Interim Results for the six months ended 30.06.16

CEO Statement

Shawbrook Group plc

Shawbrook Group plc ("Shawbrook" or "the Group") today announces continued strong underlying^a performance, in line with market expectations for the six months to 30 June 2016.

Commenting on the results, CEO Steve Pateman said:

"I am delighted to report that the business achieved a strong first half performance with underlying Profit Before Tax ("PBT") up 14% from the same period in 2015 to £38.0 million (statutory PBT: £35.2 million).  This strong result is after taking into account the additional impairment charge announced on 28 June 2016 and absent  this charge, underlying PBT in H1 2016 would have been 41% higher when compared to H1 2015 (78% on a statutory PBT basis). This performance was driven by continued growth in the book to £3.8bn as we progressively increased originations by 22% to £993 million, with strong growth across all three divisions.  

We have continued to deliver strong, sustainable returns with an underlying 12 month rolling RoTE to 30 June 2016 of 21.2%, 23.3% excluding the impairment charge (statutory RoTE: 21.2%).  This reflects our disciplined approach to strong risk adjusted returns alongside continued investment to support the future growth of the loan book. Cost to income ratio of 47.9% (statutory cost to income ratio: 50.2%) demonstrates the benefits arising from economies of scale. Underlying EPS increased to 11p (statutory EPS: 10p) and we reaffirm our previous dividend guidance.

On management, I'm delighted to announce we have appointed Angela Wakelin to Chief Operating Officer who will lead the work on implementing the underlying operating model to support our growth strategy. This is a further important step in building a strong team at both a business and functional level to deliver on our stated goals and ambitions.

It is clear from the rapidly evolving and ever changing view of the future for the UK economy post the decision to leave the EU, that the situation will remain fluid for some time; we have already seen economic forecasts move from a near certain recession on the 24^th June to lower but still respectable growth rates for 2017 in the latest IMF forecasts. Much remains to be resolved and this will undoubtedly influence consumer and business confidence as the future of our relationship with the EU becomes clearer - at present we are not seeing any material change in activity and indeed some markets that slowed in the run up to the Referendum have picked up. However it is too soon to fully assess the medium term impacts on the broader economy given the number of outcomes that remain possible.

The significant structural opportunities for Shawbrook to grow and to grow safely at the returns we have targeted remain and if anything, the probability of those structural opportunities being greater than we envisaged is higher as the incumbent banks accelerate cost reduction programmes to offset compressed margins in the safe haven markets upon which they will continue to focus.

We did not extend our risk appetite during the more benign part of the cycle and we therefore do not anticipate making fundamental adjustments to accommodate this potential cyclical downturn, this conservative approach is reflected in where we see our cost of risk now and going forward. 

These results reflect the strength of our business and allow us to view the future with confidence; we have scale, resilience and opportunities for growth; our risk appetite is appropriately positioned as is our balance sheet and we have a management team that is experienced and capable of delivering the strategic goals we have set out."

 

Basis of preparation

The statutory results have been prepared in accordance with International Financial Reporting Standards (IFRS). Where appropriate, certain aspects of our results are presented to reflect the Board's view of the Group's underlying performance without distortions caused by non-recurring items that are not reflective of the Group's ongoing business. These aspects are referred to as "underlying results" for the purposes of the Interim Report. Underlying results should be considered in addition to, and not as a substitute for, the Group's statutory results and the Group's presentation of underlying results should not be construed as an indication that future results will be unaffected by exceptional items.

In order to ensure equal prominence of both statutory and underlying results, we detail below a comparison of the statutory results to the underlying results:

	H1 2016	H1 2015	FY 2015
	(£m)	(£m)	(£m)
Interest income, net fee and operating lease income	140.1	107.5	230.7
Interest expense and similar charges	(40.8)	(30.4)	(63.8)
Net Operating Income	99.3	77.1	166.9
Costs and provisions	(49.8)	(47.8)	(90.3)
Impairment losses on financial assets	(14.3)	(4.6)	(6.5)
Statutory Profit Before Taxation	35.2	24.7	70.1
Income tax charge	(9.6)	(5.9)	(11.6)
Profit for the period, attributable to owners	25.6	18.8	58.5
Underlying Adjustments
IPO Transaction Costs	-	8.2	8.9
IFRS 2 Charge	1.8	-	-
Corporate Activity Costs	1.0	0.3	1.1
Underlying Profit Before Taxb	38.0	33.2	80.1
Income tax on an underlying basis	(10.4)	(6.8)	(16.0)
Underlying profit for the period, attributable to owners	27.6	26.4	64.1

 

 

 

The underlying adjustments are as follows:

·     IPO costs include expenses incurred in 2015 in relation to the successful listing of Shawbrook Group plc on the LSE main market and recognised in the Income Statement. A further £3.7m was recognised in equity.

