for the proposed interim dividend, are set out below.

 

Regulatory basis

Fully loaded basis

 

31 March 2021

31 March 2020

30 September 2020

31 March 2021

31 March 2020

30 September 2020

 

 

 

 

 

 

 

CET1 Ratio

16.0%

14.4%

14.3%

15.5%

14.0%

13.7%

Total Capital Ratio

18.2%

16.7%

16.4%

17.7%

16.2%

15.9%

UK Leverage Ratio

7.7%

7.0%

7.1%

7.4%

6.8%

6.8%

All of the Group's ratios show strong improvement over the period. This reflects the impacts of profitable trading, a gain on the pension scheme liability, risk weighted asset reductions following the repackaging of legacy securitisations and a stabilisation of the IFRS 9 provision position.

The Basel Committee on Banking Supervision has set the implementation date for its revisions to the Basel III framework as 1 January 2023. This is, however, subject to those revisions being enacted in the relevant jurisdiction. Following the UK's exit from the EU, these rules are expected to be enacted for UK banks through the PRA Rulebook. The PRA has also launched a more extensive consultation on its approach to regulating non-systemically important banks without international activities. The Group is monitoring these developments and will respond through its capital planning as appropriate.

The Group submitted the second stage of its application for the accreditation of its Internal Ratings Based ('IRB') approach to buy-to-let credit risk for capital adequacy purposes to the PRA in March 2021. The project continues to progress to plan and work will continue through the second half of the year.

 

3.2  LIQUIDITY

It is the Group's policy to hold sufficient liquidity in the business to meet its cash requirements in the short and long term, as well as to provide a buffer under stress. There is also a regulatory requirement to hold liquidity in Paragon Bank. This policy has a consequent effect on the Group's operational capital and funding requirements.

The Board regularly reviews liquidity risk appetite and closely monitors a number of key internal and external measures. The most significant of these, which are calculated for the Paragon Bank regulatory group on a basis which is standardised across the banking industry, are the Liquidity Coverage Ratio ('LCR') and Net Stable Funding Ratio ('NSFR').

The LCR is a measure of short-term resilience which compares available highly liquid assets to forecast short-term outflows, calculated according to a prescribed formula, with a 30 day horizon. The monthly average of the Bank's LCR for the period was 175.8% compared to 162.0% during the first six months of the 2020 financial year, reflecting the steps taken during the second half of the 2020 year to enhance liquidity in response to the Covid pandemic (Year ended 30 September 2020: 173.7%).

The NSFR is a longer-term measure of liquidity with a one year horizon, supporting the management of balance sheet maturities. At 31 March 2021 the Bank's NSFR stood at 119.3% (30 September 2020: 114.7%, 31 March 2020: 115.2%), again reflecting the increases in the overall capital and liquidity position.

 

3.3  DIVIDEND AND DISTRIBUTION POLICY

The Group's dividend and distribution decisions in the 2020 financial year were dominated by the potential impact of the Covid pandemic. The strategic decision to build capital in response to the inherent risks posed by the virus meant that no interim dividend was declared for the year. At the 2020 year end a dividend was declared in line with the Group's stated policy of distributing around 40% of earnings to shareholders.

The Group has continued to manage its capital cautiously and has accumulated a capital and cash surplus over its requirements at 31 March 2021 to the level that it is considered appropriate to make distributions to its shareholders, both in the form of an interim dividend, and in a share buy-back, addressing the needs of different investor groups.

The Group's normal policy is that the interim dividend should, in normal circumstances, be equal to 50% of the preceding final dividend. Following a review of the capital position and forecasts, and considering the capital impacts of the stress testing carried out as part of the ICAAP and forecasting processes, the Board determined that a distribution in accordance with the Group's normal policy was appropriate.

It therefore declared an interim dividend for the year of 7.2 pence per share (2020 H1: nil), 50% of the 14.4p final dividend declared for 2020. This dividend will absorb £18.3 million of capital and will be paid on 23 July 2021 to shareholders on the register on 2 July 2021.

The directors have considered the distributable reserves of the Company and concluded that such a dividend is appropriate.

In addition, the Board has authorised a buyback of up to £40.0 million of shares in the market, initially to be held in treasury. The Group has the authority to make such purchases under a resolution approved by shareholders at the AGM in February 2021. Any purchases made under this programme will be announced through the Regulatory News Service ('RNS') of the London Stock Exchange on the day of the transaction.

 

3.4  CAPITAL OUTLOOK

The Board keeps the current and forecast capital position under regular review, considering the level and form of capital demanded by current business, regulatory and economic conditions, as well as the Group's strategic objectives.

The Group enters the second half of the financial year in a strong capital position. Capital and liquidity have continued to build throughout the period due to careful management of the position, the Tier-2 issuance has been replaced at a lower cost and the positive result of the regulatory review of the Group's capital management systems has resulted in a lowering of the minimum capital requirement.

This leaves the Group well capitalised, even allowing for a resumption of distributions to shareholders in the form of dividends and buy-backs, and for the return of CCyB requirements in the longer term. This capital position is both prudent and sustainable and helps ensure the viability of the business for the benefit of all stakeholders.

 


Paragon Banking Group PLC

INTERIM MANAGEMENT REPORT

4.  FINANCIAL REVIEW

The Group's trading performance before impairment charges for the six months ended 31 March 2021 demonstrates the continuing progress of the Group's businesses, in spite of the impact of the pandemic on the UK economy, with income and margins increasing generally in line with expectations. The impairment charge for the period returned to more normal levels, following the provision for the expected credit impacts of Covid in the 2020 accounts and, as a result, the Group's overall results were sharply improved.

The Group's underlying profit (Appendix A) for the six months ended 31 March 2021, at £82.9 million was 44.9% higher than the comparable period (2020 H1: £57.2 million), with the provision charge falling from £30.0 million in the first half of the 2020 financial year, when the Covid pandemic first impacted, to £6.0 million in the current period. On the statutory basis, which also includes the impact of fair value gains on hedging, profit before tax increased 68.8% to £96.4 million (2020 H1: £57.1 million).

Earnings per share increased by 66.5% to 29.3 pence (2020 H1: 17.6 pence) on the statutory basis, and by 43.2% to 25.2 pence excluding the effect of the fair value gains (2020 H1: 17.6 pence) (Appendix A).

 

4.2  RESULTS

CONSOLIDATED RESULTS

For the six months ended 31 March 2021




2021 H1

2020 H1




£m

£m

 

 

 

 

 

Interest receivable

 

 

238.6 

251.1 

Interest payable and similar charges

 

 

(91.1)

(109.7)

Net interest income

 

 

147.5 

141.4 

Other operating income

 

 

7.2 

8.3 

Total operating income

 

 

154.7 

149.7 

Operating expenses

 

 

(65.8)

(62.5)

Provisions for losses

 

 

(6.0)

(30.0)

 

 

 

82.9 

57.2 

Fair value net gains / (losses)

 

 

13.5 

(0.1)

Operating profit being profit on ordinary activities before taxation

 

 

 

96.4 

 

57.1 

Tax charge on profit on ordinary activities

 

 

(22.2)

(12.6)

Profit on ordinary activities after taxation

 

 

74.2 

44.5 

 

 

 

 

 




2021 H1

2020 H1

 

 

 

 

 

Basic earnings per share

 

 

29.3p

17.6p

Diluted earnings per share

 

 

28.3p

17.3p

Dividend - rate per share for the period

 

 

7.2p

-

 

Income

The total operating income of the Group for the six months increased by 3.3% to £154.7 million (2020 H1: £149.7 million). This included a net interest income increase in the period of 4.3% to £147.5 million (2020 H1: £141.4 million). This increase was partly driven by the growth in the average loan book, which rose by 3.1% to £12,723.9 million (2020 H1: £12,346.1 million) (Appendix B), but also by the 3 basis point increase in annualised net interest margin ('NIM') recorded in the period. This increase fully unwound the temporary adverse impacts of the 2020 reduction in UK base rates, which affected NIM in the second half of the 2020 financial year.

NIM improved in the six months to 31 March 2021 to 232 basis points (2020 H1: 229 basis points) (Appendix B), with each of the Group's segments showing improved NIM in the period as a result of stability in product yields and tighter funding costs. Excluding the impact of the declining Idem Capital business, NIM increased by 6 basis points, from 214 basis points in the six months ended 31 March 2020, to 220 basis points in the current period.

Other operating income was £7.2 million for the six months, compared with £8.3 million in the first half of the 2020 financial year. The largest part of this reduction relates to third party servicing income, which is attributable to the reduction in size of the serviced portfolios.

 

Costs

Operating expenses for the period increased by 5.3% to £65.8 million (2020 H1: £62.5 million). Charges for share-based payments in the period were increased by £4.3 million, in excess of the total movement, following a low charge in 2020 as Covid impacted on vesting expectations and the associated (share price related) National Insurance charges.

The Group's average number of employees increased to 1,413 for the period, an increase of 1.8% over the comparable period in 2020 (2020 H1: 1,388). The growth in the Group's savings balance in the period (24.9% between 31 March 2020 and 31 March 2021) also increased operating costs, with the outsourced servicing fee set by reference to the balance outstanding. However, these increases were offset by reductions in other areas, including travel and accommodation and office running costs, which reflect the direct impacts of the pandemic and of the associated lockdowns.

Despite the impact of Covid, the Group has continued to invest in the development of systems to improve customer service and operational efficiency. During the period the digitisation of the Group's SME business commenced its pilot phase and the system to support the Group's deposit platform relationships also went live, enabling the broadening of this element of the deposit gathering strategy.

Much of the Group's IT systems and infrastructure development is carried out by its experienced in-house resource, and the Group has therefore tended to capitalise less software than might be seen elsewhere in the sector, with more costs being taken immediately to profit. During the period software of £1.4 million was capitalised (2020 H1: £0.4 million, 2020 full year: £1.0 million).

The Group's IRB project made further progress through the period, with the second stage of the application for buy-to-let submitted in March 2021. Costs for the half year include expenditure of around £1.0 million on this project, both in internal resources and on external advice.

This continuing investment meant that the Group's cost:income ratio in the period, at 42.5% (Appendix C), was broadly similar to the 43.0% for the 2020 financial year and the 41.8% recorded in the six months ended 31 March 2020.

The Group considers that the ongoing control of its cost base is a key element of its operational strategy and seeks to enhance cost-effectiveness from efficiencies and scale, with targeted investment in people and systems. However, the costs of these investments, coupled with new business initiatives and increasing regulatory expectations mean that the achievement of a sustainably lower ratio is a longer-term target.

 

Impairment

The Group's charge for impairment in the six months, at £6.0 million, is much reduced from the charge in the comparable period in the previous year (2020 H1: £30.0 million). Accounting Standards require that losses are provided for on an expected basis, rather than an arising basis and losses attributable to the Covid crisis were provided as the impact of the pandemic was recognised. The ongoing development of the pandemic since 30 September 2020 has not provided significant evidence that the overall outturn will be worse than expected at that point, and thus the additional charge made in the half year is much more comparable to pre-Covid levels.

The absolute level of the balance sheet provision, at £82.4 million (30 September 2020: £81.8 million) has remained broadly similar across the half year, as has the coverage ratio, at 64 basis points (30 September 2020: 64 basis points, 31 March 2020: 53 basis points). To date, little of the provision established at the previous year end has been utilised in writing off defaulted accounts. However, the Group remains cautious on the future prospects of those loans for which provision is being carried. Support schemes from the UK Government remain in place and, as at 31 March 2021, no repayments for CBILS and BBLS loans had been required from customers. This means that significant uncertainty as to the future behaviour of the supported customers still exists and the Group considers it would be inappropriate to scale back its level of impairment coverage without hard evidence of both customer performance and a sustainable improvement in UK macro-economic conditions.

 

Payment holidays and outcomes

The Group offered payment relief to a significant number of its customers during the initial period of the pandemic. Most of these came to an end before the previous year end on 30 September 2020, but some continued into the current period.

The Group has around 400 accounts remaining on payment holidays across all its portfolios at 31 March 2021, representing around £40.0 million of gross balances. Of these, 137 are in an initial three month relief period and the reminder in a secondary period. These represent a very small proportion of the over 21,000 accounts granted relief by the Group at some point in the last twelve months. During the six month period, which included the second Covid lockdown period in the UK, the Group granted 574 first time payment reliefs and 1,303 extensions, 367 of which related to cases granted their first relief in the period as well. Compared to the volume of requests in the first part of the pandemic this does not have a significant impact on the Group's exposures.

The position at 30 April 2021, the most recent available month end, is summarised in the table below. This analyses the values of accounts by payment relief status, which also highlights, for each of those groups, the relative change between the April 2021 arrears position and the 29 February 2020, pre-Covid position. Cases where the payment holiday has ended, but no payment is yet due, are shown separately.

 

Currently business-as-usual

Between

Current relief

 

No relief

Single relief only

Extended relief

relief and BAU

Extended

Original

 

£ billion

£ billion

£ billion

£ billion

£ billion

£ billion

Balance

10.57

1.65

0.81

0.01

0.03

0.01

Proportion

80.8%

12.6%

6.2%

0.1%

0.2%

0.1%

 

 

 

 

 

 

 

% with arrears deterioration

0.8%

1.3%

8.0%

3.5%

3.1%

0.1%

% with arrears improvement

2.8%

1.1%

6.8%

1.8%

2.3%

5.5%

Payment holiday status (30 April 2021)

Of the accounts granted a single payment holiday, over 98% were up-to-date at 30 April 2021. This fell to over 90% of accounts with extended payment holidays. However, the level of volatility in these accounts noted at the year end has continued through the half year, both in terms of improving and worsening arrears, particularly for customers who had received extended payment holidays.

It is also clear that while many customers may have taken payment reliefs for precautionary reasons, these accounts may have been able to perform due to external support. Examples of this might include tenants of buy-to-let landlords accessing furlough payments to meet rent demands and SME customers using drawings under CBILS and BBLS schemes to meet day-to-day payments. These reliefs have a limited time scale and this level of performance may not be fully representative of the true position.

As a result, management have maintained the approach of increasing the probability of default for this population above the levels suggested by the underlying models for those accounts which have taken a payment holiday extension. Such accounts have been transferred from Stage 1 to Stage 2 for impairment purposes.

 

Multiple economic scenarios and impacts

The setting of economic scenarios for the purposes of IFRS 9 in the current economic climate is difficult. The broad thrust of economic data for the UK over the past six months has been positive, but this has been in a period where government interventions have continued and there is continuing uncertainty over the direction the economy will take once these start to be withdrawn, with potentially radically different medium term outcomes.

To address these uncertainties the Group has adopted a two-part approach to its scenario setting. For the three main scenarios, central, upside and downside, a similar approach has been adopted to 'normal' year ends with the central scenario based on public forecasts and the upside and downside scenarios more benign or severe variants of this. This follows the general sentiment towards the UK economy, assuming a continuing of the easing of Covid restrictions and no significant impact from a third wave of infections.

The severe scenario has been set to represent a potential negative outturn, either for the economy, for the pandemic, or for both. This is largely based on the Bank of England's stress testing scenarios, but with a less optimistic outlook on house prices. This scenario stands for a radically different future course for the UK, which is plausible and potentially has a very different impact on the Group's customers.

