Bradford & Bingley
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Bradford & Bingley plc Annual Report & Accounts 2010 Registered in England and Wales No. 3938288 Bradford & Bingley plc Annual Report & Accounts 2010 2 Our Mission is: ‘maximising value for the taxpayer’ Bradford & Bingley plc Annual Report & Accounts 2010 3 Contents Directors’ Report page Chairman’s statement 4 Chief Executive Officer’s review 6 Overview of 2010 8 Key performance indicators 10 Financial review 11 Corporate governance 19 Risk management and control 29 Directors’ remuneration report 36 Corporate social responsibility report 43 Statement of Directors’ responsibilities 44 Other matters 45 The Accounts Independent Auditor’s report 48 Consolidated Income Statement 49 Consolidated Statement of Comprehensive Income 50 Balance Sheets 51 Statements of Changes in Equity 52 Cash Flow Statements 53 Notes to the Financial Statements 55 Directors’ Report Annual Report & Accounts 2010 4 Chairman’s statement On 1 October 2010 UK Asset Resolution Ltd (‘UKAR’) was established as the holding company for Northern Rock (Asset Management) plc (‘NRAM’) and Bradford & Bingley plc (‘B&B’), bringing together the two companies under shared management and a common Board of Directors. This is the first annual report of B&B since its combination with NRAM under the ownership of UKAR. There is no legal requirement to produce consolidated UKAR accounts this year due to the short accounting period covered so we have only produced separate accounts for NRAM and B&B, saving taxpayers’ money. However, my report and the Chief Executive Officer’s (‘CEO’) report, and a number of other sections of these accounts, cover both companies. UKAR and its two component firms share a common Board of Directors. This is an efficient and cost effective way of working but we have to ensure that each firm operates independently as there are two distinct and separate pools of creditors. We are managing an orderly wind-down, so we have to be very careful to maintain the correct hierarchy of creditors and ensure conflicts of interest are properly managed. In addition to myself, the Board of UKAR comprises three Non-Executive Directors from NRAM – Kent Atkinson, Sue Langley and Keith Morgan together with three Non-Executive Directors from B&B – Michael Buckley, Louise Patten and John Tattersall. There is one Executive Director, Richard Banks, our Chief Executive. Richard, assisted by a management team drawn from the two firms, has done a good job setting up UKAR. The new Board comprises strong banking, risk and operational expertise which will be essential to oversee the activities of the Company. Bob Davies, previously a NRAM Non-Executive Director, stood down from the Board on 31 December 2010 and I thank him for his contribution to the businesses throughout the year. On 1 October 2010 Philip Remnant, who served as a Non-Executive Director of NRAM, stood down together with the Chief Executive, Gary Hoffman, and Chief Operating Officer, Andy Tate. I would like to take this opportunity to thank all three for their efforts in leading the NRAM business during the year. UKAR has, in total, an £80bn book of residential mortgage assets and running this down will take many years. The NRAM book comprises mainly residential mortgages and has a faster run-off rate than B&B which comprises a majority of buy-to-let mortgages. Very few of our mortgages would be written on their current terms by any financial institution today. Either the loan to value or earnings multiple would be considered too high, or the pricing would be viewed as too cheap. However, the vast majority of customers are up to date with their payments – in NRAM 87% and in B&B 91%. In terms of 3+ months arrears, B&B has made good progress during the year. This reflects tight management of collection activity and, for buy-to-let customers the advantageous borrowing rate is less than the rental yield. Customers more than 3 months in arrears including possessions fell from 5.5% to 4.1%. In NRAM, arrears increased from 4.7% to 6.6% reflecting the transfer of £10.3bn mortgages to Northern Rock plc (‘NR’) on 1 January 2010, the declining total book and the nature of the mortgages in the book, which have high loan to value ratios and do not have the benefit of the lower interest rates applicable to the majority of B&B buy-to-let customers. Some of our customers have many challenges to face and the role of our customer service teams is to treat them fairly and take account of their individual circumstances. We employ around 2,400 colleagues in total of which around 1,000 are engaged in dealing with customers in arrears or facing payment difficulties. The faster redemption rate of NRAM mortgages enabled our Government loan balances to be reduced by £1.1bn by the year end. B&B did not draw any additional borrowing from the Government. In total the two firms either directly or indirectly