 

·     IFRS 2 charges recognised in relation to share based awards made to Steve Pateman (Chief Executive Officer) in H1 2016, which were fully satisfied by Special Opportunities Fund (Guernsey) LP. This charge is a transfer from P&L to retained earnings and results from a one-off award.

 

·    Corporate activity costs in 2015 and H1 2016 include the incremental costs of raising additional deposits to fund the  property asset portfolio acquisition, which will be completed in July 2016. H1 2015 corporate activity costs includes £0.3 million of deferred consideration incurred in connection with the acquisition of Money2Improve in November 2012. Corporate activity costs in FY15 include £0.6 million of final deferred consideration incurred in connection with the acquisition of Money2Improve in November 2012.

 

Comparison of statutory KPIs to underlying KPIs:

 

Certain financial measures disclosed in this report do not have a standardised meaning prescribed by the International Financial Reporting Standards (IFRS) and may therefore not be comparable to similar measures presented by other issuers. These measures are deemed to be Alternative Performance Measures ("APM"). All APMs referred to in this report are annotated and defined and the definitions of these measures can be found on page 16 of this report.

 

Highlights

·     The Group delivered a strong performance in H1 2016, with underlying PBT increasing by 14% to £38.0 million (H1 2015: £33.2 million) and statutory PBT increased by 43% to £35.2 million (H1 2015: £24.7 million).

·     The Group continues to maintain its returns discipline, resulting in a 12 month rolling RoTE⁽¹¹⁾ of 21.2% (23.3% when excluding the impairment charge) which compares to a 2015 RoTE of 22.7%.  

·     Underlying net interest margin⁽⁶⁾  for H1 2016 was 5.6% compared with 6.1% in H1 2015 and is stable against Q1 2016. The  year on year reduction was driven by the mix impact highlighted in the Q1 2016 IMS following the acquisition of the lower yielding yet strong RoTE property portfolio in December 2015.

·     The Group continues to benefit from scale efficiencies and has achieved a reduction in the underlying cost to income ratio⁽¹²⁾ to 47.9% (H1 2015: 51.0%) whilst continuing to invest in people, technology and infrastructure to support the delivery of the Group's strategy. The period average headcount increased to 556 during H1 2016 compared to an average of 514 in FY 2015. Key new initiatives include building out the direct Personal Loan proposition, lending into retirement mortgage product, building out our regional SME footprint and beginning the test and learn strategy in development finance.

Progressively increase originations

·     The Group has achieved a 14% increase in the loan book from £3.4 billion at 31 December 2015 to £3.8 billion at 30 June 2016. Gross organic originations amounted to £993 million, an increase of 22% compared to H1 2015.

Ø Organic originations in the Property Finance division increased by 19% from £416 million in H1 2015 to £495 million in H1 2016 as volumes have remained robust following the stamp duty changes which came into effect on 1 April 2016. Included in the total originations of £495 million are second charge mortgage originations of £103 million. Despite disruption arising from the transition from the Consumer Credit Act to the Mortgage Credit Directive in the second charge mortgage market, originations have remained in line with management's expectations as the division worked closely with our strategic partners to ensure a smooth and effective transition.

Ø The Business Finance division achieved £363 million of organic originations, a 19% increase from £306 million in H1 2015. This growth has been driven by strong growth in the Group's Structured Finance portfolio. We have launched new product ranges in two specialist sectors of Marine Leisure and Technology Finance which also contributed to the division's success.

Ø Consumer lending originations for the period amounted to £135 million, an increase of 50% from the same period in 2015. The Consumer lending division is in the process of developing a direct to consumer proposition for the personal loans products which is expected to go live in H2 2016. 

 

 

 

Maintain excellent credit quality

·     The Group announced an additional impairment charge of £9 million due to irregularities on a number of loans in one office of our Asset Finance Business that did not meet the business's strict lending criteria.  This isolated control breach was identified by the Group's upgraded risk management framework, systems and controls.  Management believes that the £9 million provision allocated to this isolated incident is sufficiently prudent to cover the risk of realised loss on the impacted lease portfolio of £14.7 million.

·     Excluding this isolated breach, the Group continues to experience a low cost of risk⁽⁸⁾ (H1 2016: 34bps excluding/80bps including the breach), reflective of a benign economic environment and the continued focus on originating high quality business against prudent credit principles that have remained largely unchanged since the inception of the Bank.

·      The current benign environment is reflected in the Group's non-performing loan ratios. As at 30 June 2016, 1.2% of the Group's loans and advances to customers were 3+ months in arrears or impaired, with a coverage ratio of 55%. At 31 December 2015, these metrics were 0.8% and 54% respectively.

