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See Governance section on page 58 for the Chairman`s letter to shareholders
AT A GLANCE
We lend to limited companies and individuals secured on residential property held for investment purposes. Our target market is experienced and professional landlords or high net worth individuals with established and extensive property portfolios.
We provide loans to limited companies and individuals secured on commercial and semi-commercial properties held for investment purposes or for owner occupation.
We provide development loans to small and medium sized developers of residential property. Loans are staged, with monitoring surveyors signing off each stage of the development before funds are released.
The Bank provides funding lines (loans) to non-bank finance companies secured against portfolios of financial assets, principally mortgages and leases.
|Loans and advances (£bn)||3.1|| |
|Gross new lending (£bn)||1.5|| |
|Average book LTV at 31 December (%)||66|| |
For more information go to the Operating and financial review p22
RESIDENTIAL MORTGAGE LENDING
We provide bespoke loans to individuals, secured by a first charge against their residential home. Our target market includes high net worth and complex income customers. We are also expert in shared ownership, lending to first-time buyers and key workers buying a property in conjunction with a housing association.
We provide loans to individuals seeking to raise additional funds secured by a second charge against their residential home. We predominantly target good credit quality borrowers.
The Bank provides funding lines to non-bank lenders who operate in high yielding, specialist sub -segments such as residential bridge finance.
|Loans and advances (£bn)||2.0|| |
|Gross new lending (£bn)||0.3|| |
|Average book LTV at 31 December (%)||56|| |
For more information go to the Operating and financial review p22
We attract retail savings deposits via the internet.
The direct channel sources savings products via the telephone and post.
HIGH STREET BRANCHES
Our Kent Reliance branded network operates in the South East of England and offers a variety of fixed, notice, easy access and regular savings products, including ISAs.
- The Bank acquired the performing former Northern Rock consumer loan portfolio from UK Asset Resolution in July 2013. This portfolio of high-margin, seasoned loans currently represents the Group`s only unsecured lending and is serviced by a third party specialist servicer. Net loan book was £9.1m at 31 December 2016 (2015: £42.1m).
Retail savings balance by channel
For more information go to One fair place to save p18
OUR TRADING BRANDS
OneSavings Bank is made up of a family of specialist financial services brands.
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Specialist semi-commercial and commercial mortgage lender providing Buy-to-Let loans, alongside owner-occupied and investor commercial mortgages throughout England and Wales (acquired in August 2012).
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Specialist residential and Buy-to-Let mortgages for its local market since 2005.
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Largest lending business in the Group, offering Buy-to-Let and first charge residential loans.
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Experienced team providing specialist residential development finance to small and medium sized developers with a proven track record (commenced trading in January 2014).
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Specialist residential and Buy-to-Let mortgages for its local market since 2002.
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Kent Reliance is also an established, stable and award-winning savings franchise. Its strong customer focus delivers high levels of customer satisfaction, resulting in strong customer loyalty and retention.
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Long-standing second charge lender, which offers an award-winning range of specialist secured loans throughout England, Scotland and Wales (acquired in September 2012).
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Based in Bangalore, India, and a wholly-owned subsidiary of OneSavings Bank, OSBI provides primary processing for our Kent Reliance, Jersey and Guernsey brands.
CHIEF EXECUTIVE OFFICER`S STATEMENT
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CHIEF EXECUTIVE OFFICER
I am delighted to report another strong performance from the OneSavings Bank Group, in a year where we have once again met or exceeded all of our financial objectives set at IPO. Our clear strategy and unique business model have proven robust and we finish the year with a strong balance sheet, a high quality secured asset portfolio and an excellent reputation for customer service. This continues to position us well going forward.
"We have continued to focus on customer needs and the quality of new lending, leading to an enhanced customer reputation across our lending and savings brands."
CONTINUED STRONG PERFORMANCE
OneSavings Bank (`OSB`) continued to grow the loan book through our specialist lending brands during 2016, with 28% growth in organic origination, responding well to the headwinds created by the change in Stamp Duty Land Tax (`SDLT`), the EU referendum result and the signalled individual taxation regime changes. This growth was achieved without compromising net interest margin as the Group remained focused on delivering our objective of being a leading specialist lender in our chosen markets, supported by a strong retail savings franchise and an efficient and scalable back office function. We have created value by taking a people-centric approach to our business through bespoke, manual underwriting, distribution and customer service, which have collectively driven the performance of our lending and savings brands.
We achieved particularly strong growth in our core Buy-to-Let lending sub-segment as the market became more focused on our professional landlord audience. We enhanced our core residential segment through selective asset acquisition and I am very pleased that we also increased our capital ratio following the sale of our economic interest in the Rochester Financing No. 1 plc securitisation (the `Rochester 1 disposal`) as well as through our profitable organic origination. We have grown the commercial side of our Buy -to-Let/SME segment cautiously and we have been prudent in business areas exposed to cyclical uncertainty, such as residential development finance, through increased stress testing measures in these sub-segments.
RESULTS AT A GLANCE
The Group delivered strong profit and loan book growth in 2016. Underlying pre -tax profit1 increased by 29% to £137.0m (2015: £105.9m) and underlying basic earnings per share1 grew by 20% to 41.7 pence (2015:34.8 pence). The Group grew its loan book by 16% to £5.9bn in 2016 (2015: £5.1bn), whilst maintaining an appropriate risk return profile. Excluding the Rochester 1 disposal, the loan book grew by 20%. This was driven by strong new originations in our core Buy-to-Let/SME segment, which continued to build on our 2015 achievements.
Our high quality residential mortgage segment also continued to perform well.
The balance sheet growth was achieved whilst delivering a strong return on equity of 29% (2015: 32%) or, 32% excluding the impact of the new bank corporation tax surcharge, despite strengthening our fully-loaded common equity tier 1 (`CET1`) capital ratio to 13.3% (2015: 11.6%). The capital ratio increased following the Rochester 1 disposal, whilst also demonstrating the strong organic capital generation capability of the business through profitability.
The Board is recommending a final dividend of 7.6 pence per share. This gives a total dividend per share for the full year of 10.5 pence in-line with our stated dividend policy.
BEST SPECIALIST LENDER
The increase in gross new origination of 28% to £2.3bn (2015: £1.8bn) demonstrates the strength of our lending franchises in the specialist lending markets we serve. We continue to differentiate ourselves from the competition by offering well defined propositions in high margin, underserved markets, where we have the experience, as well as the internal and intermediary infrastructure, to successfully develop and service those markets.
Changes to SDLT at the end of the first quarter of 2016 and the signalled changes in the individual taxation regime led to varying levels of mortgage applications and completions in Buy-to-Let throughout the year. Completion volumes in our core businesses were strong in the first quarter as we fulfilled heightened demand to accelerate Buy-to-Let mortgage completions ahead of the SDLT changes and then grew again to record levels during the second half. Application volumes in our core businesses remained strong throughout the year with the run -rate increasing in the second half of 2016. It increased further in the last quarter ahead of the introduction of new underwriting standards for Buy-to-Let at the beginning of 2017. This performance demonstrates the sustainable strength of our propositions targeted at professional landlords, particularly our specialist, manual underwriting and our deep relationships with mortgage intermediaries. Professional/ multi-property landlords accounted for 68% of completions for OSB by value during the second half of 2016 (2015: 60%).
A significant proportion of the Buy-to-Let market comes from refinancing. OSB`s Buy-to-Let refinancing percentage was 58% during 2016 despite the high level of purchase activity ahead of the change to SDLT (2015: 58%).
I am pleased that our more cyclical commercial businesses continued to perform strongly. Heritable Development Finance continued to grow and deliver high quality residential development lending, with a preference for forging relationships with those active outside prime central London. The business continued to gain momentum in spite of new entrants to the market, as customers sought an experienced and knowledgeable lender. After the EU referendum, the number of potential development schemes which can meet our stringent stress tests may reduce, but our high quality relationships have supported loan book growth, with commitments standing at £212m at year end, an increase of £44m for the year.
In addition, we have also grown the provision of secured funding lines to other lenders that operate in certain high yielding, specialist sub-segments, such as residential bridge finance and asset finance. Total credit approved limits were £330m with total loans outstanding of £122m as at 31 December 2016 (2015: £185m and £126m respectively). During 2016, four new funding lines were added, with a further two credit lines approved and in the documentation process.
We continued to gain recognition amongst mortgage customers and intermediaries, winning multiple awards during the year. I am particularly pleased that Kent Reliance won the Personal Finance Best Buy-to -Let Mortgage Provider award for the second year running and the What Mortgage Best Specialist Lender award in 2016. This combined with our broker net promoter score (`NPS`) of 48% demonstrates the strength and value of our lending customer franchise.
AWARD WINNING SAVINGS
Our stable and award winning retail funding franchise continues to support lending growth, with retail deposits up 11% to £6.0bn (2015: £5.4bn). Our loan to deposit ratio for 2016 was 90%2, comfortably within our target of less than 100%, delivering on our strategy to be primarily retail funded. Nearly 27,000 new savings customers joined the Bank during 2016 and our successful programme of creating long -term savings relationships by offering market competitive rates to all customers, including those with maturing fixed rate bonds and ISAs, continued to deliver a very strong 87% retention rate.
The strength and fairness of our retail savings proposition, coupled with excellent customer service and high retention rates, continues to allow the Bank to raise significant funds without needing to price at the very top of the best buy tables.
RETURN ON EQUITY
1. 32% excluding impact of the new bank corporation tax surcharge
DIVIDEND PER SHARE
We have diversified sources of funding including the government`s Funding for Lending Scheme (`FLS`) and Term Funding Scheme (`TFS`) and we managed liquidity using a mixture of new and retained retail deposits, FLS and TFS. In 2016, the Group also extended its savings product proposition to small and medium businesses.
OPERATIONAL EXCELLENCE AND SERVICE IS CORE
As the Group has grown, costs have been controlled in-line with our stated financial objectives, resulting in a broadly stable cost to income ratio of 27% (2015: 26%). During 2016, we continued to invest in risk and compliance functions as regulatory costs increased. In particular, we continued to invest in the development of models needed both for IFRS 9 and to progress our stated aim of becoming an internal ratings- based approach bank (`IRB`). The Group`s IFRS 9 models and first generation IRB models were delivered on schedule in late 2016. We commenced the parallel run for IFRS 9 at the start of 2017 and are well placed to implement the requirements for 2018. We continue to invest in customer facing and back office infrastructure as previously reported and to accommodate growth in OSBIndia, new premises in Bangalore became operational during the first quarter of 2016.
OSBIndia undertakes a range of primary processing services at a significantly lower cost than an equivalent UK-based operation and with very high quality levels. I am especially pleased that we achieved this whilst maintaining our focus on customers, borne out by an increase in customer NPS to an outstanding 59% (2015: 55%). This is also demonstrated by our numerous awards including Kent Reliance being named in the Moneyfacts awards as Best Bank Savings Provider for the second year in succession.
"We continue to gain recognition amongst customers and intermediaries, winning multiple awards during the year."
BUILDING A BUSINESS FOR THE FUTURE
The Group`s strength and expertise in manual underwriting has continued to exercise strong diligence over loan and customer assessment, contributing to the Group`s loan loss ratio falling to 16bps in the year to 31 December 2016 (2015:23bps). We remain particularly pleased with the performance of the front book of mortgages. From more than 29,000 loans totalling £5.9bn of new organic originations since the Bank`s creation in February 2011, we only have 91 cases of arrears over three months in duration, with an aggregate balance of £8.6m and an average loan to value (`LTV`) of 60%, reflecting the continued strength of the Bank`s underwriting and lending criteria.
In June 2016, we implemented a revised mortgage product transfer scheme (`Choices`) to encourage greater levels of retention amongst those borrowers reaching the end of their initial product term. Under this programme, borrowers are encouraged to engage with their broker to receive advice and select from a bespoke product set. Since the implementation of the scheme there has been a significant increase in the number of borrowers choosing a new product within three months of their initial product ending, driven exclusively by success in switching borrowers who were otherwise remaining on standard variable rate (`SVR`) and who, by definition, were therefore in the market for other lenders.
The Bank of England Monetary Policy Committee announced a bank base rate cut of 25bps on 4 August 2016 and signalled that rates could go lower if the economy worsens. OSB reduced its SVR by the full 25bps effective from 1 September 2016. This reduction had a broadly neutral impact on the Bank`s NIM due to rate reductions on administered savings. Since the creation of OSB we have kept control of asset pricing in our core businesses, with the majority of new origination linked to our SVR or in naturally hedged fixed rate products. This control over pricing provides significant protection against rate changes.
The Prudential Regulation Authority (`PRA`) issued a Supervisory Statement on Buy-to-Let underwriting standards in September 2016, requiring lenders to adopt more stringent affordability assessments from 1 January 2017. We have always assessed affordability for borrowers through our specialist underwriting model and applied stringent stress tests. This can be seen in our weighted average interest coverage ratio (`ICR`) for Buy-to-Let origination during 2016, which increased to 171% from 159% in 2015, demonstrating our cautious approach to the assessment of customer affordability.
We continued our focus on disciplined lending following the EU referendum, using lending criteria together with product targeting to position the business to grow its lower risk, low LTV portfolio. The weighted average loan to value (LTV) of the mortgage book remained low at 63% at the end of 2016, with an average LTV of 69% on new origination during the year (2015: 69%). We have limited exposure to high value properties, with only 2% of our total loan book secured on properties valued at greater than £2m and with an LTV above 65%.
In its internal capital adequacy assessment process (`ICAAP`), OSB applies a number of severe stress scenarios to its balance sheet including the H2 2016 PRA Stress Scenario, to demonstrate that it can survive a substantial economic downturn while maintaining capital levels above the Board capital risk appetite. The H2 2016 PRA Stress Scenario contains a severe reduction in house prices of more than 30% over the first two years of the five-year stress period, as well as an increase in unemployment to more than 9% and a significant fall in GDP. OSB`s secured balance sheet with low average LTVs and the underlying profitability of its existing loan book allow it to survive such a stress, keeping above regulatory prescribed levels.
STRENGTHENING THE SENIOR MANAGEMENT TEAM
During 2016, we took the opportunity to strengthen the senior management team. Jason Elphick joined as Group General Counsel and Company Secretary in June 2016 from Santander, where he was Legal Director, Head of UK Banking Legal.
Additionally, Lisa Odendaal joined OSB in April 2016 as Head of Internal Audit and is a member of the Executive Team. Lisa was previously part of the outsourced Grant Thornton Internal Audit team.
In 2016 we successfully negotiated regulatory uncertainty and economic challenges, and we believe that our specialist manual underwriting capabilities will become increasingly relevant during 2017 as economic uncertainty persists and regulatory changes take hold. We will maintain a deep understanding of the risks that we can actively manage and price for, and this together with our strong service proposition based on flexibility and speed of turnaround, will underpin the attractiveness of our products to customers.
The SDLT increase for Buy-to-Let purchases introduced in April 2016 has been absorbed by the market with little long-term impact for our target audience of professional landlords.
In 2017 we will see the market adjusting to the new Buy-to-Let underwriting standards which ensure that lenders, inter alia reflect the changes to personal tax on landlords within their affordability assessments. These changes will reduce yield for some higher rate tax payers. We have seen a clear trend for borrowers to seek to mitigate this by opting to borrow via a limited company during 2016. We saw a continued increase in the proportion of applications from limited companies for our main Buy-to-Let brand, Kent Reliance, from around 40% in December 2015 to 57% in the second half of 2016. The Group has always specialised in lending to limited companies, and given the market trends, this gives us competitive advantage over those lenders without such a capability.
Our manual, bespoke approach to underwriting will give us additional advantages when further market- wide measures to strengthen underwriting standards are to be implemented from September 2017, as we already substantively meet the regulatory requirements for assessment of landlords with four or more mortgaged properties.
We remain committed to being retail funded and the through-the- cycle benefits that this brings, but intend to complement this by taking advantage of the four-year term funding provided through the TFS at Bank of England base rate, as we lend into the `real economy`. We have drawn down £301m to date.
The consultation from the Basel Committee on revised standardised risk weights proposed higher risk weights for Buy-to-Let, to be implemented from 2019 at the earliest. This proposed standardised risk weight revision is based on a global calibration, which in OSB`s view is not appropriate for the UK Buy-to -Let market. Additional information is expected in March 2017 updating the Basel Committee proposals. As an alternative to the standardised risk weights, OSB is progressing towards IRB and the required models have been built and are being run during 2017 to test their accuracy. OSB is on target and aims to have it in place for residential and Buy-to-Let lending prior to adoption of final rules on standardised risk weights. The PRA published a consultation, "Refining the PRA`s Pillar 2A capital framework" in February 2017 to be implemented by 1 January 2018. The consultation`s aim is to ensure that the total amount of capital required is not excessive for firms following the standardised approach for credit risk.
Finally, there is the broader macroeconomic environment, primarily driven by uncertainties following the decision to leave the EU and the intention of the UK Government to trigger Article 50 before the end of March 2017. The UK economy has remained resilient in the face of the uncertainty and we have seen no material change in customer confidence or demand for loans in our core markets. We will continue to concentrate on our core strengths, and remain confident in the quality of our chosen markets and our business model, and believe we are in a strong position to perform well in each of our key market segments.
Our achievements in 2016 are a testament to the management and staff of OSB and I would like to thank my colleagues for their hard work and commitment throughout the year.
"We are a responsible lender and will continue to manage the business prudently."
LOOKING FORWARD TO 2017
Following the strong performance in 2016, we entered 2017 with a strong pipeline of new business and are currently seeing very strong application levels in our core businesses. We expect to deliver net loan book growth in the mid-teens in 2017, whilst keeping NIM and cost to income ratio broadly flat to 2016. We will concentrate on what we have proven we do best; being a people focused business, using our relationships, manual underwriting expertise and secured lending strategy to lend responsibly to customers in underserved markets.
Over the coming year, organic lending, through the Buy -to-Let segment will remain the key driver of loan book growth focused on professional, multi-property landlords. Additionally, we will continue to evaluate selective inorganic opportunities that provide long-term value and meet our strategic objectives.
We start 2017 with a fully loaded CET1 ratio of 13.3% and a proven organic capital generation capability through profitability. We anticipate maintaining a CET1 ratio at a minimum 12% going forward. We remain keen to transition the capital stack to an optimum mix which may include Additional Tier 1 Capital (`AT1`) when market conditions are right.
Our dividend policy for 2017 remains a pay-out ratio of at least 25% of underlying profit after taxation.
It is too soon to predict the medium to long -term impact of economic, tax and regulatory changes, but I believe that OneSavings Bank is well placed to take advantage of opportunities that arise and we remain capable of generating attractive returns for our shareholders.
Chief Executive Officer
16 March 2017
1. See Highlights, page 1 for statutory equivalents
2. Excluding the impact of drawdowns under the FLS and TFS
The defining economic event of 2016 was the EU referendum in June. Whilst prior to the vote there were widespread assumptions of a significant negative impact in the event of a vote to leave, the economy proved itself resilient with GDP growth of 1.8% driven by the manufacturing and service sectors. Fiscal intervention, including the reduction in base rate and the devaluation of the pound, were important supporting factors. The prospect of a "hard" Brexit has seen the yield curve flatten and the interest rate outlook remains benign, notwithstanding the inflationary pressures that are starting to be seen and which will see real wage inflation stagnate. The Bank of England has indicated that it will tolerate inflation rising above the 2% target in order to minimise any negative impacts of Brexit on the UK economy.
UK BUY-TO-LET GROSS ADVANCES
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Source: CML Research.
UK HOUSE PRICE INFLATION
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Source: ONS, Survey of Mortgage lenders.
THE HOUSING MARKET
Housing transaction volumes were materially distorted in 2016 by the Stamp Duty Land Tax (`SDLT`) change on second properties, and the underlying trend has seen a modest reduction in activity, driven by a number of factors. The most obvious of these was the outcome of the EU referendum, which created uncertainty throughout the second half of the year. This uncertainty undermined consumer confidence, suppressing levels of transactions.
In addition, regulatory and tax changes adversely affected volumes. SDLT increases first applied in 2015 continued to subdue the upper end of the property market and the introduction of a 3% SDLT surcharge in April 2016 on second properties further dampened transaction levels, albeit not before a substantial spike in activity in March.
The stricter affordability assessments that were introduced in the Mortgage Market Review in 2014 have continued to suppress first-time buyers and home movers. High transaction costs and relatively few properties on the market are also holding back activity.
Nonetheless, first-time buyers have been supported by various government schemes, which have helped the number of first-time buyers on an annual basis increase by 116% since its post-crisis low in mid-2009. It is other home movers, whose activity continues to be subdued since the financial crisis, that are underperforming, with mover numbers up by only 44% since the same period.
Average house prices in the UK increased by 7.2% in 2016 according to Land Registry.1 Growth in the first half of 2016 was reversed in the third quarter as uncertainty followed the EU referendum outcome. The fourth quarter however saw recovery with both December and January showing small gains.
THE MORTGAGE MARKET
The Council of Mortgage Lenders (`CML`) entered 2016 expecting 7.7% growth in new lending over 2015, to £237bn.2 Changes to SDLT that came into effect from April gave rise to a substantial spike in new lending in March, in particular in Buy-to-Let, and the month saw £26.3bn of lending, compared to an average of £18.7bn in the first half of the year (excluding March). This contributed to a full year figure of £245.5bn of new lending in 2016, a 10.6% increase on 2015.3
Buy-to-Let lending grew to £40.6bn4 in the year (2015: £37.9bn), an increase of 7%, supported by the SDLT change in April. Despite the spike in purchase activity that this caused, overall the year saw purchase transactions fall to 102,100 (2015: 117,500). This was entirely offset by an increase in remortgage transactions to 153,000 (2015: 132,300) and marks the beginning of what the CML perceive will be a trend of lower purchase transactions offset by rising remortgage volumes to create growth.