The weightings applied to each scenario have been held at those used at 30 September 2020, in the light of the continuing economic uncertainty described above. The forecast economic assumptions within each scenario, and the weightings applied, are set out in more detail in note 11.

To illustrate the impact of these scenarios, the impairment provision at 31 March 2021 before post‑model adjustments ('PMA's) has been recalculated weighting each of the central scenario and the severe scenario at 100%, with the results shown below.

 

Provision before PMAs
£m

Cover ratio

Weighted average

54.9

0.43%

Central scenario

40.7

0.32%

Severe scenario

96.2

0.75%

 

Post-model adjustments ('PMAs')

It is important to note that the impairment model focusses principally on the impact of future economic changes on the portfolio. Where accounts are currently only being kept from defaulting by external short-term support measures they may still default when these are removed, despite an improved economic climate. Therefore the Group applies PMAs, based on its experience and its understanding of current customer positions, to allow for the possibility of such cases not being identified by the modelling approach. At 30 September 2020 these overlays were applied to specific account types where it was felt there was a risk of the modelled probabilities of default being understated.

The Group has reconsidered its methodologies for calculating overlays in the light of economic movements in the period. It is clear that the positive movements in economic indicators such as house prices and UK GDP in the period, both in actual and forecast terms have had a positive impact on the modelled outputs for cases benefitting from support measures without any broader evidence of improvement in the underlying credit quality of the customer balances being available. It was therefore decided to scale up the level of PMAs to address the potentially increased divergence between model outputs and underlying credit quality on such cases.

The total level of PMAs applied are summarised below.


31 March
2021

31 March
2020

30 September 2020


£m

£m

£m





Initial Covid overlay

-

24.0

-

Overlay for payment relief and lagged effects

18.5

-

19.8

March 2021 uplift

9.0

-

-

Total PMAs

27.5

24.0

19.8

In order to illustrate the combined effect of the weightings and PMAs applied in the Group's impairment calculations, the calculation at 31 March 2021 has been sensitised to show the impact of the PMA uplift, the use of alternative scenario weightings and a combination of the two (note 11) with the potential for a future Covid-related crash excluded. The first uses the same PMA methodology as was used at 30 September 2020 (Sensitivity A), the second the more optimistic weightings used at 30 September 2018 (Sensitivity B) but unchanged PMAs, while the third uses both the more benign economics and the lower level of PMAs. The September 2018 weightings, which were also used at March 2019, are used as an illustration of weightings which might be used where the overall economic outlook is generally positive to neutral.

These scenarios are set out in more detail in the notes with the results summarised below.

 

Total provision

Difference

Cover ratio

Difference

Reported provision

£82.4m

-

0.64%

-

Sensitivity A

Based on actual weightings but excluding March 2021 PMA uplift

£73.4m

£9.0m

0.57%

7bp

Sensitivity B

Based on 1 October 2018 weightings and including March 2021 PMA uplift

£73.0m

£9.4m

0.57%

7bp

Sensitivity C

Based on 1 October 2018 weightings but excluding March 2021 PMA uplift

£64.0m

£18.4m

0.50%

16bp

 

Ratios and trends

The combination of approach to economic forecasting described above and the approach to the continuing uncertainty over accounts which have had payment relief or other government support has resulted in the provision amount and cover ratios broadly aligned with those at the 2020 year end.


31 March
2021

31 March
2020

30 September 2020

30 September 2019


£m

£m

£m

£m






Calculated provision

54.9

42.7

62.0

41.9

PMAs

27.5

24.0

19.8

-

Total

82.4

66.7

81.8

41.9






Cover ratio

0.64%

0.53%

0.64%

0.34%

The PMAs described above align the overall reported provision with current loss expectations, given the inherent uncertainties on a macro and micro level and based on the Group's internal monitoring of credit risk and customer contact metrics. The Group maintains a cautious approach and will require evidence as to customer behaviour once government interventions are scaled back, before moving scenario weightings to more normal levels and revising PMA methodologies so that actual emergent behaviour is reflected.

 

Fair values

There have been significant movements in spot and forward interest rates in the period which have resulted in fair value net gains of £13.5 million as a result of the Group's hedging activities (2020 H1: £0.1 million net losses). These movements do not affect cash flow and the fair value items are expected to trend to zero over the lives of the related instruments. As such this item represents a timing difference which is consistently excluded from the Group's definition of its underlying profit. The Group remains appropriately economically hedged.

 

Taxation

The Group's effective rate for the period was 23.0%, broadly similar to the 22.1% charge in the corresponding period last year. Materially all the Group's operations fall within the scope of UK taxation and the standard rate of corporation tax applying to the Group in both periods was 19.0%. While the UK Government has announced an increase in the basic rate of corporation tax to 25% from 2023, this was not enacted at the balance sheet date.

The effect of the rate change on the Group's deferred tax assets and liabilities will be accounted for in the second half of the financial year, but the impact is not expected to be significant (note 7).

Longer term, the rate of tax that will apply to the Group remains uncertain. While the basic rate of corporation tax will increase from 19% to 25%, HM Treasury has announced that it is considering changes to the 8% Bank Surcharge in light of this increase, but firm proposals are not expected until the autumn of 2021 at the earliest.

 

Result

Profits after taxation of £74.2 million (2020 H1: £44.5 million) have been transferred to equity, which totalled £1,203.8 million at the period end (31 March 2020: £1,122.0 million). This represents a tangible net asset value of £4.07 per share (31 March 2020: £3.74 per share) and a net asset value on the statutory basis of £4.74 per share (31 March 2020: £4.41 per share) (Appendix D).

 

The information on related party transactions required by DTR 4.2.8(1) of the Disclosure Guidance and Transparency Rules is given in note 25.

 

4.2  ASSETS AND LIABILITIES

The Group's assets and liabilities at the period end are summarised in the balance sheet below.

SUMMARY BALANCE SHEET

31 March 2021


31 March
2021

31 March
2020

30 September

2020


£m

£m

£m

 

 

 

 

Intangible assets

170.5

170.5

170.1

Investments in customer loans

12,816.3

12,506.1

12,631.4

Derivative financial assets

180.7

538.1

463.3

Cash

2,103.0

1,206.8

1,925.0

Other assets

218.3

267.7

315.7

Total assets

15,488.8

14,689.2

15,505.5

Equity

1,203.8

1,122.0

1,156.0

Retail deposits

8,631.2

6,911.9

7,856.6

Other borrowings

5,466.8

6,412.4

6,229.7

Derivatives financial liabilities

76.2

94.6

132.4

Pension deficit

11.8

28.3

20.4

Other liabilities

99.0

120.0

110.4

Total equity and liabilities

15,488.8

14,689.2

15,505.5

Changes in the balance sheet of the Group are principally driven by movements in its loan books. During the six month period the portfolio increased by 1.5%, with growth in Mortgage Lending a broadly stable position in Commercial Lending and a continuing amortisation of the Idem Capital portfolio. This is discussed in more detail in the lending review (Section 1 above). This increase, together with the Group's liquidity and capital policy, determines its funding requirements and hence the level of its liabilities.

 

Funding structure and cash resources

The Group's funding increased by 0.1% during the six months ended 31 March 2021 reflecting the broadly stable state of the balance sheet and the Group's continuing cautious outlook on funding and liquidity. The proportion represented by retail deposits increased to 61.2% in accordance with the Group's long-term funding strategy (30 September 2020: 55.8%). The continuing caution on liquidity also resulted in a £178.0 million increase cash balance in the period. Movements in funding balances are discussed in more detail in Section 2 of this report.

 

Derivatives

Movements in derivative financial assets principally arise from the retirement of certain of the Group's currency denominated floating rate notes and their related hedging instruments in the period. These swaps decreased by £292.3 million over the six month period. These movements do not impact the Group's results but do reduce the TRE for capital purposes and have therefore reduced capital requirements and improved capital ratios.

Derivative assets used for interest rate hedging increased by £9.7 million, while interest rate hedging liabilities reduced by £56.2 million, both principally as a result of interest rate movements. This net £66.0 million movement was largely offset by a £51.6 million reduction in the hedging adjustment on loans to customers, included in sundry assets above, and a £7.3 million reduction in the hedging adjustment on retail deposits, included in sundry liabilities.

 

Pension obligations

The net liability in respect of the Group's defined benefit pension scheme ('the Plan'), valued in accordance with IAS 19, reduced by £8.6 million in the six month period, resulting in an accounting deficit of £11.8 million (30 September 2020: 20.4 million, 31 March 2020: £28.3 million). This was principally a result of an increase in the discount rate used, which is set on the basis of market bond yields.

While the valuation under IAS 19 is that which is required to be disclosed in the accounts, pension trustees generally use the technical provisions basis as provided in the Pensions Act 2004 to measure scheme liabilities. On this basis, which includes the effect of the charge given over the Group's head office building, the Plan showed a surplus at 31 March 2021 of £9.7 million, compared to a deficit of £9.7 million at 30 September 2020, meaning that the scheme was fully funded on that basis.

The Plan was closed to new members in 2002 and a consultation is currently taking place to mitigate the Group's exposure to future service costs under the scheme. Details of any changes will be given with the year end results, when this process will have concluded.

 

Other assets and liabilities

Sundry assets have reduced by £97.4 million since 30 September 2020. This arises principally from movements in swap rates which generated the £56.2 million movement in the fair value hedging adjustment on assets referred to above and generated a £42.2 million reduction in collateral deposits as a result of the increased value of derivative liabilities.

Sundry liabilities reduced by £11.4 million over the six month period, the largest element being the settlement of brought forward contingent consideration balances.

 

4.3  SEGMENT PERFORMANCE

The underlying operating profits of the three segments described in the Lending Review in Section 2 are detailed fully in note 2 and are summarised below.

 

Six months to

31 March 2021

Six months to

31 March 2020

Year to

30 September 2020

 

£m

£m

£m

Segmental profit

 

 

 

Mortgage Lending

92.4 

76.9 

154.3 

Commercial Lending

37.6 

15.1 

45.9 

Idem Capital

8.7 

9.6 

19.6 

 

138.7 

101.6 

219.8 

Unallocated central costs and other one-off items

(55.8)

(44.4)

(99.8)

 

82.9 

57.2 

120.0 

The Group's central administration and funding costs, principally the costs of service areas, establishment costs and interest on excess liquidity and bonds have not been allocated.

 

Mortgage Lending

The Mortgage Lending division continued to maintain its market position through the period and benefitted from the tightening of the Group's overall funding costs. Coupled with the division's operational strategy, and the gradual replacement of legacy assets by new originations in the portfolio, this led to an increase of 6 basis points in segmental NIM, and a 7.6% increase in net interest to £103.1 million (2020 H1: £95.8 million).

With mortgage accounts continuing to perform well in the period, provision charges reduced significantly, though not yet to pre-Covid levels, with a charge for the period of £4.9 million (2020 H1: £13.8 million), reflecting the continued use of PMAs in estimating expected credit losses.

Together these changes saw segmental profit increase by 20.2% from the corresponding period in the previous year to £92.4 million (2020 H1: £76.9 million).

 

Commercial Lending

The profit of the Commercial Lending segment in the period was £37.6 million, increased by 149.0% from the result in the first half of 2020 (2020 H1: 15.1 million). This arose from both an improvement in NIM and a reduction in provision charges.

The average loan balance across the period, at £1,471.0 million, was similar to that through the first half of 2020 (2020 H1: £1,473.2 million). This included significant changes in mix between the division's business lines, including a 15.1% increase in the average development finance balance. Annualised NIM in the period increased from 5.25% to 6.32% as a result of tighter funding costs, the continuing operational focus on yield and changes in the product mix of the book delivered a 20.2% increase in net interest to £46.5 million (2020 H1: £38.7 million).

Total impairment provisions for the period were £1.3 million, a reduction from the £15.5 million charged in the comparative period. With accounts continuing to perform, no factors have been identified which would lead to additional cases being provided and provision levels have been largely maintained. However, with many SME customers potentially having been in receipt of CBILS and BBLS funds, it is too early to conclude that this positive performance will continue as these drawings are exhausted.

 

Idem Capital

All the portfolios within the Idem Capital division continued to run off in the period, with no new transactions completing. This led to a 23.4% reduction in average loan balance for the half year compared to the same period in 2020. Net interest fell by 18.2% to £10.8 million (2020 H1: £13.2 million) as a result. The 2020 outcome included the effects of a Covid-related reduction in expected future cash flows, leading to a write down of future interest, which has not been repeated in the 2021 results.

Average annualised NIM improved from 7.28% in the half year to 31 March 2020 to 7.77% in the current period. The long-term period-on-period decline of NIM in this division was temporarily halted by the effect of the inclusion of the interest write down noted above in the results for 2020.

Asset performance in the period has been encouraging, with accounts continuing to pay down as expected and no significant additional Covid provisioning requirements identified, creating a write-back of provision of £0.2 million, largely on redeeming accounts (2020 H1: charge of £0.7 million).

Overall, these factors restricted the decline in the segment profit to 9.4%, with a contribution of £8.7 million to the Group result (2020 H1: £9.6 million).


Paragon Banking Group PLC

INTERIM MANAGEMENT REPORT

5.  OPERATIONAL REVIEW

While the Group's business has inevitably been impacted by Covid and the changing levels of restrictions imposed in the UK, it has been a priority of the Group to maintain business‑as‑usual, as far as possible. This has largely been achieved and has played a large part in delivering the results for the period.

This has left the Group in a good position as it moves in to the second half of the financial year and restrictions begin to ease. It is still too early to say how the experiences of the pandemic will impact on the Group's business model in the longer term, but plans are already in hand to develop working models for the future.

 

5.1  OPERATIONS

The Group employs just over 1,400 employees, with the majority normally based in its Solihull offices. However, since the beginning of the Covid pandemic approximately 90% of employees have worked from home.

As a result, the Group has been able to continue to provide a full service to customers, intermediaries and other business partners throughout the various lockdowns during the six month period, while at the same time continuing to develop the business and address issues arising from the pandemic, particularly in dealing from the transition of customers from payment reliefs back to normal payment profiles.

The Group is proud that it has been able to continue to develop the business through new systems, processes and products despite the restrictions on contact, rather than simply mark time until the pandemic is concluded.

Instead, during the six months the Group has completed or progressed a significant number of technological, operational and regulatory projects. While long-term projects to provide better technology for the asset finance and savings operations continued in the period, other important projects included enhancing the Group's cyber-security, developing its operational resilience capabilities, putting in place contingency plans in case of negative interest rates and preparing for the transition of LIBOR-linked customer accounts to alternative reference rates. Overall, the half year saw more projects delivered than most recent comparable time periods.

The wellbeing and safety of employees has been the priority of the leadership team over the past year and this will continue as plans are established for a phased return to the office from June, in line with the Government's guidelines. The Group intends to pilot various approaches to flexible working using a hybrid operating model, in order to identify the best outcome for its customers, shareholders, and its people. These pilots will continue throughout 2021 with business performance and employee feedback shaping the overall future way of working for the Group.