Maintain conservative foundations

·     The Group maintains a strong capital position, with a CET1⁽²⁰⁾ ratio of 12.4% (31 December 2015: 14.4%) and a total capital ratio⁽²¹⁾ of 15.5% (31 December 2015: 18.0%). Including unverified profits results in a CET1⁽²⁰⁾  ratio of 13.0% and a total capital ratio⁽²¹⁾ of 16.1%. This allows the Group to continue to execute its strategy of constantly delivering growth in customer loans. The prudently positioned leverage ratio was stable at 30 June 2016 at 7.6% (8.0% when including unverified profits, 31 December 2015: 7.9%).

·     The liquidity ratio⁽¹⁸⁾ of 18.5% at 30 June 2016 compares with 25.8% at 31 December 2015 as the Group held excess liquidity at 31 December 2015 in relation to the purchase of the Property portfolio.

·     The Group continued to benefit from the FLS, with total drawings amounting to £307 million at 30 June 2016 (£270 million T-Bills available net of repo agreements) with further capacity to utilise.

·     The Group remains predominantly retail deposit funded, with a loan to deposit ratio⁽¹⁷⁾ of 108% (31 December 2015: 104%).

Outlook                                                

Following a strong H1 2016 and a solid H2 2016 pipeline, the Group is preparing to adapt to the macroeconomic environment following the referendum result for the UK to leave the European Union. The macroeconomic outlook is mixed with many economists expecting a softening of economic conditions in the short to medium term.

The BoE is preparing itself for a slowdown in the UK economy and has laid the ground for a possible interest rate cut or the need to introduce a monetary stimulus over the coming months. In addition, the prevailing political and economic uncertainty could result in deferred investment decisions and a decline in the demand for borrowing.  

Despite the negative macroeconomic outlook, a number of opportunities may present themselves as the incumbent banks choose to further exit non-core markets. The interest rate floors in some of our loan portfolios also alleviate the potential downside on gross asset yields from a reduced base rate, supporting lending margins. 

Against this backdrop, we will continue to be cautious yet confident in our outlook and we are well prepared for a softer economic environment. Our structural opportunities remain strong and we expect to grow our business against the strong return metrics we detailed on 5 May 2016 at our Capital Markets Day.

Business Review

Group Key Performance Indicators (refer to page 16 for Notes to the Business Review)

		H1 2016 (1)	H1 2015 (1)	FY 2015
Assets
Average principal employed (£m)(2)		3,583.5	2,551.2	2,712.8
Loans and advances to customers (£m)(3)		3,823.3	2,716.7	3,361.0
Originations (£m)		992.7	811.9	1,684.9
Profitability (on an underlying basis)d
Gross asset yield (%)(4)		7.9	8.5	8.5
Liability yield (%)(5)		(2.2)	(2.4)	(2.3)
Net interest margin (%)(6)		5.6	6.1	6.2
Management expenses ratio (%)(7)		(2.7)	(3.1)	(3.0)
Cost of risk (%)(8)		(0.80)	(0.36)	(0.24)
Return on lending assets before tax (%)(9)		2.1	2.6	3.0
Return on lending assets after tax (%)(10)		1.5	2.1	2.4
12-month rolling return on tangible equity (%)(11)		21.2	20.4	22.7
Cost/income ratio (%)(12)		47.9	51.0	48.3
Earnings per share (pence)		10.2	8.0	24.1
Asset quality
Ratio of impaired loans (%)(13)		0.8	0.7	0.5
Ratio of past due over 90 days and impaired loans (%)(14)		1.2	0.9	0.8
Forbearance cases(15)		800	720	559
Forbearance principal employed (£m)(16)		29.2	12.3	19.0
Balance sheet
Loan-to-deposit ratio (%)(17)		108.0	102.0	104.2
		H1 2016 (1)	H1 2015 (1)	FY 2015
Liquidity
Liquidity ratio (%)(18)		18.5	17.9	25.8
Ratio of liquidity buffer eligible assets to liquidity balances (%)(19)		95.9	94.5	96.2
Capital and leverage
CET1 ratio (%)(20)	12.4		14.5	14.4
Total capital ratio (%)(21)	15.5		16.4	18.0
Leverage ratio (%)(22)	7.6		8.7	7.9
Capital and leverage (including unverified profits)
CET1 ratio (%)(20)	13.0		15.2	14.4
Total capital ratio (%)(21)	16.1		17.2	18.0
Leverage ratio (%)(22)	8.0		9.2	7.9
Employees - Full time equivalents (period average)	556		489	514

 

Underlying income statements

 Underlying income statements (continued) 

 

 

 

Underlying income statements (continued) 