This expectation is driven by the introduction of the changes to personal taxation, which will be phased in from April 2017, coupled with new regulation on Buy-to-Let underwriting and affordability assessment, key elements of which were introduced on 1 January 2017, with further measures to be implemented in September.
THE COMPETITIVE LANDSCAPE
The UK market for lending and savings products is highly concentrated towards the high street banks. It is dominated by five major players, whose strategy is to use current accounts to cross-sell a range of products including savings and investments, mortgages, personal loans and credit cards. The high street banks primarily target the traditional, high-volume consumer markets and rely upon economies of scale and process automation. In recent years, high street banks have been subject to heightened and sustained regulatory, political and public scrutiny following several industry issues: the need for state aid during the financial crisis, alleged complicity in LIBOR rate fixing, mis-selling of payment protection insurance and interest rate swaps.
This has facilitated the entry of challenger banks, a term applied to an emerging group of banks seeking to challenge the dominant market share of the high street banks. These challenger banks also offer current accounts as their core proposition, using them to develop wider customer relationships. Smaller than high street banks and without the negative brand legacy, they develop customer propositions where they have identified areas of competitive advantage such as service, accessibility and product features.
More recent entrants are specialist banks, a group that includes OneSavings Bank. The specialist banks focus on specific UK lending niches that are underserved and do not offer current accounts. A key feature of these specialist banks is a growing presence in the retail savings sector as they develop a range of funding sources.
We have also seen the emergence of fintech banking propositions. These are yet to acquire material traction with UK consumers, however they do attract attention for their innovative use of technology.
ONESAVINGS BANK`S LENDING MARKETS
UK BUY-TO-LET/SPECIALIST SME MARKET
Growth in the private rented housing sector (`PRS`) has been consistent since 2000, underpinned by strong tenant demand as a result of social and demographic changes, government policy and the potential difficulties faced by first-time buyers in securing finance. The major shift seen in residential mortgage lending has been to make affordability assessments stricter, and this has curtailed lending activity, despite mortgage rates at historically low levels.
The PRS now provides accommodation for more than 5.3m households in Great Britain (as at September 2016), nearly 20% of the total. Sector growth is expected to continue, increasing to 25% of total households by 2025 (Local Government forecasting). The total value of property in the PRS in Great Britain is £1.3 trillion, driven by house price inflation (HPI) and PRS growth5. At the same time, social housing properties as a percentage of the housing sector have decreased, with renting the only major alternative to home ownership.
The Buy-to-Let mortgage market serving the PRS has increased, with the number of outstanding mortgages rising from 120,300 in 2000 to over 1.8 million in 2016.6 Expansion in the Buy-to-Let market has been criticised for inhibiting growth in the owner-occupied market, particularly for first time buyers. Changes to tax relief, new Buy-to-Let regulation and SDLT are expected to moderate Buy-to-Let market growth, however the PRS is expected to remain a core component of the UK housing supply and the primary issue affecting the owner occupied market remains the lack of available stock and insufficient new build starts, as was recognised in the Housing White Paper in February 2017.
The prospect of changes to personal taxation have seen an increase in the number of landlords seeking to borrow via a limited company entity. With most of the larger lenders in the sector not offering a limited company proposition, this has led to a shift towards those lenders who do. With one specialist broker suggesting that 69% of purchase applications in the fourth quarter of 2016 were from limited companies, the inability of the market leaders to meet this demand will have a positive outcome for the pool of smaller lenders who do and marks a shift in the sector.
Moreover, following the implementation of the Prudential Regulation Authority`s (`PRA`) revised rules on Buy-to-Let underwriting, many lenders who lend to the limited company market offer criteria that allow for greater levels of borrowing than would be available to individual borrowers.
OSB is a respected lender within the specialist Buy-to-Let sector and is experienced in dealing with limited company lending. Therefore whilst the succession of changes, both actual and planned, that have impacted the market will undoubtedly dampen demand as a whole, we believe that this dampening will be more acute at the amateur end of the market, where borrowers own a small number of properties in their personal name. Professional landlords will increasingly grow their portfolios using limited companies.
The UK commercial property market saw investment demand increase in the second half of 2016 following the EU referendum, with the trend positive. The Royal Institute of Chartered Surveyors7 have noted an increase in demand from foreign investors, potentially attributable to favourable currency movements. Whilst investor demand has grown in all sectors, growth in the retail sector was weakest, with demand notably higher in the office and industrial sectors. Market sentiment is positive, particularly outside of London.
Research from Savills8 showed commercial property investment decline by 28% in 2016 to £51.4bn however this figure is above the ten year average of £45.9bn, the fourth quarter growth in 2016 at 39% was stronger than in 2015 (25%), driven by overseas investment. The UK is seen as an attractive investment opportunity given the deeper political uncertainties in Europe and there is a degree of optimism in respect of capital values, helped by business confidence levels being greater than the consumer equivalent.
The lending market is dominated by the high street banks. Opportunity exists for specialist lenders whose manual underwriting approach, and willingness to engage in a dialogue to ensure robust understanding of customer requirements can provide a service differential.
The UK has experienced a long-term upward trend in real house prices, creating affordability problems as demand for housing continues to outstrip both supply and real wage growth. Furthermore, turnover in the second-hand housing market is subdued.
The Housing White Paper published in February 20179, refers to a "broken housing market" and identified that "not enough homes are being built" and thus prioritised initiatives that will seek to address this. Notable among the initiatives announced in the White Paper were a raft of measures to encourage smaller builders to build more homes, through an improved planning framework. They also expressed a desire that lenders should "back developers.in building more homes". The White Paper represents a holistic assessment of the UK`s housing needs, and it is encouraging to note the emphasis placed on supporting the small and medium sized developers who form our core audience for development finance.
SPECIALIST RESIDENTIAL LENDING
The high street banks typically rely on a heavily automated, scorecard-driven approach to lending, as this provides a cost-effective means of servicing a high volume of residential mortgage loans. This is not an effective model for the specialist market, where OneSavings Bank`s manual underwriting and individual case assessment model is more appropriate. Customers with complex asset or income structures and those seeking shared ownership mortgages are ill-served by the commoditised and inflexible decision processes of mainstream lenders.
Whilst MMR has been in place for some time, its consequences are still visible in the form of reduced home mover levels, as recognised by the CML. The market share of the top six lenders continues to decline, as specialist and challengers grow market share.
SECOND CHARGE LENDING
The second charge market saw an estimated £874m of gross new lending in 2016 (2015: £844m). OneSavings Bank targets good credit quality mortgage borrowers who wish to extend their borrowing, but do not want to change their existing mortgage arrangements. Borrowers are typically seeking to fund a major purchase, undertake home improvements or consolidate and reschedule other consumer debt without refinancing their existing first charge mortgage, as it often carries a low interest rate.
The market experienced significant change in March 2016 when market regulation was taken over by the Financial Conduct Authority. Most notably, as a result of this, affordability assessment now mirrors the practice seen in first charge lending and is aligned with the MMR.
Whilst the gross lending figures represent year on year growth of 3.6%, this can be attributed wholly to business volumes prior to the change. The first quarter saw 29% growth year on year as business was written in advance of the rule changes. The remainder of the year saw a small reduction in overall lending with the market settling at around £70m of new lending per month.
There are a number of successful non-bank or alternative providers of finance to retail and SME customers in the UK. These businesses are funded through a variety of means including wholesale finance provided by banks, high net worth investors and market based/peer-to-peer finance. OSB is an active provider of secured funding lines to the non-bank finance market, to date focusing on short-term real estate finance, leasing and development finance. Through these activities the Bank has achieved senior secured exposure at attractive returns to asset classes that it knows well. This market services a broad range of business sectors and its overall size is thus difficult to quantify. OSB sees a regular flow of opportunities, adopts a very selective approach and has a strong pipeline of new business.
1. Land Registry, UK House Price Index, 14 February 2017
2. CML, Market Review, December 2016
3. CML, New Mortgage by purpose of loan, ML1 UK, 1 March 2017
4. CML, New and Outstanding Buy-to-Let new mortgages, MM17, 7 February 2017
5. Savills.co.uk, UK News 18 January 2016
6. See footnote 4
7. RICS UK Commercial Property Market Survey Q4 2016, 26 January 2017
8. Savills, Market in Minutes UK Commercial, 21 February 2017
9. House of Commons Library briefing paper number 06416, 15 June 2016
Our strategic objective
To be a leading specialist lender in our chosen sub-sectors, supported by a strong retail savings franchise.
|BE A LEADING SPECIALIST LENDER IN OUR CHOSEN MARKETS|| Grow profitable loan origination in key markets || || || || |
LOAN BOOK GROWTH £BN
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|RETAIN FOCUS ON BESPOKE AND RESPONSIVE UNDERWRITING|| High quality decisions protecting the business || || || || |
LOAN LOSS RATIO %
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|FURTHER DEEPEN RELATIONSHIPS AND REPUTATION FOR DELIVERY WITH INTERMEDIARIES|| Increase partner reach in response to demand || || || || |
GROSS NEW LENDING £BN
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|MAINTAIN AND BUILD UPON 150 YEAR HERITAGE IN SAVINGS|| Stable, high quality funding platform || || || || |
CUSTOMER NPS %
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|LEVERAGE UNIQUE AND COST EFFICIENT OPERATING MODEL|| Best in class customer service || || || || |
COST: INCOME RATIO %
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ONE SPECIALIST LENDER
We focus on specialist mortgage lending to consumers, entrepreneurs and SMEs in sub-sectors of the UK market where we have identified opportunities for high returns on a risk-adjusted basis and where we can take a leading position.
GROSS NEW ORGANIC LENDING
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Our confident and friendly staff communicate
and deal with each customer on an individual basis.
Sub-sector market specialisation
We focus on specialist mortgage lending to consumers, entrepreneurs and SMEs in sub-sectors of the UK market where we have identified opportunities for risk-adjusted high returns and strong growth, and where we can take a leading position:
· private rented Buy-to-Let sector;
· commercial and semi-commercial;
· residential development finance;
· bespoke specialist residential lending;
· second charge residential lending; and
· shared ownership.
OSB also provides funding lines to other lenders, secured against pools of loan collateral providing indirect access to certain high-yielding, specialist sub-segments, such as residential bridge finance and leasing. As at the end of 2016, the Group had total loans outstanding of £122m (2015: £126m).
We continue to identify opportunities where we can use our strengths to take leading sub-sector positions, adding value to the Group and maximising our use of capital.
We build long-term partnerships with a panel of selected specialist mortgage intermediaries that are leaders in their sub-sectors, making it easier for them to serve borrowers by providing swift decision making.
We provide access to specialist products and underwriting through our coordinated multi-brand approach and focus on listening and working with partners to develop new opportunities and bespoke solutions.
We deepen our relationships with these intermediaries and conservatively expand the panel with whom we work. We develop marketing and education campaigns, combined with dedicated marketing support leading to an intermediary NPS of 48% in 2016.
The Group is focused on organic origination as its core growth strategy. In addition, OSB has diversified into new lending markets through business acquisitions, including SME/Commercial and second charge residential mortgages.
In 2016, OSB completed the purchase of portfolios of UK first and second charge residential mortgages for £181m.
OSB will continue to actively consider inorganic opportunities as they arise to complement the core organic origination strategy.
We adopt an expertise-based, manual approach to underwriting in each market sub-sector, specifically geared to each individual customer. We do not use automated or scorecard-based processes for underwriting new loans.
We differentiate our service proposition by responding quickly and flexibly to requests with direct access to decision makers, and provide a service differential for more complex situations.
We leverage the expertise of our highly-skilled underwriting team to enhance the experience of our partners. Our Transactional Credit Committee met 101 times in 2016 to assess more complex or larger new mortgage applications.
What we will do
We will continue to develop existing and new manual underwriting skills, through a training and coaching programme, ensuring that OSB staff have up-to-date skills and can continue to deliver a high-quality differentiated service.
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A RELATIONSHIP BUILT ON RESPECT
BUSINESS DEVELOPMENT MANAGER
"It takes a long time to build trust and a moment to lose it."
My role revolves around people and building relationships. I have spent my whole career getting to know brokers and listening to what is important to them. It is all about helping them to help their clients, offering certainty and treating them properly. Of course honesty and integrity are crucial, and that means doing the small things right, being available and responding to people swiftly but I aim to go beyond that.
Using my expertise I can act as a consultant, helping my brokers put a proposal together to ensure it can meet the needs of OSB and their client. Sometimes that means not being afraid to say no early in the process, even suggesting a more suitable lender where a case does not meet our risk appetite. It makes a difference to me that I can present larger and more complex cases to the Bank`s Transactional Credit Committee. I see the decision making process first hand and what will make an application successful. This helps me stand out to my brokers and makes OSB their lender of choice.
ONE FAIR PLACE TO SAVE
We deliver straightforward products that meet customers` needs for cash savings. We offer good and consistent value to attract and retain a loyal customer base.
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We offer long term value for money products without the use of short term bonus rates.
Stable funding platform
We focus on delivering a proposition to attract and retain a loyal customer base, providing a stable funding platform for OneSavings Bank to grow its loan book. Our proven retail savings performance ensures secure long-term funding.
We continued to manage long-term relationships across all channels throughout 2016, offering a mixture of market competitive rates including maturing fixed rate bonds and ISAs. Where we target customer retention we achieve more than 80%. We have diversified our funding using the Bank of England Funding for Lending Scheme and the new Term Funding Scheme.
We attracted nearly 27,000 new savings customers in 2016. The average balance of our savings customers is £30,134. We also extended our savings proposition to small and medium businesses.
Transparent savings products
We deliver straightforward products that meet customer needs for cash savings. We offer good and consistent value, without having to price at the top of the best buy tables. We do not offer new customer-only products, and new customers are not offered better rates than those for existing customers. In 2016, we were recognised by Moneyfacts as the Best Bank Savings Provider and Best No Notice Account Provider, both for the second year running and Best Cash ISA Provider for the fourth year running.
By maintaining our strong customer-centric approach we are rewarded with a loyal customer base that recognises long-term good value.
We reward our people based on the quality of service they provide to customers, further protecting our retail savings franchise. We measure customer satisfaction and net promoter score (`NPS`) through regular customer surveys using independent experts. These measures are aligned to our business strategy.
We measure customer satisfaction in several ways: NPS assesses customer advocacy - the likelihood of a customer recommending us to someone else. Our customer NPS increased to 59% across the year.
We will continue to invest in enhancing our service in 2017, based on using technology and modern practices to support the brand traits customers have told us they prefer - heritage, trustworthy and traditional. We will also use our real-time customer feedback capability to identify and act on ideas for new products and service improvements.
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IMPROVED SERVICE WITH THE SAME HEART
BRANCH OPERATIONS MANAGER
"Great customer service starts with common sense and remembering what you want from a bank."
It`s amazing how the little things are often the most irritating. It`s often like that in my job. I am responsible for making it easier for our customers to do business with us in our branches and to ensure we deliver the best service possible. The most important thing we do is listen. I listen to customers both through formal surveys and also by being in the branches, often working behind the counter helping to gain insights into what we can still do better.
What makes us really different is our personal and individual approach to everything we do. We are flexible and not afraid to push the boundaries and find new ways to deliver the service our customers expect from us.
ONE UNIQUE OPERATING MODEL
We work to an overarching risk appetite and single Group lending policy spanning all our brands and deliver our services with the aim of providing excellent customer experience. We put customers` needs first.
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Simple and easy to do business with.
Integrated multi-brand approach
We capitalise on our cross-company expertise, operating under a common operational framework that supports our key lending brands. Distribution, sales and risk processes operate under a simple, coordinated management structure giving us the ability to present our multiple lending brands with great efficiency.
We work to an overarching risk appetite and a single Group lending policy spanning all our brands and borrowing customers, using our experience in specialist lending to enhance policy. We ensure that risks are modelled and the comprehensive risk pricing model reflects latest market conditions and forecasts. This modelling ensures all product pricing goes through the same rigorous analysis, according to core principles set by our Group Pricing Committee, comprised of senior management.
We will further develop the coordination and commonality of approach for our lending brands and customer and risk supporting operations in 2017 to maximise the expertise and goodwill we have built up in those customer-facing brands.
We aim to ensure our administrative functions, based in our wholly-owned subsidiary OSBIndia, support the strategic intent of delivering excellent customer experience. We drive continuous customer-focused improvement through our flexible and cost-effective operating platform, putting customer needs first.
We benefit from our investment in continuously identifying and curing areas that cause customer dissatisfaction.
We will further benchmark our processes against industry best practice, challenging what we do and eliminating customer pain points as they arise. We will also develop skills that enable highly efficient service management, matching those to business needs both in India and the UK.
Investment in infrastructure and systems
We aim to deliver efficient, scalable and resilient infrastructure to support our business strategy objectives. We invest in complementary systems, both proprietary and industry standard, to deliver excellent service (measured against peers by industry experts), outstanding resilience and strong governance. OSB focuses on being a nimble bank with very few legacy issues.
We continue to invest in IT security, supported by market leading data security and resilience experts.
We will continue to leverage infrastructure investment across the Group in 2017, maximising customer and efficiency benefits. We will also ensure infrastructure and systems are regularly reviewed and tested, maximising their security and resilience using industry experts with particular focus on cyber security.
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WE ARE DRIVEN BY CUSTOMER SATISFACTION
MANAGER, CUSTOMER EXPERIENCE
"We are an important part of OneSavings Bank and we make sure our people know that."
Here at OSBIndia we concentrate on two things.
The first is providing great customer experience to OSB clients by driving continuous improvement. This means that the targets we set for our people are based on customer service and we reward them for delivering just that. It is not about getting customers off the phone quickly, it`s about ensuring that we help them, efficiently and quickly. Experts measure what we do, helping us learn how to get it right first time.
The second is supporting OSB by delivering a flexible and cost effective platform to do business. We spend time in the UK at the Group Head Office and we regularly have visits from managers and directors. This means we understand what we need to do to help the Group deliver strategic improvements to service, and support the best in class cost:income ratio by our efficiency.
OPERATING AND FINANCIAL REVIEW
OneSavings Bank delivered another year of strong performance in 2016. We have once again met or exceeded all of our stated financial objectives as set out at IPO. This strong performance reflects the continued successful delivery of our strategy to:
- be a leading specialist lender in our chosen sub-sectors;
- retain our focus on bespoke underwriting;
- further deepen our relationships and reputation for delivery with the intermediaries who distribute our mortgage products;
- leverage our efficient, scalable and cost-effective operating model; and
- maintain and build on our stable retail savings franchise.
OneSavings Bank (`OSB`) continued to deliver strong earnings and balance sheet growth during 2016. The Group successfully dealt with a changing political and economic landscape through our focus on professional landlords and limited companies, and high quality specialist underwriting, distribution and product proposition.
Net loans and advances grew by 16% in 2016 to £5.9bn, 20% excluding the impact of the Rochester Financing No. 1 plc disposal (`Rochester 1 disposal`). The growth was due primarily to an increase in new lending in the Buy-to-Let/SME segment and portfolio purchases for £180.7m, partly offset by the sale of OSB`s entire economic interest in Rochester 1. This growth was achieved whilst improving the Bank`s fully loaded CET1 capital ratio to 13.3%, demonstrating the strength of the capital generation capability of the business through profitability.
The Bank sold its entire economic interest in Rochester Financing No. 1 plc (`Rochester 1`) on 26 May 2016. Rochester 1 was issued on 16 October 2013 and securitised approximately £376m of acquired mortgages sold to it by the Bank. The sale resulted in derecognition of securitised mortgage assets from the Bank`s balance sheet and deconsolidation of Rochester 1. This removed a total of £239.8m of securitised mortgage assets and cash reserves in the securitisation vehicle, and, as a liability, the most senior notes (A1, A2 and B) of £171.6m from the Group`s balance sheet. The transaction generated an exceptional pre-tax gain of £34.7m reflecting the significant increase in the fair value of the securitised mortgages since they were acquired by the Bank, and strengthened the Bank`s CET1 ratio by c.1.5%.
In December 2016, the Bank also sold £10.9m gross value of non-performing personal loans. The disposal generated a gain of £0.6m due to the consideration received for the portfolio being greater than the carrying value net of impairment provisions.
The Group remains focused on organic origination as its core growth strategy and gross new organic lending of £2.3bn in 2016 was up 28% compared with £1.8bn in 2015. OSB continued to see good demand for its products during 2016, particularly in Buy-to-Let where the Group continues to target professional landlords with larger portfolios. Buy-to-Let/SME is the Group`s largest segment comprising 69% of the gross loan book with Residential Mortgages at 31% as at 31 December 2016. Organic originations in our residential book stood at £382.1m (2015: £334m) up 14% even though the residential loan book as a whole decreased due to the Rochester 1 disposal in the year.
For all our lending segments, we manually underwrite all risks, providing us with competitive advantage over more automated lenders as we are able to identify and understand complex cases that others cannot.
In June 2016, we implemented a revised mortgage product transfer scheme (`Choices`) to encourage greater levels of retention amongst those borrowers reaching the end of their initial product term. Under this programme, borrowers are encouraged to engage with their broker to receive advice and select from a bespoke product set. Since the implementation of the scheme there has been a significant increase in the number of borrowers choosing a new product within three months of their initial product ending, driven exclusively by success in switching borrowers who were otherwise remaining on SVR and who, by definition, were therefore in the market for other lenders.
The Group continues to actively consider inorganic opportunities as they arise. During 2016, the Bank acquired portfolios of first and second charge residential mortgages for £180.7m (2015: a portfolio of second charge mortgages for £260.8m). The Group conducts extensive due diligence when considering any portfolio acquisitions.
The Bank`s secured funding line business in both its Buy-to-Let/ SME and Residential segments remains important, although additional controls and more prudent criteria were put in place after the result of the EU referendum in light of potential market uncertainties. Notwithstanding these additional controls, gross advances to other lenders, including bridge and asset finance businesses, were up 19% to £156.2m in 2016 (2015: £131.4m) with total loans outstanding as at 31 December 2016 of £122.3m (2015: £125.8m). Four new funding lines were added in the year.