The Group continues to envisage that its office hubs will remain important to ensure that its culture and identity can continue to grow, that collaboration is encouraged and that its peoples' sense of belonging is nurtured. To that end it was pleased to sign a lease during the period on a new central London base, bringing together its City-based staff, replacing two existing locations, and providing a venue to interface with stakeholders in the capital.

The Group has demonstrated agility and flexibility in how its resources are deployed throughout the pandemic, with short-term secondments being introduced to support operational volumes resulting from initiatives such as payment holidays.

Throughout the pandemic the Group's strategy has focussed on customer outcomes, particularly for more vulnerable customers and it was particularly pleasing that the Group's FOS complaints data shows no significant increase in the period. The number of complaint cases reported to FOS in the six months ended 31 December 2020, the most recent reporting period, was 60 with an uphold rate of 43.3% while the number for the six months ended 30 June 2020 was 40, with an uphold rate of 41.3%.

Overall, the Group is very pleased with the way that its people and infrastructure have continued to respond to the challenges posed by the pandemic.

 

5.2  GOVERNANCE

The Group continues to operate under business continuity arrangements as a result of the pandemic; with board and committee meetings being held remotely since March 2020. The impact of the pandemic on all the Group's stakeholders has continued to be an area of significant focus for the Board and the Group's ongoing response has been thoroughly reviewed. The Group's 2021 Annual General Meeting was held in February on a closed basis, in accordance with UK Government guidance and the Board regrets that shareholders could not be given the opportunity to attend in person. However, shareholders were encouraged to participate in the meeting by completing and returning their proxy voting terms and were able to view the meeting online. Shareholders were also invited to submit questions in advance on the business to be considered at the meeting.

The Group continues to be subject to the 2018 UK Corporate Governance Code ('the Code') and the Group's procedures for compliance with the Code are set out in the Annual Report and Accounts for 2020. The Group continued to comply with the principles of the Code during the period.

 

Board of Directors

As announced in the Group's 2020 year end results announcement, Finlay Williamson stepped down from the Board on 31 December 2020. Peter Hill, who was appointed to the Board on 27 October 2020, assumed the role of Risk and Compliance Committee Chair from 31 December 2020.

Peter Hill was appointed to the Board following a robust search and selection process. He was CEO of Leeds Building Society, one of the UK's largest building societies, from 2011 until his retirement in 2019, having previously worked in a number of senior management positions within the society. Peter is currently a non-executive director of Pure Retirement Limited and chair of its risk committee and is also chair of the board at Mortgage Brain. He brings with him a wealth of experience in financial services and a proven track record in risk oversight, gained during his executive and non-executive career.

Following these changes, the Board has three female directors, including the Chair of the Board, out of a total of eight board members, forming 37.5% of the Board.

 

Remuneration policy

The PRA remuneration rules applicable to the Group are changing with effect from 1 October 2021. This is a result both of the reduction in the asset threshold defining a Level 2 bank from £15 billion to £13 billion, announced by the PRA in December 2020, which brings the Group within the scope of more onerous rules, and of the development of the rules themselves in response to CRD V. In response a full gap analysis is being performed against the updated rules, with affected members of staff being identified. While some of the required changes to remuneration policies were prospectively approved at the 2020 AGM, any further changes required will be submitted to the Remuneration Committee for review and approval in September 2021. Any changes will be reported on in the Directors' Remuneration Report for the year and in the Remuneration Section of the Pillar 3 report for the year as appropriate.

The Group has also taken steps to assess the status of the small number of off-payroll workers in the business and made necessary changes to ensure the Group does not enter into engagements with workers who fall within IR35 status, avoiding the complexities of such arrangements.

 

5.3  PEOPLE

Equality and diversity

Diversity within the Group continues to be an area of focus at board level and across all areas of the business. The Group's Equality, Diversity and Inclusion ('EDI') Network, made up of representatives from across the Group, was established in October 2020, and its purpose is to:

· Raise awareness and understanding at all levels of the Group of what equality, diversity and inclusion in the workplace means

· Provide feedback and advice to leadership of the business on the issues affecting employees from underrepresented groups

· Support the delivery of initiatives to improve equality, diversity and inclusion across the Group

· Promote the Group externally as a diverse and inclusive place to work

The EDI Network has so far run communications campaigns, launched new unconscious bias and inclusive workplace training workshops and agreed a plan of further actions to promote equal opportunities within recruitment, learning and career development. Richard Rowntree, Managing Director, Mortgages, took on the role as Executive Sponsor for Diversity in February 2021.

The Group published its Gender Pay Gap report in March 2021 and reported a mean pay gap of 40.7% at 5 April 2020 (2019: 41.3%) and median gap of 36.9% (2019: 33.9%). The Group's 2020 gender pay measures are similar to those for 2019 and remain larger than senior management would like. The gender pay gap is predominately due to the seniority and nature of positions occupied by men and women in the organisation and one of the principal objectives of the Group's diversity initiatives is to investigate ways of developing female talent in specialisms where women have historically been underrepresented.

At senior levels of the organisation the representation of women, measured against the Hampton Alexander target of boards having 33% female representation, is encouraging (37.5% as at March 2021). The Group is also a signatory to the Women in Finance Charter, sponsored by HM Treasury and has set the target of achieving 35% of women in senior positions, using the Hampton Alexander definition by January 2022 (34.6% as at March 2021). It was pleasing to note that in the final Hampton Alexander review, published in February 2021, the Group's senior management gender diversity ranked tenth out of 38 financial services companies in the FTSE 350.

The Group is committed to progressing the careers of women both internally and across the financial services sector and has a number of initiatives in place to support this. The Group continues to have mentors and mentees involved in the 'Women Ahead 30% Club', cross-company mentoring scheme, a number of female senior leaders have been involvement in The Women's Association's 'For the Women' campaign and Nigel Terrington, the Group's CEO, has been involved in their Executive Challenge project, which gives girls between the ages of 12-17 the chance to connect with and learn from executive directors.

Whilst the Group is pleased with progress to date in improving diversity, relative to other similar organisations, it recognises that there is still much work to do and welcomes the additional impetus provided by the EDI Network. It is confident, however, that the measures put in place will help provide individuals with the opportunities they deserve and the Group with the workforce it needs to achieve its strategic goals. A full list of the Group's diversity targets can be found on the 'Sustainability' section of the Group's website.

 

People and development

Communication with employees has been critical to the Group's ability to operate successfully throughout the pandemic; senior management have provided regular updates to employees throughout the year, and feedback has been gathered through regular employee wellbeing pulse surveys. In addition, senior management, including Board members, have attended regular meetings of the Group's People Forum. A Groupwide employee engagement survey had been planned for early 2021; this has been postponed until June given the third national lockdown and the Group's priority on employees' welfare.

The Group's average number of employees in the period has increased by 2.5% compared to the equivalent period in 2020, despite the complexities of recruiting and onboarding people during pandemic working conditions.

The Group's attrition rate remains improved on previous years with 6.9% turnover in the first half of the year (2020 H1: 15.3%). While some of this change may be attributable to constraints in the employment market due to the pandemic, the Group's turnover rate has historically remained below the average for the sector. This can be attributed to the development opportunities available to employees and the strong corporate culture that is fostered by the Group's leadership. Over 30% of the Group's people have been employed for more than ten years, with 12.9% having achieved over 20 years' service. The stability within the Group is a valued component of its corporate culture and has been an important factor in supporting its business through the pandemic; as well as in providing the specialist service its customers require.

In December 2020 all eligible employees were awarded a £1,000 share award in recognition of their contribution throughout a challenging 2020. The shares were awarded to 97% of employees and will vest in December 2023.

As at March 2021 81% of employees were enrolled in the work-save pension. The default investment option of the plan was reviewed in the period and changes have been made to reflect closer alignment with the Group's environmental, social and governance policies. A further 8% of employees are members of the Group's final salary pension scheme, meaning that around 90% of employees are receiving the Group's support to save for their retirement.

During the period the Group's People Forum has continued to act as the principal conduit for employee opinions to be communicated to senior management and the Board. In February 2021 a suggestion made by the People Forum to increase the provision of Christmas Eve leave and New Year's Eve leave from a half day to a full day received the support of the Executive and this will commence from December 2021. Senior management and Board members continue to attend People Forum meetings regularly to seek feedback and provide strategic updates. Subjects covered in meetings during the period include the Group's technology strategy and its plans for a return to office-based working.

Employee development continues to be a priority for the Group with most learning continuing to be delivered virtually and a number of new initiatives being rolled out. The Group's ability to deliver learning online has been enhanced with the launch of its new learning management system ('LMS') in February 2021. This new LMS offers libraries of resources that employees can use for self-directed learning, as well as being used for regulatory eLearning.

During the period the Group has launched three development programmes: a new leadership programme aimed at all current leaders and line managers; a new programme for high-potential employees; and another cohort of the existing Team Leader Academy, aimed at employees aspiring to their first step into people management.

The Group continues to make use of the Apprenticeship Levy scheme, with 21 apprentices registered at 31 March 2021. In addition to this there will be a further draw down in April 2021 to cover 27 apprentices including 12 aspiring team leaders. The Group utilised 34% of its available levy pot in the past twelve months, with the Group's ability to access funds restricted partly by the practical difficulties caused by the Covid pandemic, but also partly by the terms of the scheme, under which it is difficult for the Group to identify suitable roles for funding. The Group is also currently supporting 135 individuals with funding to complete professional qualifications across various bodies, with CeMap students the most numerous.

 

5.4  SUSTAINABILITY

Sustainability, including resilience in the face of climate change risks, is core to the Group's strategy: to focus on specialist customers, delivering long-term sustainable growth and returns through a low risk and robust business model. Sustainability influences every aspect of the Group's business and means:

• Reducing the impact of the Group's operations on the environment

• Ensuring that the Group has a positive effect on our stakeholders and communities

• Delivering sustainable lending through the design of products offered and the choices of sectors in which to operate

 

Climate change

Climate change is designated as a principal risk within the Group's Risk Management Framework: information and measures on climate change risks are considered at board level and the Group's responses are considered within the Board's overall strategy. These risks fall into two main groups:

• Physical risks (which arise from weather-related events)

• Transitional risks (which come from the adoption of a low-carbon economy)

The Group has an internal Climate Change Forum, sponsored at executive level and containing representation from across the business, to share information on initiatives within business areas and to help develop the Group's overall response.

The Green Bond Framework, published in the period, reflects the Group's commitment to embed sustainability throughout its strategy, operations, and product offerings including funding and capital raising activities. The recently established Sustainability Committee, under the oversight of the Executive Risk Committee, is responsible for the Framework.

Developments in sustainable products and climate-related exposures are discussed in the relevant business reviews.

While the Group is not required to report on climate change risk and exposures under the TCFD framework until its 2022 year end, it intends to move towards that position in its 2021 disclosures.

 

Social engagement

Despite the difficulties for fund-raisers created by the pandemic, the Group's Charity Committee raised over £43,000 for Macmillan Cancer Support, the Group's chosen charity for the 2020 calendar year. This was a significant increase from the amounts raised by employees in previous years and included several new virtual activities to help support employee engagement and team collaboration.

For the 2021 calendar year the Group is supporting the Alzheimer's Society and the Charity Committee continues to adapt its fundraising approach to cope with evolving working practices.

The Group continues to actively consider how community involvement can be enhanced on an ongoing basis in a Covid-safe way as peoples' lives slowly return to normal.

 

5.5  RISK MANAGEMENT

The effective management of risk is crucial to the achievement of the Group's strategic objectives, particularly in the current ongoing Covid environment. It operates a risk governance framework, designed around a formal three lines of defence model (business areas, Risk and Compliance function and Internal Audit) supervised at board level, and this model has provided an effective framework to oversee the business and operational changes necessitated by the pandemic.

Inevitably the principal challenges in the risk environment faced by the Group during the six-month period and going forward remain the various impacts of Covid across all of its main risk areas. The longer-term implications of the global crisis in terms of economic impacts on the business, potential changes to lending profiles, new business volumes and customer credit risk and the potential impacts on operational risk of changed working patterns continue to be closely monitored. The Group responds to the immediate challenges of the pandemic as they emerge whilst considering how any of these might affect its future strategy. These include:

· Risks involved in planning a Covid-safe return to office-based working and related implications for the longer-term workplace strategy as lockdown eases according to the UK Government roadmap

· Management of the remaining payment holidays in accordance with regulatory initiatives together with working closely with all customers impacted by Covid to determine forbearance solutions that are tailored to individual customer circumstances and that are aligned to regulatory guidance and expectation

· Risks arising related to the provision of CBILS and BBLS, as customer repayments begin, and to the implementation of RLS lending including process changes and underwriting decisions

· Revision of credit policies and decisioning to reflect the challenges in applying existing lending criteria in the current economic climate

During the period the Group conducted a review of its exposure to issues relating to defective cladding on high-rise buildings, where such buildings form the security for mortgage loans. Exposure on the existing mortgage book has been quantified, with accounts secured on potentially affected buildings over six storeys high comprising less than 0.5% of the balance. Underwriting guidelines have been reviewed to ensure they remain in line with emerging best practice. Overall, the Group is well placed to manage these risks.

Despite the demands of managing pandemic-related risks, the Group has continued to make good progress in further developing its ability to manage all categories of risk as the business develops. Whilst the pandemic has provided its own unique set of challenges including re-deployment of resource and priorities, the Group is committed to continuing to deliver on key risk management initiatives including:

· Operational readiness of the Group for zero or negative interest rates following the publication of the PRA's 'Dear CEO' letter in February 2021

· Strategy and operational and conduct implications for change in product design, funding and operations in transitioning all LIBOR-linked customers to an alternative rate following the withdrawal of LIBOR in December 2021

· Ongoing embedding of operational resilience capabilities. This has included refinement of critical business services and tolerances and ensuring these considerations are embedded as part of day-to-day operations, together with enhancement of the Group's technology

· Addressing the impact of climate change on managing financial risks following the adoption of climate change as a principal business risk during 2020

· Continuing to develop advanced models and embed the overarching model risk framework to enhance credit risk management and support the Group's IRB application process, with Phase 2 of the Buy-to-Let application submitted to the PRA in March 2021

· Evolution and embedding of the Group's approach to managing the risks and oversight of its outsourced relationships and important suppliers

· Enhancing stress testing procedures within the Group to ensure the robustness of capital and liquidity positions

· Ensuring that the Group's cyber-security controls and data protection approach continue to remain effective in the face of the rapidly evolving challenges in these areas

It remains a priority of the Group to ensure that its risk management framework evolves in line with the strategic development of the business. During the period, an externally facilitated benchmarking exercise was carried out, confirming that in the majority of areas, the framework was effective and proportionate in terms of both maturity and operation. However, the Group will continue to enhance the entity-wide risk management framework over the coming years and has added further to its permanent resource during the period to facilitate this programme.

The Group continues to review its exposure to emerging developments in the Brexit process as further clarity is received as to future dealings with the EU. However, the end of the transition period on 31 December 2020 has caused no immediate impact to the Group. While the Group does not have operations outside the UK it has continued to review the capital, liquidity and operational implications of the stresses which might be caused by the process. The Board has kept the situation under ongoing review throughout the period and continues to do so, and considers that the Group is well placed to address the challenges. However, the long-term outcome of the Brexit process remains uncertain and it will remain subject to ongoing monitoring as the position develops.