	FY 2015
	Adjustments
	Statutory accounts basis	IPO transaction costs(23)		Corporate activity costs(25)		DTA revaluation(27)	Underlying results
	(£m)
Interest income and similar income	216.9	-	-		-		216.9
Interest expense and similar charges	(63.8)	-	0.5		-		(63.3)
Net interest income	153.1	-	0.5		-		153.6
Operating lease rentals	14.9	-	-		-		14.9
Other income	1.1	-	-		-		1.1
Depreciation on operating leases	(12.2)	-	-		-		(12.2)
Net income from operating leases	3.8	-	-		-		3.8
Fees and commission income	13.1	-	-		-		13.1
Fees and commission expense	(2.8)	-	-		-		(2.8)
Net fee and commission income	10.3	-	-		-		10.3
Fair value losses on financial instruments	(0.3)	-	-		-		(0.3)
Net operating income	166.9	-	0.5		-		167.4
Administrative expenses	(88.7)	8.9	0.6		-		(79.2)
Impairment losses on financial assets	(6.5)	-	-		-		(6.5)
Provisions for liabilities and charges	(1.6)	-	-		-		(1.6)
Profit before taxation	70.1	8.9	1.1		-		80.1
Income tax charge(26)	(14.8)	(1.0)	(0.2)		-		(16.0)
Impact of DTA revaluation(27)	3.2	-	-		(3.2)		-
Profit for the period, attributable to owners	58.5	7.9	0.9		(3.2)		64.1

 

 

Divisional performance (on an underlying basis)^e

Property Finance

Provides mortgages for investors, businesses and personal customers. It serves professional landlords and property traders in residential and commercial asset classes across long term and shorter term finance and it lends to trading businesses to fund the acquisition and refinancing of business premises. The division also serves the needs of personal customers through the provision of mortgages secured by second charge on the main residence. 

Property Finance	H1 2016	H1 2015	FY 2015
Assets
Average principal employed (£m)(2)	2,185.3	1,504.6	1,592.0
Loans and advances to customers (£m)(3)	2,314.3	1,603.8	2,083.1
Of which, Residential Lending	553.0	456.2	487.2
Originations (£m)	495.0	416.0	831.8
Profitability
Gross asset yield (%)(4)	6.7	7.1	7.2
Liability yield (%)(5)	(2.4)	(2.4)	(2.4)
Net interest margin (%)(6)	4.3	4.7	4.8
Management expenses ratio (%)(7)	(0.7)	(0.9)	(0.9)
Cost of risk (%)(8)	(0.06)	(0.05)	(0.06)
Return on lending assets before tax (%)(9)	3.5	3.8	3.9
Asset quality
Ratio of impaired loans (%)(13)	0.2	0.3	0.2
Ratio of past due over 90 days and impaired loans (%)(14)	0.5	0.6	0.5
Forbearance cases(15)	192	188	184
Forbearance principal employed (£m)(16)	8.4	5.4	7.7

 

The division has a well-diversified product range serving property professionals in both residential and commercial investment markets, across short term and more traditional mortgage terms. Whilst the majority of the loans are to established landlords and property professionals, it also lends to well-established SME owner-occupiers. 86% of originations in H1 2016 were supported by residential property, 8% by mixed commercial and residential property and 6% by commercial property.

In H1 2016 the Property Finance division achieved strong growth in the loan book to £2.3 billion (H1 2015: £1.6 billion); continued its excellent loan performance with a  H1 2016 gross asset yield⁽⁴⁾ of 6.7% (H1 2015: 7.1%); the drop was primarily a result of higher yielding back book being replaced with lower yielding front book. We continued to retain strong credit discipline in terms of loan to value and income coverage ratios.

 

Divisional performance (Continued)

Alongside the strong financial performance the division also achieved a number of other notable successes during H1 2016, including:

·     A number of award successes, including "Best Secured Loan Provider" and "Best Commercial Mortgage Provider" at the annual Moneyfacts Awards, and "Bridging Lender of the Year" and "Best Secured Loans Lender" at the 2016 What Mortgage Awards.

·     A successful implementation of the Mortgage Credit Directive as our second charge mortgage activity transitioned from consumer credit to mortgage conduct of business supervision. Our systems and general preparedness were well received by the intermediary market.

·     Delivering a smooth customer service during the abnormal peak of activity in March created by the stamp duty surcharge deadline.

·     Launching both electronic signature in our second charge mortgage processes and an online automated decision tool for our specialist BTL product range.

·     Establishing our development finance team in line with our stated strategy to add this market to our range of specialist markets served.

Business Finance

Primarily finances UK SME businesses either for fixed 'hard' assets or working capital solutions through using 'asset based lending'. In addition, the division provides secured senior debt facilities to smaller UK financial institutions through wholesale and block facilities.