The Group reported strong profit growth in 2016 with statutory profit before taxation increasing by 55% to £163.1m (2015: £105.3m) and underlying profit before taxation up by 29% to £137.0m (2015: £105.9m).1 This significant improvement in underlying profitability reflects the strength of our lending and funding franchises and our efficient operating model. Underlying basic earnings per share (`EPS`) strengthened to 41.7p (2015:34.8p). On statutory basis, basic EPS was 49.4p in 2016 (2015:34.1p).
Our customer-centric strategy of providing transparent savings products which offer long-term value for money continues to deliver high levels of customer satisfaction and loyalty. Our customer net promoter score (`NPS`) increased to 59% across the year and the maturing fixed term bond and ISA balance retention rate remained strong at 87% in 2016 (2015: 55% and 89% respectively).
The Group continued to utilise the Bank of England`s Funding for Lending Scheme (`FLS`). Total drawings to 31 December 2016 under the scheme stood at £524.6m. In November 2016, the Group was accepted into the Term Funding Scheme (`TFS`) and expects to transition out of the FLS into this new facility over the course of 2017, given the more attractive terms. As at 31 December 2016, TFS drawings were £101.0m and the Group anticipates the total to reach £1bn by the end of 2017.
The Bank of England base rate cut of 25bps on 4 August 2016 had a broadly neutral impact on NIM as the Group was able to offset the associated reductions in mortgage rates with rate reduction on administered savings.
In 2016, the Group also extended its savings product proposition to small and medium businesses.
The table below sets out the Group`s stated financial objectives for 2014-2016 and our performance against them during the year.
The Group remained predominantly retail funded during the year with a loan to deposit ratio of 90% as at 31 December 2016, excluding the impact of drawdowns under the Bank of England`s FLS and TFS schemes. Our focus on cost discipline and efficiency continued throughout 2016, helping to deliver a very strong cost to income ratio. It increased by one percentage point to 27% for the year, comfortably below our financial objective of 35% and reflecting planned further investment in the Bank`s infrastructure and operations to enable us to meet increasing regulatory demands.
The Bank ended the year with a fully loaded CET1 capital ratio of 13.3% (2015: 11.6%) demonstrating the Bank`s ability to support significant growth through the organic capital generation capability of the business through profitability.
Return on equity remained strong and above our stated objective, decreasing three percentage points to 29% for the year, due to the new 8% Bank Corporation Tax Surcharge (`BCTS`), or 32% excluding the impact of the BCTS, despite our strengthened capital position.
The Board is recommending a final dividend of 7.6 pence per share which together with the interim dividend of 2.9 pence per share, represents 25% of underlying profit after taxation for the year in-line with the Bank`s stated dividend policy.
1. See reconciliation of statutory profit to underlying profit in Alternative performance measures on page 31
FINANCIAL OBJECTIVES 2014-20161
|FUNDING/ LIQUIDITY STRENGTH||Maintain loan to deposit ratio of <100%2|| |
|COST DISCIPLINE||Cost:income ratio of <35%|| |
|CAPITAL STRENGTH||CRD IV CET1 ratio >10%|| |
|SHAREHOLDER RETURNS||Return on equity of> 25%3|| |
|DIVIDEND POLICY||Pay-out ratio of >25%4|| |
1. Objectives relate to the financial planning cycle that lasted until the end of 2016
2. Excluding the impact of any drawdown under the FLS and TFS schemes
3. For more information see Key performance indicator table on page 28
4. Pay-out ratio of at least 25% of underlying profit after taxation
This segment comprises Buy-to-Let mortgages secured on residential property held for investment purposes by experienced and professional landlords, commercial mortgages secured on commercial and semi-commercial properties held for investment purposes or for owner occupation, residential development finance to small and medium sized developers and secured funding lines to other lenders.
GROSS LOAN BOOK £4,094.9M
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NET INTEREST INCOME £132.0M
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CONTRIBUTION TO PROFIT £130.2M
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BUY-TO-LET/SME SUB-SEGMENT: GROSS LOANS
|Residential development|| |
|Funding lines|| |
At the end of 2016, the Buy-to-Let gross advances stood at £40.6bn (2015: £37.9bn), according to the Council of Mortgage Lending1, an increase largely attributable to the rise in advances in March 2016 ahead of SDLT changes coming into effect. Subdued activity in the Buy-to-Let market continued for the rest of 2016 compared to 2015.
The Group significantly increased its volume of new organic lending in this segment in 2016 to £1.9bn, an increase of 27% on 2015 new organic lending of £1.5bn. This included a significant increase in Buy-to-Let lending through the Kent Reliance and InterBay brands, where we continued to see strong growth opportunities. Our Buy-to-Let sub -segment stood at £3,613.3m at 31 December 2016 (2015: £2,710.5m) with a weighted average LTV of 69% and average loan size of circa £250,000.
The Group primarily focused on organic origination as its core growth strategy during the year, however, we will continue to actively consider inorganic opportunities in this segment as they arise.
We have always assessed affordability for borrowers through our specialist underwriting model and apply stringent stress tests. This can be seen in our weighted average ICR for Buy-to -Let origination during 2016 which increased to 171% (2015: 159%). The Group focuses on professional multi-property landlords. We have seen a clear trend for borrowers to seek to mitigate changes to personal tax, and during 2016 there was continued increase in the proportion of applications from limited companies for our main Buy-to-Let brand Kent Reliance from over 40% in December 2015 to 57% in the second half of 2016.
We invested in sales capability across all of our lending brands and extended distribution to reach a number of substantial new partners during the year and deepened our existing relationships. Through the Kent Reliance and InterBay brands the Bank distributes via intermediaries throughout England and Wales with a bias towards properties in London and the South-East where the demand supply gap is widest and most sustainable. We have improved our intermediary proposition with the introduction of a broker-led retention programme, the first of its kind in the specialist lending market. We have also deepened our analysis of borrower behaviour throughout the life of a mortgage and are better able to manage our retention activity, with positive results. Product development has continued to increase our focus on the professional landlord community and we have tightened criteria for non-professionals.
We have been prudent in our lending secured on commercial real estate, and have grown the portfolio modestly to a gross value of £268.3m as at 31 December 2016 (2015: £230.2m) with a low weighted average LTV of 59% and average loan size of £270,000.
The Bank`s Heritable Development Finance business provides development finance to smaller residential developers, with a preference for forging relationships with those active outside of prime central London. The business continued to gain momentum in spite of new entrants to the market, as customers sought an experienced and cautious lender. However, following the UK vote to leave the EU, the number of potential development schemes which can withstand our stringent stress testing may reduce until the outlook becomes clearer. The residential development funding gross loan book at the end of 2016 was £141.6m, with a further £70.0m committed (31 December 2015, £95.0m and £43.3m respectively).
In addition, the Bank continued to grow the provision of secured funding lines it provides to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as bridging finance and asset finance. Total credit approved limits as at 31 December 2016 were £244.0m with total loans outstanding of £71.7m (31 December 2015: £116.0m and £69.8m respectively). During 2016, three new funding lines were added, with a further two credit lines approved and in the documentation process. The pipeline remains robust, however following the UK`s vote to leave the EU, a cautious risk approach has been adopted.
OSB`s combined Buy-to-Let/SME net loan book grew by 32% in 2016 to £4,078.0m (2015: £3,087.8m) due to the gross new lending in the year, partially offset by back book redemptions, and is the Group`s largest segment. Buy-to-Let/SME made a contribution to profit of £130.2m in 2016, up 46% compared to £89.3m in 2015, reflecting the positive impact of new lending, the falling cost of funds, and low impairment losses of £2.1m (2015: £5.3m).
The Group remains highly focused on the credit quality of new lending as demonstrated by the average LTV in the Buy-to-Let/SME segment as at 31 December 2016 of 69% (31 December 2015: 66%) with only 0.4% of loans exceeding 90% LTV (31 December 2015: 1%). The average LTV for new Buy-to-Let/SME origination was 70% (2015: 72%).
1. CML, New and outstanding buy-to-let new mortgages, UK, MM17, 7 February 2017
YEAR ENDED 31-DEC-16
BALANCES AT THE REPORTING DATE
|Gross loans and advances to customers|| |
|Provision for impairment losses on loans and advances|| |
|Loans and advances to customers|| |
|Risk weighted assets|| |
PROFIT OR LOSS FOR THE PERIOD
|Net interest income|
|Other income/(expense)|| |
|Total income|| |
|Impairment (losses)/gains|| |
|Contribution to profit|| |
YEAR ENDED 31-DEC-15
BALANCES AT THE REPORTING DATE
|Gross loans and advances to customers||3,105.5||2,007.1||49.5||-||5,162.1|
|Provision for impairment losses on loans and advances||(17.7)||(2.2)||(7.4)||-||(27.3)|
|Loans and advances to customers||3,087.8||2,004.9||42.1||-||5,134.8|
|Risk weighted assets||1,435.1||858.6||45.8||-||2,339.5|
PROFIT OR LOSS FOR THE YEAR
|Net interest income||95.2||69.0||5.6||-||169.8|
|Other income / (expense)||(0.6)||(5.9)||(1.4)||0.6||(7.3)|
|Contribution to profit||89.3||60.7||1.3||0.6||151.9|
This segment comprises lending to owner occupiers, secured via either first or second charges against the residential home.
The Bank provides funding lines to non-bank lenders who operate in high-yielding, specialist sub-segments such as residential bridge finance.
GROSS LOAN BOOK £1,859.9M
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NET INTEREST INCOME £71.4M
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CONTRIBUTION TO PROFIT £59.5M
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RESIDENTIAL SUB-SEGMENT: GROSS LOANS
|First charge|| |
|Second charge|| |
|Funding lines|| |
During the year, the Group organically originated residential lending of £382.1m (2015: £334m). This included first charge residential lending in the UK, predominantly in London and the South-East, through the Kent Reliance brand, second charge lending through the Prestige Finance brand, and the provision of secured funding lines to non-bank lenders for residential lending.
Organic growth remains the Group`s core growth strategy, however we continue to actively consider inorganic opportunities as they arise, particularly where we have in-house servicing expertise. In 2016, the acquisitions of residential mortgages for £180.7m included portfolios of first and second charge mortgages (2015: £260.8m, a portfolio of second charge mortgages).
Our Kent Reliance brand provides bespoke first charge mortgages, typically to prime credit quality borrowers with more complex circumstances, for example high net worth borrowers with multiple income sources and self-employed borrowers. These circumstances often preclude them from the mainstream market, where most lenders favour automated decision-making over manual underwriting.
Kent Reliance also operates in the shared ownership market, where borrowers buy a property in conjunction with a housing association.
Our first charge residential book had a gross value of £1,322.1m as at 31 December 2016 (2015: £1,433.2m) with new organic lending and portfolio acquisitions more than offset by the Rochester 1 disposal and redemptions on the back book and acquired mortgage portfolios in run-off.
Our second charge mortgage brand, Prestige Finance, provides secured finance to good credit quality borrowers who are seeking a loan to raise funds rather than refinancing their first charge mortgage. Competitive pressure in the second charge market caused price reductions and we allowed our market share to fall to ensure we continue to price for risk. The second charge residential loan book was slightly down as at 31 December 2016 with a gross value of £487.2m (2015: £517.8m) with organic origination and book acquisitions offset by redemptions on the organic book and acquired books in run-off.
OSB continued to grow the provision of secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as residential bridge finance, despite increasing stress testing measures in a more cautious approach in our more cyclical businesses following the EU referendum. Total credit approved limits at 31 December 2016 were £86.2m with total loans outstanding of £50.6m (2015: £69.4m and £56.1m respectively). During 2016, one new funding line was added.
OSB`s total residential loan portfolio had a net carrying value of £1,852.1m as at 31 December 2016 (2015: £2,004.9m). The average LTV remained low at 58% (2015: 56%) with only 3% of loans by value with LTV`s exceeding 90% (2015: 2%). The average LTV of new residential origination during 2016 was 66% (2015: 64%).
Residential mortgages made a contribution to Group profit of £59.5m in 2016, down 2% (2015: £60.7m), reflecting the positive impact of new lending and portfolio purchases, and the falling cost of funds, more than offset by the impact of the sale of higher yielding mortgages in the Rochester securitisation vehicle and higher impairment losses of £7.2m (2015: £2.4m). The impairment losses were recognised on acquired mortgage portfolios in run-off due to incremental prudence added to the collectively assessed provision calculations following the EU referendum result.
OSB acquired the performing former Northern Rock consumer loan portfolio from UKAR in July 2013 for £258.0m. This portfolio of high-margin, seasoned, performing loans currently represents OSB`s only unsecured loans. The portfolio, which was purchased at a discount, has a net carrying value after collective provisions of £9.1m as at 31 December 2016 (2015: £42.1m).
In December 2016, the Bank made a disposal of £10.9m gross value of non-performing personal loans in the normal course of business. The disposal generated a gain of £0.6m.
The portfolio made a contribution to profit of £2.7m in 2016 (2015: £1.3m), however, the book is in run-off with a short remaining weighted average life. Impairment credit was £0.3m in 2016 (2015: £2.9m charge).
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MAKING A DIFFERENCE
HEAD OF TREASURY
"Treasury is not forgiving; there`s no room for mistakes or taking your eye off the ball. That`s why I do it."
I have been with OSB since 2012 through a period of significant growth and it has been good to have gone through the journey and understand why OneSavings Bank is different. I invested in the systems and processes needed to closely manage the Bank`s treasury assets and risks.
In an uncertain external environment Treasury adds certainty. We don`t take directional views on the book; instead we use a mixture of natural hedging through our fixed retail deposits, swaps and treasury products to manage the Bank`s position, mitigating the impact of interest rate risk. We also have to be responsive. One of the things that I like best is getting involved in product development both for savings and lending to ensure our products deliver for both customers and the Bank. My role is encouraging the business rather than just managing what I am given. It helps me make a difference and keeps OSB Treasury at the forefront, ensuring strong, accessible liquidity and predictable cash flows in all market conditions.
KEY PERFORMANCE INDICATORS
GROSS NEW LENDING
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|This is defined as gross new organic lending before redemptions.||Gross new lending in 2016 reflects growth in new origination, primarily in the BTL/SME segment.|
NET INTEREST MARGIN
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|This is defined as net interest income less coupons on perpetual subordinated bonds (`PSBs`) classified as equity, as a percentage of average interest bearing assets including off balance sheet FLS drawings. It represents the margin earned on loans and advances and liquid assets after swap expense/income and cost of funds.||Net interest maintained at a slight increase to prior year level through carefully managed pricing of assets and liabilities.|
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|This is defined as administrative expenses including depreciation and amortisation as a percentage of total income after deducting coupons on equity PSBs. It is a measure of operational efficiency.||The cost to income ratio reflects the Bank`s additional investment to meet regulatory requirements in 2016 but continues to be significantly below the Bank`s target of cost: income ratio of less than 35%. It highlights continued focus on lending in risk-adjusted high-margin sub-segments of the market and on cost control and efficiency. The ratio continues to reflect the benefit of the Bank`s efficient and scalable low cost back office based in Bangalore, India.|
UNDERLYING PROFIT BEFORE TAXATION
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|This is defined as statutory profit before taxation before exceptional items and after deduction of coupons on equity PSBs. See reconciliation of statutory profit to underlying profit in Alternative performance measures on page 31.|| The increase reflects strong balance sheet growth, increased net interest margin and continued focus on cost discipline and efficiency.
Statutory profit before taxation of £163.1m in 2016 increased by 55% compared to £105.3m in 2015.
UNDERLYING BASIC EPS
PERFORMANCE 41.7 PENCE PER SHARE
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| This is defined as underlying profit after taxation divided by the weighted average number of ordinary shares in issue. It is a measure of shareholder value.
See reconciliation of statutory profit to underlying profit in Alternative performance measures on page 31.
| The strong growth is in line with the significant increase in underlying profitability of the Bank.
On a statutory basis basic EPS improved to 49.4 pence per share in 2016 from 34.1 pence per share in 2015.
RETURN ON EQUITY
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| This is defined as underlying profit after taxation as a percentage of average shareholders` equity (excluding equity PSBs of £22m).
For further information on underlying profit after taxation, see reconciliation of statutory profit to underlying profit in Alternative performance measures on page 31.
|The return on equity for 2016 of 29% is ahead of the Bank`s target of at least 25%. The reduction compared to 2015 is due to the new 8% Bank Corporation Tax Surcharge. Excluding the impact of the tax surcharge, return on equity would have been 32% despite our strengthened capital position, driven by the Rochester 1 disposal and continued strong organic capital generation through profitability.|
DIVIDEND PER SHARE
PERFORMANCE 10.5 PENCE PER SHARE
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|This is defined as the sum of the recommended final dividend for 2016 plus the interim dividend divided by the number of ordinary shares in issue at the year end.||The Board will recommend a final dividend of 7.6 pence per share in respect of 2016 at the Bank`s AGM on 10 May 2017. This together with the interim dividend of 2.9 pence per share represents 25% of underlying profit after tax for 2016, in line with the Bank`s target dividend pay-out ratio.|
CRD IV FULLY-LOADED COMMON EQUITY TIER 1 CAPITAL RATIO
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|This is defined as common equity tier 1 capital as a percentage of risk-weighted assets (calculated on a standardised basis) and is a measure of the capital strength of the Bank.||The capital ratio of 13.3% reflects the ability of the business to generate capital through profitability to support significant loan book growth.|
LOAN LOSS RATIO
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|This is defined as impairment losses expressed as a percentage of average gross loans and advances. It is a measure of the credit performance of the loan book.||The improved ratio of 16bps for 2016 (2015:23bps) reflects the continued strong performance from the front book of loans, originated by the Bank since its creation in 2011. From more than 29,000 loans totalling £5.9bn of new organic originations since the Bank`s creation in February 2011, we only have 91 cases of arrears over three months in duration, with an aggregate balance of £8.6m and average LTV of 60%.|
CUSTOMER SATISFACTION - NET PROMOTER SCORE
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|The net promoter score measures our customers` satisfaction with our service and products. It is based on customer responses to the question of whether they would recommend us to a friend. The question scale is 0 for absolutely not to 10 for definitely yes. Based on the score a customer is defined as a detractor between 0 and 6, a passive between 7 and 8 and a promoter between 9 and 10. Subtracting the percentage of detractors from the percentage of promoters gives a net promoter score of between -100 and +100%.||The Bank`s customer NPS across the year for 2016 improved from 55% in 2015 to 59%. This demonstrates that our investment in customer service in the UK and India and customer-centric strategy of providing transparent savings products which offer long-term value for money continues to deliver high levels of customer satisfaction.|
STRONG GROWTH IN GROSS NEW ORGANIC LENDING
up 28% to £2.3bn
NET LOAN BOOK GROWTH
(20% EXCLUDING THE IMPACT OF ROCHESTER DISPOSAL)
STRONG INCOME GROWTH AND CONTINUED FOCUS ON COST DISCIPLINE AND EFFICIENCY
STRONG PROFIT GROWTH
The Group reported very strong profit growth in 2016 with profit before taxation of £163.1m up 55% (2015: £105.3m) including an exceptional gain of £34.7m on the Rochester 1 disposal, partially offset by an exceptional loss of £9.8m in respect of accelerated amortisation of fair value adjustments on hedged assets relating to legacy back book long-dated interest rate swap cancellations.
Underlying profit before taxation, before exceptional items and after deduction of coupons on equity PSBs was up 29% to £137.0m (2015: £105.9m) reflecting strong balance sheet growth and net interest margin combined with continued focus on cost discipline and efficiency.
SUMMARY PROFIT OR LOSS
|Net interest income|| |
|Losses on financial instruments|| |
|Net fees and commissions|| |
|External servicing fees|| |
|Administrative expenses1|| |
|FSCS and other provisions|| |
|Impairment losses|| |
|Exceptional items|| |
|Profit before taxation|| |
|Profit after taxation|| |
|Underlying profit before taxation3|| |
|Underlying profit after taxation3|| |
|Net interest margin2|| |
|Cost:income ratio2|| |
|Management expense ratio4|| |
|Loan loss ratio|| |
|Basic EPS2, pence per share|| |
|Underlying basic EPS2, pence per share|| |
|Return on equity2|| |
|Dividend per share, pence per share|| |
EXTRACTS FROM THE STATEMENT OF FINANCIAL POSITION
|Loans and advances|| |
|Retail deposits|| |
|Total assets|| |
|CET1 capital ratio6|| |
|Total capital ratio|| |
|Leverage ratio|| |
1. Including depreciation and amortisation
2. See definition in Key performance indicators table on pages 28-29
3. For underlying profit before and after taxation calculation, see the reconciliation of statutory profit to underlying profit in Alternative performance measures on page 31
4. Administrative expenses including depreciation and amortisation as a percentage of average total assets
5. Liquid assets as a percentage of funding liabilities
6. Fully-loaded under Basel III/CRD IV
Profit after taxation in 2016 increased by 44% to £120.9m (2015: £84.1m). This increase reflects the higher pre-tax profitability, partially offset by the impact of the 8% Bank Corporation Tax Surcharge (`BCTS`) which increased the Bank`s effective tax rate to 25.6%1 in 2016 (2015: 20.1%). Underlying profit after taxation increased by 20% to £101.5m (2015: £84.5m) despite the impact of the new BCTS.
NET INTEREST MARGIN
The Group reported an increase in net interest income of 22% to £206.6m in 2016 (2015: £169.8m) and NIM of 314bps (2015:309bps). The improvement in NIM primarily reflects the positive impact of new lending and a reduced cost of funds, partially offset by the sale of high yielding loans in the Rochester 1 disposal and the roll-off of the personal loan portfolio.
ALTERNATIVE PERFORMANCE MEASURES
OSB believes that the use of alternative performance measures (`APMs`) for profitability and earnings per share provide valuable information to the readers of the financial statements and present a more consistent basis for comparing the Group`s performance between financial periods, by adjusting for exceptional non-recurring items. OSB also believes that it is appropriate to adjust those performance measures to include the coupons on PSBs classified as equity. APMs also reflect an important aspect of the way in which operating targets are defined and performance is monitored by the Board. However, any alternative performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well.