A summary of the principal risks and uncertainties faced by the Group, required by DTR 4.2.7(2) of the Disclosure and Transparency Rules, is set out on pages 157 to 161. These risks have not changed significantly since those disclosed at the year end.

 

5.6  REGULATORY CHANGES

Paragon Bank, which, for regulatory purposes, includes most of the Group's activities, is authorised by the PRA and regulated by the PRA and the FCA. The Group is subject to consolidated supervision by the PRA and a number of its other subsidiaries are authorised and regulated by the FCA. As a result, current and projected regulatory changes, particularly the ongoing programme of revisions to the Basel supervisory regime, continue to pose a significant risk for the Group, both as a result of their impact and of the pace of change.

The governance and control structures within the Group continue to be developed to ensure that the impacts of all new regulatory requirements on the business are clearly understood and that appropriate preparations are made before implementation. Regular reports on key regulatory developments are received at both executive and board risk committees, assessing the potential implications for the Group, along with necessary actions.

Covid has continued to be a principal concern of UK and European regulators over the last six months and subsequently, with the PRA, FCA, European Banking Authority ('EBA'), European Securities and Markets Authority ('ESMA') and others making regulatory changes and providing advice in response to the crisis, generally with very short consultation and implementation periods. These have included far reaching and detailed directions on the conduct of customer accounts in these circumstances, including the nature of reliefs which might be appropriate. All these publications have been considered by the Group, any implications identified, and any changes required implemented within an appropriate timeframe.

Whilst the Group is affected by a broad range of prudential and conduct regulations, given the nature of its operations, in addition to the consequences of Covid the following recent and current developments have the greatest potential impact:

· The Bank of England's Monetary Policy Committee confirmed in February 2021 that negative rates still form part of its monetary policy tool. In response, the PRA issued a 'Dear CEO' letter requesting firms initiate the implementation of tactical solutions to process zero and negative rates by August 2021. The Group is well positioned to meet this deadline

· In order to manage the impact of the withdrawal of LIBOR by December 2021, a project is in progress to transfer all customers with LIBOR-linked accounts to alternative rates by this deadline. The Group has a significant legacy LIBOR-linked mortgage book but is confident that it is well-placed to meet the regulatory timeframes and operational requirements to ensure an orderly transition while ensuring the fair treatment of customers

· The PRA remuneration rules applicable to the Group are changing, both as a result of the reduction in the asset threshold defining a Level 2 bank from £15 billion to £13 billion, announced by the PRA in December 2020, bringing the Group within the scope of more onerous rules, and of the development of the rules themselves in response to CRD V. In response a full gap analysis is being performed against the updated rules, with affected members of staff being identified. While some of the required changes to remuneration policies were prospectively approved at the 2020 AGM, any further changes required will be submitted to the Remuneration Committee for review and approval in September 2021

· The treatment of vulnerable customers continues to be a strong focus for the FCA, with further guidance having been finalised in February 2021. The Group continues to take its responsibilities in this regard seriously. Significant work has already been undertaken to map existing procedures, controls and training provisions to deliver against these enhanced expectations

· Good progress continues to be made in developing and enhancing operational resilience capability across the Group. Due to Covid, the consultation period for proposed PRA and FCA requirements was extended with final rules published in March 2021. Initial analysis indicates these do not differ materially from the consultation paper and the Group continues to deliver against the agreed plan to ensure compliance. The Group is committed to strengthening its operational resilience as a core priority particularly given the practical benefit this infrastructure has provided in informing the Group's Covid response

On a longer-term basis, in February 2021 the Bank of England began the consultation process for the incorporation of the prudential regulation regime previously set out in European legislation (including CRD IV) into the PRA Rulebook, following Brexit. While the expectation is that the majority of requirements will be directly transcribed, the PRA has indicated its willingness to depart from the EU text where it believes such a departure would enhance regulatory oversight in the UK. The Group will continue to monitor this process and respond as appropriate.

The Bank of England has also published a discussion paper concerning its future approach to setting a minimum requirement for own funds and eligible liabilities ('MREL') for banking firms. The current size and potential for future growth of the Group means it may be required to issue MREL at some point in the future. The Group submitted a response to this consultation in March setting out the potential negative impacts of the proposal on the competitiveness of mid-tier firms from the low level of the threshold, the high cost of MREL issuance for mid-tier firms and the shortness of the transition period. The Group will consider the final proposals when they are published and respond accordingly.

Overall, the Group considers that it is well placed to respond to upcoming regulatory developments and ensure compliance in line with required timescales.


Paragon Banking Group PLC

INTERIM MANAGEMENT REPORT

6.  CONCLUSION

The Group is extremely proud of the results achieved over the past six months. They reflect the hard work of all its people during a challenging period as well as the success of the longstanding strategy to build a diversified, technology enabled, specialist banking group. A record first half profit has been delivered and the Group enters the second half of the financial year with strong momentum, healthy new business pipelines and enhanced margins.

Our people continue to excel, maintaining both productivity levels and flexibility as we look to develop the future operating model options for the Group. We can look forward to the second half cautiously provisioned, with strong capital ratios and prudent liquidity and with growing confidence as the UK emerges from the Covid crisis.


Paragon Banking Group PLC

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors confirm that, to the best of their knowledge:

· The condensed financial statements have been prepared in accordance with International Accounting Standard 34 - 'Interim Financial Reporting', issued by the IASB and as adopted and endorsed by the European Union

· The Interim Management Report includes a fair review of the information required by Section 4.2.7R of the Disclosure Guidance and Transparency Rules, issued by the Financial Conduct Authority (that being an indication of important events that have occurred during the first six months of the current financial year and their impact on the condensed financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year)

· The Interim Management Report includes a fair review of the information required by Section 4.2.8R of the Disclosure Guidance and Transparency Rules, issued by the Financial Conduct Authority (that being disclosure of related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or the performance of the enterprise during that period; and any changes in the related party transactions described in the last annual report which could do so)

Approved by the Board of Directors and signed on behalf of the Board as the persons responsible within the Company.

 

MARIUS VAN NIEKERK

Company Secretary

8 June 2021

 

Board of Directors

F J Clutterbuck

(Chair of the Board)

H R Tudor

(Non-executive director, Chair of the Remuneration Committee and Senior Independent Director)

B A Ridpath

(Non-executive director)

G H Yorston

(Non-executive director)

A C M Morris

(Non-executive director and Chair of the Audit Committee)

P A Hill

(Non-executive director and Chair of Risk and Compliance Committee)

N S Terrington

(Chief Executive Officer)

R J Woodman

(Chief Financial Officer)

 


Paragon Banking Group PLC

INDEPENDENT REVIEW REPORT TO PARAGON BANKING GROUP PLC 

Conclusion

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2021 which comprises consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated cash flow statement, consolidated statement of movements in equity and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2021 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

 

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 28, the latest annual financial statements of the Group were prepared in accordance with International Financial Reporting Standards as adopted by the EU and the next annual financial statements will be prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

 

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the Company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

 

Simon Ryder

for and on behalf of KPMG LLP

Chartered Accountants

66 Queen Square

Bristol

BS1 4BE

8 June 2021


Paragon Banking Group PLC

CONDENSED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

For the six months ended 31 March 2021 (Unaudited)

 


Note

Six months to

Six months to

Year to



31 March

2021

31 March

2020

30 September 2020



£m

£m

£m

 

 

 

 

 

Interest receivable

3

238.6 

251.1 

491.7 

Interest payable and similar charges

4

(91.1)

(109.7)

(213.6)

Net interest income

 

147.5 

141.4 

278.1 

 

 

 

 

 

Other leasing income

 

9.6 

9.4 

19.2 

Related costs

 

(8.5)

(7.9)

(16.2)

Net leasing income

 

1.1 

1.5 

3.0 

Other income

5

6.1 

6.8 

14.0 

Other operating income

 

7.2 

8.3 

17.0 

 

 

 

 

 

Total operating income

 

154.7 

149.7 

295.1 

 

 

 

 

 

Operating expenses

 

(65.8)

(62.5)

(126.8)

Provisions for losses

11

(6.0)

(30.0)

(48.3)

Operating profit before fair value items

 

82.9 

57.2 

120.0 

Fair value net gains / (losses)

6

13.5 

(0.1)

(1.6)

Operating profit being profit on ordinary activities before taxation

 

 

96.4 

57.1 

118.4 

Tax charge on profit on ordinary activities

 

7

 

(22.2)

(12.6)

(27.1)

Profit on ordinary activities after taxation

 

 

74.2 

44.5 

91.3 

 

 

 

 

 


Note

Six months to

Six months to

Year to



31 March

2021

31 March

2020

30 September 2020

 

 

 

 

 

Basic earnings per share

8

29.3p

17.6p

36.0p

Diluted earnings per share

8

28.3p

17.3p

35.6p

Dividend - rate per share for the period

21

7.2p

-

14.4p

The results for the periods shown above relate entirely to continuing operations.

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 31 March 2021 (Unaudited)

 


Note

Six months to

Six months to

Year to



31 March

2021

31 March

2020

30 September 2020



£m

£m

£m

 

 

 

 

 

Profit for the period

 

74.2 

44.5 

91.3 

 

 

 

 

 

Other comprehensive income

 

 

 

 

Items that will not be reclassified subsequently to profit or loss

 

 

 

 

Actuarial gain / (loss) on pension scheme

17

7.8 

5.6 

(7.4)

Tax thereon

 

(1.5)

(0.4)

2.1 

 

 

6.3 

5.2 

(5.3)

Items that may be reclassified subsequently to profit or loss

 

 

 

 

Cash flow hedge (losses) taken to equity

 

(2.9)

(0.6)

(0.6)

Tax thereon

 

0.6 

0.2 

0.1 

 

 

(2.3)

(0.4)

(0.5)

Other comprehensive income / (expenditure) for the period net of tax

 

 

4.0 

4.8 

(5.8)

Total comprehensive income for the period

 

 

78.2 

49.3 

85.5 

 

 

CONSOLIDATED BALANCE SHEET

31 March 2021 (Unaudited)

 



31 March

2021

31 March

2020

30 September 2020

30 September

2019

 

Note

£m

£m

£m

£m

Assets

 

 

 

 

 

Cash - central banks

9

1,832.3 

812.7 

1,637.1 

816.4 

Cash - retail banks

9

270.7 

394.1 

287.9 

409.0 

Loans to customers

10

12,874.4 

12,585.3 

12,741.1 

12,250.3 

Derivative financial assets

12

180.7 

538.1 

463.3 

592.4 

Sundry assets

 

88.8 

108.4 

128.0 

92.8 

Current tax assets

 

3.0 

10.1 

5.7 

Deferred tax assets

 

3.7 

4.2 

6.2 

6.2 

Property, plant and equipment

 

 

64.7 

 

65.8 

 

66.1 

57.3 

Intangible assets

13

170.5 

170.5 

170.1 

171.1 

Total assets

 

15,488.8 

14,689.2 

15,505.5 

14,395.5 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Short-term bank borrowings

 

0.1 

0.2 

0.4 

1.0 

Retail deposits

14

8,634.3 

6,919.7 

7,867.0 

6,395.8 

Derivative financial liabilities

12

76.2 

94.6 

132.4 

80.5 

Asset backed loan notes

15

2,011.3 

3,887.3 

3,270.5 

4,419.4 

Secured bank borrowings

15

755.7 

879.2 

657.8 

787.5 

Retail bond issuance

15

237.0 

296.6 

296.8 

296.5 

Corporate bond issuance

15

168.3 

149.7 

149.8 

149.6 

Central bank facilities

15

2,244.4 

1,199.4 

1,854.4 

994.4 

Repurchase agreements

15

50.0 

Sundry liabilities

16

95.9 

112.2 

100.0 

112.7 

Current tax liabilities

 

15.2 

Retirement benefit obligations

 

17

 

11.8 

 

28.3 

 

20.4 

34.5 

Total liabilities

 

14,285.0 

13,567.2 

14,349.5 

13,287.1 

 

 

 

 

 

 

Called-up share capital

18

262.0 

261.7 

261.8 

261.6 

Reserves

19

976.9 

893.2 

932.0 

887.3 

Own shares

20

(35.1)

(32.9)

(37.8)

(40.5)

Total equity

 

1,203.8 

1,122.0 

1,156.0 

1,108.4 

 

 

 

 

 

 

Total liabilities and equity

 

15,488.8 

14,689.2 

15,505.5 

14,395.5 

The condensed financial statements for the half year were approved by the Board of Directors on 8 June 2021.

 

CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 31 March 2021 (Unaudited)

 

 

Note

Six months to

Six months to

Year to

 


31 March

2021

31 March

2020

30 September 2020

 


£m

£m

£m

 

 

 

 

 

Net cash flow generated by operating activities

 

22

 

691.7 

 

196.6 

1,028.7 

Net cash (utilised) by investing activities

23

(2.3)

(1.1)

(2.8)

Net cash (utilised) by financing activities

 

24

 

(511.1)

(213.3)

(325.7)

Net increase / (decrease) in cash and cash equivalents

 

 

178.3 

(17.8)

700.2 

Opening cash and cash equivalents

 

1,924.6 

1,224.4 

1,224.4 

Closing cash and cash equivalents

 

2,102.9 

1,206.6 

1,924.6 

Represented by balances within

 

 

 

 

  Cash

9

2,103.0 

1,206.8 

1,925.0 

  Short-term bank borrowings

 

(0.1)

(0.2)

(0.4)

 

 

2,102.9 

1,206.6 

1,924.6 

 

 

CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY

For the six months ended 31 March 2021 (Unaudited)

 

Six months ended 31 March 2021


Share capital

Share premium

Capital redemption reserve

Merger reserve

Cash flow hedging reserve

Profit and loss account

Own shares

Total equity


£m

£m

£m

£m

£m

£m

£m

£m

Transactions arising from

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

-

74.2 

-

74.2 

Other comprehensive income

-

-

-

-

(2.3)

6.3 

-

4.0 

Total comprehensive income

-

-

-

-

(2.3)

80.5 

-

78.2 

Transactions with owners

 

 

 

 

 

 

 

 

Dividends paid (note 21)

-

-

-

-

-

(36.5)

-

(36.5)

Own shares purchased

-

-

-

-

-

-

-

-

Exercise of share awards

0.2

0.5

-

-

-

(2.6)

2.7 

0.8 

Charge for share based remuneration

-

-

-

-

-

4.4 

-

4.4 

Tax on share based remuneration

-

-

-

-

-

0.9 

-

0.9 

Net movement in equity in the period

0.2

0.5

-

-

(2.3)

46.7 

2.7 

47.8 

Opening equity

261.8

68.7

50.3

(70.2)

2.5 

880.7 

(37.8)

1,156.0 

Closing equity

262.0

69.2

50.3

(70.2)

0.2 

927.4 

(35.1)

1,203.8 

Six months ended 31 March 2020

 

Share capital

Share premium

Capital redemption reserve

Merger reserve

Cash flow hedging reserve

Profit and loss account

Own shares

Total equity

 

£m

£m

£m

£m

£m

£m

£m

£m

Transactions arising from

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

-

44.5 

-

44.5 

Other comprehensive income

-

-

-

-

(0.4)

