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Shawbrook Group plc Annual Report & Accounts 2017 Proudly different Proudly different Word Contents Strategic report The Strategic report provides readers with a holistic picture of Shawbrook’s business model, strategy, 2017 performance and future prospects. 1 The difference in being different 2 Basis of preparation 4 Our business 6 Chairman’s statement 7 Chief Executive Officer’s statement 9 Our strategy 10 Our business model 12 Business review 24 Risk management report 42 Corporate social responsibility Corporate governance report In this section we set out our commitment to the highest standards of corporate governance in line with UK best practice, our approach to remuneration and Directors’ Responsibilities. 47 Corporate governance report 50 Board of Directors 76 Directors’ Remuneration Report 81 Directors’ report 85 Statement of Directors’ responsibilities 86 Independent Auditor’s report Financial statements The financial statements comprise of the statutory financial statements and notes to the accounts for 2017. 94 Consolidated statement of profit and loss and other comprehensive income 95 Consolidated and Company statement of financial position 96 Consolidated statement of changes in equity 97 Company statement of changes in equity 98 Consolidated and Company statement of cash flows 99 Notes to the financial statements 167 Glossary shawbrook.co.uk twitter.com/shawbrookbank twitter.com/shawbrookbroker linkedin.com/company/shawbrook-bank The difference in being different Shawbrook is a growing UK specialist bank. Our approach to lending and savings is founded on the simple and good old-fashioned quality of good sense. What sets us apart is the deep relationships we develop with our customers and business partners. We take the time to get to know them; we learn more about their specific needs and this allows us to identify and tailor the products that will help them to maximise their opportunities. Our chosen target markets are selected carefully and are ones that are poorly served by the mainstream banks. We are determined to support our customers and business partners by being highly engaged, straightforward, agile and easy to do business with. Drawing on a deep understanding of our clients’ businesses and our specialist knowledge, we offer a clear proposition and certainty in the markets in which we operate. We use our experience and judgement to make decisions that balance risk, return and customer needs. Shawbrook – Proudly different. How we’ve done 2017 key highlights How we have Achieve strong Maintain delivered risk adjusted excellent returns credit quality against our strategic pillars 5.4% 53bps Stable NIM1 Cost of risk throughout 2017 Progressively Maintain Enhance increase conservative customer originations foundations focus 20% 12.9% 19.1% 89% Increase in loan book CET1 Total Capital Customer satisfaction* to £4.9bn Ratio *As conducted in our 2017 Charterhouse survey 1. Refer to the Glossary on page 167 for definitions 1 Basis of preparation The statutory results have The following items have been excluded from underlying results: been prepared in accordance with International Financial ■ Costs of £13.2 million include expenses incurred during the year in relation to the offer from Reporting Standards (IFRS). The Marlin Consortium for the entire share Where appropriate, certain capital of Shawbrook Group plc. aspects of the results are ■ IFRS 2 charges amounting to £5.9 million were recognised in 2017 in respect of share-based presented to reflect the Board’s awards made to employees that vested on The view of the Group’s underlying Marlin Consortium gaining control of Shawbrook Group plc. IFRS 2 charges recognised in 2016 performance without distortions amounting to £2.2 million related to share-based caused by non-recurring items that awards to Steve Pateman, Chief Executive Officer, which were fully satisfied by Special Opportunities are not reflective of the Group’s Fund (Guernsey) LP. This was the result of a one-off ongoing business activities. award for compensation against forfeited long-term incentives at a previous employer. Underlying results should be considered in addition ■ Corporate activity costs of £0.4 million in 2017 to, and not as a substitute for, the Group’s statutory relate to the cost of the incremental deposits results, and the Group’s presentation of underlying raised to prefund the acquisition of a c.£190 million results should not be construed as an indication that portfolio of property loans at the end of Q3 2017, future results will be unaffected by exceptional items. which completed at the end of November 2017. Underlying results have limitations as analytical In 2016 the costs of £1 million related to the cost tools, and they should not be considered in isolation of the incremental deposits raised to prefund the or as substitutes for analysis of the Group’s results as acquisition of the c.