Business Finance	H1 2016	H1 2015	FY 2015
Assets
Average principal employed (£m)(2)	1,028.1	805.1	851.7
Loans and advances to customers (£m)(3)	1,094.9	852.6	944.5
Originations (£m)	362.7	306.0	626.3
Profitability
Gross asset yield (%)(4)	8.8	9.9	9.8
Liability yield (%)(5)	(2.2)	(2.3)	(2.2)
Net interest margin (%)(6)	6.7	7.6	7.5
Management expenses ratio (%)(7)	(1.3)	(1.7)	(1.6)
Cost of risk (%)(8)	(2.01)	(0.65)	(0.45)
Return on lending assets before tax (%)(9)	3.3	5.3	5.5
Asset quality
Ratio of impaired loans (%)(13)	1.8	0.8	0.7
Ratio of past due over 90 days and impaired loans (%)(14)	2.3	0.8	0.9
Forbearance cases(15)	187	38	126
Forbearance principal employed (£m)(16)	18.1	3.6	9.6

 

 

Divisional performance (Continued)

In H1 2016, Business Finance achieved strong growth in the loan book of 28.4% to £1.1 billion (H1 2015: £0.9 billion). Gross asset yield⁽⁴⁾ decreased from 9.9% in H1 2015 to 8.8% in H1 2016, due primarily as a result of stronger originations in the Structured Finance portfolios, which are lower yielding but generate strong risk adjusted returns.  The Asset Finance market continues to be subject to increasing competition, particularly as new lenders emerge in the space; however we continue to deliver exceptional customer service through speed and certainty of delivery, together with continuing to diversify our specialisms enabling us to maintain growth and strong returns in this market.

The awards received during H1 2016 are testament to our commitment to deliver excellent service to our customers. The four most notable awards received during the period are:

-      Insider Dealmakers South East - Asset Based Lender of the year

-      High Potential Business Awards UK - Asset Based Lender of the year

-      ACQ Global Awards - Asset Based Lender of the year

-      Business Money Intermediary Index - Winner (4^th consecutive year)

As noted in the Trading Update released on 28 June 2016, Asset Finance was subject to irregularities in one of its offices resulting in the Group holding a provision of £9 million in H1 2016. This has resulted in the Business Finance cost of risk⁽⁸⁾ increasing from 0.7% in H1 2015 to 2.0% in H1 2016. Excluding the impairment charge relating to these irregularities, the cost of risk for Business Finance would be 0.4% for the period. The irregularities identified have now been rectified and the Group is confident that the upgraded risk management systems and controls will prevent the recurrence of such control breaches in the future.

The control breach has not changed our focus on our core customer segments and we continue to deliver on our mandate to provide finance to poorly served sectors. During H1 2016, we have launched product ranges into two adjacent specialist sectors, namely 'Marine Leisure' and 'Technology Finance'.

 

Divisional performance (Continued)

Consumer Lending

The Consumer Lending subdivision provides unsecured loans for a variety of purposes, primarily focused on home improvements, holiday ownership, personal loans and certain retailers.

Consumer lending	H1 2016	H1 2015	FY 2015
Assets
Average principal employed (£m)(2)	370.1	241.5	269.1
Loans and advances to customers (£m)(3)	414.1	260.3	333.4
Originations (£m)	135.0	89.9	226.8
Profitability
Gross asset yield (%)(4)	10.9	10.9	10.6
Liability yield (%)(5)	(2.5)	(2.6)	(2.6)
Net interest margin (%)(6)	8.4	8.3	8.1
Management expenses ratio (%)(7)	(2.6)	(3.1)	(3.0)
Cost of risk (%)(8)	(1.79)	(1.34)	(0.67)
Return on lending assets before tax (%)(9)	4.0	3.8	4.4
Asset quality
Ratio of impaired loans (%)(13)	2.2	2.9	1.7
Ratio of past due over 90 days and impaired loans (%)(14)	2.2	2.9	1.7
Forbearance cases(15)	421	494	249
Forbearance principal employed (£m)(16)	2.7	3.3	1.7

 

In H1 2016 the Consumer division achieved strong growth in the loan book to £0.4 billion (H1 2015: £0.3 billion). The  Gross asset yield⁽⁴⁾ has proven stable as we have begun the marginal shift in the mix towards personal loans in line with our stated strategy (12% of the portfolio).

We continued to build strategic partnerships with key suppliers in the lending portfolio, strengthening our existing relationship with Anglian Windows, leveraging our industry expertise, flexibility and consultative approach to secure more long term, deeper relationships across the portfolio.

 

Divisional performance (Continued)

Savings

The Savings subdivision offers a range of savings account options.

	H1 2016	H1 2015	FY 2015
Deposit book (£m)	3,503.6	2,620.6	3,186.4
Retail Cost of funds (%)*	2.12%	2.25%	2.18%

 

* - Retail cost of funds is calculated as the interest expense on retail deposits divided by the monthly average retail deposit balance, annualised for the half year calculations.

We continue to build the deposits distribution capability with the addition of Primetime Retirement during H1 2016, enabling Shawbrook to provide savings solutions to customers within their pension wrapper.

During H1 2016 we invested in the digitising of the savings business from an application and servicing perspective. Over 85% of customer applications were made via the online application process (83% in 2015). 63% of customers are now registered and can service their accounts online (53% at the end of 2015).