5.2 

-

4.8 

Total comprehensive income

-

-

-

-

(0.4)

49.7 

-

49.3 

Transactions with owners

 

 

 

 

 

 

 

 

Dividends paid (note 21)

-

-

-

-

-

(35.9)

-

(35.9)

Own shares purchased

-

-

-

-

-

-

-

-

Exercise of share awards

0.1

0.2

-

-

-

(7.4)

7.6

0.5 

Charge for share based remuneration

-

-

-

-

-

0.1 

-

0.1 

Tax on share based remuneration

-

-

-

-

-

(0.4)

-

(0.4)

Net movement in equity in the period

0.1

0.2

-

-

(0.4)

6.1 

7.6

13.6 

Opening equity

261.6

68.3

50.3

(70.2)

3.0 

835.9 

(40.5)

1,108.4 

Closing equity

261.7

68.5

50.3

(70.2)

2.6 

842.0 

(32.9)

1,122.0 

 

Year ended 30 September 2020

 

 

Share capital

Share premium

Capital redemption reserve

Merger reserve

Cash flow hedging reserve

Profit and loss account

Own shares

Total equity

 

£m

£m

£m

£m

£m

£m

£m

£m

Transactions arising from

 

 

 

 

 

 

 

 

Profit for the year

-

-

-

-

-

91.3 

-

91.3 

Other comprehensive income

-

-

-

-

(0.5)

(5.3)

-

(5.8)

Total comprehensive income

-

-

-

-

(0.5)

86.0 

-

85.5 

Transactions with owners

 

 

 

 

 

 

 

 

Dividends paid (note 21)

-

-

-

-

-

(35.9)

-

(35.9)

Own shares purchased

-

-

-

-

-

-

(5.2)

(5.2)

Exercise of share awards

0.2

0.4

-

-

-

(7.7)

7.9

0.8 

Charge for share based remuneration

-

-

-

-

-

2.7 

-

2.7 

Tax on share based remuneration

-

-

-

-

-

(0.3)

-

(0.3)

Net movement in equity in the year

0.2

0.4

-

-

(0.5)

44.8 

2.7

47.6 

Opening equity

261.6

68.3

50.3

(70.2)

3.0 

835.9 

(40.5)

1,108.4 

Closing equity

261.8

68.7

50.3

(70.2)

2.5 

880.7 

(37.8)

1,156.0 


Paragon Banking Group PLC

CONDENSED FINANCIAL STATEMENTS

SELECTED NOTES TO THE ACCOUNTS

For the six months ended 31 March 2021 (Unaudited)

1.  GENERAL INFORMATION

The condensed financial statements are prepared for Paragon Banking Group PLC ('the Company') and its subsidiary companies (together 'the Group') on a consolidated basis.

The condensed financial statements for the six months ended 31 March 2021 and for the six months ended 31 March 2020 have not been audited, as defined in section 434 of the Companies Act 2006.

The figures shown above for the year ended 30 September 2020 and the year ended 30 September 2019 are not statutory accounts. A copy of the statutory accounts for the year has been delivered to the Registrar of Companies. The auditors reported on those statutory accounts and their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain an adverse statement under sections 498 (2) or 498 (3) of the Companies Act 2006.

This half-yearly financial report is also available on the Group's website at www.paragonbankinggroup.co.uk. As previously advised, the half-yearly financial report is available online only, to help to reduce the environmental impact of shareholder communication.

The remaining notes to the accounts are organised in to three sections:

· Analysis - providing further analysis and information on the amounts shown in the primary financial statements

· Capital and Financial Risk - providing information on the Group's management of operational and regulatory capital and its principal financial risks

· Basis of preparation - providing details of the Group's accounting policies and of how they have been applied in the preparation of the condensed financial statements

 


Paragon Banking Group PLC

CONDENSED FINANCIAL STATEMENTS

SELECTED NOTES TO THE ACCOUNTS - ANALYSIS

For the six months ended 31 March 2021 (Unaudited)

The notes set out below give more detailed analysis of the balances shown in the primary financial statements and further information on how they relate to the operations, results and financial position of the Group.

2.  SEGMENTAL INFORMATION

The Group analyses its operations, both for internal management information and external financial reporting, on the basis of the markets from which its assets are generated. The segments used are described below:

· Mortgage Lending, including the Group's buy-to-let, and owner-occupied first and second charge lending and related activities

· Commercial Lending, including the Group's equipment leasing activities, development finance, structured lending and other offerings targeted towards SME customers, together with its motor finance business

· Idem Capital, including loan assets acquired from third parties and legacy assets which share certain credit characteristics with them

Dedicated financing and administration costs of each of these businesses are allocated to the segment. Shared central costs are not allocated between segments, nor is income from central cash balances or the carrying costs of unallocated savings balances.

Loans to customers and operating lease assets are allocated to segments as are dedicated securitisation funding arrangements and their related cross-currency basis swaps and cash balances.

Other assets are not allocated between segments.

All the Group's operations are conducted in the UK, all revenues arise from external customers and there are no inter-segment revenues. No customer contributes more than 10% of the revenue of the Group.

Financial information about these business segments, prepared on the same basis as used in the consolidated accounts of the Group, is shown below.

Six months ended 31 March 2021

 

Mortgage Lending

Commercial Lending

Idem

Capital

Unallocated items

Total


£m

£m

£m

£m

£m

 

 

 

 

 

 

Interest receivable

168.4 

57.1 

12.3 

0.8 

238.6 

Interest payable

(65.3)

(10.6)

(1.5)

(13.7)

(91.1)

Net interest income

103.1 

46.5 

10.8 

(12.9)

147.5 

Other operating income

2.9 

4.1 

0.2 

-

7.2 

Total operating income

106.0 

50.6 

11.0 

(12.9)

154.7 

Direct costs

(8.7)

(11.7)

(2.5)

(42.9)

(65.8)

Provisions for losses

(4.9)

(1.3)

0.2 

-

(6.0)

 

92.4 

37.6 

8.7 

(55.8)

82.9 

 

Six months ended 31 March 2020

 

Mortgage

Lending

Commercial Lending

Idem

Capital

Unallocated items

Total


£m

£m

£m

£m

£m

 

 

 

 

 

 

Interest receivable

177.0 

55.5 

15.7 

2.9 

251.1 

Interest payable

(81.2)

(16.8)

(2.5)

(9.2)

(109.7)

Net interest income

95.8 

38.7 

13.2 

(6.3)

141.4 

Other operating income

3.3 

4.7 

0.3 

-

8.3 

Total operating income

99.1 

43.4 

13.5 

(6.3)

149.7 

Direct costs

(8.4)

(12.8)

(3.2)

(38.1)

(62.5)

Provisions for losses

(13.8)

(15.5)

(0.7)

-

(30.0)

 

76.9 

15.1 

9.6 

(44.4)

57.2 

 

Year ended 30 September 2020

 

Mortgage

Lending

Commercial Lending

Idem

Capital

Unallocated Items

Total Segments

 

£m

£m

£m

£m

£m

 

 

 

 

 

 

Interest receivable

344.9 

112.9 

30.4 

3.5 

491.7 

Interest payable

(154.9)

(30.8)

(4.3)

(23.6)

(213.6)

Net interest income

190.0 

82.1 

26.1 

(20.1)

278.1 

Other operating income

6.5 

9.9 

0.6 

-

17.0 

Total operating income

196.5 

92.0 

26.7 

(20.1)

295.1 

Direct costs

(16.4)

(24.4)

(6.3)

(79.7)

(126.8)

Provisions for losses

(25.8)

(21.7)

(0.8)

-

(48.3)

 

154.3 

45.9 

19.6 

(99.8)

120.0 

 

The segmental profits disclosed above reconcile to the consolidated results as set out below.

 


31 March

2021

31 March

2020

30 September

2020



£m

£m

£m

 

 

 

 

 

Results shown above

 

82.9

57.2 

120.0 

Fair value items

 

13.5

(0.1)

(1.6)

Operating profit

 

96.4

57.1 

118.4 

 

The assets of the segments were:


31 March

2021

31 March

2020

30 September 2020

30 September

2019


£m

£m

£m

£m

 

 

 

 

 

Mortgage Lending

11,490.8

11,489.2

11,488.2

11,279.9

Commercial Lending

1,466.0

1,533.0

1,554.3

1,488.4

Idem Capital

258.6

335.7

297.1

389.9

Total segment assets

13,215.4

13,357.9

13,339.6

13,158.2

Unallocated assets

2,273.4

1,331.3

2,165.9

1,237.3

Total assets

15,488.8

14,689.2

15,505.5

14,395.5

An analysis of the Group's loan assets by type and segment is shown in note 10.

 

3.  INTEREST RECEIVABLE

 

 

31 March

2021

31 March 2020

30 September 2020

 

 

£m

£m

£m

Interest receivable in respect of

 




Loans and receivables

 

216.6

224.3

440.4

Finance leases

 

20.1

21.7

44.3

Factoring income

 

1.1

1.3

2.4

Interest on loans to customers

 

237.8

247.3

487.1

Other interest receivable

 

0.8

3.8

4.6

Total interest on financial assets

 

238.6

251.1

491.7

The above interest arises from:

 

 

31 March

2021

31 March 2020

30 September 2020

 

 

£m

£m

£m

 

 

 

 

 

Financial assets held at amortised cost

 

218.5

229.4

447.4

Finance leases

 

20.1

21.7

44.3

 

 

238.6

251.1

491.7

 

4.  INTEREST PAYABLE AND SIMILAR CHARGES

 

 

31 March

2021

31 March 2020

30 September 2020

 

 

£m

£m

£m

 

 

 

 

 

On retail deposits

 

63.1 

64.4

129.7

On asset backed loan notes

 

10.0 

24.4

42.2

On bank loans and overdrafts

 

3.8 

1.2

5.4

On corporate bonds

 

5.4 

5.4

10.9

On retail bonds

 

8.2 

9.3

18.5

On central bank facilities

 

0.9 

3.7

4.5

On repurchase agreements

 

Total interest on financial liabilities

 

91.4 

108.4

211.2

On pension scheme deficit (note 17)

 

0.2 

0.3

0.4

Discounting on contingent consideration

 

0.1 

0.2

0.4

Discounting on lease liabilities

 

0.1 

0.1

0.2

Other finance costs

 

(0.7)

0.7

1.4

 

 

91.1 

109.7

213.6

All interest payable on financial liabilities relates to financial liabilities carried at amortised cost.

 

5.  other incOme

 

31 March

2021

31 March 2020

30 September 2020


£m

£m

£m

 

 

 

 

Loan account fee income

2.8

3.0

5.7

Broker commissions

1.0

1.1

1.7

Third party servicing

2.1

2.6

5.0

Other income

0.2

0.1

1.6

 

6.1

6.8

14.0

All loan account fee income arises from financial assets held at amortised cost.

 

6.  FAIR VALUE NET GAINS / (LOSSES)

 

31 March

2021

31 March 2020

30 September 2020

 

£m

£m

£m

 

 

 

 

Ineffectiveness of fair value hedges (note 12)

 

 

 

Portfolio hedges of interest rate risk

 

 

 

Deposit hedge

(0.2)

(0.4)

0.2 

Loan hedge

3.9 

2.2 

0.1 

 

3.7 

1.8 

0.3 

Ineffectiveness of cash flow hedges

Other hedging movements

6.7 

0.6 

(2.9)

Net gains / (losses) on other derivatives

3.1 

(2.5)

1.0 

 

13.5 

(0.1)

(1.6)

The fair value net gain / (loss) represents the accounting volatility on derivative instruments which are matching risk exposure on an economic basis generated by the requirements of IAS 39. Some accounting volatility arises on these items due to accounting ineffectiveness on designated hedges, or because hedge accounting has not been adopted or is not achievable on certain items. The losses and gains are primarily due to timing differences in income recognition between the derivative instruments and the economically hedged assets and liabilities. Such differences will reverse over time and have no impact on the cash flows of the Group.

 

7.  TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES

Income tax for the six months ended 31 March 2021 is charged at an effective rate of 23.0% (six months ended 31 March 2020: 22.1%, year ended 30 September 2020: 22.9%), representing the best estimate of the annual effective rate of income tax expected for the full year, applied to the pre-tax income of the period.

The standard rate of corporation tax in the UK applicable to the Group in the period was 19.0% (2020 H1: 19.0%), based on currently enacted legislation. During the year ended 30 September 2020, legislation was substantively enacted, reversing the reduction in the tax rate to 17.0% which had been due to come into effect from April 2020. The effects of the increases in the standard rate for the year ended 30 September 2020 from 18.0% to 19.0%, and the expected rate in subsequent years from 17.0% to 19.0% on deferred tax balances have been accounted for in the year ended 30 September 2020.

The increase in the standard rate of corporation tax in the UK to 25.0% from April 2023, announced in March 2021 had not been substantially enacted at 31 March 2021 and its impact is therefore not yet accounted for in these accounts. It is anticipated that an additional deferred tax credit of around £0.3m and an additional credit to equity of £0.5m will be accounted for when the legislative process is substantially complete, expected to be in the second half of the current financial year.

 

8.  EARNINGS PER SHARE

Earnings per ordinary share is calculated as follows:

 

31 March

2021

31 March

2020

30 September 2020

 

 

 

 

Profit for the period (£m)

74.2

44.5

91.3

 

 

 

 

Basic weighted average number of ordinary shares ranking for dividend during the period (m)

 

253.3

253.2

253.6

Dilutive effect of the weighted average number of share options and incentive plans in issue
during the period (m)

 

 

8.8

4.2

2.5

Diluted weighted average number of ordinary shares ranking for dividend during the period (m)

 

262.1

257.4

256.1

 

 

 

 

Earnings per ordinary share   - basic

29.3p

17.6p

36.0p

  - diluted

28.3p

17.3p

35.6p

 

9.  CASH and cash equivalents

 


31 March

2021

31 March

2020

30 September

2020

30 September 2019

 


£m

£m

£m

£m

 

 

 

 

 

 

Balances with central banks

 

1,832.3

812.7

1,637.1

816.4

Balances with other banks

 

270.7

394.1

287.9

409.0

 

 

2,103.0

1,206.8

1,925.0

1,225.4

Not all of the Group's cash is immediately available for its general purposes, including liquidity management. Cash received in respect of loan assets funded through warehouse facilities and securitisations is not immediately available, due to the terms of those arrangements. This cash is shown as 'securitisation cash' below.

Cash held by the Trustees of the Paragon Employee Share Ownership Plans may only be used to invest in the shares of the Company, pursuant to the aims of those plans. This is shown as 'ESOP cash' below.

The total 'Cash and Cash Equivalents' balance may be analysed as shown below.

 


31 March

2021

31 March

2020

30 September

2020

30 September 2019

 


£m

£m

£m

£m

 

 

 

 

 

 

Available cash

 

1,895.1

915.6

1,701.1

872.1

Securitisation cash

 

207.2

290.3

223.4

353.1

ESOP cash

 

0.7

0.9

0.5

0.2

 

 

2,103.0

1,206.8

1,925.0

1,225.4

Cash and cash equivalents are classified as Stage 1 exposures (see note 11) for the purposes of impairment provisioning. The probabilities of default have been assessed to be so low as to require no significant impairment provision.