Profit before taxation
Profit after taxation
|Reconciliation of statutory profit to underlying profits|| |
|Statutory profit|| |
|Gain on Rochester 1 disposal|| |
|Coupons on equity PSBs|| |
|Exceptional amortisation of fair value adjustments on hedged assets|| |
|IPO expenses1|| |
|Underlying profit|| |
1. IPO expenses are £0.4m in 2016, however due to materiality level, this expense is now shown within staff costs, see note 9 for further information
Statutory basic EPS of 49.4 pence per share is calculated by dividing profit attributable to ordinary shareholders of £120.0m (profit after taxation of £120.9m less coupons on equity PSBs including the tax effect of £0.9m) by the weighted average number of ordinary shares in issue during the year of 243.1m.
Underlying basic EPS of 41.7 pence per share is calculated by dividing underlying profit after taxation of £101.5m by the weighted average number of ordinary shares in issue during the year of 243.1m. Further information can be found in note 11 to the financial statements.
The lower cost of funds reflects the continued reduction in the cost of retail funds including the impact of maturing fixed term deposits rolling on to lower prevailing rates, the positive impact of funding from the FLS throughout the year and the introduction of the TFS scheme in the last quarter of 2016. Total drawdowns for FLS stood at £524.6m as at 31 December 2016, down from a peak of more than £600m in October 2016, as the Bank sought to spread the maturity profile and manage liquidity more efficiently.
On 4 August 2016, the Bank of England announced that it would extend provision of up to £100bn funding in cash at base rate to banks and building societies by introducing the TFS scheme. The scheme was available for drawdowns from 19 September 2016 and will run until 28 February 2018 with a term of four years, in the form of a securitised cash loan. The Group was accepted to the scheme in November 2016 and made its first drawdown in December with a balance of £101.0m as at 31 December 2016 reflecting a switch of funds from the FLS.
The TFS, as a collateralised loan, provides cheaper funding than FLS. The Group plans to replace all FLS funding with the TFS during 2017 in a phased way in order to spread the maturity profile.
The Bank of England base rate cut of 25bps on 4 August 2016, had a broadly neutral impact on NIM due to rate reductions on administered savings broadly offsetting the impact of rate reductions on mortgages.
LOSSES ON FINANCIAL INSTRUMENTS
Net loss on financial instruments in 2016 of £4.3m (2015: net loss £2.6m) includes £4.9m amortisation of fair value adjustments on hedged assets relating to cancelled swaps (2015: £3.2m) and £0.6m gain on disposal of the non-performing personal loans with a gross value of £10.9m (2015: a net gain of £0.6m from the sale of the Bank`s RMBS portfolio). The increase in the amortisation of fair value adjustments includes the impact of accelerating the amortisation in-line with the run-off of the underlying legacy long-term fixed rate mortgages due to faster than expected prepayments.
NET FEES AND COMMISSION
Net fees and commission income of £1.7m (2015: £0.03m) comprises fees and commission receivable of £2.5m (2015: £1.1m) primarily due to arrangement fees receivable on funding lines and master servicing fees and commission expense of £0.8m (2015: £1.1m).
EXTERNAL SERVICING FEES
External servicing fees decreased to £2.6m in 2016 (2015: £4.7m) due to the transfer of servicing for acquired second charge residential loan books to the Group`s second charge platform Prestige Finance at the end of 2015 and the run-off of other acquired portfolios.
EFFICIENT AND SCALABLE OPERATING PLATFORM
Administrative expenses including depreciation were up 31% to £53.7m in 2016 (2015: £41.1m) reflecting the continued build out of the Group`s operations and infrastructure to support growth in the business and meet the investment demands of new regulation. This included model building for IFRS 9 and internal ratings-based approach to risk weights (`IRB`).
The Group`s cost to income ratio increased by one percentage point to 27% in 2016 (2015: 26%) and the management expense ratio increased to 0.86% for 2016 (2015: 0.75%), reflecting the additional regulatory spend and investment. Both ratios reflect the benefit of the Bank`s efficient and scalable low cost back office based in Bangalore, India.
Regulatory provisions expense, which is primarily in respect of the Financial Services Compensation Scheme (`FSCS`) levies, decreased to £0.5m for 2016 (2015: £3.4m). This includes the full annual charge recognised on 1 April in each year, based on retail savings balances as at the previous 31 December. The reduction is primarily due to the FSCS`s announcement that it does not expect to collect contributions in respect of capital loan repayments for 2016, as well as a reduction to the Bank`s accrual as at 31 December 2015 based on the FSCS`s latest estimates for the prior year levy.
Impairment losses decreased to £9.0m in 2016 (2015: £10.6m) representing 16bps on average gross loans and advances (2015:23bps). The Group recorded lower loan losses on the organic BTL/SME segment and personal loans portfolios driven by improvements in the credit profile and the continuing roll-off of the personal loans portfolio. Together, these more than offset higher loan losses on the acquired residential mortgage portfolios.
The £0.3m credit on the personal loan portfolio (2015: £2.9m charge) was due to recoveries on loans previously written off more than offsetting additional loan loss provisions.
Impairment losses on acquired mortgage portfolios in run -off increased to £6.8m in 2016 (2015: £2.8m) where despite a fall in total arrears balances, incremental prudence was added to the collectively assessed provision calculations following the EU referendum result.
The performance of the front book of mortgages remains strong, reflecting the continued strength of the Bank`s underwriting and lending criteria. We kept tight control on credit quality, as seen in our reportable arrears statistics, from more than 29,000 loans totalling £5.9bn of new organic originations since the Banks`s creation in February 2011, there were only 91 cases of arrears over three months or more as at 31 December 2016, with an aggregate value of £8.6m and average LTV of 60%.
Exceptional items in 2016 of £24.9m comprise the gain on disposal of the Bank`s entire economic interest in Rochester 1 of £34.7m (see Business Highlights above for further detail), and an exceptional loss of £9.8m in respect of accelerated amortisation of fair value adjustments on hedged assets relating to legacy back book long-dated swap cancellations.
The Group uses interest rate swaps to hedge fixed rate mortgages and adopts fair value hedge accounting where the criteria specified in IAS 39 (EU endorsed) are met. Under hedge accounting, the change in the fair value of hedged mortgages for interest rate risk is recognised in the statement of profit or loss, as an offset to fair value movements on the swaps, with the cumulative movement reflected as fair value adjustments on hedged assets in the statement of financial position. A number of long-dated legacy swaps were cancelled in 2012 and 2013 whilst still effective. Following the cancellations, fair value adjustments on the legacy hedged long-term fixed rate mortgages (c.25 years at origination) remained in the statement of financial position to be amortised over their remaining lives. Both the cancelled swaps and hedged mortgages were inherited from the Kent Reliance Building Society.
During 2016, the Group reviewed the roll-off of the legacy long-dated fixed rate mortgages. Following this review, the Group accelerated the amortisation of these fair value adjustments on hedged assets in-line with the mortgage asset run-off, due to faster than expected prepayments since cancellation. The exceptional loss represents the impact of accelerating the amortisation in prior years from 2012 to 2015, which was not material in any individual year. It has been presented as an exceptional item and excluded from 2016 underlying profit before tax to provide an appropriate measure of the underlying performance of the Group in 2016. The exceptional loss would have reduced fair value adjustments on hedged assets by £9.8m, retained earnings by £7.6m, including the tax effect, and the CET1 ratio by 0.3% points as at 31 December 2015.
In 2015, the exceptional items of £2.1m related to IPO costs.
The Board recommends a final dividend for 2016 of 7.6 pence per share. Together with the 2016 interim dividend of 2.9 pence per share, this represents 25% of underlying profit after taxation for 2016 in-line with the Bank`s target dividend pay-out ratio. The proposed final dividend will be paid on 17 May 2017, subject to approval at the AGM on 10 May 2017, with an ex-dividend date of 30 March 2017 and a record date of 31 March 2017.
BALANCE SHEET GROWTH
Net loans and advances grew by 16% in 2016 to £5,939.2m (31 December 2015: £5,134.8m) due primarily to an increase in new lending in the BTL/SME segment and portfolio purchases totalling £180.7m, partly offset by the Rochester 1 disposal and redemptions. Excluding the impact of the Rochester 1 disposal, loan book growth was 20% in 2016.
Retail deposits and total assets grew by 11% and 10%, respectively in 2016 with additional funding supplied by the FLS and TFS. The Bank drew down a total of £524.6m under the FLS as at 31 December 2016 (31 December 2015: £160.7m), having replaced £101.0m with TFS by the end of the year (31 December 2015: £nil).
The FLS drawdowns are in the form of T-bills which are held off balance sheet and replace cash deposits with the Bank of England or other maturing treasury assets in the Bank`s liquidity portfolio which can then be used to fund loan book growth. The TFS drawdowns are offered in the form of securitised cash loans.
OneSavings Bank operates under the PRA`s liquidity regime. The Bank operates within a target liquidity runway in excess of the minimum regulatory requirement. The Bank prudently increased its liquidity above normal target levels in the first half of 2016 in the run- up to the EU referendum with levels returning to normal by year end. In addition, the Bank maintains a strong retention track record on fixed term bond and ISA maturities. Our liquidity coverage ratio of 239% is significantly in excess of the 2016 regulatory minimum of 80%, including drawings under the Bank of England FLS and TFS funding facilities. The Group`s liquidity ratio as at 31 December 2016 was 17.9% (31 December 2015: 16.4%).
SUMMARY CASH FLOW STATEMENT
|Profit before tax|| |
|Net cash generated/(used in):|| |
|Investing activities|| |
|Financing activities|| |
|Net increase/(decrease) in cash and cash equivalents|| |
|Cash and cash equivalents at the beginning of the period|| |
|Cash and cash equivalents at the end of the period|| |
The Bank`s fully- loaded CET1 capital ratio under CRD IV strengthened to 13.3% as at 31 December 2016 (31 December 2015: 11.6%), primarily due to the Rochester 1 disposal.
The Bank had a total capital ratio of 15.1% and a leverage ratio of 5.5% as at 31 December 2016 (31 December 2015: 14.1% and 4.5% respectively).
The Bank has a Pillar 2a requirement of 1.2% of risk weighted assets.
CASH FLOW STATEMENT
The Group`s cash and cash equivalents at the end of the year were 18% higher than in 2015 at £418.2m (2015: £355.1m).
In 2016, the Group increased its loans and advances to customers by £1,031.3m. This was partially funded by an additional £588.6m of deposits from retail customers. Collectively, these were the main drivers of the £315.2m of cash used in operating activities. The remaining funding came primarily from the Group replacing its maturing on balance sheet available for sale investment securities (£251.8m decrease) with off balance sheet securities under the FLS (£363.9m increase) in its liquidity portfolio. Together with £80.2m of cash received from the Rochester 1 disposal, this generated £324.3m of cash inflows from investing activities. In addition, the Group drew down £101.0m of cash under the TFS which is reflected in the cash generated from financing activities.
In 2015, the Group increased its loans and advances to customers by £1,226.0m. This was mainly funded by an additional £1,032.2m of deposits from retail customers, driving the £79.3m used in operating activities. The remaining funding came from the utilisation of the Group`s cash reserves which were replaced with off balance sheet securities from the FLS (£160.7m) in the Group`s liquidity portfolio. In addition, the Group purchased £235.3m of investment securities as part of its liquidity management driving cash used in investing activities of £244.4m.
Further information can be found in the Statement of Cash Flows on page 103.
1. Effective tax rate excludes £0.5m of adjustments relating to prior years.
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GROUP REAL ESTATE STRATEGY DIRECTOR
"An in-depth understanding of property is key to our lending strategy."
As a Chartered Surveyor I have spent my entire career working in the residential and commercial property markets. As you would expect, reviewing and analysing third party valuations takes up a large amount of our time and whilst the capital value is of paramount importance we give equal weighting to the marketability of the property from both an occupier and purchaser perspective. We need to ensure the rental and purchaser demand is sustainable and that the asset will represent good lending security throughout the mortgage term. This ensures that the Bank has an excellent understanding of the property when assessing a case in support of the underwriters and then on an ongoing basis.
I have strategic responsibility for the Group`s property activity including appointing a panel of surveyors, how we undertake valuations for the larger and more complex properties, and valuation audits. Last year, we audited more than 20% of valuations in -house to make sure they are consistent and aligned with our lending goals.
I also look after the Group`s corporate real estate assets so have a hands on role managing and maintaining a number of properties.
CHIEF RISK OFFICER`S REPORT
Throughout 2016, significant progress has been made with respect to embedding the Strategic Risk Management Framework (`SRMF`), through further extending the core risk disciplines defined by the SRMF across all key underlying risk categories, with a particular focus on risk analytical capabilities, data management and management information and reporting.
The Group has continued to grow its balance sheet during 2016 in a profitable and prudent manner. Adherence to Board approved risk appetite has remained strong throughout the period with the underlying quality of the loan portfolio exhibiting strong performance. The Group has further strengthened its core solvency and liquidity ratios in an uncertain economic, political and regulatory environment.
The Risk function has continued to deliver against its overarching objective of being a strategic partner whilst retaining its independence. This has been achieved by judicious and considered investment in risk data and analytics and enhancing risk management capability through a further increase in the size and structure of the Risk function. The nature and quality of engagement with internal and external stakeholders has further strengthened the risk culture and ensured increased embeddedness of the risk disciplines.
Whilst the UK economic performance has remained broadly stable throughout the year, the outlook remains uncertain post the referendum decision to leave the European Union. Further global uncertainty has been created following the recent US presidential election. The Group continues to closely monitor economic developments within the UK and overseas, with support from its independent macroeconomic advisors.
The Group remains highly confident in the underlying robustness of the business model and quality of the balance sheet as demonstrated by ongoing stress testing analysis.
The continued supervisory focus on the Buy-to -Let sector has been an important consideration for the Credit and Risk functions. The inherent strength of the Group`s underwriting procedures and risk measurement capabilities have enabled the Group to respond effectively to the changes in its primary sectors.
The Group has made significant progress in the development of its IFRS 9 and Internal Ratings Based (`IRB`) models. The Board has identified transition towards IRB based capital treatment as an important strategic objective. The net potential benefits of the IRB approval remain uncertain given the ongoing consultations in relation to changes to the standardised risk weights and IRB floors. However, the Group also views the IFRS 9 and IRB model development initiative from the perspective of enhancing wider risk management capabilities. In particular, the increased granularity of risk based information would further enhance portfolio optimisation and pricing capabilities.
RISK PROFILE REVIEW
Coupled with the strong financial performance, the Group`s risk profile has been managed in accordance with the Board approved risk appetite. The performance against key risk indicators has been strong throughout the year. The table below outlines the comparative analysis of the leading risk indicators with supporting commentary.
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KEY RISK INDICATORS OVERVIEW
INDIVIDUAL RISK TYPE REVIEW
The Group`s credit portfolio has exhibited strong performance across all risk indicators and has operated within the Board approved risk appetite. Deep market knowledge, prudent lending policies and supportive market conditions have been the underlying explanatory factors.
OSB continues to identify low-risk opportunities in areas of the market poorly serviced by mainstream lenders, including the delivery of compelling products to professional Buy-to-Let landlords, first charge bespoke residential, second charge loans to prime borrowers at conservative LTV levels, commercial loans against highly marketable properties, and niche residential development lending to borrowers with strong track records and credible projects. We offer secured funding lines to finance companies, managing credit risk through cross-collateralisation.
The Group carefully underwrites each lending case, maintains sensible LTVs, assesses affordability on each loan and avoids lending on property where we believe current valuations are unsustainable. A suite of portfolio limits have been established in adherence to the Board credit risk appetite. Stress and scenario analysis are used to assess the potential impact on credit impairments, losses and capital requirements when subjected to severe but plausible stress scenarios.
The Group ensures that security valuations are reviewed on an ongoing basis for appropriateness, with ongoing annual indexing of commercial properties, with residential properties indexed against monthly HPI data. Where the Group identifies that a published index is not representative, a formal review will be carried out by the Group Real Estate function to assess valuations appropriately. The Group Real Estate function ensures that newly underwritten lending cases are written to appropriate valuations, with assessment being carried out by appointed, qualified chartered surveyors, accredited by the Royal Institute of Chartered Surveyors (RICS). The Group has ensured that the Real Estate function is placed within the Bank`s assurance team and are therefore independent from all credit making decisions.
Since its inception, the Group has experienced material loan growth with Group loans and advances totalling £5.9bn as at December 2016. Importantly, there has been a portfolio composition change over the period, with post 2011 lending (incorporating enhanced lending criteria) now making up a greater proportion of the total Group loan balances. Since 2011, the Group has originated 29,000 loans with only 91 cases with aggregate balances totalling £8.6m greater than three months in arrears, with an average 60% LTV, reflecting the continued strength of the Group`s underwriting and lending criteria. During 2016, the Group continued to prudently underwrite new loans, carefully assessing customer affordability as demonstrated by the number of newly originated residential mortgage loans with a loan to income of greater than 4.5 falling to 2.6% from 3.3% during 2015. Buy-to-Let interest coverage ratios (`ICR`) for new loans increased to 171% up from 159% during 2015, further demonstrating the prudent underwriting conducted during 2016. Buy-to-Let LTVs for new lending remained stable at 70%, whilst residential mortgage new lending LTVs increased marginally to 66% from 64% during 2016. The acquired portfolios, funding lines and development finance portfolios continued to perform in line with expectations, whilst the Group also sold £10.9m (gross value) of non -performing personal loan accounts during the year. Pre 2011 lending balances continued to run down during the year, and historic problem loans reduced from £17.8m to £13.8m as at December 2016.
The net impact of the above loan book composition changes and strong performance of new lending, in conjunction with the sale of non-performing loan balances resulted in the Group observing a historically low portfolio greater than three months in arrears rate of 1.4% versus 2.1% as at December 2015 (excluding legacy problem loan balances).
Forbearance measures undertaken during 2016:
|Forbearance type|| Number
| 2016 year
| 2015 year
| 2016 vs 2015 variance
| 2016 vs 2015
|Interest only switch||60||6.3||106||10.7||(46)||(4.4)|
|Interest rate reduction||3||2.2||-||-||3||2.2|
|Voluntary assisted sale||-||-||11||7.7||(11)||(7.7)|
|Payment concession (reduced monthly payments)||58||6.4||70||5.7||(12)||0.7|
|Full or partial debt forgiveness||-||-||-||-||-||-|
|Loan Type|| Number
| 2016 year
| 2015 year
| 2016 vs 2015
| 2016 vs 2015
|First charge owner occupier||117||12.3||200||21.0||(83)||(8.7)|
|Second charge owner occupier||60||6.2||38||1.3||22||4.9|
There was however an observed increase in Buy-to-Let not impaired past due 1 to 3 months as at December 2016 (see note 35 Risk Management and financial instruments analysis of mortgage portfolio by arrears for BTL/SME), driven by a low number of high balance cases which fell into arrears during 2016 and technical arrears balance inflow during December 2016 resulting from requested payments being carried over into the first working day of January 2017. In all cases the technical arrears accounts moved back up to date. There was also an increase in residential first charge balances not in impairment but past due 1 to 3 months, driven by historic legacy loans falling into arrears during the year in conjunction with arrears balances introduced via portfolio purchases within the year (see note 35 Risk management and financial instruments analysis of mortgage portfolio by arrears for residential).
Occasionally, some borrowers experience financial difficulties which impact their ability to meet mortgage finance obligations. We may seek to identify borrowers who are experiencing financial difficulties as well as contacting borrowers whose loans have gone into arrears, consulting with them in order to ascertain the reasons for the difficulties and to establish the best course of action to be taken to bring the account up -to-date. In certain circumstances, where the borrower is experiencing significant financial distress, we may use forbearance measures to assist them.
Throughout the year the Group materially enhanced its identification and management of forborne accounts. With respect to proactive identification the Group now leverages external forward looking bureau information, analysing probability of default and customer indebtedness which in turn underpin pre arrears watchlist triggers. Watchlist cases are then in turn carefully monitored and managed as appropriate. During the year the Group also internally developed a collections dashboard tool, again leveraging external bureau information which provides the arrears management team with detailed information about the borrower`s full financial position, facilitating enhanced conversations when establishing the best course of action to bring their accounts up to date or out of a forborne state.
The Group continues to observe low levels of accounts in forbearance with total forbearance balances reducing materially within the year (see tables on page 35).
The Group continues to maintain an appropriate level and quality of capital to support its growth objectives and to meet its prudential requirements. By subjecting its financial operating plan to extreme but plausible stresses, the Group is able to assess the effectiveness of its capital strategy and plan under expected and stressed market conditions.
The Group defines its solvency risk appetite by projecting forward its capital requirements (internal and prudential) and ensuring that it currently holds sufficient CET1 and total capital to meet its target capital ratios.
Solvency risk is a function of balance sheet growth, profitability, access to capital markets and regulatory changes. The Bank actively monitors all key drivers of solvency risk and takes prompt action to maintain its solvency ratios at acceptable levels. The Board and management also assess solvency when reviewing the Bank`s business plans and inorganic growth opportunities.
During the course of 2016, the Bank strengthened its common equity tier 1 (`CET1`) capital ratio and total capital ratio despite organic and inorganic growth, demonstrating the strength of internal capital generation capabilities of its business through profitability.
Liquidity and Funding
The Bank has a prudent approach to liquidity management through maintaining sufficient liquidity resources to cover cash flow imbalances and fluctuations in funding under both normal and stressed conditions arising from market wide and Bank specific events. The Bank`s liquidity risk appetite has been calibrated to ensure that the Bank always operates above the minimum prudential requirements with sufficient contingency for unexpected stresses whilst actively minimising the risk of holding excessive liquidity which would adversely impact the financial efficiency of the business model.