Our product base has grown with the introduction of Easy Access during December 2015 resulting in origination of 7,250 accounts since launch and origination balances exceeding £230 million.

 

Notes to the Business Review and definitions of APMs

Percentages and certain amounts included in this Business Review have been rounded for ease of presentation. Accordingly, figures shown as totals in certain tables may not be the precise sum of the figures that precede them.

 

1.        All KPI ratios have been annualised for H1 2016 and H1 2015 based on the 182/181 calendar days between January and June.

2.        Average principal employed is calculated as the average of monthly closing loans and advances to customers, net of impairment provision, from the Group's financial reporting and management information systems, including operating leases, which are classified as property, plant and equipment in the Group's statutory accounts.

3.        Loans and advances to customers is presented net of impairment provision and includes operating leases, which are classified as property, plant and equipment in the Group's statutory accounts.

4.        Asset yield is calculated as the sum of underlying interest receivable and similar income, net income from operating leases, net fee and commission income and fair value losses on financial instruments, divided by average principal employed.

5.        Liability yield is calculated as underlying interest expense and similar charges divided by average principal employed.

6.        Net interest margin is calculated as underlying net operating income divided by average principal employed.

7.        Management expenses ratio is calculated as underlying administrative expenses plus provisions for liabilities and charges, divided by average principal employed.

8.        Cost of risk is calculated as impairment losses on financial assets divided by average principal employed.

9.        Return on lending assets before tax is calculated as underlying profit before taxation divided by average principal employed.

10.     Return on lending assets after tax is calculated as underlying profit for the year attributable to owners divided by average principal employed.

11.     Return on tangible equity is a twelve month rolling KPI, calculated as underlying profit attributable to owners for the 12 months ending on the reporting period in question divided by average tangible equity. Average tangible equity is calculated as total equity less intangible assets at the beginning of a period plus total equity less intangible assets at the end of the period, divided by two. Adjustments have been made to tangible equity to include net IPO proceeds of £82m across all pre-IPO periods for comparability purposes.

12.     The cost/income ratio is calculated as underlying administrative expenses plus provisions for liabilities and charges, divided by underlying net operating income.

13.     The ratio of impaired loans is calculated by dividing impaired loans and advances to customers by total gross loans and advances to customers.

14.     The ratio of past due over 90 days and impaired loans is calculated by adding past due over 90 days loans and advances to customers and impaired loans and advances to customers and dividing the sum by total gross loans and advances to customers.

15.     Forbearance cases is the number of cases for which the Group has granted concession to the borrower due to reasons relating to actual or apparent financial stress and relates to accounts subject to forbearance measures at reporting date.

16.     Forbearance principal employed is the sum of the principal employed in each of the forbearance cases.

17.     The loan-to-deposit ratio is calculated as loans and advances to customers divided by customer deposits.

18.     The liquidity ratio is calculated as the liquidity reserve divided by customer deposits. The liquidity reserve comprises cash and balances at central banks (excluding mandatory balances held with central banks), loans and advances to banks, off balance sheet T-Bills but excludes additional available liquidity from pre-positioned assets.

19.     The ratio of liquidity buffer eligible assets to liquidity balances is calculated as the proportion of liquidity balances that are eligible for use in the liquidity buffer to total liquidity balances.

20.     The CET1 (i.e. Common Equity Tier 1) ratio is calculated as common equity tier 1 capital divided by risk-weighted assets at the Group level. For the H1 2016 and H1 2015 ratios, half year retained earnings have been included. Unverified profits are excluded from the capital balances.

21.     The total capital ratio is calculated as total regulatory capital divided by risk-weighted assets at the Group level. For the H1 2016 and H1 2015 ratios, half year retained earnings have been included.  

22.     The leverage ratio is calculated as common equity tier 1 capital divided by the sum of total assets less intangible assets.

23.     IPO costs include expenses incurred in 2015 in relation to the successful listing of Shawbrook Group plc on the LSE main market and recognised in the Income Statement. A further £3.7m was recognised in equity

24.     IFRS 2 charges recognised in relation to share based awards made to Steve Pateman upon joining the Group.  This charge is a transfer from P&L to retained earnings.

25.     H1 2016 corporate activity costs primarily relate to the interest expense incurred on the additional deposits raised ahead of the transfer of funds for the Property portfolio acquisition to be completed in July 2016. H1 2015 corporate activity costs include £0.3m of deferred consideration incurred in connection with the acquisition of Money2Improve in November 2012. FY 2015 corporate activity costs include a final £0.6 million of deferred consideration incurred in connection with the acquisition of Money2Improve in November 2012. In addition, costs incurred in relation to the acquisition of three asset portfolios (including the incremental costs of raising additional deposits to fund inorganic growth) have been excluded from the underlying results.

