Bradford & Bingley Plc Annual Report & Accounts
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Bradford & Bingley plc Annual Report & Accounts for the 12 months to 31 March 2019 Registered in England and Wales under company number 03938288 Annual Report & Accounts 2019 Contents Page Strategic Report Overview 2 Highlights of 2018/19 3 Key performance indicators 4 Business review 5 Principal risks and uncertainties 10 Directors’ Report and Governance Statement Other matters 13 - Statement of Directors’ responsibilities 14 Independent Auditor’s report Independent Auditor’s report to the Members of Bradford & Bingley plc 16 Accounts Consolidated Income Statement 20 Consolidated Statement of Comprehensive Income 21 Balance Sheets 22 Consolidated Statement of Changes in Equity 23 Company Statement of Changes in Equity 24 Cash Flow Statements 25 Notes to the Financial Statements 26 1 Strategic Report Annual Report & Accounts 2019 The Directors present their Annual Report & Accounts for the year to 31 March 2019. Bradford & Bingley plc ('the Company') is a public limited company which was incorporated in the United Kingdom under the Companies Act 2006 and is registered in England and Wales. The Company and its subsidiary undertakings comprise the Bradford & Bingley plc Group ('B&B' or 'the Group'). Overview The Group and Company primarily operates as an asset manager holding mortgage loans secured on residential properties and other financial assets. No new lending is carried out. After the transfer into public ownership by the Bradford & Bingley plc Transfer of Securities & Property etc. Order 2008, the Group closed its doors to new mortgage applications in 2008 and committed to lend only where a formal mortgage offer or further advance arrangement had already contractually been made. B&B ceased to increase loans to existing customers except in specific circumstances where doing so supported the strategic priorities of running down the Balance Sheet or minimising impairments and losses. On 1 October 2010 UK Asset Resolution Limited ('UKAR') was established as the holding company for B&B and NRAM plc1 bringing together the two brands under shared management and a common Board of Directors. UKAR’s overarching objective is to develop and execute an investment strategy for disposing of its underlying investments in NRAM and B&B in an orderly and active way through sale, redemption, buy-back or other means within the context of protecting and creating value for the taxpayer as shareholder and, where applicable, as provider of financial support, paying due regard to the maintenance of financial stability and to acting in a way that promotes competition. Our mission to maximise value for the taxpayer is supported by four strategic objectives all of which are underpinned by the need to treat all our stakeholders fairly: . To reduce and protect the Balance Sheet . To challenge and maximise cost-effectiveness and efficiency . To work with our partners to ensure continued excellence in customer service and debt management . To be a great place to work These strategic objectives continue to support our overarching objective and the successes achieved in those areas over the past 12 months are highlighted in this strategic overview. 1 In 2016, NRAM plc was acquired by Cerberus Capital Management LP (‘Cerberus’) and the assets and liabilities not included in the transaction were transferred to a newly established subsidiary of UKAR, which is now known as NRAM Limited. Throughout the Annual Report & Accounts ‘NRAM’ refers to the underlying business. 2 Strategic Report Annual Report & Accounts 2019 Highlights of 2018/19 During the year we have made significant progress against all our key objectives and overall mission of maximising value for the taxpayer. The key highlights are: Balance Sheet reduced by £7.5bn bringing the total reduction to £41.6bn (90%) since formation of UKAR in 2010. In May 2018 we completed the sale of £5.0bn B&B mortgage assets to an investor group led by Barclays Bank Plc (‘Barclays’) and in October 2018 we completed the sale of a £0.9bn portfolio of equity release mortgages to Rothesay Life Plc. In December 2018, a portfolio of £23m Commercial loans was sold to Davidson Kempner and Arrow Global. Government loan repayments of £7.1bn, bringing total repayments to £26.5bn (98%) since UKAR was formed. Post the Balance Sheet date, in May 2019, B&B repaid its remaining £0.5bn of government debt. Reflecting reducing mortgage balances, underlying profit before tax decreased by 45% to £152.7m. Statutory profit before tax of £22.1m, which included £289.3m profit on sale of customer loans, a £389.0m loss due to unwinding hedges relating to the equity release mortgages sold and a £26.4m charge in respect of customer redress provisions, primarily for Payment Protection Insurance ('PPI'). In January 2019 B&B declared an interim dividend of £2.0bn to UKAR. Mortgage accounts three or more months in arrears, including possessions, have reduced by 11% since March 2018 2 to 1,446 . 