The Bank has successfully utilised the Bank of England Funding for Lending (`FLS`) and Term Funding Scheme (`TFS`) secured funding facilities to manage its liquidity in 2016, and continues to attract new retail savers and retain existing customers through transparent and loyalty-based product offerings.
During the course of 2016, the Bank actively managed its liquidity and funding profile within the confines of its risk appetite as set out in the Liquidity Risk Policy and reviewed in the year-end Individual Liquidity Adequacy Assessment Process (`ILAAP`).
The Bank proactively manages its risk profile in respect of adverse movements in interest rates, foreign exchange rates and counterparty exposures. The Bank accepts interest rate risk and basis risk as a consequence of structural mismatches between fixed rate mortgage lending, sight and fixed term savings and the maintenance of a significant portfolio of high quality liquid assets. Interest rate exposure is mitigated on a continuous basis through portfolio diversification, reserve allocation and the use of financial derivatives within limits set by ALCO and approved by the Board.
Interest Rate Risk
The Bank does not actively assume interest rate risk and does not seek to take a significant directional interest rate position. Limits have been set to allow management to run some un-hedged positions in response to balance sheet dynamics and capital has been allocated for this. The Bank does not take a directional view on future interest rates. The capital allocation has been set to be proportionate to the available CET1 capital to allow for balance sheet growth.
The Group sets limits on the mismatch between fixed -rate assets and liabilities, taking into account interest rate swaps that are in place. Exposure is mitigated on a continuous basis through the use of derivatives within limits set by the ALCO, the Board and reserve allocations (currently 1.5% of common equity tier 1 capital). The limit is measured against the sensitivity of the fair value of the portfolio as a whole to defined yield curve scenarios. These moves are specified in the Board-approved interest rate and basis risk policy and capture parallel movement, twist, and flex in the yield curve. The stress scenario interest rate movements are scaled to approximate the potential move over one year at 99.9% two-tailed confidence interval. After taking into account the derivatives entered into by the Group, the highest loss under these scenarios as at year end would have been £1.9m and the highest gain £2.1m. Against a parallel interest rate movement of 2%, the impact would have been £3.9m gain (2015: £0.2m gain) recognised in the statement of profit or loss.
Basis risk arises from assets and liabilities re-pricing with reference to different interest rate indices, including positions which reference variable market, policy and managed rates. As with structural interest rate risk, the Group does not seek to take a significant basis risk position, but maintains defined limits to allow operational flexibility.
As with structural interest rate risk, capital allocation has been set in proportion to common equity tier 1 capital, with exposure assessed and monitored monthly across a range of `business as usual` and stressed scenarios.
OSB continues to assume a proactive approach to the management of operational risks. The Operational Risk Management Framework has been designed to ensure a robust approach to the identification, measurement and mitigation of operational risks, utilising a combination of both qualitative and quantitative techniques in order to promote an environment of progressive operational risk management. The Group`s operational processes, systems and controls are designed to minimise disruption to customers, damage to the Bank`s reputation and any detrimental impact on financial performance. The Bank actively promotes the continual evolution of its operating environment through the identification, evaluation and mitigation of risks, whilst recognising that the complete elimination of operational risk is not possible.
A strong culture of transparency and escalation has been cultivated throughout the organisation, with the operational Risk function having a Group-wide remit, ensuring a risk management model that is well embedded and consistently applied. In addition, a community of Risk Champions representing each business line and functional area has been identified. Operational Risk Champions ensure that the operational risk identification and assessment processes are established across the Group in a consistent manner. Risk Champions are provided with appropriate support and training by the Group Operational Risk function.
Regulatory and Compliance Risk
The Bank is committed to the highest standards of regulatory conduct and aims to minimise breaches, financial costs and reputational damage associated with non-compliance. However, given the growing scale and complexity of regulatory changes, it is acknowledged that there may be isolated instances whereby the Bank`s response to new regulatory requirements may be subject to interpretation risk.
The Bank has an established compliance function which actively identifies, assesses and monitors adherence with current regulation and the impact of emerging regulation.
In order to minimise regulatory risk, OSB maintains a proactive relationship with key regulators, engages with industry bodies such as the Council for Mortgage Lenders and British Bankers` Association, and seeks external advice from our professional advisers. The Group also assesses the impact of upstream regulation on OSB and the wider markets in which we operate, and undertakes robust assurance assessments from within the Risk and Compliance functions.
During 2016, the Group has responded effectively to a broad range of regulatory changes impacting its primary products (Buy-to-Let and ISAs), Board and senior management governance and oversight (Senior Managers and Certification Regime) and financial crime (EU Fourth Money Laundering Directive).
The Group`s culture and behaviours are central to ensuring a fair and considered approach in dealing with its customers. It operates in a manner that ensures the underlying integrity of markets in which it operates. OSB will not tolerate any systemic failure to deliver fair customer outcomes or practices that distort markets.
On an isolated basis, incidents can result in customer detriment owing to human and/or operational failures. Where such incidents occur they are thoroughly investigated, and the appropriate remedial actions are taken to address any customer detriment and to prevent recurrence.
OSB views effective conduct risk management as a core feature of its risk culture and values. A clear tone from the top with respect to conduct ensures awareness of behaviours which demonstrate commitment to good customer outcomes and market integrity.
Strategic and Business Risk
The Board has clearly articulated the Bank`s strategic vision and business objectives underpinned by performance targets. The Bank does not intend to undertake any medium to long term strategic actions which would put at risk the Bank`s vision of being a leading specialist lender in its chosen markets and being backed by a strong and dependable savings franchise.
To deliver against its strategic objectives and business plan, the Bank has adopted a resilient and efficient business operating model based on a focused approach to core niche markets where its experience and capabilities give it a clear competitive advantage.
The Bank remains highly focused on delivering against its core strategic objectives and strengthening its market position further through strong and sustainable financial performance.
KEY EVENTS AND ACHIEVEMENTS DURING 2016
The Group has further improved its approach to assessing and calibrating its risk appetite through closer alignment with the Group`s strategic objectives and business operating plan.
Through the use of stress testing analysis the risk appetite has been calibrated to ensure that the level of risk being assumed is commensurate with the risk management and absorption capabilities of the Group.
The Group`s IFRS 9 programme progressed to plan, moving into the parallel run phase for 2017. Embedding the IFRS 9 framework into the standard monthly reporting processes is ongoing.
An important strategic initiative for the Group is to progress towards the implementation of an IRB approach for credit risk. Tangible progress has been made during 2016 with a suite of first generation IRB models being developed. This is a significant milestone for the Group.
Improvements made to the collective provision methodology have enabled the Group to better align its approach to industry good practice basing its provisioning decisions on a more robust and prudent approach. A comprehensive review of the methodologies, judgements and estimates which underpin IAS 39 collective provisioning calculations took place during 2016.
Risk based management information has been identified as a critical area of enhancement and investment. During 2016, the Group has leveraged the improved analytics and has aligned internal risk data with external credit bureau customer profiles to provide a more insightful and forward looking assessment of its risk profile.
The Group has identified stress testing capabilities as a critical tool to assess and quantify the potential areas of vulnerability in its risk profile. Stress testing as a discipline has been applied across all principal risks, based on industry best practice and regulatory guidelines. Stress testing has also been used to support the Group`s development of both the ICAAP and ILAAP.
To ensure that the Group`s growth objectives are achieved in a stable and controlled operating environment, a significant level of management focus has been placed on further enhancements to the Operational Risk Management Framework. A fully integrated purpose built risk management system (`OSIRIS`) has been put in place, supporting both operational and conduct risk management.
A comprehensive Group- wide Risk and Control Self-Assessment (`RCSA`) has been performed to identify material risks and assess controls effectiveness. Identified risks have also informed the Bank`s operational risk scenario exercise which in turn informed the internal assessment of capital requirements.
PRIORITIES FOR 2017
On a forward looking basis, the Risk function has identified the following areas of priority:
· Integration of the IFRS 9 capability into other core risk processes such as risk appetite, ICAAP, stress testing and risk based pricing, is a priority for 2017.
· Integration of the IRB capability into the Group`s capital monitoring and planning framework and independent review and validation of the first generation models are key objectives for 2017. In parallel, a comprehensive self-assessment against the regulatory requirements will take place within the year allowing further development of the implementation route to gaining the necessary regulatory approvals.
· The Risk function will be an important contributor to the Strategic Data Management Project, in light of the requirements arising from IRB, but also the wider risk data management discipline`s outlined in the Strategic Risk Management Framework.
· Further build out of the Group`s risk management information capability is a continuing priority for 2017. This is a key area where further enhancements will result in even more informed risk and reward decisions being made across the Group.
· In line with the Group`s business model the Risk function plans to build out a risk analytics support function at our OSBIndia subsidiary to support our UK based risk teams. Investment in enhanced risk analytics continues to be viewed as essential in delivering the risk strategy and keeping pace with industry standards and regulatory expectations.
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The Group undertakes a comprehensive review of its current and projected risk profiles based on expected and stressed market and economic conditions. The two primary risk-based annual planning exercises are the Internal Capital Adequacy Assessment Process (`ICAAP`) and the ILAAP. The ICAAP informs the Board`s and management`s view on the level and quality of capital needed to meet the prudential and risk-based capital requirements over the planning horizon under base and stress scenarios. The ICAAP is an integral input into the PRA`s supervisory review process (`SREP`) and forms the basis upon which the Group`s capital guidance is set. The ILAAP informs the Board`s view on the Group`s level and quality of liquidity buffer and liquidity management framework. It is an input to the PRA`s L-SREP process, which leads to regulatory liquidity buffer guidance.
The Group also reviews and updates its Recovery and Resolution Plan (`RRP`) on an annual basis. The recovery plan process is designed to ensure that the Group`s recovery plan is credible and can be implemented in a time of stress. The Group`s recovery options are assessed for feasibility and time to implementation under stressed conditions. The Group leverages its risk appetite and stress testing procedures to identify a suite of early warning indicators and triggers which inform the nature and type of recovery options which would be put in place. The resolution pack provides the regulatory authorities with information and analysis on the Group`s businesses, organisation and structures to facilitate an orderly resolution should it become necessary.
The Bank actively engages with its key regulators to ensure that the supervisory teams are kept abreast of the Bank`s strategic and business objectives, the risks to which it is exposed and the adequacy of risk controls and mitigants.
Strategic Risk Management
OSB continues to enhance and leverage its SRMF in support of its strategic and business growth objectives. OSB`s approach to risk management ensures effective identification, assessment and pricing of risk and therefore is a critical driver of the Bank`s competitive advantage. Effective risk management has generated shareholder value through the optimisation of the risk- reward profile which is framed within the Board approved risk appetite. Specifically, OSB`s risk management capabilities have made it possible to operate in distinct specialist market segments.
The SRMF and its core modular components are subject to periodic review and approval by the Board and its oversight committees. The modular construct of the SRMF makes it dynamic and versatile, making it an enduring framework. The integrated nature of the SRMF provides for improved Board oversight, engagement, and monitoring of the Bank`s risk profile. The following sections describe the key modules of the SRMF structure.
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RISK PRINCIPLES AND CULTURE
The Board has established overarching risk based principles. These risk principles provide for a clearly articulated risk vision and strategy, and ensure that the Bank`s risk capabilities and processes are aligned. The risk principles are:
- Customer Interests: Customer outcomes and conduct risk are central to all aspects of OSB`s business and control functions
- Proportionate and Commensurate: The Strategic Risk Management Framework reflects the complexity of the Bank`s business model and is scalable to accommodate future growth
- Defined Risk Appetite: Risks are assumed subject to defined qualitative statements and quantitative limits and thresholds
- Coverage: All principal risks are identified, assessed and managed based on robust systems and controls
- Risk Governance: Risk taking and oversight responsibility is appropriately segregated, in adherence to the `three lines of defence` principle
- Integration and Usage: Risk management disciplines are fully integrated into the Board and senior management decision making processes
- Versatile: Risk framework and underlying capabilities are subject to ongoing review and are adaptive to the changing operating environment and the Bank`s business model
The Group`s corporate vision of being a leading specialist lender within its chosen markets helps to shape its risk culture. The Board and senior management have cultivated a risk culture which encourages a proactive, transparent and informed approach to risk management in a balanced and considered manner, taking into account stakeholder expectations and good customer outcomes.
RISK STRATEGY & APPETITE
The Group`s risk strategy is to create value through correct decisions being taken informed by accurate and timely risk assessments.
This risk strategy is based on three key components:
· Scalability of the Risk function;
· Structure and discipline around how risks are identified, assessed and managed;
· Risk management capability leveraged to create true information value.
At OSB, we have established a clear linkage between our strategy and risk appetite, ensuring that the setting and monitoring of risk appetite is embedded within the business (with respect to processes e.g. business planning processes, new product development / approval). Our risk appetite is informed by our strategic choices and our business strategy, which in turn is developed within the confines of our articulated risk appetite. Our risk appetite is calibrated to a plausible but extreme macroeconomic scenario severity (1 in 20), which seeks to ensure that our strategy and business model remains resilient under a range of macroeconomic environments.
The OSB risk governance framework is summarised in the diagram below.
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The risk appetite process is informed by robust statistical analysis which supports the development of scenario analysis and stress testing. Our risk appetite framework ensures we understand how the Group performs under current market and economic conditions and under a range of stress scenarios.
OVERARCHING RISK APPETITE STATEMENT
The Bank has a prudent and proportionate approach to risk taking and management, which is reflective of its straightforward business model. The business model is based on secured lending, robust underwriting standards, intermediary based distribution, stable funding, financial strength, and efficient and effective operational capabilities. A strong conduct and compliance culture is critical to the overall success of the Bank.
RISK GOVERNANCE AND ORGANISATIONAL STRUCTURE
Risk governance refers to the processes and structures established by the Board to ensure that risks are taken within the approved appetite, with clear delineation between risk taking and oversight responsibilities.
The Group has established a structural approach to risk governance, ensuring an effective level of alignment between oversight and management responsibility for risk. The risk governance structure has clearly defined roles and responsibilities for Board and Management committees, control functions and the accountable executives. The risk based roles and responsibilities are organised in adherence to the `three lines of defence` principle to ensure appropriate levels of segregation.
The Board acts directly or through its committees to discharge its risk oversight and control responsibilities. The Board and its committees are provided with appropriate and timely information relating to the nature and level of risks to which the Group is exposed and the adequacy of risk controls and mitigants. Internal Audit provides independent assurance as to the effectiveness and compliance with the SRMF and the underlying risk management policies and procedures.
The executive function has day-to-day responsibility for managing the risk profile of the Group within the defined risk appetite, with oversight and guidance provided by the Board and its Risk Committee. The Chief Risk Officer is the executive accountable for establishing an effective risk management and reporting framework. The Chief Risk Officer has dual reporting lines into the Chief Executive Officer and the Chair of the Board Risk Committee.
The Chief Risk Officer has management responsibility for ensuring an independent risk oversight and reporting function is established and is able to undertake its second line responsibility. The risk function is organised to ensure an appropriate level of resources and capabilities are in place to identify, assess, manage and report all material risks.
Management level risk committees have been established to ensure a more focused approach to the review and challenge of individual principal risk profiles take place. Additional sub-committees are also in place which focus on specific and finer aspects of the risk profile and its ongoing management. For example, the Transactional Credit Committee, a sub-committee of the Credit Committee, meets twice a week to sanction individual lending cases that fall outside the mandates of the underwriting team.
THE OSB RISK GOVERNANCE STRUCTURE IS DETAILED BELOW
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PRINCIPAL RISKS AND UNCERTAINTIES
The Board has carried out a robust assessment of the principal risks and uncertainties facing the Group, including those that could threaten its business model, future performance, solvency or liquidity, as set out in the table below.
STRATEGIC AND BUSINESS RISK
Definition - The risk to the Bank`s earnings and profitability arising from its strategic decisions, change in the business conditions, improper implementation of decisions or lack of responsiveness to industry changes.
RISK APPETITE STATEMENT
The Group`s strategic and business risk appetite states that the Group does not intend to undertake any long to medium-term strategic actions that would put at risk its vision of being a leading specialist lender, backed by a strong and dependable savings franchise. The Group adopts a long-term sustainable business model which, while focused on niche sub-sectors, is capable of adapting to growth objectives and external developments.
Performance against strategic and business targets does not meet stakeholder expectations. This has the potential to damage the Group`s franchise value and reputation.
MITIGATION AND CONTROLS
Regular monitoring by the Board and the Executive Committee of monitoring of strategic and business performance against market commitments, the balanced business scorecard and risk appetite. Use of stress testing to flex core business planning assumptions to assess potential performance under stressed operating conditions.
The Group`s strategic and business operating environments are subject to ongoing changes primarily driven by market competition, economic outlook and regulation. However, the business model has proven to be resilient and responsive to the dynamic environment in which it operates.
Definition - The potential risk of adverse effects that can arise from the Bank`s reputation being sullied due to factors such as unethical practices, adverse regulatory actions, customer dissatisfaction and complaints or negative/adverse publicity. Reputational risk can arise from a variety of sources and is a second order risk - the crystallisation of a credit risk or operational risk can lead to a reputational risk impact.
RISK APPETITE STATEMENT
The Group does not knowingly conduct business or organise its operations to put its reputation and franchise value at risk.
Potential loss of trust and confidence that our stakeholders and customers place in us as a responsible and fair provider of financial services.
MITIGATION AND CONTROLS
Culture and commitment to treating customers fairly and being open and transparent in communication with key stakeholders. Established processes to proactively identify and manage potential sources of reputational risk.
The Group has increased the size and capabilities of its Risk and Compliance function to ensure appropriate oversight of the growing balance sheet.
Definition - Potential for loss due to the failure of a counterparty to meet its contractual obligations to repay a debt in accordance with the agreed terms.
RISK APPETITE STATEMENT
The Group seeks to maintain a high quality lending portfolio that generates adequate returns in benign and stressed periods. The portfolio is actively managed to operate within set criteria and limits based on profit volatility, focusing on key sectors, recoverable values, and affordability and exposure levels. The Group aims to continue to generate sufficient income and control credit losses to a level such that it remains profitable even when subjected to a credit portfolio stress of a 1 in 20 intensity stress scenario.
INDIVIDUAL BORROWER DEFAULTS
Borrowers may encounter idiosyncratic problems in repaying their loans, for example, loss of a job or execution problems with a development project. While most of the Bank`s lending is secured, some borrowers fail to maintain the value of the security.
MITIGATION AND CONTROLS
All loans are extended only after thorough bespoke and expert underwriting to ensure ability and propensity of borrowers to repay and sufficient security in case of default.
Should there be problems with a loan, the collections and recoveries team works with customers unable to meet their loan service obligations to reach a satisfactory conclusion while adhering to the principle of treating customers fairly.
Our strategic focus on lending to professional landlords means that properties are likely to be well managed, with income from a diversified portfolio mitigating the impact of rental voids or maintenance costs. Lending to owner-occupiers is subject to a detailed affordability assessment, including the borrower`s ability to continue payments if interest rates increase. Lending on commercial property is more based on security, and is scrutinised by the Group`s independent Real Estate team as well as by external valuers. Development lending is extended only after a deep investigation of the borrower`s track record and the specific project and requires approval by a dedicated Development Finance Transactional Credit Committee.
Greater than three months in arrears balances fell to a historically low rate of 1.4% from 2.3% (not including legacy problem loans) during 2016, driven by the strong credit performance of post 2011 lending (underwritten using enhanced lending policy). Pre 2011 lending including legacy problem loans continues to run down. During December 2016, the Group sold £10.9m of non-performing personal loans which contributed to the marked reduction in arrears balances. Group weighted average loan to value ratios of the mortgage book remained low at 63% at the end of 2016, with an average LTV of 69% for new originations within the year.
RISK APPETITE STATEMENT
A broad deterioration in the economy would adversely impact both the ability of borrowers to repay loans and the value of the Group`s security. Credit losses would impact across the lending portfolio, so even if individual impacts were to be small, the aggregate impact on the Group could be significant.
WHOLESALE CREDIT RISK
The Bank has wholesale exposures both through call accounts used for transactional and liquidity purposes and through derivative exposures used for hedging.
MITIGATION AND CONTROLS
The Group works within portfolio limits on LTV, affordability, name, sector and geographic concentration that are approved by the Risk Committee and the Board. These are reviewed at least annually. In addition, stress testing is performed as part of the ICAAP to ensure the Group maintains sufficient capital to absorb losses in an economic downturn and will continue to meet its regulatory requirements.
The Group transacts only with high-quality wholesale counterparties. Derivative exposures include collateral agreements to mitigate credit exposures.
Although the UK economy has remained stable during 2016, the economic outlook is uncertain following the result of the EU referendum and the US presidential election.
The Group continues to utilise a reserve account with the Bank of England, enabling it to eliminate credit risk on most of its liquidity portfolio.
Definition - Potential loss due to changes in market prices or values.
RISK APPETITE STATEMENT
The Group actively manages market risk arising from structural interest rate positions. The Group does not seek to take a significant interest rate position or a directional view on rates and it limits its mismatched and basis risk exposures.
INTEREST RATE RISK
An adverse movement in the overall level of interest rates could lead to a loss in value due to mismatches in the duration of assets and liabilities.
A divergence in market rates could lead to a loss in value, as assets and liabilities are linked to different rates.
MITIGATION AND CONTROLS
The Group`s Treasury department actively hedges to match the timing of cash flows from assets and liabilities.
The Group strategically focuses on products linked to administered rates to keep control of yield. Where there is a mismatch of market rates in the portfolio (e.g. base rate vs. LIBOR), the Treasury department hedges the exposure.
The Group has developed a better understanding of the potential impact of more complex movements in rates and enabling better hedging.
Product design and hedging has enabled the Group to maintain the overall level of basis risk through the year.
LIQUIDITY AND FUNDING RISK
Definition - The risk that the Group will be unable to meet its financial obligations as they fall due.