26.     Income tax charge on underlying adjustments has been calculated at the implied corporation tax rate. Income tax charge on certain underlying adjustments has been assumed as £nil on the basis of being disallowable for tax purposes.

27.     The impact of the DTA revaluation following the implementation of the 8% Corporation Tax surcharge for bank profits in excess of £25 million was a benefit of £3.2 million. Given the one-off nature of this benefit, we have sought to adjust for it in our underlying results.

 

 

Risk Management Report

TOP AND EMERGING RISKS

The Group announced in 2016 that going forwards it would be organised around three lending divisions: Property Finance; Business Finance; and Consumer Lending.  In respect of risk management the Group continues to invest in embedding its Risk Management Framework and Risk Appetite that were reported in the 2015 Annual Report and Accounts.  The Group believes that following the UK vote to leave the EU it is appropriate to be cautious in its outlook and prepare for a softer economic environment.  The Group's Risk Management Framework and governance plays a key role in monitoring the outlook and supporting the divisions in carefully setting out their preparedness plans.

The Group has reviewed its Top and Emerging Risks and concluded that a number of risks increased from 31 December 2015.  The following table summarises the Top and Emerging Risks to which the Group is exposed, along with the Group's approach to mitigating these risks and the change in assessment since 31 December 2015.  This summary should not be regarded as a complete statement of all potential risks faced by the Group but rather those top and emerging risks which the Group currently believes may have a significant impact on the Group's performance and future prospects.  Further detail on the Top and Emerging Risks and the Group's approach to managing these risks is set out on page 40 of the 2015 Annual Report and Accounts which can be accessed through the Group's website at Shawbrook.co.uk.

The Group Risk function has continued its work on enhancing the overall Enterprise Risk Management Framework under an agreed 2016 Risk Plan. In broad terms the plan enhances the overall risk governance framework at the Group level and oversees the continued development of the 1st line of defence in each of the divisions. The progress against this plan is reported through the Enterprise Risk Management Committee (ERMC) and to Board and Board Risk Committee.

 

Key:             ↔  No Change                                ↓ Risk Decreased                          ↑Risk Increased

Risk Type	Risk	Mitigation	Change
Competitive Environment	The Group's financial position continues to improve with increasing profitability and strong capital ratios.  However, rising competition and changing economic conditions in the UK, particularly in England where the majority of the Group's operations are based, could affect the Group's performance in a number of ways including:   -          Rising competition could compress Group margins below current levels.   -          Increased funding costs resulting from changes in the Regulatory, Economic and  Political environment at a macro level;   -          A reversal in the UK economy could drive higher impairments through increased defaults and/or reductions in collateral values.	The Group operates in specialist areas where management and staff have significant expertise and a deep understanding of customer needs to drive customer service and a long term relationship with its customers through the cycle.   All loans are written only after thorough, bespoke underwriting to SMEs and consumers with a proven ability to repay and, in the main, sufficient security.  Lending mandates are tiered to ensure independent review by a centralised first line credit team. Material loans over £300k in Property and Business Finance are approved by a centralised Credit Approval Committee that includes members from the Group Risk function.    The Group undertakes a comprehensive assessment of its Risk Appetite and stress tests its lending and deposit portfolios to ensure that it can meet its objectives in severe but plausible economic conditions.   The Group also establishes a prudent balance sheet strategy with robust levels of capital, liquidity and a prudent funding structure.   The Group monitors its chosen markets on a regular basis and regularly reviews adjacent markets where it has expertise and reviews opportunities for inorganic growth.	↑   There is clear uncertainty politically, economically and in terms of how the UK will separate from the EU.  The Group believes that it is appropriate to be cautious in its outlook and prepare for a softer economic environment.
Pace of Regulatory Change	The prudential and conduct regulatory regimes are subject to change and could lead to increases in the level and quality of capital that the Group needs to hold to meet regulatory requirements.	The regulatory environment continues to evolve and change. The Group actively engages with regulators, industry bodies and advisors to actively engage in consultation processes.	↑   The Financial Services Sector remains subject to significant scrutiny.  The Group believes that the potential for regulatory change continues to increase.    The FSB has suspended the increase in the Countercyclical Buffer to 50bps in March 2017 to at least June 2017.  The projected normalised level of 100bps represents an additional capital requirement to the Bank given its concentration in the UK market place.   The Group welcomes the Bank of England's consultation on underwriting standards in Buy to Let and is closely monitoring the development of the Buy to Let sector following tax changes announced by the Treasury in the Spring budget.
Intermediary and Outsourcing	The Group is a specialist lending and savings bank for SMEs and consumers. The specialist nature of some of its lending through Intermediaries and Brokers may mean that some customers find themselves with an increased risk of an unfavourable outcome. For the Group this may also lead to increased conduct related redress, additional fraud or credit risk impairments.	The Group works with carefully selected Intermediary and Broker partners who take on the role of advising SME and consumers. The Group recognises the importance of taking ownership for the lending it originates and continually undertakes a review of their performance in delivering good outcomes for SMEs and consumers. In addition, experienced underwriters perform thorough checks on each application.   The Group continually reviews its risk management approach to intermediaries, brokers and outsource partners to reflect the regulatory environment that the Bank operates in.	↔   The Group works with Intermediaries and Brokers to support its progressive increase in lending originations and to service its loan portfolio.  The Group continues to develop its control environment to manage this risk within appetite and considers that the risk is stable.
Pace, Scale of Change and Management Stretch	The scale and pace of change could create delivery challenges and may lead to a disruption of the Group's plans and the delivery of its objectives.	The Group understands the need to manage change without disrupting the Group's operating environment and impacting customer service. These operational risks are managed through a strong focus on change governance and programme management disciplines and led by a dedicated Executive member. The risks are further mitigated by the Group's significant strengthening of the senior management team.   The Group has a formal Operating Committee that is set-up to prioritise change and provide effective oversight of the change portfolio to ensure that requirements are delivered within budget and on time.   The Group has detailed succession plans in place to identify emergency cover and forward plans for up to two years to mitigate management stretch.	↔   The Group continues to manage effectively its change portfolio.
Information Security	The pace of technological development is changing the way in which SMEs and consumers want to engage with the Group leading to a number of risks:   - Increasing customer demand may exceed the Group's ability to provide highly reliable and widely available systems and services;   - The ever evolving nature and scale of criminal activity increases the likelihood and severity of attacks on the Group's systems; and   - Franchise value and customer trust could be significantly eroded by a sustained hack of the Group's systems leading to a diversion of funds or the theft of customer data.	The Group continually reviews its control environment for Information Security to reflect the evolving nature of the threats that the Bank is exposed to.   The Group's strategy for mitigating Information Security risk is comprehensive including: a documented cyber-strategy, ongoing threat assessments, regular penetration testing, the wide deployment of detective controls and a programme of education and training.	↔   The Group continues to invest in its IT infrastructure and control environment to reduce its exposure to cyber-attack and the impact of colleagues inadvertently exposing the Bank to information security risk.