 

 

10.  Loans to Customers

 

31 March

2021

31 March

2020

30 September

2020

30 September

2019

 

£m

£m

£m

£m

 

 

 

 

 

Loans to customers

12,816.3

12,506.1

12,631.4

12,186.1

Fair value adjustments from portfolio hedging

 

58.1

79.2

 

109.7

64.2

 

12,874.4

12,585.3

12,741.1

12,250.3

 

The Group's loan assets at 31 March 2021, analysed between the segments described in note 2, are set out below.

 

Mortgage

Lending

Commercial Lending

Idem
Capital

Total


£m

£m

£m

£m

At 31 March 2021

 

 

 

 

First mortgages

10,962.0

-

-

10,962.0

Consumer loans

168.6

-

249.7

418.3

Motor finance

-

220.4

8.9

229.3

Asset finance

-

467.8

-

467.8

Development finance

-

552.3

-

552.3

Other commercial loans

-

186.6

-

186.6

Loans to customers

11,130.6

1,427.1

258.6

12,816.3

 

 

 

 

 

At 31 March 2020

 

 

 

 

First mortgages

10,489.9

-

-

10,489.9

Consumer loans

186.2

-

311.3

497.5

Motor finance

-

290.4

24.4

314.8

Asset finance

-

513.4

-

513.4

Development finance

-

502.3

-

502.3

Other commercial loans

-

188.2

-

188.2

Loans to customers

10,676.1

1,494.3

335.7

12,506.1

 

At 30 September 2020

 

 

 

 

First mortgages

10,636.9

-

-

10,636.9

Consumer loans

182.6

-

281.6

464.2

Motor finance

-

256.9

15.5

272.4

Asset finance

-

478.0

-

478.0

Development finance

-

609.0

-

609.0

Other commercial loans

-

170.9

-

170.9

Loans to customers

10,819.5

1,514.8

297.1

12,631.4

 

 

 

 

 

At 30 September 2019

 

 

 

 

First mortgages

10,172.5

-

-

10,172.5

Consumer loans

171.6

-

352.3

523.9

Motor finance

-

281.3

37.6

318.9

Asset finance

-

492.2

-

492.2

Development finance

-

506.5

-

506.5

Other commercial loans

-

172.1

-

172.1

Loans to customers

10,344.1

1,452.1

389.9

12,186.1

 

11.  Impairment provision on loans to customers

IFRS 9 requires that impairment is evaluated on an expected credit loss ('ECL') basis. ECLs are based on an assessment of the probability of default ('PD') and loss given default ('LGD'), discounted to give a net present value. The estimation of ECL should be unbiased and probability weighted, considering all reasonable and supportable information, including forward looking economic assumptions and a range of possible outcomes. Provision may be based on either twelve month or lifetime ECL, dependant on whether an account has experienced a significant increase in credit risk ('SICR').

The Group's approach to impairment provision on loans to customers, in accordance with IFRS 9, is set out in note 19 to the annual accounts. This includes an outline of the calculations used and a definition of terms.

There have been no significant changes in overall approach since the 2020 year end. At that time, as discussed in the 2020 annual accounts, it was necessary for the Group to depart from its normal provisioning methodology due to the impact of the Covid crisis, both on the Group's customers and on the metrics used to determine credit quality. A broadly similar approach has been applied in determining provision at 31 March 2021.

In extreme or unprecedented economic conditions, such as the Covid pandemic, it is likely that mechanical models will be less predictive of outcomes as the historical data used for modelling will be insufficiently representative of current conditions and this proved to be the case. In these circumstances, management carefully review all outputs to ensure provision is adequate and make appropriate adjustments when this is not the case.

At 31 March 2021 the effects of the material reductions in GDP, and in economic activity in the UK more generally since the onset of the Covid crisis had not yet been evidenced in customer credit performance and defaults, due to the lagging effect of ongoing government policy interventions. Where customers were given payment reliefs, arrears and adverse credit indicators were not recorded by the Group or other lenders, meaning that both internal credit metrics and external credit bureau data might not accurately reflect a customer's credit position leading to modelled PDs being underestimated. At the same time the actual performance of economic indicators over the six month period has been generally upward, meaning that the starting point for economic forecasts is higher than at 30 September 2020.

While forecast economics assume the current economic situation as a starting point, the generally upward trend of the forecasts also tends to reduce PDs, in a way that may not be justifiable where an underlying credit issue on an account has not emerged, which may result in default as government support initiatives unwind.

In reviewing the subsequent payment patterns of accounts that have been granted Covid-related reliefs, it has been evident that there is higher payment volatility (both in terms of account improvement and deterioration) so whilst credit risk is increased, it is not significant in scale in all cases. The Group has reflected this position by applying PD floors to its payment holiday population in the main portfolios at Stage 1, and moved accounts with payment holiday extensions to Stage 2, again with floors reflecting extrapolations of recent cohort experience to allow for the potential under-recognition of losses caused by these effects.

While the approach to applying these overlays at 31 March 2021 has remained broadly consistent to that at 30 September 2020, their scale has been uplifted to allow for the generally reduced level of modelled PDs, due to the more benign economic outlook and hence the potential additional under provision on those accounts where a loss or default is being suppressed by reliefs.

In determining whether an account has an SICR in the Covid environment the granting of Covid‑related reliefs, including payment holidays and similar arrangements, may mean that an SICR may exist without this being reflected in either arrears performance or credit bureau data. The Group has accepted the advice of UK regulatory bodies that the grant of initial Covid relief does not, of itself, indicate an SICR, but has carefully considered internal credit and customer data to determine whether there might be any accounts with SICR not otherwise identified by the process.

For customers who have been granted extended payment reliefs, whether these are currently in place or have expired, the account has been placed in Stage 2, regardless of other indicators, as a result of the analysis described above. This aligns the Group's approach to regulatory guidance which suggested that while initial payment reliefs should not automatically be taken as an indication of an SICR, an extension to such a relief was more likely to be so.

This overall approach remains consistent with that taken at 30 September 2020. In reviewing account performance since the year end the Group has not yet identified any positive evidence which would cause it to begin to unwind this position. It will be reviewed going forward as other government economic interventions are scaled back and the post-relief credit characteristics of such accounts become more evident.

 

IFRS 9 Analysis

IFRS 9 calculations and related disclosures require loan assets to be divided into three stages, with accounts which were credit impaired on initial recognition representing a fourth class.

The three classes comprise: those where there has been no SICR since advance or acquisition (Stage 1); those where there has been a SICR (Stage 2); and loans which are impaired (Stage 3).

· On initial recognition, and for assets where there has not been an SICR, provisions are made in respect of losses resulting from the level of credit default events expected in the twelve months following the balance sheet date

· Where a loan has experienced an SICR, whether or not the loan is considered to be credit impaired, provisions are made based on the ECLs over the full life of the loan

· For credit impaired assets, provisions are made on the basis of lifetime ECLs

For assets which are 'Purchased or Originated as Credit Impaired' ('POCI') accounts (those which were considered as credit impaired at the point of first recognition), such as certain of the Group's acquired assets in Idem Capital, the carrying valuation is based on expected cash flows discounted by the EIR determined at the point of acquisition.

 

Impairments by stage

An analysis of the Group's loan portfolios between the stages defined above is set out below.


Stage 1

Stage 2 *

Stage 3 *

POCI

Total


£m

£m

£m

£m

£m

31 March 2021

 

 

 

 

 

Gross loan book

 

 

 

 

 

Mortgage Lending

10,063.9 

980.0 

121.3 

14.0 

11,179.2 

Commercial Lending

1,352.0 

79.8 

17.7 

6.7 

1,456.2 

Idem Capital

107.2 

7.4 

27.7 

121.0 

263.3 

Total

11,523.1 

1,067.2 

166.7 

141.7 

12,898.7 

 

 

 

 

 

 

Impairment provision

 

 

 

 

 

Mortgage Lending

(4.5)

(16.0)

(28.1)

(48.6)

Commercial Lending

(17.3)

(2.7)

(8.7)

(0.4)

(29.1)

Idem Capital

(0.2)

(0.3)

(4.2)

(4.7)

Total

(22.0)

(19.0)

(41.0)

(0.4)

(82.4)

 

 

 

 

 

 

Net loan book

 

 

 

 

 

Mortgage Lending

10,059.4 

964.0 

93.2 

14.0 

11,130.6 

Commercial Lending

1,334.7 

77.1 

9.0 

6.3 

1,427.1 

Idem Capital

107.0 

7.1 

23.5 

121.0 

258.6 

Total

11,501.1 

1,048.2 

125.7 

141.3 

12,816.3 

 

 

 

 

 

 

Coverage ratio

 

 

 

 

 

Mortgage Lending

0.04%

1.63%

23.17%

0.43%

Commercial Lending

1.28%

3.38%

49.15%

5.97%

2.00%

Idem Capital

0.19%

4.05%

15.16%

1.79%

Total

0.19%

1.78%

24.60%

0.28%

0.64%

*  Stage 2 and 3 balances are analysed in more detail below.


Stage 1

Stage 2 *

Stage 3 *

POCI

Total


£m

£m

£m

£m

£m

31 March 2020

 

 

 

 

 

Gross loan book

 

 

 

 

 

Mortgage Lending

10,120.5 

447.8 

129.9 

15.2 

10,713.4 

Commercial Lending

1,412.1 

81.8 

15.0 

9.6 

1,518.5 

Idem Capital

137.8 

12.6 

29.7 

160.8 

340.9 

Total

11,670.4 

542.2 

174.6 

185.6 

12,572.8 

 

 

 

 

 

 

Impairment provision

 

 

 

 

 

Mortgage Lending

(1.9)

(6.3)

(29.1)

(37.3)

Commercial Lending

(16.0)

(2.3)

(5.7)

(0.2)

(24.2)

Idem Capital

(0.2)

(0.4)

(4.6)

(5.2)

Total

(18.1)

(9.0)

(39.4)

(0.2)

(66.7)

 

 

 

 

 

 

Net loan book

 

 

 

 

 

Mortgage Lending

10,118.6 

441.5 

100.8 

15.2 

10,676.1 

Commercial Lending

1,396.1 

79.5 

9.3 

9.4 

1,494.3 

Idem Capital

137.6 

12.2 

25.1 

160.8 

335.7 

Total

11,652.3 

533.2 

135.2 

185.4 

12,506.1 

 

 

 

 

 

 

Coverage ratio

 

 

 

 

 

Mortgage Lending

0.02%

1.41%

22.40%

0.35%

Commercial Lending

1.13%

2.81%

38.00%

2.08%

1.59%

Idem Capital

0.15%

3.17%

15.49%

1.53%

Total

0.16%

1.66%

22.57%

0.11%

0.53%

*  Stage 2 and 3 balances are analysed in more detail below.


Stage 1

Stage 2 *

Stage 3 *

POCI

Total


£m

£m

£m

£m

£m

30 September 2020

 

 

 

 

 

Gross loan book

 

 

 

 

 

Mortgage Lending

9,822.6 

903.2 

127.0 

15.0 

10,867.8 

Commercial Lending

1,384.2 

132.3 

20.2 

6.7 

1,543.4 

Idem Capital

122.9 

9.9 

28.9 

140.3 

302.0 

Total

11,329.7 

1,045.4 

176.1 

162.0 

12,713.2 

 

 

 

 

 

 

Impairment provision

 

 

 

 

 

Mortgage Lending

(5.0)

(12.6)

(30.7)

(48.3)

Commercial Lending

(17.0)

(3.0)

(8.2)

(0.4)

(28.6)

Idem Capital

(0.2)

(0.2)

(4.5)

(4.9)

Total

(22.2)

(15.8)

(43.4)

(0.4)

(81.8)

 

 

 

 

 

 

Net loan book

 

 

 

 

 

Mortgage Lending

9,817.6 

890.6 

96.3 

15.0 

10,819.5 

Commercial Lending

1,367.2 

129.3 

12.0 

6.3 

1,514.8 

Idem Capital

122.7 

9.7 

24.4 

140.3 

297.1 

Total

11,307.5 

1,029.6 

132.7 

161.6 

12,631.4 

 

 

 

 

 

 

Coverage ratio

 

 

 

 

 

Mortgage Lending

0.05%

1.40%

24.17%

0.44%

Commercial Lending

1.23%

2.27%

40.59%

5.97%

1.85%

Idem Capital

0.16%

2.02%

15.57%

1.62%

Total

0.20%

1.51%

24.65%

0.25%

0.64%

*  Stage 2 and 3 balances are analysed in more detail below.

In terms of the Group's credit management processes, Stage 1 cases will fall within the appropriate customer servicing functions and Stage 2 cases will be subject to account management arrangements. Stage 3 cases will include both those subject to recovery or similar processes and those which, though being managed on a long-term basis, are included with defaulted accounts for regulatory purposes. However, these broad categorisations may vary between different product types.

POCI balances included in the Commercial Lending segment arise from acquired businesses, where those assets were identified as credit impaired at the point of acquisition when the acquired portfolios as a whole were evaluated. Additional provision arising on these assets post‑acquisition is shown as 'Impairment provision' above.

Idem Capital loans include acquired consumer and motor finance loans together with legacy (originated pre-2010) second charge mortgage and unsecured consumer loans. Legacy assets and acquired loans which were performing on acquisition are included in the staging analysis above.

Acquired portfolios within the Mortgage Lending and Idem Capital segments which were largely non-performing at acquisition, and which were purchased at a deep discount to face value, are shown as POCI assets above. Although no provision is shown above for such assets, the effect of the discount on purchase is included in the gross value ensuring that the carrying value is substantially less than the current balances due from customers and the level of cover is considerable.

 

Analysis of Stage 2 loans  

The table below analyses the accounts in Stage 2 between those not more than one month in arrears where an SICR has nonetheless been identified from other information and accounts more than one month in arrears.

Cases which have been greater than one month in arrears in the last three months, but which are not at the balance sheet date are shown as 'recent arrears' in the tables below.

In all cases accounts which are more than one month in arrears, where this is a meaningful measure, are considered to have an SICR. However, in certain loan portfolios, regular monthly payments of pre-set amounts are not required and hence this criterion cannot be used.

Levels of Stage 2 assets increased substantially during the early part of the Covid outbreak, with balances at 31 March 2021 significantly higher than at 31 March 2020, though broadly aligned to those at 30 September 2020. The principal trigger driving these increases has been the allocation of accounts with extended payment holidays to Stage 2, as described above. These are shown in the < 1 month arrears column in the table below. As fewer extensions were granted after 30 September 2020, the rate of increase of such Stage 2 cases has been much reduced in the period.

While the numbers of Stage 2 arrears accounts across the portfolios have increased since September 2020 in the Mortgage Lending segment as payment reliefs unwind, levels remain far lower than those seen in March 2020 in more normal payment conditions.

Coverage levels in Stage 2 across the portfolios have increased significantly since 31 March 2020 particularly for '< 1 month arrears' cases with the imposition of PD floors to accounts with payment holiday extensions from 30 September 2020 having a significant impact and levels continuing to build since then. Coverage ratios of '> 1 < = 3 months arrears' cases have been varied due to the composition of the relatively small balances, particularly in the Commercial Lending and Idem Capital divisions.