RISK APPETITE STATEMENT
The Group actively manages stable and efficient access to funding and liquidity to support its ongoing operations. It also maintains an appropriate level and quality of liquid asset buffer so as to withstand market and idiosyncratic liquidity-related stresses.
RETAIL FUNDING STRESS
As the Group is primarily funded by retail deposits, a retail run could put it in a position where it could not meet its financial obligations.
MITIGATION AND CONTROLS
The Group`s funding strategy is focused on a highly stable retail deposit franchise. The large number of depositors provide diversification, with a high proportion of balances covered by the FSCS and so at no material risk of a retail run.
In addition, the Group performs in-depth liquidity stress testing and maintains a liquid asset portfolio sufficient to meet obligations under stress.
Finally, the Group has prepositioned mortgage collateral with the Bank of England, so that its liquidity insurance facilities can be accessed in the unlikely event that should become necessary.
The Group has made continual improvements in both its regular liquidity forecasting and stress testing framework. In addition, it has gained access to the Bank of England liquidity insurance facilities.
Definition - The potential inability of the Bank to ensure that it maintains sufficient capital levels for its business strategy and risk profile under both the base and stress case financial forecasts.
RISK APPETITE STATEMENT
The Group seeks to ensure that it is able to meet its Board level capital buffer requirements under a 1 in 20 stress severity scenario. The Group`s solvency risk appetite is constrained within the leverage ratio related requirements. We manage our capital resources in a manner which avoids excessive leverage and allows us flexibility in raising capital.
Key risks to solvency arise from balance sheet growth and unexpected losses which can result in the Bank`s capital requirements increasing or capital resources being depleted such that it no longer meets the solvency ratios as mandated by the PRA and the Board risk appetite.
The regulatory capital regime is subject to change and could lead to increases in the level and quality of capital that the Group needs to hold to meet regulatory requirements.
MITIGATION AND CONTROLS
Currently the Bank operates from a strong capital position and a consistent record of strong profitability. The Bank actively monitors its capital requirements and resources against financial forecasts and plans and undertakes stress testing analysis to subject its solvency ratios to extreme but plausible scenarios.
The Bank also holds prudent levels of capital buffers based on CRD IV requirements and expected balance sheet growth. The Group engages actively with regulators, industry bodies, and advisers to keep abreast of potential changes and provide feedback through the consultation process, and actively manages its capital strategy and plan.
The Group has improved both its CET1 capital and total capital position increasing its resilience against unexpected losses.
Definition - The risk of loss or negative impact to the Group resulting from inadequate or failed internal processes, people or systems, or from external events.
RISK APPETITE STATEMENT
The Group`s operational processes, systems and controls are designed to minimise disruption to customers, damage to the Bank`s reputation and any detrimental impact on financial performance. The Bank actively promotes the continual evolution of its operating environment through the identification, evaluation and mitigation of risks, whilst recognising that the complete elimination of operational risk is not possible.
If hackers were to penetrate the Group`s IT system, consequences could range from the diversion of funds to the theft of customer data.
The use of inaccurate, incomplete or outdated data may result in a range of risks impacting risk management and reporting services.
The risk that the Bank will be unable to meet its future resource requirements through a combination of higher than expected staff attrition and/or the inability to identify and hire candidates with the necessary skills.
Banks should have business resiliency, continuity monitoring and plans in place to ensure an ability to operate on an ongoing basis and limit losses in the event of severe business disruption.
MITIGATION AND CONTROLS
A series of tools designed to identify and prevent network / system intrusions are deployed across the Group.
The effectiveness of the controls is overseen by a dedicated IT Security Governance Committee, with specialist IT Security staff employed by the Bank.
The Bank continues to invest in and enhance its data management architecture, systems, governance and controls. The Bank has a series of initiatives that are intended to respond to this risk. This includes the introduction of a range of development programmes intended to improve retention and increase the population of in-house developed talent.
The Bank carries out scenario based Business Continuity Planning (BCP), has crisis management procedures and recovery and contingency plans. The BCP is periodically tested to ensure operability.
Whilst the Bank has made a series of enhancements to its defences in respect to IT security threats during 2016 it recognises that the threats to the industry continue to grow both in respect to the volume and the level of sophistication.
The increase in data risk has been primarily driven by the increased scale of operations and the multiple sources from which data is derived.
As the business continues to grow, the need for additional resources increases the pressure on hiring. In a number of specialist areas, the issue is exacerbated by the wider industry demands for individuals with the relevant skills. However, the Bank is adopting a proactive approach to ensure future resource requirements can be met.
The increasing scale and globalisation of operations together with dependencies on a number of third party service and network providers. The sophistication of cyber crime continues to evolve.
Definition - The risk that the Group`s behaviours or actions result in customer detriment or negative impact on the integrity of the markets in which it operates.
RISK APPETITE STATEMENT
The Bank considers its culture and behaviours in ensuring the fair treatment of customers and in maintaining the integrity of the markets in which it operates a fundamental part of its strategy and a key driver to sustainable profitability and growth. OSB does not tolerate any systemic failure to deliver fair customer outcomes. On an isolated basis, incidents can result in detriment owing to human and / or operational failures. Where such incidents occur they are thoroughly investigated, and the appropriate remedial actions are taken to address any customer detriment and to prevent recurrence.
Whilst the Group originates relatively simple products, there remains a risk that (primarily legacy) products may be deemed to be unfit for their original purpose in line with the current regulatory definitions.
The risk that customer data is accessed inappropriately, either as a consequence of network / system intrusion or through operational errors in the management of the data.
MITIGATION AND CONTROLS
The Group has a strategic commitment to provide simple, customer-focused products. In addition, a Product Governance framework is established to oversee both the origination of new products and to revisit the ongoing suitability of the existing product suite.
The combination of a dedicated Product Governance team and an independent Conduct Risk team serves to effectively manage this risk
During the year, the Group established an effective product transfer programme.
In addition to a series of network / system controls (documented within as part of the operational risks), the Bank performs extensive root cause analysis of any data leaks in order to ensure that the appropriate mitigating actions are taken.
Whilst this risk has reduced in 2016 as a result of increased awareness and dedicated oversight, the Bank remains aware of the changes to the regulatory environment and their possible impact on product suitability.
Despite a number of additional controls being introduced in 2016, the network / system threats continue to evolve in both volume and sophistication.
COMPLIANCE AND REGULATORY RISK
Definition - The risk that a change in legislation or regulation or an interpretation that differs from the Group`s will adversely impact the Group.
RISK APPETITE STATEMENT
The Group will not tolerate systemic failures to comply with the relevant laws, regulations and codes of conduct applicable to its business activities. The Group`s compliance culture and supporting procedures ensure adherence to all relevant regulation and it actively monitors and assesses changing and emerging regulatory standards. The Group applies its own intellectual capital and seeks external advice where appropriate to ensure that it is compliant with the intent and spirit of regulation without causing unforeseen detriment to its customers.
Key compliance based regulatory changes that the Bank is subject to include EMCD, SMCR and potential macro prudential controls of the Buy-to-Let sector.
Further proposals currently under discussion, including the Basel Committee consultation on standardised risk weights, which could lead to significant increases in the Group`s capital requirements.
Regulatory changes focused on the conduct of business could force changes in the way the Group carries out business and impose substantial compliance costs. For example, the Financial Policy Committee`s increased focus on Buy-to-Let lending or tax changes such as the Bank Corporation Tax Surcharge must be considered.
MITIGATION AND CONTROLS
The Bank has adopted the EMCD and SMCR in an effective and timely manner.
The adoption of SS13/16 and the lending policy requirements around affordability mean that the Bank should be well placed to respond to any macro prudential regulation of the Buy-to-Let sector.
The Basel proposals will be subject to extensive consultation and the eventual outcome could be materially different to those initially proposed. The adoption of the eventual changes may take a number of years to implement. The Group intends to migrate to IRB.
Another consultation of note relates to the recently published CP3/17 issued by the PRA, which details proposed refinements to the PRA`s Pillar 2A capital framework. The Group is currently assessing the potential impact this consultation may have on the Group`s capital strategy and plan going forward.
The Group has a programme of regulatory horizon scanning linking into a formal regulatory change management programme. In addition, the focus on simple products and customer oriented culture means that current practice may not have to change significantly to meet new conduct regulations.
The Bank has historically responded effectively to regulatory changes and does not believe that future changes represent a heightened level of compliance risk.
Recent changes implemented as part of CRD IV have resulted in requirements for more and higher quality capital, though elements of these requirements are being phased in. Further proposals currently under discussion, including the Basel Committee standardised risk weight consultation, could lead to significant increases in the Group`s capital requirements.
The regulatory environment has tightened and this is likely to continue, exposing the Group to increased risk.
In accordance with provision C.2.2 of the UK Corporate Governance Code, the Board of Directors have assessed the prospects and viability of the Group over a three-year period and have concluded they have a reasonable expectation that the Group will be able to continue to operate and meet its liabilities as they fall due over that period.
The three-year time period was selected for the following reasons:
· The Group`s operating and financial plan covers a three-year period;
- The three-year operating and financial plan considers, among other matters: the Board`s risk appetite; macro-economic outlook; market opportunity; the competitive landscape; and sensitivity of the financial plan to volumes, margin pressures and capital requirements;
- The Board believes that there is sufficient visibility over the economic and regulatory landscape and the market outlook offered by the three-year time horizon to make a reasonable assessment of viability;
- Uncertainty in the UK economic outlook over the medium to long-term following the EU referendum outcome; and
- Significant uncertainty exists in the regulatory horizon beyond this point, with the Basel Committee currently in consultation on standardised approaches to credit and operational risk.
The Company is authorised by the PRA, and regulated by the FCA and PRA, and undertakes regular analysis of its risk profile and assumptions. It has a robust set of policies, procedures and systems to undertake a comprehensive assessment of all the principal risks and uncertainties to which it is exposed on a current and forward-looking basis (as described in Principal Risks and Uncertainties on pages 42 to 45).
The Group manages and monitors its risk profile through its strategic risk management framework, in particular through its risk appetite statement and risk limits (as described in the Chief Risk Officer`s Report on pages 34 to 41). Potential changes in its risk profile are assessed across the business planning horizon by subjecting the operating and financial plan to severe but plausible macroeconomic and idiosyncratic scenarios.
Stress testing is a vital discipline, which underpins the Company`s ICAAP and ILAAP. The stress scenarios are identified based on the severity of underlying assumptions, relevance to the Company`s business model and alignment with the Bank of England`s prescribed stress scenario.
In addition, the Company identified a suite of credible management actions that would mitigate the impact of the stress scenarios. The Board and executive management use the outcome of the stress test analysis to evaluate the Company`s management options and adequacy of the Company`s capital and liquidity resources to withstand an extreme but plausible stress scenario. The Company holds sufficient capital to withstand such a stress scenario.
In addition, the Group identifies a range of catastrophic stress scenarios, which could result in the failure of its current business model. Business model failure scenarios (reverse stress tests) are primarily used to inform the Board and executive management of the outer limits of the Group`s risk profile. Reverse stress tests play an important role in helping the Board and its executives to identify potential recovery options under a business model failure scenario, and form an important aspect of the Company`s recovery and resolution plans prescribed by the regulator.
The ongoing monitoring of all principal risks and uncertainties that could impact the operating and financial plan, together with the use of stress testing to ensure that the Group could survive a severe but plausible stress, enables the Board to reasonably assess the viability of the business model over a three-year period.
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CORPORATE RESPONSIBILITY REPORT
Operating sustainably and responsibly is integral to our business model and strategy, and builds on OneSavings Bank`s long tradition of putting the customer at the heart of everything we do.
Our Core Values: Specialist, Personal and Flexible reflect our commitment to interact ethically, responsibly, and with integrity with all our stakeholders and the wider community in which we operate:
- We take a SPECIALIST approach to everything we do - we ensure we understand our stakeholders` requirements and use our creativity, skill and expertise to fulfil their requirements with honesty and integrity
- We take a PERSONAL approach to everything we do - we treat everyone with respect and take accountability for our actions
- We take a FLEXIBLE approach to everything we do - we ensure that we work collaboratively with our colleagues, customers and other stakeholders to achieve shared positive outcomes
- We aim to be FAIR to our colleagues, customers and stakeholders developing long-term relationships
WHAT WE ACHIEVED
In 2016 we successfully delivered on a number of initiatives across the business aimed at improving our relationships with key stakeholders and achieving strong results.
ACHIEVEMENTS IN 2016
- Customers - consistently high consumer net promoter score - 59%
- Employees - committed to signing HM Treasury`s Women in Finance Charter in order to promote gender diversity throughout the Group
- Communities - donated over £136,000 to Great Ormond Street Hospital
FOCUSED ON OUR CUSTOMERS
OneSavings Bank (`OSB`) encourages a culture that aims to:
- communicate and deal with each customer on an individual basis
- act with consistency across all channels
- be a confident, open and trustworthy workforce
- offer simplicity and ease of business
- offer long-term value for money, and
- offer transparent products without the use of short-term bonus rates, and to offer the same rates to both existing and potential customers
Our customers are part of our success and we aim to become a financial services provider of choice. To achieve that, the Group established a governance framework for consistent best practice across the Group to ensure there are robust policies and procedures to minimise the risk of failure to deliver the service our customers have come to expect from us.
The relevant policies include:
- Conduct Risk policy, including treating customers fairly to ensure the Group conducts its business fairly and without causing customer detriment
- Responsible Lending Policy to ensure that the Group lends money responsibly
- Complaints Handling Policy to ensure the group responds to complaints swiftly, fairly and consistently
- Vulnerable Customer and Suicide Awareness Policy to ensure that employees can identify vulnerability and potential suicide risks in our customers and put in place appropriate actions to deal with such issues as effectively as possible
- Anti-Money Laundering Policy to ensure the Group is not used to further criminal activities
- Anti-Bribery and Corruption Policy to ensure the Group carries out its business honestly
- A Conflicts of Interest Policy to ensure the Group can identify and if possible avoid conflicts, and where this is not possible to manage conflicts fairly
- Data Protection Policy to ensure the Group protects its customer data and manages it fairly
- Whistleblowing Policy to ensure that any employee who raises concerns around misconduct is protected
- Environmental Policy to conduct our business in an environmentally aware manner
- Diversity and Equality Policy to promote diversity and equality in our workforce
Employees have mandatory training on all the key policies, with a completion rate of 100%.
We take a personal approach to our customers, treating each customer as an individual and listening to their needs. Many of our customers are also members of the Kent Reliance Provident Society, the society that took over the management of the membership of the former Kent Reliance Building Society. The Bank and the Society have benefited from member engagement through the online `portal` launched late in 2015 enabling input from a geographically broader range of members. Topics of engagement have included key areas of customer literature, working with saving and borrowing members helping the Bank to maximise clarity and understanding, and product retention process enhancement. Each year we hold an AGM at which members can engage with senior management and discuss their ideas for improving our customer experience.
Our commitment to our customers is evidenced in the strong net promoter score (a measure of how likely a customer is to recommend a business on a scale of -100 to +100) we achieve across our lending and saving franchises which in 2016 has improved to 59%. In addition, we won numerous awards for being the best provider for a range of services from cash ISAs to Buy-to-Let mortgages.
KENT RELIANCE SAVINGS
WINNER : Best Bank Savings Provider, Moneyfacts Awards 2016 (for the second year running)
WINNER : Best Cash ISA Provider, Moneyfacts Awards 2016 (for the fourth year running)
WINNER : Best No Notice Account Provider, Moneyfacts Awards 2016 (for the second year running)
WINNER : ISA Provider of the Year, Consumer Moneyfacts 2016
WINNER : Best Regular Savings Provider, Moneynet Awards 2016
KENT RELIANCE FOR INTERMEDIARIES
WINNER : Best Specialist Lender, What Mortgage Awards 2016
WINNER : Best Buy-to-Let Mortgage Provider, Personal Finance Awards 2015/2016 (for the second year running)
We aim to make banking easier for our customers and as such we continue to invest in digital banking and upgrades to our infrastructure which make a significant difference in allowing our customers better access to their money. This includes security, internet capability and handling services.
In 2016, our customers benefited from refurbishment that took place in a number of our branches and we introduced online statements for all of our customers. In November, our savings proposition was also extended to private limited SMEs and we are developing additional services for our new business savings customers.
Whilst we concentrate on providing an excellent service, when things have gone wrong, we aim to put this right and learn from any mistakes made. We have a comprehensive, Group-wide complaints handling system and our staff complete rigorous training programmes to ensure a compliant and fair process is followed.
FOCUSED ON OUR EMPLOYEES
Our employees are our key asset. Their skills, expertise and enthusiasm are central to achieving our strategic goals, and we continue to invest in their training and development and employee engagement activities to make OSB the best work place it can be.
Our recruitment process is fair and inclusive, with shortlisting, interviewing and selection always carried out without regard to gender, gender reassignment, sexual orientation, marital or civil partnership status, colour, race, caste, nationality, ethnic or national origins, religion or belief, age, pregnancy or maternity leave or trade union membership. No candidate with a disability is excluded unless it is clear that the candidate is unable to perform a duty that is intrinsic to the role, having taken into account reasonable adjustments. Reasonable adjustments to the recruitment process are made to ensure that no applicant is disadvantaged because of his/her disability and questions asked during the process are not in any way discriminatory or unnecessarily intrusive.
RETENTION AND TRAINING
We encourage employees to carry out their work to the best of their ability and promote learning and skills development opportunities across the organisation. Our Learning and Development team manage the allocation and completion of regular mandatory e -learning modules and delivery of in-house workshops, programmes and coaching in addition to coordinating employees attending external or in-sourced training activities and supporting staff undertaking professional development. In 2016, the completion rate for our mandatory monthly online compliance training was 100%, demonstrating the importance we place on ensuring our employees are suitably aware of key requirements.
While we are still a relatively small business in terms of employee numbers, we actively advertise vacancies internally to provide career development opportunities for existing employees. In 2016, we filled 24% of vacancies (54 of 221) with internal candidates.
Our regretted attrition rate in 2016 was 12% for our UK-based employees and 17% for our employees in India. 2016 also saw the introduction of our long service awards in order to recognise employee loyalty with the awards increasing in value for each five years of tenure. We are proud that our longest serving employee has been with the Group for 32 years.
TALENT MANAGEMENT AND LEADERSHIP PROGRAMMES
We have recently undertaken a talent mapping exercise and have identified the employees who constitute our primary and core talent pools based on their performance and potential. A range of talent management activities will be undertaken in 2017 in order to assist in developing, motivating and retaining identified employees.
2016 saw the launch of OSB`s Leadership Development Programme with 20 managers each completing the eight separate day-long modules that make up the programme. The success of the programme has led to another 30 managers signing up to undertake the Leadership and Development Programme in 2017.
REMUNERATION AND BENEFITS
We believe in rewarding our employees fairly and transparently, enabling them to share in the success of the business. Details of the Group`s remuneration policies can be found in the Remuneration Report on pages 77 to 90.
We offer our employees a comprehensive range of benefits, and continue to review these to ensure they are in line with market practice. Although the list is not exhaustive, our benefits include pension contributions, medical insurance, life cover, a childcare voucher scheme, interest free season ticket loan and a cycle purchase scheme.
We also encourage our employees to hold shares in the Bank for the long term, and offer a Sharesave scheme. The scheme is open to all UK-based employees and allows them to save a fixed amount of between £5 and £500 per month over either three or five years in order to use these savings at the end of the qualifying period to buy the Company`s shares at a fixed price established when the scheme was announced. The Group launched its first Sharesave scheme in June 2014 and granted further options under the scheme in June 2015 and June 2016. As at December 2016, 44% of employees were participating in one of these schemes.
In 2016, for the second time, our employees completed The Sunday Times Best Companies Employee Engagement survey, achieving an overall score that put us in the Best Companies `One to Watch` category. Take -up of the opportunity to give feedback to the business was very strong at around 80% and highlighted a strong alignment of our people with the Company and their teams.
To utilise the feedback from the survey in the most efficient way, we established the Employee Engagement Team who actively engage with our staff and collect ideas to further enhance the working environment. The initiatives that were introduced throughout the business as a result included an employee recognition programme, enhanced induction workshop, leadership development programme, the election of Group`s charities, a paid volunteering day a year and free fruit in the offices. The Employee Engagement Team will be busy in 2017 with more suggestions going live during the year.
Employees are kept informed of developments within the business and in respect of their employment through a variety of means, such as a new Company newsletter, regular town hall meetings, regular briefings and use of our intranet. Employee involvement is encouraged and views and suggestions are taken into account when planning new products and projects.
EMPLOYEE RECOGNITION AND AWARDS
We are proud that the expertise of our employees was recognised in 2016 by the industry. Dawn Mirfin, our Group Head of Underwriting, was the recipient of the Operation / Credit Risk Person of the Year category award at the British Mortgage Awards 2016. This award recognises those who delivered strong initiatives in the last year to improve the quality of business, overall performance and/or controls within their lender which demonstrates that they are exceptional in their position.
Our Chief Executive Officer, Andy Golding, also received the 2016 Leadership Award from Mortgage Finance Gazette which acknowledges his leadership efforts in relaunching and refocusing OneSavings Bank to become a successful FTSE 250 company.
HEALTH AND SAFETY
We have a duty of care to all of our employees, and a safe and healthy work environment is paramount to OneSavings Bank. We are committed to fostering and maintaining a working environment in which our employees can flourish, and our customers can safely transact with us.
We operate a Group Health and Safety Policy and we review our employee and customer environment regularly.
ACTIVITIES IN 2016:
- We introduced a monthly Health and Safety report which details the Bank`s performance with regards to workplace hazards
- Statutory Health and Safety training has been added for all Group employees
DIVERSITY AND INCLUSION
We recognise the benefits of diversity, including gender diversity, throughout the Group and work to ensure that there is an appropriate balance of skills and experience across the Group.