 

 

 

 

 

 

 

 

 

 

RISK GOVERNANCE

The Group has continued to invest in its risk management capabilities.  In March 2016, the Group enhanced its risk governance arrangements with the inception of an Enterprise Risk Management Committee (ERMC).  The ERMC is chaired by the Chief Risk Officer and supports the Chief Executive in providing second line oversight of the Group's enterprise wide risk profile and its Key Risk Categories.   The Bank's Key Risk Categories remain unchanged and are summarised on page 33 of the 2015 Annual Report and Accounts.   The changes to the oversight of the Group's Key Risk Categories are shown in the table below.  The Executive has also established a formal Operating Committee.

Board / Board Risk Committee
	Oversight			Board Audit Committee
Risk Category	First Line	Second Line		Third Line
Credit Risk	Credit Management in Business Areas & Treasury	Credit Risk	Enterprise Risk Management Committee (ERMC)	Internal Audit
Liquidity &    Market Risk	Treasury	Market & Liquidity Risk & Finance	ALCo
Operational Risk	All Business Divisions and functional areas	Operational Risk	Enterprise Risk Management Committee (ERMC)
Conduct, Legal and Compliance Risk	All Business Divisions and functional areas	Conduct and Compliance Risk	Enterprise Risk Management Committee (ERMC)
Strategic Risk	Exec Directors & Senior Management	Finance	ExCo
Systems and Change Risk	IT/Change Management	Operational Risk	Operating Committee

 

 

COMMITTEE STRUCTURE AND RISK RESPONSIBILITIES

The ERMC has simplified responsibility for oversight and certain approvals across the Bank's Management Committees and has replaced the Credit Committee and the Conduct and Operational Risk Committee.  The existing Impairment Committee and the Credit Approval Committee now escalate to the ERMC.  The ERMC has also established a number of groups and forums to support the CEO and CRO in the oversight of the Group's risk profile and embedding of the Group's risk management framework.  These include the Model Management Group and the Policy Review Group.  An abbreviated Board and Management Committee structure is set out below highlighting those Committees with primary risk-related duties.

 

 

Group Board

Nomination Committee

Remuneration Committee

Board Risk Committee

Board Audit Committee

Disclosure Committee

NomCo

RemCo

BRC

BAC

DISCo

Executive Committee

ExCo

Operations Committee

Asset & Liability Committee

Product & Pricing Committee

Enterprise Risk Manangement Committee

OpCo

ALCo

PPC

ERMC

Weekly Liquidity Forum

Credit Approval Committee

Model Management Group

Impairment Committee

Policy Review Group

WLF

CAC

MMG

IC

PRG

Key: Risk Committees