 


< 1 month
arrears

Recent
arrears

> 1 <= 3 months arrears

Total


£m

£m

£m

£m

31 March 2021

 

 

 

 

Gross loan book

 

 

 

 

Mortgage Lending

948.2 

12.7 

19.1 

980.0 

Commercial Lending

73.6 

1.6 

4.6 

79.8 

Idem Capital

3.4 

0.8 

3.2 

7.4 

Total

1,025.2 

15.1 

26.9 

1,067.2 

 

 

 

 

 

Impairment provision

 

 

 

 

Mortgage Lending

(15.1)

(0.6)

(0.3)

(16.0)

Commercial Lending

(2.2)

(0.5)

(2.7)

Idem Capital

(0.1)

(0.2)

(0.3)

Total

(17.4)

(0.6)

(1.0)

(19.0)

 

 

 

 

 

Net loan book

 

 

 

 

Mortgage Lending

933.1 

12.1 

18.8 

964.0 

Commercial Lending

71.4 

1.6 

4.1 

77.1 

Idem Capital

3.3 

0.8 

3.0 

7.1 

Total

1,007.8 

14.5 

25.9 

1,048.2 

 

 

 

 

 

Coverage ratio

 

 

 

 

Mortgage Lending

1.59%

4.72%

1.57%

1.63%

Commercial Lending

2.99%

10.87%

3.38%

Idem Capital

2.94%

6.25%

4.05%

Total

1.70%

3.97%

3.72%

1.78%

 


< 1 month
arrears

Recent
arrears

> 1 <= 3 months arrears

Total


£m

£m

£m

£m

31 March 2020

 

 

 

 

Gross loan book

 

 

 

 

Mortgage Lending

386.1 

9.7 

52.0 

447.8 

Commercial Lending

72.2 

0.3 

9.3 

81.8 

Idem Capital

6.8 

1.3 

4.5 

12.6 

Total

465.1 

11.3 

65.8 

542.2 

 

 

 

 

 

Impairment provision

 

 

 

 

Mortgage Lending

(3.1)

(0.4)

(2.8)

(6.3)

Commercial Lending

(2.0)

(0.3)

(2.3)

Idem Capital

(0.1)

(0.3)

(0.4)

Total

(5.2)

(0.4)

(3.4)

(9.0)

 

 

 

 

 

Net loan book

 

 

 

 

Mortgage Lending

383.0 

9.3 

49.2 

441.5 

Commercial Lending

70.2 

0.3 

9.0 

79.5 

Idem Capital

6.7 

1.3 

4.2 

12.2 

Total

459.9 

10.9 

62.4 

533.2 

 

 

 

 

 

Coverage ratio

 

 

 

 

Mortgage Lending

0.80%

4.12%

5.38%

1.41%

Commercial Lending

2.77%

3.23%

2.81%

Idem Capital

1.47%

6.67%

3.17%

Total

1.12%

3.54%

5.17%

1.66%

 


< 1 month
arrears

Recent
arrears

> 1 <= 3 months arrears

Total


£m

£m

£m

£m

30 September 2020

 

 

 

 

Gross loan book

 

 

 

 

Mortgage Lending

879.9 

5.9 

17.4 

903.2 

Commercial Lending

113.2 

10.5 

8.6 

132.3 

Idem Capital

4.8 

1.6 

3.5 

9.9 

Total

997.9 

18.0 

29.5 

1,045.4 

 

 

 

 

 

Impairment provision

 

 

 

 

Mortgage Lending

(12.0)

(0.2)

(0.4)

(12.6)

Commercial Lending

(2.5)

(0.1)

(0.4)

(3.0)

Idem Capital

(0.1)

(0.1)

(0.2)

Total

(14.6)

(0.3)

(0.9)

(15.8)

 

 

 

 

 

Net loan book

 

 

 

 

Mortgage Lending

867.9 

5.7 

17.0 

890.6 

Commercial Lending

110.7 

10.4 

8.2 

129.3 

Idem Capital

4.7 

1.6 

3.4 

9.7 

Total

983.3 

17.7 

28.6 

1,029.6 

 

 

 

 

 

Coverage ratio

 

 

 

 

Mortgage Lending

1.36%

3.39%

2.30%

1.40%

Commercial Lending

2.21%

0.95%

4.65%

2.27%

Idem Capital

2.08%

2.86%

2.02%

Total

1.46%

1.67%

3.05%

1.51%

The Group uses arrears multiples as a proxy for days past due, as this measure is commonly used in its arrears reporting. A loan will generally be one month in arrears from the point it is one day past due until it is thirty days past due.

 

Analysis of Stage 3 loans

The table below analyses the accounts in Stage 3 between those:

· In the process of sale or other enforcement procedures ('Realisations')

· Where a receiver of rent ('RoR') has been appointed by the Group to manage the property on the customers' behalf

· Which are being managed on a long-term basis and where full recovery is possible, but which are considered to meet regulatory default criteria at the balance sheet date ('>3 month arrears')

· Which no longer meet regulatory default criteria but which are being retained in Stage 3 for a probationary period ('Probation')

In these disclosures probation accounts have been analysed separately for the first time, in order to provide better information for users.

RoR accounts in Stage 3 may be fully up-to-date with full recovery possible. These accounts are included in Stage 3 as they are classified as defaulted for regulatory purposes.

The impact of Covid on the number and value of Stage 3 accounts has been limited so far. Payment reliefs have prevented arrears being recorded and other enforcement activities have been limited by government intervention.

The completion of payment relief periods has led to some increase in > 3 month arrears cases, particularly in the Mortgage Lending business, although this is offset by the continuing realisations from the receiver of rent portfolio.

Coverage levels in Mortgage Lending and Idem Capital remain broadly stable compared with 31 March 2020 and 30 September 2020. The coverage ratio for Commercial Lending is subject to fluctuations as the number of cases is relatively low and the ratio can be significantly influenced by individual cases.


Probation

> 3 month arrears

RoR  managed

Realisations

Total


£m

£m

£m

£m

£m

31 March 2021

 

 

 

 

 

Gross loan book

 

 

 

 

 

Mortgage Lending

3.3 

23.1 

81.3 

13.6 

121.3 

Commercial Lending

1.3 

6.9 

9.5 

17.7 

Idem Capital

1.1 

23.3 

3.3 

27.7 

Total

5.7 

53.3 

81.3 

26.4 

166.7 

 

 

 

 

 

 

Impairment provision

 

 

 

 

 

Mortgage Lending

(0.2)

(2.1)

(20.4)

(5.4)

(28.1)

Commercial Lending

(0.5)

(3.3)

(4.9)

(8.7)

Idem Capital

-

(2.6)

(1.6)

(4.2)

Total

(0.7)

(8.0)

(20.4)

(11.9)

(41.0)

 

 

 

 

 

 

Net loan book

 

 

 

 

 

Mortgage Lending

3.1 

21.0 

60.9 

8.2 

93.2 

Commercial Lending

0.8 

3.6 

4.6 

9.0 

Idem Capital

1.1 

20.7 

1.7 

23.5 

Total

5.0 

45.3 

60.9 

14.5 

125.7 

 

 

 

 

 

 

Coverage ratio

 

 

 

 

 

Mortgage Lending

6.06%

9.09%

25.09%

39.71%

23.17%

Commercial Lending

38.46%

47.83%

51.58%

49.15%

Idem Capital

11.16%

48.48%

15.16%

Total

12.28%

15.01%

25.09%

45.08%

24.60%

 


Probation

> 3 month arrears

RoR  managed

Realisations

Total


£m

£m

£m

£m

£m

31 March 2020

 

 

 

 

 

Gross loan book

 

 

 

 

 

Mortgage Lending

5.3 

12.2 

95.8 

16.6 

129.9 

Commercial Lending

1.2 

6.1 

7.7 

15.0 

Idem Capital

1.3 

23.9 

4.5 

29.7 

Total

7.8 

42.2 

95.8 

28.8 

174.6 

 

 

 

 

 

 

Impairment provision

 

 

 

 

 

Mortgage Lending

(0.2)

(1.5)

(21.9)

(5.5)

(29.1)

Commercial Lending

(0.3)

(1.1)

(4.3)

(5.7)

Idem Capital

(2.6)

(2.0)

(4.6)

Total

(0.5)

(5.2)

(21.9)

(11.8)

(39.4)

 

 

 

 

 

 

Net loan book

 

 

 

 

 

Mortgage Lending

5.1 

10.7 

73.9 

11.1 

100.8 

Commercial Lending

0.9 

5.0 

3.4 

9.3 

Idem Capital

1.3 

21.3 

2.5 

25.1 

Total

7.3 

37.0 

73.9 

17.0 

135.2 

 

 

 

 

 

 

Coverage ratio

 

 

 

 

 

Mortgage Lending

3.77%

12.30%

22.86%

33.13%

22.40%

Commercial Lending

25.00%

18.03%

55.84%

38.00%

Idem Capital

10.88%

44.44%

15.49%

Total

6.41%

12.32%

22.86%

40.97%

22.57%

 


Probation

> 3 month arrears

RoR managed

Realisations

Total


£m

£m

£m

£m

£m

30 September 2020

 

 

 

 

 

Gross loan book

 

 

 

 

 

Mortgage Lending

6.5 

12.9 

86.7 

20.9 

127.0 

Commercial Lending

3.2 

11.2 

5.8 

20.2 

Idem Capital

1.0 

24.3 

3.6 

28.9 

Total

10.7 

48.4 

86.7 

30.3 

176.1 

 

 

 

 

 

 

Impairment provision

 

 

 

 

 

Mortgage Lending

(0.3)

(1.5)

(20.8)

(8.1)

(30.7)

Commercial Lending

(0.9)

(4.1)

(3.2)

(8.2)

Idem Capital

(2.8)

(1.7)

(4.5)

Total

(1.2)

(8.4)

(20.8)

(13.0)

(43.4)

 

 

 

 

 

 

Net loan book

 

 

 

 

 

Mortgage Lending

6.2 

11.4 

65.9 

12.8 

96.3 

Commercial Lending

2.3 

7.1 

2.6 

12.0 

Idem Capital

1.0 

21.5 

1.9 

24.4 

Total

9.5 

40.0 

65.9 

17.3 

132.7 

 

 

 

 

 

 

Coverage ratio

 

 

 

 

 

Mortgage Lending

4.62%

11.63%

23.99%

38.76%

24.17%

Commercial Lending

28.12%

36.61%

55.17%

40.59%

Idem Capital

11.52%

47.22%

15.57%

Total

11.21%

17.36%

23.99%

42.90%

24.65%

The security values available to reduce exposure at default in the calculation shown above for Stage 3 accounts are set out below. The estimated value of the security represents, for each account, the lesser of the valuation estimate and the exposure at default in Central scenario (31 March 2021 and 30 September 2020) or Scenario 1 (31 March 2020). Security values are based on the most recent valuation of the relevant asset held by the Group, indexed or depreciated as appropriate.


31 March

2021

31 March

2020

30 September

2020


£m

£m

£m





First mortgages

70.4

69.9

71.9

Second mortgages

17.2

14.3

17.3

Asset finance

4.4

4.1

6.7

Motor finance

1.9

1.2

1.5

 

93.9

89.5

97.4

The RoR managed accounts are being managed to ensure the optimal resolution for landlords, tenants and lenders and have largely reached a long-term, stable position, but the existence of the RoR arrangement causes the accounts to be treated as defaulted for regulatory purposes. The Group's RoR arrangements are described in more detail below.

Idem Capital balances with over three months arrears comprise principally second charge mortgage accounts originated over ten years ago which have been over three months in arrears for some time. These accounts are generally making regular payments and have significant levels of equity in the underlying property which reduces the required provision to the value shown above. It is expected that a high proportion of these accounts will eventually redeem naturally, either on the sale of the property or by the satisfaction of the amount due through instalment payments.

 

Buy-to-let receiver of rent cases (Stage 3)

Where a buy-to-let mortgage customer in England or Wales falls into arrears on their account the Group has the power to appoint a receiver of rent under the Law of Property Act. The receiver will then manage the property on behalf of the customer, collecting rents and remitting them to make payments on the account. While the receiver has the power to sell the property, in many cases they will operate it as a buy-to-let on at least a short to medium term basis, potentially longer, depending on the individual circumstances of the case. This causes less disruption to the tenants and may result in the mortgage account returning to performing status and the property being handed back to the customer.

The following table analyses the number and gross carrying value of RoR managed accounts shown above by the date of the receivers' appointment, illustrating this position.


31 March 2021

31 March 2020

30 September 2020


Number

£m

Number

£m

Number

£m

Managed accounts







Appointment date

 

 

 

 

 

 

2010 and earlier

350

59.1

384

65.5

369

62.4

2011 to 2013

64

10.7

82

15.7

72

12.4

2014 to 2016

27

3.9

31

4.5

29

4.2

2016 and later

46

7.6

63

10.1

46

7.7

Total managed accounts

487

81.3

560

95.8

516

86.7

Accounts in the process of realisation

 

69

 

13.1

84

14.7

 

104

 

19.7

 

556

94.4

644

110.5

620

106.4

Receiver of rent accounts in the process of realisation at the period end are included under that heading in the Stage 3 tables above.

In addition to the cases analysed above, 1 POCI account also had a receiver of rent appointed (31 March 2020: 4, 30 September 2020: 3), making a total of 557 (30 September 2020: 623).

 

Movements in impairment provision

The movements in the impairment provision calculated under IFRS 9, analysed by business segments, are set out below.


Mortgage

Lending

Commercial
Lending

Idem
Capital

Total


£m

£m

£m

£m

 

 

 

 

 

At 30 September 2020

48.3 

28.6 

4.9 

81.8 

Provided in period

4.9 

1.8 

6.7 

Amounts written off

(4.6)

(1.3)

(0.2)

(6.1)

At 31 March 2021

48.6 

29.1 

4.7 

82.4 

 

 

 

 

 

At 30 September 2019

26.8 

10.7 

4.4 

41.9 

Provided in period

13.7 

15.8 

1.2 

30.7 

Amounts written off

(3.2)

(2.3)

(0.4)

(5.9)

At 31 March 2020

37.3 

24.2 

5.2 

66.7 

 

 

 

 

 

At 30 September 2019

26.8 

10.7 

4.4 

41.9 

Provided in period

25.8 

22.7 

1.3 

49.8 

Amounts written off

(4.3)

(4.8)

(0.8)

(9.9)

At 30 September 2020

48.3 

28.6 

4.9 

81.8 

Accounts are considered to be written off for accounting purposes if a balance remains once standard enforcement processes have been completed, subject to any amount retained in respect of expected salvage receipts. This has no effect on the net carrying value, only on the amounts reported as gross loan balances and accumulated impairment provisions.

The difference between the amount shown above and the profit and loss account charge for the period is amounts recovered on previously written off accounts of £0.7m (31 March 2020: £0.7m, 30 September 2020: 1.5m).

A more detailed analysis of these movements by IFRS 9 stage on a consolidated basis for the six months ended 31 March 2021, the six months ended 31 March 2020, and the year ended 30 September 2020 are set out below.