Over 59% of our workforce is female, we have three female directors (27% of Board) and two female members of the Executive Team (20%). In our office in India, women constitute 37% of the total workforce.
|Number of Board Directors||8||3|
|Number of Directors of subsidiaries||10||1|
|Number of senior managers (not directors)||40||12|
|All other employees1||301||354|
1 Includes OSBIndia
In early 2017, the Group became a signatory to the HM Treasury`s Women in Finance Charter. The Charter is a commitment of the Bank and HM Treasury to work together to promote better gender balance in the financial services industry. The pledge includes appointing a senior executive who is responsible for gender equality, setting internal targets, publishing progress against the targets and taking steps to link senior executives pay to delivery of these gender diversity goals. Accordingly, we have appointed Jason Elphick, Group General Counsel and Company Secretary, as the senior executive responsible for gender diversity throughout the Group and our Board approved a target of 30% of OSB`s senior management roles to be represented by women by 2020.
We are continuously tracking the take up of flexible working arrangements and other gender related metrics going forward, and will assess whether any further measures or measurable objectives need to be put in place. In 2016, as a result of the employee survey, we extended paid maternity and paternity leave. Unconscious bias training has been included in a number of workshops for line managers during the year, being a direct outcome of our 2015 gender diversity review. In the coming months, we plan to extend this training to all employees.
We want each member of our workforce and wider stakeholders to be treated with dignity and respect. OSB endorses the UN Declaration of Human Rights and supports the UN Guiding Principles of Business and Human Rights. The Group adheres to the International Labour Organisation Fundamental Conventions. We seek to engage with stakeholders with fairness, dignity and respect. The Company does not tolerate child labour or forced labour. OSB respects freedom of association and the rights of employees to be represented by trade unions or works councils. The Group is a fair employer and does not discriminate on the basis of gender, religion, age, caste, disability or ethnicity. Our policy applies throughout the Group and is communicated to our employees during their induction training. We encourage suppliers and business partners to adhere to the same principles.
In 2015, the Modern Slavery Act came into force and it encompasses slavery, human trafficking, forced labour and domestic servitude, and applies not only to OSB as a Group but also to our supply chain. OSB will take steps to promote and continually improve our commitment to eliminating abuse and exploitation in the workplace and we will publish our modern slavery statement in the coming months. To do that, actions are being taken throughout the organisation to ensure we are well prepared not only to support the required disclosure but are also vigilant to any form of forced labour in all of the locations from which we operate including our suppliers.
OSB India (`OSBI`) is a wholly owned subsidiary of the Group. OSBI operates from an office in Bangalore and currently employs 276 staff. Customer support and some of the Group`s back office processing is provided by OSBI. We actively promote integration between our colleagues in the UK and India with frequent employee exchanges, transfers, overseas training and management visits.
As part of the Group, OSBI falls under the same Group policies that are in force in the UK offices, most importantly: equal opportunities, non-discrimination and harassment policies, whistleblowing policy, information security and clear desk policies. There are only very slight differences in the Group`s main HR policies due to the national legislation.
In compliance with the Modern Slavery Act, we do not support excessive overtime and India employees are encouraged to work in accordance with national legislation. The staff in the Bangalore office enjoy benefits which include 21 days of annual leave, 10 days sick leave and cafeteria services. In the early part of 2016, OSBI moved offices to further enhance the working environment for our Indian colleagues.
FOCUSED ON THE ENVIRONMENT
As an office based financial services provider, we have a relatively low environmental impact.
Despite this, we remain committed to conducting our business in an environmentally responsible way and whenever we can, to reduce consumption of the resources and our negative impact on the environment in which we operate.
In 2016, we delivered on our goal to establish a formal Environmental Policy which confirms that OSB aims to:
· Respect the environment
· Comply with all relevant environmental laws and regulations
- Take action to minimise the direct and indirect impacts of its operations on the environment and environmental performance
- Set, monitor and review environmental objectives and targets for operations across the organisation on a periodic basis
- Communicate our policy to all employees, business partners and make it assessable to customers and any interested shareholders
- Engage employees in the delivery of its environmental strategic agenda and support them in practical ways so they can reduce their own environmental footprints
- Periodically measure and report on its performance in keeping with relevant national and international standards, and where applicable, have its environmental performance and reporting independently assured
· Commit to continual improvement and developing objectives and targets for reducing our environmental impacts
We also apply environmental principles when selecting suppliers and now employ a cleaning company that offsets its carbon emission by planting trees.
ACTIVITIES IN 2016
We have implemented a programme of environmental initiatives and identified areas where we can do more to reduce impact throughout the Group. Activities during the year included:
· Improvements made to real estate resulting in reduction of energy consumption
· Introduction of secure print solutions in all offices which significantly lowered paper consumption
· Online statements are now offered to all of our customers
- `Zero to Landfill` waste policy in operation which means we either recycle, reuse or send all of our waste to a dedicated Energy From Waste facility
GREENHOUSE GAS EMISSIONS
|Emission type|| Location-
|Scope 1: Operation of facilities||125||-|
|Scope 1: Combustion||383||-|
TOTAL SCOPE 1 EMISSIONS
|Scope 2: Purchased energy (UK)||364||335|
|Scope 2: Purchased energy (rest of world)||386||3861|
TOTAL SCOPE 2 EMISSIONS
|Total emissions|| |
1 Location based figure used where market based not available
GREENHOUSE GAS EMISSIONS INTENSITY RATIO:
|Total footprint (Scope 1 and Scope 2) - CO2e|
| Previous year
| Year on year
|Turnover (£m)||162.5|| |
|Intensity ratio - Scope 2 location based method (tCO2e/£100,000)||0.004|| |
|Intensity ratio - Scope 2 market based method (tCO2e/£100,000)||0.003|| |
- Our methodology has been based on the principles of the Greenhouse Gas Protocol, taking account of the 2015 amendment which sets out a `dual reporting` methodology for the reporting of Scope 2 emissions. This means that UK electricity is reported using two methods
- This includes emissions under Scope 1 and 2, except where stated, but excludes any emissions from Scope 3
- Conversion factors for UK electricity (location-based methodology), gas and other emissions are those published by the Department for Environment, Food and Rural Affairs for 2016/17
- Conversion factors for UK electricity (market-based methodology) are published by electricityinfo.org
- The market based methodology has only been applied to UK electricity supplies
- Conversion factors for overseas electricity, gas and other emissions are those published by the International Energy Agency for 2016
- Conversion factor used for R417A (F-gas) is published by Linde Gas
- Conversion factor used for R22 (F-gas) is published by Department for Environment, Food and Rural Affairs for 2016/17
- In addition, due to expansion of the India offices in 2016, there is an associated increase in total tCO2e reported
- It has been confirmed there is no LPG use within the estate either in the UK or overseas
- It has been confirmed that there is no mains gas supply in relation to the India operations
- Two UK sites; Heritable and InterBay, have been excluded from reporting as it has been confirmed that these are managed rented properties and are therefore considered to be Scope 3 emissions and are not readily available
- We have reported on all the measured emissions sources required under The Companies Act 2006 (Strategic Report and Directors` Report) Regulations 2013, except where stated
- The period of our report is 1 January 2016-31 December 2016
- An increase in the availability of data this year has meant that the scope of the emissions reporting has increased. In addition to the emission sources reported in 2015, the following sources have now been accounted for:
- F-gas (India)
- Diesel generators (India)
- Disaster Recovery Unit - Electricity and Diesel (India)
· As a result, reported emissions this year have increased
Statement of exclusions
· Global diesel/petrol use (for vehicles) has been excluded from the report on the basis that it is not material to our carbon footprint
FOCUSED ON OUR COMMUNITY
OSB has traditionally had very strong links with the community in which it operates, through its building society heritage, and this is continued through its Kent Reliance brand.
We have a well-established community services programme that does not simply take the form of donations and fundraising, but also includes staff volunteering and involvement.
As one of the largest employers in the region, many of our staff live in the local area - they are a part of the local and regional community and therefore local causes and campaigns particularly resonate with our workforce. Staff feedback is crucial to informing where our support can be best placed within the community, from an in-office collection to our major charity partners.
Our diverse community services programme includes being a major sponsor of Demelza Hospice Care for Children, donating to local Kent-based charitable causes through our Kent Reliance Community Fund including sponsorship of Kent County Football Association (`Kent FA`) 23 County Cup competitions and development centre and Kent County Cricket Club`s (`KCCC`) sponsorship for the disability squads and adding its Academy Programme sponsorship in 2016. Our Kent Reliance `Kent Heroes` and `Make Someone`s Christmas` campaigns are undertaken with a local media partner. We also supported Kent Literacy which offers reading initiative in ten Medway schools.
However, our charitable endeavours cannot simply take place on our front doorstep; we also support both national and international charities too. Through our savings arm of Kent Reliance we fundraise for Great Ormond Street Hospital through in-office and branch initiatives.
Overall the Bank has contributed through sponsorship and donations a total of over £200,000 to community and charitable causes in 2016.
Feedback from our 2016 Employee Engagement survey brought to our attention the desire of our employees to get involved in voluntary work in their communities and to assist them, we introduced a paid volunteering day a year.
DEMELZA HOSPICE CARE FOR CHILDREN
Demelza Hospice Care for Children provides specialist care and support to babies, children, young people and their loved ones from diagnosis, day-to-day family life, times of crisis, end of life and through bereavement. As a registered charity, Demelza offers bespoke support, free of charge, to families and are available 24 hours a day, 365 days a year. In order to provide these vital services, they need to raise over £10m a year.
As a locally based charity, staff from Kent Reliance are hugely aware of and are keen supporters of Demelza. They have participated in a number of fundraising events throughout the year including headline sponsors and participants of the annual KM Dragon Boat Race, which helped raise more than £100,000 in sponsorship for local charities and good causes across the county. The event continues to be one of the biggest charity fundraising events staged in Kent and the Kent Reliance teams raised the majority share of donations for Demelza through their efforts on the day.
Kent Reliance also take huge pride in Demelza`s annual fundraising event, `Go Dotty` which this year culminated in a week long campaign involving office and branch staff who enthusiastically embraced the challenges set upon them which ranged from dotty based quizzes to bake-off challenges. Aside from straightforward fundraising, we also engaged with the local community by gifting our branch network as collection and promotion outlets for the charity. Engagement with the charity doesn`t end with our sponsorship. We welcomed the opportunity to get actively hands-on with Demelza, with many of our employees visiting the Hospice on volunteer days to help clear and maintain the gardens, build new outdoor activity centres for the children and assist with building maintenance.
KENT COUNTY FOOTBALL ASSOCIATION
The partnership between the Kent FA and Kent Reliance has grown over the last three years and now covers 23 Kent County Cup competitions and the Kent Girls and Disability Player Development Centres; leading Kent Reliance to become Kent FA`s first official `Community Partner`. This is a great enhancement to the successful partnership, and for grassroots football in Kent.
Paul Dolan, Kent FA`s Chief Executive is delighted to have the continued backing from Kent Reliance: "Throughout our relationship with Kent Reliance, they have shown how committed they are to the Kent grassroots football community and, through the support they give us, it seemed like a natural fit for them to become our first ever `Community Partner`. To have Kent Reliance on board helps to ensure that we lead the way in creating competitions and opportunities that uphold the highest standards."
The Kent Reliance Girls and Disability Player Development Centres provide excellent opportunities to deliver elite training and support to talented young football players in the county while the 23 Kent Reliance County Cups have over 1,000 teams competing from across the county, catering for all standards and abilities. The partnership will also see continued support and investment into grassroots football through the Kent Reliance `Magic of the Cup` competition. Over 15 teams won football equipment during the competition last season, and our overall winner, Mangravet FC from the Maidstone & District Football League, was presented with 16 tickets by Kent Reliance to see an England match at Wembley.
Barry W. Bright, Kent FA`s Chairman and Managing Director stated that: "the partnership with Kent Reliance has enabled us to professionalise the service we provide. Grassroots football provides so many opportunities and we are delighted that Kent Reliance continues to help support the growing football talent in Kent communities."
Kent Heroes returned in 2016 in conjunction with KM Media Group, led by KMFM, to give the Kent community the opportunity to celebrate local, unsung heroes who may not otherwise gain recognition for their selfless acts. This community initiative was powered by nominations from the public who were asked to nominate who they thought should receive the awards. This year`s categories were:
· Unsung Hero
· Teacher of the Year
· Carer of the Year
· Fundraiser of the Year
· Young Person of the Year
Each award recipient was publicly recognised with an exclusive story in the Kent Messenger and a £500 cheque from Kent Reliance. The campaign built upon the success of its inaugural edition last year and increased in popularity, with more nominations and interest via social media that led to over 20,000 people having viewed the awards on video alone.
GREAT ORMOND STREET HOSPITAL
As a business, we like to think of our staff as extended family - a cliché, perhaps, but one that certainly rings true with Kent Reliance. It is perhaps because of this family-focused ethos that we naturally feel drawn to charities that support families at their time of need.
Great Ormond Street Hospital`s mission is simple, as a charity their aim is to raise enough money to enable the hospital to continue to provide the very best care for its young patients and their families as well as fund vital research. Since 2011, we committed to donate a minimum of £25,000 a year to the hospital and we do that through our Peter Pan savings accounts. To date, we have donated in excess of £305,000 to the children`s hospital and in 2016 alone we gave in excess of £136,000 to this cause.
KENT CHARITY AWARDS
The Kent Charity Awards (`KCA`) showcase the hard work that charities and voluntary groups from around the county undertake to make the lives of others better. Celebrating and supporting the county at a grassroots level is key to Kent Reliance`s charitable endeavours and our sponsorship of KCA reflects that.
KENT COUNTY CRICKET CLUB
In 2016, Kent Reliance continued its partnership with KCCC, by supporting the Club`s community programme. As with our commitment to Kent FA, this relationship is another opportunity to really support grassroots activity within the county and encourage people of all abilities to get involved and enjoy sport. Our sponsorship activity provides for funding for the Disability Performance Squads who currently operate two teams:
· The Kent Reliance Learning and Physically Disabled (`LDPD`) Performance Squad
· The Kent Reliance Visually Impaired (`VI`) Performance Squad
Both squads train during the winter months and represent Kent in national competitions against other counties during the summer months. This is the first step to representing the national team managed by the England and Wales Cricket Board. The LDPD squad currently plays in two formats of cricket, both softball, and for the more experienced players, full cricket balls (hardball). The VI team play with size three footballs which have been adapted to contain beads which rattle, although the national team play with regular cricket ball size hardball, again adapted to rattle and the squad trains throughout the year at a number of venues around the county.
In 2016, Kent Reliance increased its commitment to KCCC by supporting its Academy Programme. Jamie Clifford, CEO, KCCC: "We are very pleased with the achievements of the Academy since its inception in 2003 but with Kent Reliance`s support it is hoped we can take the programme to another level. Their partnership will enable us to bring in more specialist coaches and further develop life skills to prepare scholars for a professional career. Our disability cricket programmes have also been boosted by the support of Kent Reliance which allows us to provide kit, coaching and facilities for our players. The inclusion of Kent Spitfires player Amin Afshari in England`s Visually Impaired World Cup squad is evidence that the programme really does work."
MAKE SOMEONE`S CHRISTMAS
Make Someone`s Christmas encourages listeners and readers of KMFM and KM Media Group respectively, to nominate those they feel deserve something special during the festive season. Following the big success of the programme in 2015, this year`s edition was a hard task but we were not disappointed. In 2016, we helped ten special people in Kent with ten bespoke prizes. Nominations were varied and included a young family that had lost their dad just before Christmas, a seven and nine year old who had raised hundreds of pounds for charity by making cards and selling them and an elderly man who had devoted his life to serving his local community.
In 2016, Kent Reliance also supported the educational charity to launch and develop its new home reading initiative - Buster`s Book Club - in ten Medway schools. The scheme was extremely successful across the county with more than 2.8m minutes of reading achieved and making the 11,000 children involved official members of the Millionaire Reading Club. The feedback from schools has been so positive that major plans to expand the initiative are being drawn up, which Kent Reliance aims to continue to support.
The Strategic Report is approved by the Board and signed on its behalf.
Group General Counsel and Company Secretary
16 March 2017
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IT`S ALL ABOUT BESPOKE UNDERWRITING
GROUP HEAD OF UNDERWRITING
"Putting myself in the customer`s shoes."
Basic, traditional underwriting is pretty straightforward. It focuses on whether the property is valued correctly and the borrower both, wants to, and has the means to, repay the loan. But I think that there is a lot more to it than that. I see underwriting as central to growing and developing OSB and how we approach underwriting is all about understanding customers and what both they and the Bank are trying to achieve.
I am lucky to have recruited great, experienced staff who care about the decisions they make. They can read accounts, balance the risks and see a proposition from the Bank`s and the customer`s point of view. Of course we have processes and systems but at the end of the day, decisions down to our people`s skill and expertise. 100% of cases are assessed by an underwriter. They are here at OSB because they want to be responsible for making decisions, and not ticking boxes in an automated process. This makes us different.
I always stress that we should look to lend and be positive. If a proposition doesn`t fit then we can often help adapt it and make it work. We try to be innovative across our Kent Reliance, InterBay and Prestige brands to help customers.
One of our mantras that makes us stand out is being responsive, working with intermediaries and our sales team as a partnership. Building long-term relationships means that I have to be able to put myself in the customer`s shoes and see through their eyes.
BOARD OF DIRECTORS (BIOGRAPHIES)
[Graphic appear here]
CHIEF EXECUTIVE OFFICER
CHIEF FINANCIAL OFFICER
|Mike was appointed to the Board in April 2014.||Andy was appointed to the Board in December 2011.||April was appointed to the Board in May 2012.||Tim was appointed to the Board in February 2011.||Margaret was appointed to the Board in July 2016.|
|Member of the Nomination and Governance Committee.||None.||Member of the Risk Committee.||Member of the Nomination and Governance Committee.||Member of the Risk Committee.|
|Mike is an extremely experienced banking executive. In a career spanning more than 40 years, he has held a range of senior positions.||Andy has over 30 years` experience in financial services.||April has broad financial services experience. She has been a member of the Institute of Chartered Accountants in England and Wales since 1992.||Tim has over 25 years` experience in banking and investment, including in credit strategies, risk management, mergers and acquisitions.||Margaret brings a broad range of experience developed across various industry sectors including manufacturing, utilities, and financial services.|
EXPERIENCE & QUALIFICATIONS
|Mike was previously Deputy Chief Executive of Lloyds Banking Group for ten years, until 2008. Currently, he holds a number of Non-Executive positions with the Energy Saving Trust, Retirement Advantage, Stonehaven UK and Hastings Group Holdings plc. He is also the Chairman of the Trustees of the Lloyds TSB Pension Funds. Mike spent the first 25 years of his banking career with Barclays.||Andy was previously CEO of Saffron Building Society, where he had been since 2004. Prior to that he held senior positions at NatWest, John Charcol and Bradford & Bingley. He is a Non-Executive Director of Kreditech Holding SSL GmbH and currently holds a number of posts with industry institutions including membership of the Council of Mortgage Lenders Executive Committee. He is also a Director of the Building Societies Trust and has also served as a Non- Executive Director for Northamptonshire NHS.||April was previously an Executive Director in the Rothesay Life pensions insurance business of Goldman Sachs and worked for Goldman Sachs International for over 16 years, including as an Executive Director in the Controllers division in London and New York. April began her career at KPMG in a general audit department.||Tim is Managing Director of J.C. Flowers & Co. UK Ltd. Previously, he was Head of Private Equity at Dresdner Bank and a member of the Institutional Restructuring Unit`s Executive Committee. Tim has also served as a Board Director of Schroders, based in Hong Kong and Tokyo, where he was responsible for structured finance.||Margaret spent seven years working for Deloitte and Touche as a consultant and led the financial services consulting business for Charteris Plc. More latterly Margaret has been engaged as chief operations officer or chief information officer for divisions within some of the world`s largest banks, namely Bank of America Merrill Lynch, Barclays and RBS. Margaret is a Non-Executive Director for Ascension Trust (Scotland).|
|1 Independent Non-Executive Director|
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SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR
|Rod was appointed to the Board in July 2012 and was appointed Senior Independent Director in 2014.||Andrew was appointed to the Board in July 2016.||Mary was appointed to the Board in May 2014.||Graham was appointed to the Board in May 2014.||Nathan was appointed to the Board in May 2014.||Eric was appointed to the Board in December 2015.|
|Chair of the Nomination and Governance Committee and member of the Remuneration Committee.||Member of the Risk and Audit Committees.||Chair of Remuneration and member of Risk and Nomination and Governance Committees.||Chairman of the Risk Committee and member of the Audit Committee.||Member of Remuneration, Audit and Nomination and Governance Committees.||Chairman of the Audit Committee and member of the Risk Committee.|
|Rod has extensive experience in operations, investments, risk management and corporate finance across retail and commercial banking.||Andrew is an experienced financial services executive.||Mary has broad senior management experience in the banking and finance sectors.||Graham has significant banking and credit risk experience and financial services experience.||Nathan is a business development and marketing specialist and has worked extensively in the banking sector.||Eric has extensive corporate finance and Mergers & Acquisitions experience over a broad range of business sectors. He is a member of the Takeover Panel Appeals Board and Visiting Professor, London Metropolitan University Business School.|
EXPERIENCE & QUALIFICATIONS
|Rod was previously Group General Manager, HSBC with responsibility for UK distribution - branches, call centres and internet banking - for both personal and commercial customers. Rod was with HSBC for 33 years. Previous directorships include VISA (UK), HFC Bank plc and HSBC Life. He also served on the Board of Alliance & Leicester plc until its takeover by Santander. Rod is a Fellow of the Institute of Financial Services.||Andrew is currently Chairman at Castle Trust Capital plc and was previously CEO of Premium Credit Limited and CEO, President and later Chairman of Frank Russell Company. He was also a senior director of McKinsey & Company, management consultants, based in the London office. He focused on the financial services sector, serving a number of leading banks, insurance companies and asset managers across a wide range of topics including strategy, performance improvement and risk. He was formerly a Non-Executive Director of The Wesleyan.||Mary is a Non- Executive Director of Dignity plc and Motorpoint plc. She was previously CEO of the Commercial Division and Board Director of the Banking Division at Close Brothers Group PLC. Prior to that, Mary was COO of Skandia, the European arm of Old Mutual Group and prior to that, Mary spent 17 years at GE Capital, running a number of businesses including GE Fleet Services Europe and GE Equipment Finance.||Graham was previously Acting Group Credit Director at Lloyds TSB and Chief Credit Officer at Abbey National. Prior to this he spent 18 years in the NatWest Group culminating in the role of Managing Director, Credit Risk at NatWest Markets. A Fellow of the Institute of Chartered Accountants, Graham is Deputy Chairman of the Friends of the British Library and was involved in housing associations for nearly 30 years as Treasurer and Board member in the North of England and in London.||Nathan was previously Group Strategy Director at Friends Life from 2010 to 2013 and prior to that Nathan was Managing Director of Wealth Management at Lloyds TSB Group having joined Scottish Widows in 2002 as Managing Director, Marketing & Distribution. Prior to this he spent 18 years with HSBC Group including four years as General Manager, Personal Financial Services and culminating as COO of Merrill Lynch HSBC. Nathan is a Non-Executive Director of Homeserve Membership Ltd and Canada Life Group (UK) Ltd.||Eric was Chairman of CPP Group plc from 2014 to 2015. Prior to this he was Chief Executive of the City of London Group plc, the first Chief Executive of the Institute of Chartered Accountants in England and Wales and Group Finance Director of Old Mutual plc. Eric was also Group Finance Director at The Energy Group plc and advisor to Lord Hanson on the Demerger of Hanson plc. Prior to this Eric spent 17 years at Ernst & Young. Eric is also a Non-Executive director of Sun Life Financial of Canada Limited, Insight Asset Management and Vocalink Limited.|
CORPORATE GOVERNANCE REPORT
The statement of corporate governance practices, including the Reports of Committees, set out on pages 58 to 93 and information incorporated by reference, constitutes the Corporate Governance Report of OneSavings Bank.
