Strategic report Corporate governance Risk management report Financial statements Shawbrook Group plc Annual Report & Accounts 2018 Proudly different Proudly different A Word How we’ve done 2018 key highlights How we have Maintain delivered against excellent our strategic credit quality pillars: 68bps Cost of risk* *43bps including the £13.0 million of insurance proceeds received relating to the controls breach in Business Finance in 2016 Progressively Maintain increase conservative originations foundations 20% 12.3% 17.0% Increase in loan book CET1 Total capital to £5.9 billion ratio Enhance Achieve strong customer risk adjusted focus returns 87% 6.8% Customer satisfaction** Gross asset yield **feedback from our 2018 Charterhouse survey shawbrook.co.uk twitter.com/shawbrookbank twitter.com/shawbrookbroker linkedin.com/company/shawbrook-bank Contents Strategic report Risk management report The strategic report provides readers with a holistic The risk management report provides information view of Shawbrook’s business model, strategy, on actual and potential risks the Group is facing, and 2018 performance and future prospects. how they are managed and controlled to minimise their occurrence and potential loss. 1 The difference in being different 2 Basis of preparation 73 1. The Group’s approach to risk management 5 Our business 76 2. Risk governance and oversight 7 Chairman’s statement 81 3. Top and emerging risks 9 Chief Executive Officer’s statement 91 4. Key risk categories 11 Our business model 92 5. Creditworthiness risk 13 Business reviews 109 6. Liquidity risk 29 Corporate Social Responsibility 113 7. Market risk 116 8. Operational risk Corporate governance report 116 9. Conduct, legal and compliance risk In this section we set out our commitment to the 116 10. Strategic risk highest standards of corporate governance in line 116 11. Systems and change risk with UK best practice, our approach to remuneration and Directors’ responsibilities. 117 12. Capital risk and management 122 13. ICAAP, ILAAP and stress testing 35 Chairman’s introduction 122 14. Recovery Plan and Resolution Pack 37 Board of Directors 123 15. Group viability statement 39 Leadership structure 48 Directors’ report Financial statements 51 Nomination Committee report The financial statements comprise of the statutory 54 Directors’ Remuneration report financial statements and notes to the accounts for 2018. 61 Audit Committee report 125 Statement of Directors’ responsibilities 67 Risk Committee report 126 Independent auditor’s report 135 Consolidated statement of profit and loss and other comprehensive income 136 Consolidated and Company statements of financial position 137 Consolidated statement of changes in equity 138 Company statement of changes in equity 139 Consolidated and Company statement of cash flows 140 Notes to the financial statements Other information 203 Abbreviations 204 Alternative performance measures The Shawbrook story Since 2011, we’ve been quietly growing our business. Our approach to lending and savings is founded on the simple quality of good sense, adopting traditional values with a modern delivery. This is a big part of who we are. Communication matters. We listen, we understand and we talk to one another. We care about our customers and where they’re going. People are the life force of our business, so our approach is to blend human judgement with technological tools when it comes to decision-making. That’s why ensuring a deep understanding of our customers is our top priority. Shawbrook – Proudly different. The difference in being different Shawbrook Group plc 1 Annual Report and Accounts 2018 Strategic report Corporate governance Risk management report Financial statements Basis of preparation The statutory results have been In the year ended 31 December 2018, there are no underlying adjustments. prepared in accordance with In the year ended 31 December 2017, the following International Financial Reporting items were excluded from the underlying results: Standards (IFRS). Where ■ Costs of £13.2 million relating to expenses incurred appropriate, certain aspects of during the year in relation to the offer from Marlin the results are presented to reflect Bidco Limited for the entire share capital of the Board’s view of the Group’s Shawbrook Group plc. underlying performance without ■ IFRS 2 charges amounting to £5.9 million recognised in 2017 in respect of share; based awards made distortions caused by non-recurring to employees that vested on Marlin Bidco Limited items that are not reflective of the gaining control of Shawbrook Group plc. Group’s ongoing business activities. ■ Corporate activity costs of £0.4 million in 2017 relate to the cost of the incremental deposits raised to Underlying results should be considered in addition prefund the acquisition of a c.