These tables, and the matching tables analysing movements in gross balances, have been compiled by comparing opening and closing balances on each account and analysing the movements between them.

Changes due to credit risk includes all changes in model parameters whether related to account performance, external credit data or model assumptions, including economic scenarios and weightings.

There have been no changes in models creating significant movements in balances in the period.


Stage 1

Stage 2

Stage 3

POCI

Total


£m

£m

£m

£m

£m







Loss allowance at 30 September 2020

22.2 

15.8 

43.4 

0.4

81.8 

New assets originated or purchased

5.7 

5.7 

Changes in loss allowance

 

 

 

 

 

Transfer to Stage 1

3.6 

(1.5)

(2.1)

Transfer to Stage 2

(1.0)

2.0 

(1.0)

Transfer to Stage 3

(0.1)

(0.5)

0.6 

Changes on stage transfer

(2.9)

1.8 

4.9 

3.8 

Changes due to credit risk

(5.5)

1.4 

1.3 

(2.8)

Write offs

(6.1)

(6.1)

Loss allowance at 31 March 2021

22.0 

19.0 

41.0 

0.4

82.4 

 

 

Stage 1

Stage 2

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

 

 

 

 

 

 

Loss allowance at 30 September 2019

6.0 

3.7 

32.2 

41.9 

New assets originated or purchased

2.2 

2.2 

Changes in loss allowance

 

 

 

 

 

Transfer to Stage 1

0.7 

(0.5)

(0.2)

Transfer to Stage 2

(0.4)

0.5 

(0.1)

Transfer to Stage 3

(0.2)

(0.6)

0.8 

Changes on stage transfer

(0.5)

2.0 

3.2 

4.7 

Changes due to credit risk

10.3 

3.9 

9.4 

0.2 

23.8 

Write offs

(5.9)

(5.9)

Loss allowance at 31 March 2020

18.1 

9.0 

39.4 

0.2 

66.7 

 

 

Stage 1

Stage 2

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

 

 

 

 

 

 

Loss allowance at 30 September 2019

6.0 

3.7 

32.2 

41.9 

New assets originated or purchased

 

10.2 

 

 

 

 

10.2 

Changes in loss allowance

 

 

 

 

 

Transfer to Stage 1

0.9 

(0.7)

(0.2)

Transfer to Stage 2

(1.2)

1.3 

(0.1)

Transfer to Stage 3

(0.5)

(0.4)

0.9 

Changes on stage transfer

(0.5)

7.5 

6.2 

13.2 

Changes due to credit risk

7.3 

4.4 

14.3 

0.4 

26.4 

Write offs

(9.9)

(9.9)

Loss allowance at 30 September 2020

22.2 

15.8 

43.4 

0.4 

81.8 

The level of loss allowances has remained broadly stable through the six month period. The availability of payment holidays and other reliefs more widely has tended to reduce mobility between categories and potentially troubled accounts have generally not moved through to resolution and write off. PD floors allow for these impacts to remain in place but also have a damping effect on movements.

As noted above accounts which have had extended payment reliefs have been included Stage 2, when otherwise they would have qualified for Stage 1.

Stage 2 amounts at 31 March 2021 include £661.2m of balances with extended payment reliefs which were identified as having an SICR for this reason only (31 March 2020: £nil, 30 September 2020: £576.3m).

Overall the impact of the PMAs including PD floors and the transfer of additional accounts to the life-time ECL provisioning required by Stage 2 has increased the total provision by £27.5m from £54.9m which would have been indicated had only the Group's standard SICR tests been used (31 March 2020: £nil, 30 September 2020: Increase of £19.8m).

The movements in the Loans to Customers balances in respect of which these loss allowances have been made are set out below.

 

Stage 1

Stage 2

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

 

 

 

 

 

 

Balances at 30 September 2020

11,329.7 

1,045.4 

176.1 

162.0 

12,713.2 

New assets originated or purchased

1,079.1 

1,079.1 

Changes in staging

 

 

 

 

 

Transfer to Stage 1

116.9 

(109.2)

(7.7)

Transfer to Stage 2

(215.7)

223.0 

(7.3)

Transfer to Stage 3

(18.3)

(21.2)

39.5 

Redemptions and repayments

(974.8)

(89.2)

(29.6)

(29.0)

(1,122.6)

Write offs

(6.1)

(6.1)

Other changes

206.2 

18.4 

1.8 

8.7 

235.1 

Balance at 31 March 2021

11,523.1 

1,067.2 

166.7 

141.7 

12,898.7 

Loss allowance

(22.0)

(19.0)

(41.0)

(0.4)

(82.4)

Carrying value

11,501.1 

1,048.2 

125.7 

141.3 

12,816.3 

 

 

Stage 1

Stage 2

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

 

 

 

 

 

 

Balances at 30 September 2019

11,382.6 

458.5 

167.9 

219.0 

12,228.0 

New assets originated or purchased

1,209.4 

1,209.4 

Changes in staging

 

 

 

 

 

Transfer to Stage 1

193.9 

(192.7)

(1.2)

Transfer to Stage 2

(333.3)

335.4 

(2.1)

Transfer to Stage 3

(18.5)

(18.5)

37.0 

Redemptions and repayments

(809.7)

(42.4)

(22.0)

(43.1)

(917.2)

Write offs

(5.9)

(5.9)

Other changes

46.0 

1.9 

0.9 

9.7 

58.5 

Balance at 31 March 2020

11,670.4 

542.2 

174.6 

185.6 

12,572.8 

Loss allowance

(18.1)

(9.0)

(39.4)

(0.2)

(66.7)

Carrying value

11,652.3 

533.2 

135.2 

185.4 

12,506.1 

 

 

Stage 1

Stage 2

Stage 3

POCI

Total

 

£m

£m

£m

£m

£m

 

 

 

 

 

 

Balances at 30 September 2019

11,382.6 

458.5 

167.9 

219.0 

12,228.0 

New assets originated or purchased

2,071.4 

2,071.4 

Changes in staging

 

 

 

 

 

Transfer to Stage 1

202.3 

(200.1)

(2.2)

Transfer to Stage 2

(846.2)

849.2 

(3.0)

Transfer to Stage 3

(42.6)

(20.5)

63.1 

Redemptions and repayments

(1,488.3)

(54.1)

(42.0)

(78.1)

(1,662.5)

Write offs

(9.9)

(9.9)

Other changes

50.5 

12.4 

2.2 

21.1 

86.2 

Balance at 30 September 2020

11,329.7 

1,045.4 

176.1 

162.0 

12,713.2 

Loss allowance

(22.2)

(15.8)

(43.4)

(0.4)

(81.8)

Carrying value

11,307.5 

1,029.6 

132.7 

161.6 

12,631.4 

Other changes includes interest and similar charges.

 

Economic impacts

Impairment provision under IFRS 9 is calculated on a forward-looking ECL basis, based on expected economic conditions in multiple internally coherent scenarios. While the provision calculation is intended to address all possible future economic outcomes, the Group, in common with most other lenders, uses a small number of differing scenarios as representatives of this universe of potential outturns.

The Group uses four distinct economic scenarios chosen to represent the range of possible outcomes and allow for the impact of economic asymmetry in the calculations. Each scenario comprises a number of economic parameters and while models for different portfolios may not use all of the variables, the set, as a whole, is defined for the Group and must be consistent.

As the Group does not have an internal economics function, in developing its economic scenarios it considers analysis from reputable external sources to form a general market consensus which informs its central scenario. These sources include data and forecasts produced by the Office of Budget Responsibility ('OBR') and the PRA as well as private sector economic research bodies. The Group also takes account of public statements from bodies such as the Bank of England and the UK Government to inform its final position.

The central scenario used for IFRS 9 impairment purposes is the same scenario which forms the basis of its business planning and forecasting and will therefore generally carry the highest probability weighting. In its March 2021 forecasting cycle (the 'April reforecast') the Group has adopted a central economic scenario derived using a broadly equivalent approach to that used in September 2020, with the starting point of the scenario updated to reflect the actual movements of economic variables in the six months. Compared to the central scenario adopted at 30 September 2020, the new central forecast is broadly similar across the five year period, but with an additional degree of optimism in the very short-term. This upgrade for the early months of the new central scenario is a result of the better than predicted opening position and of the progress made in combatting the pandemic in the UK, including the success of the vaccination programme to date.

The upside and downside scenarios continue to be derived from the central scenario, as they have been in previous periods. However, for the April reforecast these scenarios are not as markedly different in shape as at September 2020, with a greater level of consensus as to the shape and timing of the post-Covid trajectory of the UK economy emerging among analysts and commentors.

The severe scenario has been derived from the stress testing scenarios published by the Bank of England, as in previous periods. From the commentary published with the Bank of England scenarios the Group understands the scenario to be intentionally less severe than those previously published and, in particular, the projection for house prices, one of the most influential variables in the Group's modelling was less harsh than previously seen. Therefore, the Group flexed the forecast for IFRS 9 purposes to include a more severe house price impact.

Following a review of the weightings of the different scenarios, set against the overall potential for variability in the future economic outlook, the Group decided to maintain the scenario weightings used at 30 September 2020. The 15% weighting assigned to the severe scenario reflects the fact that the underlying Bank of England stress is not calibrated on a once in 200 year basis, but is rather less severe.

The weightings attached to each scenario are set out below

 

31 March

2021

30 September

2020

31 March

2020

 

 

 

 

Central Scenario

40%

40%

40%

Upside Scenario

10%

10%

10%

Downside Scenario

35%

35%

35%

Severe Scenario

15%

15%

15%

 

100%

100%

100%

 

The economic variables comprising each scenario, and their average projected values in each of the first five years of the forecast period are set out below. Values are shown for the twelve months ending on 31 March or 30 September in each year as appropriate.

 

31 March 2021

Gross Domestic Product ('GDP') (year-on-year change)

 

2021

2022

2023

2024

2025

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

11.4

4.3

2.0

1.9

2.1

Upside scenario

12.2

3.5

2.0

2.0

2.0

Downside scenario

10.3

4.8

2.5

1.9

2.1

Severe scenario

6.7

7.7

3.6

1.8

1.9

 

House Price Index ('HPI') (year-on-year change)

 

2021

2022

2023

2024

2025

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

0.4 

1.3 

2.8 

2.9 

3.2

Upside scenario

3.8 

3.5 

4.7 

4.6 

2.9

Downside scenario

(4.8)

(6.3)

(0.6)

2.1 

2.0

Severe scenario

(15.3)

(11.1)

(6.9)

(0.6)

0.9

 

Bank Base Rate ('BBR') (rate)

 

2021

2022

2023

2024

2025

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

0.1 

0.1 

0.3

0.6

0.8

Upside scenario

0.1 

0.3 

0.8

1.0

1.0

Downside scenario

0.1 

0.1 

0.1

0.3

0.4

Severe scenario

(0.1)

(0.1)

0.0

0.1

0.2

 

Consumer Price Inflation ('CPI') (rate)

 

2021

2022

2023

2024

2025

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

1.7

2.0

1.9

2.1

2.0

Upside scenario

1.9

2.2

2.2

2.0

2.0

Downside scenario

1.3

1.5

2.0

2.2

2.3

Severe scenario

0.9

0.3

1.1

1.6

1.9

 

Unemployment (rate)

 

2021

2022

2023

2024

2025

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

6.9

5.3

4.8

4.4

4.3

Upside scenario

5.8

5.4

4.8

4.4

4.3

Downside scenario

7.9

6.5

5.7

5.0

4.8

Severe scenario

11.8

10.4

7.1

5.2

4.8

 

Secured lending (annual change)

 

2021

2022

2023

2024

2025

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

4.9

3.9 

3.4 

3.1

3.1

Upside scenario

5.4

5.1 

4.5 

4.0

3.6

Downside scenario

3.6

3.0 

2.7 

3.3

3.8

Severe scenario

0.2

(2.3)

(0.4)

1.7

2.5

 

Consumer credit (annual change)

 

2021

2022

2023

2024

2025

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

(0.6)

3.9

5.0

5.9

6.1

Upside scenario

0.7 

5.8

7.0

7.6

8.2

Downside scenario

(1.8)

2.8

2.0

2.0

2.0

Severe scenario

5.1 

3.2

1.0

2.2

4.5

 

31 March 2020

Gross Domestic Product ('GDP') (year-on-year change)

 

2020

2021

2022

2023

2024

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

(6.7)

9.0

2.9

1.5

1.5

Upside scenario

(3.3)

7.4

2.5

1.5

1.5

Downside scenario

(10.0)

10.9

3.3

1.5

1.5

Severe scenario

(11.9)

10.1

3.9

1.5

1.5

 

House Price Index ('HPI') (year-on-year change)

 

2020

2021

2022

2023

2024

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

(1.7)

(0.5)

3.0 

4.5

3.8

Upside scenario

(0.4)

0.5 

2.0 

3.5

3.0

Downside scenario

(6.0)

(5.0)

0.3 

2.5

3.8

Severe scenario

(9.8)

(13.8)

(5.3)

1.3

2.3

 

Bank Base Rate ('BBR') (rate)

 

2020

2021

2022

2023

2024

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

0.1

0.1 

0.2

0.7

0.8

Upside scenario

0.1

0.2 

0.6

0.8

1.0

Downside scenario

0.1

0.1 

0.1

0.4

0.8

Severe scenario

0.0

(0.4)

0.1

0.2

0.5

 

Consumer Price Inflation ('CPI') (rate)

 

2020

2021

2022

2023

2024

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

0.6

1.4

1.9

2.0

2.0

Upside scenario

0.8

1.6

2.1

2.2

2.5

Downside scenario

0.2

0.8

1.4

1.8

1.8

Severe scenario

0.1

0.2

1.2

1.8

2.3

 

Unemployment (rate)

 

2020

2021

2022

2023

2024

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

6.8

5.5

5.0

5.0

5.0

Upside scenario

6.2

4.8

4.8

4.6

4.5

Downside scenario

8.2

6.8

6.1

5.3

5.0

Severe scenario

8.5

8.1

7.4

6.6

6.1

 

Secured lending (annual change)

 

2020

2021

2022

2023

2024

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

3.4

3.6 

3.7

3.9

3.9

Upside scenario

4.2

4.7 

4.3

4.1

4.0

Downside scenario

2.1

1.9 

2.7

3.5

3.8

Severe scenario

0.2

(0.7)

1.3

3.0

3.7

 

Consumer credit (annual change)

 

2020

2021

2022

2023

2024

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

6.0 

6.1 

6.1

6.2

6.3

Upside scenario

7.9 

8.7 

7.6

7.1

6.7

Downside scenario

2.9 

1.9 

3.7

4.9

5.6

Severe scenario

(1.8)

(4.4)

0.1

2.8

4.7

 

30 September 2020

Gross Domestic Product ('GDP') (year-on-year change)

 

2021

2022

2023

2024

2025

 

%

%

%

%

%

 

 

 

 

 

 

Central scenario

4.9

5.7

2.2

1.5

1.4

Upside scenario

6.0

5.4

2.4

1.5

1.5

Downside scenario

2.1

9.3

2.9

1.3

1.5

Severe scenario

0.2

9.5

2.2

1.4

1.3

 

House Price Index ('HPI') (year-on-year change)