UK CORPORATE GOVERNANCE CODE (`THE CODE`) - COMPLIANCE STATEMENT
During 2016, the Company applied all of the main principles of the Code and has complied with all Code provisions. The Code is available at www.frc.org.uk.
I am pleased to present to you the Company`s Corporate Governance Report for 2016, and to report our full compliance throughout the year with the Code as updated in 2014.
The Board continues to be committed to the highest standards of corporate governance and considers that good corporate governance is essential to provide the executive team with the environment and culture in which to drive the success of the business.
We welcomed Margaret Hassall and Andrew Doman to the Board in July 2016 as independent Non-Executive Directors. Margaret and Andrew have extensive financial skills and knowledge of the financial services industry which is extremely valuable to the continued development of the Bank. Stephan Wilcke, Malcolm McCaig and Dr David Morgan left the Board during 2016. I would like to thank them for their enormous contribution towards the success of the Bank over the years. I wish them well in all their future ventures. I have also informed the Board of my intention to step down as Chairman at the conclusion of the annual general meeting (AGM). The Board and its Committees continue to operate effectively, as identified in the formal performance review exercise carried out during 2016, details of which are set out in the Report below.
The Investor Relations function continues to assist the Board in developing a programme of meetings and presentations to both institutional and private shareholders, details of which are also set out in the Report. We welcome shareholders to attend the AGM, which will be held at the offices of Addleshaw Goddard LLP, 60 Chiswell Street, London, EC1Y 4AG on 10 May 2017 at 11am.
Finally, as this is my last report to you in this role, I would like to take this opportunity to thank you for your support over the years.
16 March 2017
THE ROLE AND STRUCTURE OF THE BOARD
The Board of Directors (the Board) is responsible for the long term success of the Company and provides leadership to the Group. The Board focuses on setting strategy and monitoring performance, and ensures that the necessary financial and human resources are in place to enable the Company to meet its objectives. In addition, it ensures the appropriate financial and business systems and controls are in place to safeguard shareholders` interests and to maintain effective corporate governance.
The Board is also responsible for ensuring the Company`s continuing commitment to carrying on its business fairly, honestly and openly, with a commitment to zero tolerance towards bribery.
The Board operates in accordance with the Company`s Articles of Association (the `Articles`) and its own written terms of reference. The Board has established a number of Committees as indicated in the chart on page 40. Each Committee has its own terms of reference which are reviewed at least annually.
The Board retains specific powers in relation to the approval of the Bank`s strategic aims and policies and other matters, which must be approved by it under legislation or the Articles. These powers are set out in the Board`s written `Terms of Reference` and `Matters Reserved for the Board` which are approved annually. A summary of the matters reserved for decision by the Board is set out below:
Strategy and management
· Overall strategy of the Group
· Approval of long term objectives
· Approval of annual operating and capital expenditure budgets
· Review of performance against strategy and objectives
Structure and capital
· Changes to the Group`s capital or corporate structure
· Changes to the Group`s management and control structure
· Overall risk appetite of the Group
· Approval of strategic risk management framework
Financial reporting and controls
· Approval of financial statements
· Approval of dividend policy
· Approval of treasury policies
· Approval of significant changes in accounting policies
· Ensuring maintenance of a sound system of internal control and risk management
· Determining the remuneration policy for the Directors, Company Secretary and other senior executives
· Determining the remuneration of the Non-Executive Directors
· Introduction of new share incentive plans or major changes to existing plans
· Review of the Group`s overall governance structure
· Determining the independence of Directors
· The making of political donations
· Approval of the overall levels of insurance for the Group
· Changes to the structure, size and composition of the Board
· Appointment or removal of the Chairman, CEO, SID and Company Secretary
In line with the Code provisions, the Board ensures that a fair, balanced and understandable assessment of the Company`s position and prospects is presented in all financial and business reporting. The Board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives and maintains sound risk management and internal control systems. The Board has established formal and transparent arrangements for considering how they should apply the corporate reporting, risk management and internal control principles and for maintaining an appropriate relationship with the Company`s auditors.
FINANCIAL AND BUSINESS REPORTING
The Board is committed to ensuring that all external financial reporting presents a fair, balanced and understandable assessment of the Group`s position and prospects. Matters considered in establishing this include whether there is consistency between the front and back ends of the accounts; there is a balanced review of the competitive landscape; the language used is sufficiently simple; there is an appropriate analysis of risks facing the business; and there is equal prominence given to statutory and underlying profit. Under the Schedule of Reserved Matters, the Board has responsibility for the approval of all externally-published information including, but not limited to, annual and half-yearly financial statements, regulatory news announcements and publications required by regulators or to satisfy statutory requirements.
The Company has established a disclosure and communications policy to assist the Board in ensuring the quality of its reporting. The policy applies to all communications made by and relating to the Group including written statements in periodic financial reports, news releases, letters and circulars to shareholders and speeches and presentations given by Executives and senior management.
RISK MANAGEMENT AND INTERNAL CONTROL
The Board retains ultimate responsibility for setting the Bank`s risk appetite and ensuring that there is an effective risk management framework to maintain levels of risk within the risk appetite. The Board regularly reviews its procedures for identifying, evaluating and managing risk, acknowledging that a sound system of internal control should be designed to manage rather than eliminate the risk of failure to achieve business objectives.
The Board has carried out a robust assessment of the principal risks facing the business, including those that would threaten its business model, future performance, solvency or liquidity. Further details are contained in the viability statement on page 46.
The Board has established a Risk Committee to which it has delegated responsibility for oversight of the Group`s risk appetite, risk monitoring and capital management. The Risk Committee provides oversight and advice to the Board on current risk exposures and future risk strategy, assists the Board in fostering a culture within the Group which emphasises and demonstrates the benefits of a risk-based approach to internal control and management. Further details of the Group`s risk management approach, structure and principal risks are set out in the risk management report on pages 34 to 45.
The Board has delegated to the Audit Committee responsibility for reviewing the effectiveness of the Company`s internal control systems. The Audit Committee is supported by the internal audit function in discharging this responsibility, and receives regular reports from internal audit as to the overall effectiveness of the control system within the Group. Details of the Group`s review of the effectiveness of the Company`s internal control systems are set out in the Audit Committee report on page 72.
The Company is organised along the `three lines of defence` model to ensure at least three stages of independent oversight to protect the customer and the Company from undue influence, conflict of interest and poor controls.
The first line of defence is provided by the operational business lines which measure, assess and control risks through the day-to-day activities of the business within the frameworks set by the second line of defence. The second line of defence is provided by the risk, compliance and governance functions which include the Board and Executive Committee. As noted above, the Board sets the Company`s risk appetite and is ultimately responsible for ensuring an effective risk management framework is in place. The Compliance Function maintains the `key controls framework` which tracks and reports on key controls within the business to ensure compliance with the main provisions of the (Financial Conduct Authority (`FCA`) and the Prudential Regulation Authority (`PRA`) handbooks. Policy documents also include key controls that map back to the key controls framework.
The third line of defence is the internal audit function.
The Board is committed to consistent application of appropriate ethical standards, and the conduct risk policy sets out the basic principles to be followed to ensure ethical considerations are embedded in all business processes and decision making forums. The Group also maintains detailed policies and procedures in relation to the prevention of bribery and corruption, and a whistleblowing policy.
The Directors who served during the year are listed in the table on page 61. Stephan Wilcke retired on 11 May 2016, Dr David Morgan and Malcolm McCaig retired on 31 December 2016. Andrew Doman and Margaret Hassall were appointed on 26 July 2016.
The Board currently consists of 11 Directors, being the Chairman, two Executive Directors, seven independent Non-Executive Directors and one Non-Executive Director who is not regarded as being independent. The biographies of Directors can be found on pages 56 to 57. The Board approves a formal meeting schedule each year with ad hoc meetings called as and when circumstances require. There is an annual calendar of agenda items to ensure that all matters are given due consideration and are reviewed at the appropriate point in the regulatory and financial cycle; 12 Board meetings were held during 2016. The Board has established a number of committees as shown on the chart on page 40. Each committee has its own terms of reference which are reviewed at least annually and are available on our website www.osb.co.uk. Details of each Committee`s activities during 2016 are shown in the Nomination and Governance Committee, Audit Committee, Risk Committee and Remuneration Committee Chairs` reports on pages 66 to 90. The table below shows each Director`s attendance at the Board and Committee meetings they were eligible to attend in 2016:
|Mike Fairey (Chairman)||10/12||n/a||n/a||4/7||n/a|
|Dr David Morgan||9/12||n/a||n/a||4/7||n/a|
1 All absences are due to scheduling clashes. Some ad hoc meetings were scheduled at short notice
2 Appointed on 26 July 2016
3 Retired on 11 May 2016
4 Mike Fairey did not attend meetings where his successor was discussed
In October 2016, the Board attended a strategy away day. All Directors are expected to attend all meetings of the Board and any committees of which they are members, and to devote sufficient time to the Company`s affairs to fulfil their duties as Directors. Where Directors are unable to attend a meeting, they are encouraged to submit any comments on papers to be considered at the meeting to the Chairman in advance to ensure that their views are recorded and taken into account during the meeting.
Key Board activities during the year included:
· Risk monitoring and review
· Governance and compliance
· External affairs and competitor analysis
· Talent review
· Annual and quarterly reporting
· Customer/brand/product review
· Policy review and update
· Investment proposals
Role of the Chairman and Chief Executive Officer
The roles of Chairman and Chief Executive Officer (CEO) are held by different people. There is a clear division of responsibilities, which has been agreed by the Board and is formalised in a schedule of responsibilities for each.
As Chairman, Mike Fairey is responsible for setting the `tone at the top` and ensuring that the Board has the right mix of skills, experience and development so that it can focus on the key issues affecting the business; and for leading the Board and ensuring it acts effectively. Our CEO Andy Golding has overall responsibility for managing the Group and implementing the strategies and policies agreed by the Board. A summary of the key areas of responsibility of the Chairman and CEO, and how these have been discharged during the year, are set out on page 62.
CHIEF EXECUTIVE OFFICER`S RESPONSIBILITIES
Andy Golding`s responsibilities as CEO are to ensure that the Company operates effectively at strategic, operational and administrative levels. He is responsible for all the Bank`s activities; provides leadership and direction to encourage others to effect strategies agreed by the Board; channels expertise, energy and enthusiasm; builds individuals` capabilities within the team; develops and encourages talent within the business; identifies commercial and business opportunities for the Company, building strengths in key areas; and is responsible for all commercial activities of the Company, liaising with regulatory authorities where appropriate. He is responsible for the quality and financial wellbeing of the Group, represents the Company to external organisations and builds awareness of the Company externally.
An experienced senior executive team comprising of specialists in finance, banking, risk, legal, and IT matters assist the CEO in carrying out his responsibilities. The biographies for the senior executive team can be found on our website at www.osb.co.uk.
ACTIVITIES CARRIED OUT IN 2016
|Chairing the Board and general meetings of the Company.||The Chairman chaired almost all of the Board meetings held in 2016 and the 2016 AGM.|
| Setting Board agenda and ensuring that adequate time is available for discussion of all agenda items.
|The Chairman, in liaison with the Company Secretary, sets the annual calendar of Board business and the agendas for the individual meetings. Time is allocated for each item of business at meetings.|
| Promoting the highest standards of integrity, probity and corporate governance throughout the Company.
|The Board received regular updates from its Committees and reviewed its corporate governance policies and procedures at its meeting in May.|
| Ensuring that the Board receives accurate, timely and clear information in advance of meetings.
|The Chairman, in liaison with the Company Secretary, agrees the information to be circulated to the Board in advance of each meeting.|
| Promoting a culture of openness and debate by facilitating the effective contribution of all Non-Executive Directors.
| The Chairman runs the meetings in an open and constructive way, encouraging the contribution from all Directors. He met formally with the Non-Executive Directors without management present in July so that any concerns could be expressed. Informal meetings are held throughout the year.
| Ensuring constructive relations between Executive and Non-Executive Directors and the CEO in particular.
| Regularly considering succession planning and the composition of the Board.
| The Board receives regular updates from the Nomination and Governance Committee. Details of the Committees activities are explained in the Nomination and Governance Committee report on page 66.
| Ensuring training and development needs of all Directors are met, and that all new Directors receive a full induction.
| The Chairman, in liaison with the Company Secretary, has reviewed Directors training requirements. Details of induction and training held during the year are given on page 64.
| Ensuring effective communication with shareholders and stakeholders.
|The Chairman, with the Board, assisted by the CEO, Chief Financial Officer and Investor Relations Manager, agrees a programme of investor relations meetings. Details of those carried out during the year are shown on page 65.|
The CEO chairs the Executive Committee (ExCo), whose members are the Chief Financial Officer, the Chief Operating Officer, Chief Risk Officer, Group General Counsel and Company Secretary (advisory), Commercial Director, Chief Information Officer, Chief Credit Officer, Sales and Marketing Director and Head of Internal Audit (advisory). There are seven other committees reporting to the ExCo (see the Governance Structure Chart on page 40).
The purpose of the ExCo is to assist the CEO in the performance of his duties, including:
- the development and implementation of the strategic plan including a strong operating model and systems and controls to support the strategic plan;
· the monitoring of operating and financial performance;
· the assessment and control of risk;
· the prioritisation and allocation of resources;
· the development of a high performing senior management team; and
· monitoring customer proposition and experience.
The ExCo`s activities during the year included:
· Business review;
· Capital and funding;
· Human resources and succession planning;
· Governance, control and risk environment - current and forward looking;
· System transformation; and
· Monitoring target operating model progress.
SENIOR INDEPENDENT DIRECTOR
Rod Duke is the Senior Independent Director (SID). His role is to act as a sounding board for the Chairman and to support him in the delivery of his objectives. This includes ensuring that the views of all other Directors are communicated to, and given due consideration by, the Chairman. In addition, the SID is responsible for leading the annual appraisal of the Chairman`s performance.
The SID is also available to shareholders should they wish to discuss concerns about the Company other than through the Chairman and CEO.
The Company Secretary, Jason Elphick, plays a key role within the Company assisting the Directors with their pursuit of profit and growth, acting with integrity and independence to protect the interests of the Company, its shareholders and employees. Jason ensures that the Company complies with all statutory and regulatory requirements and works closely with the Chairman, CEO and Chairs of the Board Committees so that Board procedures (including setting agendas and the timely distribution of papers) are complied with, and that there are good communication flows between the Board, its Committees, senior management and Non-Executive Directors. Jason is also available to Directors to provide advice and support, including facilitating induction programmes and training in conjunction with the Chairman.
Balance and independence
The effectiveness of the Board and its Committees in discharging their duties is essential for the success of the Company. In order to operate effectively, the Board and its Committees comprise of a balance of skills, experience, independence and knowledge to encourage constructive debate and challenge to the decision making process.
The Board comprises nine Non-Executive Directors including the Chairman and two Executive Directors. Eight of the Non-Executive Directors including the Chairman have been determined by the Board to be independent in character and judgement and free from relationships or circumstances which may affect, or could appear to affect, the relevant individual`s judgement. Andrew Doman is considered independent notwithstanding that he is Chairman of Castle Trust Capital plc, an unlisted company, of which Tim Hanford is also a Director. Tim Hanford is not considered to be independent due to his position as a representative of the Major Shareholder. The independence of the Non-Executive Directors is reviewed continually, including formal review annually.
The size and composition of the Board is kept under review by the Nomination and Governance Committee and the Board itself to ensure an appropriate balance of skills and experience is represented. The Board is satisfied that its current composition allows it to operate effectively and that all Directors are able to bring specific insights and make valuable contributions to the Board due to their varied commercial backgrounds. The Non-Executive Directors, and in particular the Independent Non-Executive Directors, provide constructive challenge to the executive management and the Chairman ensures that the views of all Directors are taken into consideration in the Board`s deliberations. Directors` biographies can be found on pages 56 to 57.
Non-Executive Directors terms of appointment
Non-Executive Directors are appointed for terms of three years, subject to annual re-election by shareholders. The initial term may be renewed up to a maximum of three terms (nine years). The terms of appointment of the Non-Executive Directors specify the amount of time they are expected to devote to the Company`s business which is a minimum of two and half days per month, calculated based on the time required to prepare for and attend Board and Committee meetings, the AGM, meetings with shareholders and training. Their commitment also extends to working such additional hours as may be required in exceptional circumstances.
Non- Executive Directors are required to confirm annually that they continue to have sufficient time to devote to the role.
Appointment, retirement and re-election of Directors
The Board may appoint a Director, either to fill a vacancy or as an addition to the existing Board. The new Director must then retire at the next AGM of the Company and is put forward for election by the shareholders. All other Directors are put forward for re-election annually. In addition to any power of removal conferred by the Companies Act, the Company may, by special resolution, remove any Director before the expiration of his period of office and may, subject to the Articles, by ordinary resolution appoint another person who is willing to act as a Director in his or her place.
On admission of its shares to the London Stock Exchange following the IPO in June 2014, the Company entered into a relationship agreement (the `Relationship Agreement`) with its major shareholder OSB Holdco Limited (the Major Shareholder). Pursuant to the Relationship Agreement, the Major Shareholder has been granted the right to appoint one Non- Executive Director to the Board for so long as it holds at least 10% of the Company`s ordinary shares and a further Non-Executive Director for so long as it holds at least 30% of the Company`s ordinary shares. Tim Hanford was appointed by the Major Shareholder. The Directors believe that the terms of the Relationship Agreement enable the Company to carry on its business independently of the Major Shareholder and ensure that all agreements and transactions between the Company, on the one hand, and the Major Shareholder and its associates and/or persons acting in concert with the Major Shareholder or its associates, on the other hand, are at arm`s length and on a normal commercial basis. So far as the Company is aware such terms have been complied with throughout the year.
Conflicts of interest
The Company`s Articles set out the policy for dealing with Directors` conflicts of interest and are in line with the Companies Act 2006. The Articles permit the Board to authorise conflicts and potential conflicts, as long as the potentially conflicted Director is not counted in the quorum and does not vote on the resolution to authorise the conflict.
Directors are required to complete an annual confirmation including a fitness and propriety questionnaire, which requires declarations of external interests and potential conflicts. In addition, all Directors are required to declare their interests in the business to be discussed at each Board meeting.
The Board has also adopted a conflicts of interest policy which includes a procedure for identifying potential conflicts of interest within the Group. Under this procedure, all potential conflicts of interest must be disclosed to the Company Secretary, who advises on proportionate controls to address the conduct risks associated with them. In addition, compliance maintains and reviews a Group wide register of potential conflicts of interest.
The Company`s Articles provide, subject to the provisions of UK legislation, an indemnity for Directors and officers of the Company and the Group in respect of liabilities they may incur
in the discharge of their duties or in the exercise of their powers, including any liabilities relating to the defence of any proceedings brought against them which relate to anything done or omitted, or alleged to have been done or omitted, by them as officers or employees of the Company and the Group. Directors` and officers` liability insurance cover is in place in respect of all Directors.
As set out in the Articles, the business of the Company is managed by the Board who may exercise all the powers of the Company. In particular, save as otherwise provided in company law or in the Articles, the Directors may allot (with or without conferring a right of renunciation), grant options over, offer, or otherwise deal with or dispose of shares in the Company to such persons at such times and generally on such terms and conditions as they may determine. The Directors may at any time after the allotment of any share but before any person has been entered in the Register as the holder, recognise a renunciation thereof by the allottee in favour of some other person and may accord to any allottee of a share a right to effect such renunciation upon and subject to such terms and conditions as the Directors may think fit to impose. Subject to the provisions of company law, the Company may purchase any of its own shares (including any redeemable shares).
TRAINING AND DEVELOPMENT
The Chairman ensures that all Directors receive a tailored induction on joining the Board, with the aim of providing a new Director with the information required to allow him or her to contribute to the running of the Company as soon as possible. The induction programme is facilitated and monitored by the Company Secretary to ensure that all information provided is fully understood by the new Director and that any queries are dealt with. Typically, the induction programme will include a combination of t...
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