owe the taxpayer £48.7bn and repaying this in full is the major focus of the UKAR team. Both firms benefited from the low cost of funding provided by the Government and this enabled profits to be achieved. Underlying profits at NRAM were £277.4m and at B&B were £200.1m. In addition, profits were generated from liability management exercises whereby debt capital instruments issued by both companies were purchased back from holders at a market value below their par value. This generated extra shareholder equity of £951m for NRAM and £566m for B&B which together with the retained profits has left both firms with high quality capital resources at the year end. Directors’ Report Annual Report & Accounts 2010 5 Chairman’s statement (continued) 2010 was a year of progress for NRAM and B&B and, looking forward to 2011, there are some challenging targets to achieve. These include NRAM’s final separation from NR which is a project involving the transfer of around 400,000 mortgage accounts and 150,000 associated unsecured loan accounts to the B&B IT platform and the integration of NRAM and B&B operations, which will provide opportunities for significant cost savings benefiting the taxpayer and creditors of both organisations. In line with the commitment made when NRAM was first taken into public ownership, £15m was paid by NRAM to The Northern Rock Foundation in 2010. However, given our focus on repayment of our Government loans we feel that it is inappropriate for the Company to continue to make such substantial donations to a single charity. For 2011, UKAR has a modest budget that enables us to support our colleagues in carrying out charitable and volunteer work in the communities in which they live and work. In addition, we will be maintaining our focus on preventing and alleviating the causes of homelessness through continued support to both the Business Action on Homelessness programme, part of Business in the Community, and the debt advice agencies. UKAR is a unique institution involved in a complex run-off. The team of colleagues assembled to undertake this task are seasoned and mature professionals conscious of their responsibilities to taxpayers, creditors and customers. I would like to thank everyone for their efforts in 2010 and the Board looks forward to the continued successful implementation of our strategies in 2011. Richard Pym Chairman 30 March 2011 Directors’ Report Annual Report & Accounts 2010 6 Chief Executive Officer’s review Introduction I am pleased to report that both B&B and NRAM made good progress against their business objectives and met all of the financial objectives agreed with our Shareholder for 2010. Throughout the year we worked closely with UK Financial Investments (‘UKFI’) and the Financial Services Authority (‘FSA’) in preparation for NRAM’s separation from NR and the integration of NRAM and B&B into UKAR. This has gone extremely well and I thank the UKAR executive team and all our colleagues for their tremendous efforts and support throughout the year. Business and objectives The combination of NRAM and B&B under the UKAR holding company brings together two businesses with combined assets of £112bn. Included within this total are £80bn of residential mortgages, £1bn of commercial mortgages and £3bn of unsecured loans. The business is now operating over three main sites in the North of England with around 2,400 employees. We have a unique opportunity to deliver value to the Shareholder, the UK’s taxpayers, by managing this business effectively as the assets wind-down, or are recovered. Since bringing the UKAR companies together we have focused on developing a clear sense of direction. Objectives for the business were agreed by the Board in October 2010 with the overall aim to maximise value for the taxpayer. This will be achieved by focusing on key activities and themes based on each of the following four objectives: • Reduce, protect and optimise the Balance Sheet; • Integrate our operations in NRAM and B&B and minimise unit costs through continuous improvement; • Maintain and develop excellence in debt management; and • Create a great place to work. These objectives will be underpinned by the need to treat customers and creditors fairly. Customers In total, UKAR has almost 850,000 customers, 726,000 mortgage accounts and 351,000 unsecured personal loan accounts. In the main, these loans are performing well and our operating activities are focused on providing effective and straightforward services to these customers. Given the current economic circumstances we are also dealing with a significant number of customers with difficulties meeting their repayments. We continue to work closely with those customers offering a wide range of solutions to help them manage their finances. In 2009, arrears in both NRAM and B&B increased significantly and this rate of increase has been arrested in 2010 with the number for B&B actually falling.