£300 million portfolio of property reported on a statutory basis. Limitations may include, loans at the end of 2015, which completed in H2 but are not limited to, the following: 2016. In both instances, during the period between acquisition and completion, the portfolio was funded ■ they may not reflect every cash expenditure, future requirements for capital expenditure or contractual by the vendor due to the length of the transition commitments; and period, and reimbursed by Shawbrook, thus resulting in Shawbrook paying to fund the portfolio twice. ■ they may not reflect the impact of earnings or charges resulting from matters the Directors consider International Organisation of Securities Commissions not to be indicative of ongoing operations. regulation does not permit adjustment for items that are reasonably likely to occur in the foreseeable future, Because of these limitations, underlying results are or activities that affected the entity’s recent past, when not intended as an alternative to the Group’s statutory considering underlying results as in their experience results or as an indicator of the Group’s operating there are rarely circumstances where an explanation performance. The Group compensates for these is sufficiently robust to result in restructuring costs or limitations by using underlying results, along with impairment losses being described as non-recurring. other comparative tools, together with statutory results, In addition, European Securities and Markets Authority to assist in the evaluation of operating performance. regulation states that items which affected past periods and will affect future periods – such as restructuring costs or impairment losses – will rarely be considered as non-recurring, infrequent or unusual. Shawbrook Group plc 2 Annual Report and Accounts 2017 Strategic report Corporate governance Financial statements Profit and Loss 2017 2016 £m £m Interest income, net fee and operating lease income 314.7 292.7 Interest expense and similar charges (76.0 ) (83.1 ) Net operating income 238.7 209.6 Costs and provisions for liabilities and charges (128.9) (97.1 ) Impairment losses on financial assets (23.3 ) (24.3 ) Statutory profit before taxation 86.5 88.2 Income tax charge (25.3) (23.4 ) Statutory profit after taxation, attributable to owners 61.2 64.8 Underlying adjustments Project Marlin costs 13.2 – IFRS 2 charge 5.9 2.2 Corporate activity costs 0.4 1.0 Underlying profit before taxation 106.0 91.4 Income tax on an underlying basis (26.8) (24.3 ) Underlying profit after taxation, attributable to owners 79.2 67.1 Comparison of statutory KPIs to underlying KPIs1 2017 2016 Statutory Underlying Statutory Underlying Gross asset yield (%) 7.1 7.1 7.8 7.8 Liability yield (%) (1.7 ) (1.7 ) (2.2 ) (2.2 ) Net interest margin (%) 5.4 5.4 5.6 5.6 Management expenses ratio (%) (2.9 ) (2.5 ) (2.6 ) (2.5 ) Cost of risk (%) (0.53) (0.53) (0.64 ) (0.64) Return on lending assets before tax (%) 2.0 2.4 2.3 2.4 Return on lending assets after tax (%) 1.4 1.8 1.7 1.8 Return on tangible equity (%) 15.1 19.5 18.8 19.4 Cost to income ratio (%) 54.0 45.9 46.3 45.1 Average principal employed (£m) 4,424.9 4,424.9 3,769.3 3,769.3 Customer loans (£m) 4,880.4 4,880.4 4,088.5 4,088.5 1 Refer to the Glossary on page 167 for KPI definitions and calculations. 3 Our business What we do Shawbrook is a specialist UK lending and savings bank focused on Property Finance, Business Finance and Consumer Lending and savings. We differentiate ourselves by concentrating on markets where our specialist knowledge, judgement and personalised approach to underwriting offers us a competitive advantage. This supports attractive, stable returns and sustainable growth, and also benefits businesses and consumers in parts of the market which continue to be poorly served by mainstream banks. Our divisions Property Finance Business Finance Consumer The Property Finance division The Business Finance division The Consumer division offers has a well diversified product offers an extensive product a broad range of lending and range with both residential and range, enabling it to provide a savings products enabling it commercial mortgage offerings. comprehensive suite of services to provide unsecured loans to address the needs of the UK to consumers for a variety SME market. of purposes in addition to a range of savings products. £3.2bn £1.1bn £0.6bn Customer loans Customer loans Customer loans Read more about Read more about Read more about Property Finance 12 Business Finance 16 Consumer 20 Shawbrook Group plc 4 Annual Report and Accounts 2017 Strategic report Corporate governance Financial statements Our differentiated approach The Shawbrook way A customer led approach... Our Our people and Specialists values community Thoughtful decision making through judgement Driven by customer needs We are expert: Innovative and tailored products We are quietly 671 confident and Employees enabling. (period average) Focus on quality Read more about 10 Our business model We are driven: We are ambitious 52 and passionate.