£190 million portfolio to, and not as a substitute for, the Group’s statutory of property loans at the end of Q3 2017, which results, and the Group’s presentation of underlying completed at the end of November 2017. results should not be construed as an indication that future results will be unaffected by exceptional items. International Organisation of Securities Commissions Underlying results have limitations as analytical tools regulation does not permit adjustment for items that and they should not be considered in isolation or are reasonably likely to occur in the foreseeable future, as substitutes for analysis of the Group’s results as or activities that affected the entity’s recent past, when reported on a statutory basis. Limitations may include, considering underlying results as in their experience but are not limited to, the following: there are rarely circumstances where an explanation is sufficiently robust to result in restructuring costs or ■ they may not reflect every cash expenditure, future impairment losses being described as non-recurring. requirements for capital expenditure or contractual In addition, European Securities and Markets commitments; and Authority regulation states that items which affected past periods and will affect future periods; such as ■ they may not reflect the impact of earnings restructuring costs or impairment losses, will rarely or charges resulting from matters the Directors be considered as non-recurring, infrequent or unusual. consider not to be indicative of ongoing operations. Due to these limitations, underlying results are not intended as an alternative to the Group’s statutory results or as an indicator of the Group’s operating performance. The Group compensates for these limitations by using underlying results, along with other comparative tools, together with statutory results, to assist in the evaluation of operating performance. 2 Basis of preparation continued Profit and loss To ensure equal prominence of the Group’s statutory and underlying results, the following table provides a reconciliation of the statutory results to the underlying results: 2018 2017 £m £m Statutory results Interest income, net income from operating leases, net fee and commission income, and net gains on financial instruments 361.4 314.7 Interest expense and similar charges (87.3 ) (76.0 ) Net operating income 274.1 238.7 Administrative expenses (130.3) (126.8 ) Impairment losses on financial assets1 2 (23.2) (23.3 ) Provisions for liabilities and charges (10.1 ) (2.1 ) Total operating expenses (163.6 ) (152.2 ) Share of results of associates (0.5 ) – Statutory profit before taxation 110.0 86.5 Taxation (28.4 ) (25.3 ) Statutory profit after taxation, attributable to owners 81.6 61.2 Reconciliation of statutory to underlying results Statutory profit before taxation 110.0 86.5 Underlying adjustments Project Marlin costs – 13.2 IFRS 2 charges – 5.9 Corporate activity costs – 0.4 Total underlying adjustments – 19.5 Profit before taxation on an underlying basis 110.0 106.0 Taxation on an underlying basis3 (28.4 ) (26.8 ) Profit after taxation on an underlying basis, attributable to owners 81.6 79.2 1 Impairment losses on financial assets in the year ended 31 December 2018 reflect expected credit losses calculated in accordance with IFRS 9. Impairment losses on financial assets in the year ended 31 December 2017 reflect impairment losses calculated in accordance with IAS 39. As such, results are not directly comparable. 2 2018 includes a recovery of £13.0 million received by the Group in relation to the insurance claim in respect of the controls breach identified in the Business Finance division in 2016. 3 The 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. Shawbrook Group plc 3 Annual Report and Accounts 2018 Strategic report Corporate governance Risk management report Financial statements Key performance indicators The below table sets out the Group’s key performance indicators (KPIs). The Group’s KPIs are defined on page 204. 2018 2017 Assets Average principal employed (£m) 5,351.8 4,424.9 Loans and advances to customers (£m) 5,880.0 4,880.4 Profitability (on an underlying basis) Gross asset yield (%) 6.8 7.1 Liability yield (%) (1.6 ) (1.7 ) Net interest margin (%) 5.1 5.4 Management expenses ratio (%) (2.6 ) (2.5 ) Cost of risk (%) (0.43)/(0.68)1 (0.53 ) Return on lending assets before tax (%) 2.1 2.4 Return on lending assets after tax (%) 1.5 1.8 Return on tangible equity (%) 16.1 19.5 Cost to income ratio (%) 51.2 45.9 Asset quality Ratio of Stage 3 loans (%) 2.0 N/A Ratio of past due over 90 days and impaired loans (%) N/A 1.2 Liquidity Liquidity coverage ratio (%) 244.9 290.6 Capital and leverage Common Equity Tier 1 capital ratio (%) 12.3 12.9 Total Tier 1 capital ratio (%) 15.2 16.6 Total capital ratio (%) 17.0 19.1 Leverage ratio (%) 9.2 9.4 Risk-weighted assets (£m) 4,206.8 3,361.7 1 During 2018, the Group received £13.0 million relating to the Group’s insurance claim in respect of the controls breach identified in the Business Finance division in 2016.