2 When reporting arrears performance the Board consider it appropriate to include all loans under management which includes loans under interim servicing arrangements, where the economic interest has been sold but legal title, and thus regulatory responsibility, remains with B&B. Mortgage accounts three or more months in arrears, including possessions on loans retained by B&B were 1,275 cases. 3 Strategic Report Annual Report & Accounts 2019 Key performance indicators ('KPIs') In addition to the primary Financial Statements, we have adopted the following KPIs in managing business performance in the context of its strategic priorities. March 2019 March 2018 Underlying Profit Before Tax £152.7m £277.2m - Statutory Profit Before Tax 1 £22.1m £292.5m - Net Interest Margin on Average Interest 3.02 2.03 Earning Assets Net Government Loan Repayments 2 £7.1bn £12.8bn - Government Loan Balance £0.5bn £7.6bn - Total Lending Balances 3 £3.6bn £9.9bn 3m+ Residential Arrears 4 1,446 1,619 - 3m+ Residential Arrears on loans retained by B&B 1,275 1,619 - Residential Arrears Balance as a percentage of the Total 0.22 0.11 Residential Mortgage Balance - Residential Payments Overdue £8.0m £10.3m - Residential Arrears 3 months and over and possessions as a percentage of the book: - By value 5.07 2.28 - By number of accounts 4.38 1.98 Ongoing Administrative Expenses £51.8m £107.9m - Ratio of costs to average interest earning assets: - Statutory 1.10 0.91 - Ongoing 0.98 0.93 1 An analysis of the difference between statutory and underlying profit is provided on page 5. 2 Repayments in the year included £5.0bn proceeds received in May 2018 from assets sold to an investor group led by Barclays and £0.9bn proceeds received in October 2018 from assets sold to Rothesay Life Plc. 3 Total lending balances includes loans to customers, assets classified as held for sale and equity release mortgages. 4 The 3m+ arrears target includes loans managed under interim servicing arrangements. When reporting arrears performance the Board consider it appropriate to include all loans under management, which includes loans under interim servicing arrangements, where the economic interest has been sold but legal title, and thus regulatory responsibility, remains with B&B. All loans under management are treated consistently, in line with the UKAR Group's customer service policies. However, from a Credit Risk perspective, it is only B&B retained loans which are relevant. The March 2018 comparative includes equity release loans and assets classified as held for sale. 4 Strategic Report Annual Report & Accounts 2019 Business review These financial results are for the year to 31 March 2019. Performance The Board continue to believe it is appropriate to assess performance based on the underlying profits of the business, which excludes the remediation of inherited regulatory defects and any associated legal or insurance claims and certain gains or losses such as the sale of assets at a discount or premium. Whilst these gains or losses permanently impact capital reserves, the Board does not believe that they reflect the performance of the underlying business. Also excluded are movements in fair value and hedge ineffectiveness relating to financial instruments. The commentary on the results in this statement uses underlying profits and its components as the primary measure of performance. An analysis of the difference between the statutory profit and the underlying profit is provided below. Underlying profit for the year to March 2019 has decreased by £124.5m to £152.7m (March 2018: £277.2m). The reduction in underlying profit primarily reflects reduced net interest income due to the shrinking Balance Sheet. For the year to March 2019, underlying net operating income has decreased by £100.1m to £178.1m (March 2018: £278.2m) due to lower income from the reducing Balance Sheet. For the year to March 2019 ongoing administrative expenses were £56.1m lower than the previous year at £51.8m (March 2018: £107.9m). Impairment on loans to customers for the year to March 2019 was a credit of £23.3m, a decrease of £77.0m from the prior year (March 2018: £100.3m credit). The Group adopted IFRS 9 ‘Financial Instruments’ with effect from 1 April 2018. The prior year comparative was prepared under IAS 39 (see page 7 for details). Provision for insurance risk on equity release mortgages was a £3.1m credit in the year (March 2018: £6.5m credit). The equity release mortgage book was sold in September 2018. The number of mortgage accounts 3 or more months in arrears including possessions and those managed under interim servicing arrangements reduced by 11% to 1,446 cases at 31 March 2019. For the year to March 2019, statutory profit before taxation of £22.1m (March 2018: £292.5m) included £289.3m profit on sale of customer loans, offset by a £389.0m loss due to unwinding hedges relating to the equity release mortgages and a £26.4m charge in respect of customer redress provisions, primarily for PPI.