Preliminary results for the year ended 31 December 2019

LEI: 213800WTQKOQI8ELD692  19 March 2020OneSavings Bank plc
Preliminary results for the year ended 31 December 2019Due to the Combination with Charter Court Financial Services Group plc (CCFS) this press release includes results on both a statutory and a pro forma underlying basis. The statutory basis reflects 12 months of OSB’s results and CCFS’ results from 4 October 2019 while the pro forma underlying basis assumes that the Combination occurred on 1 January 2018 and includes 12 months of results from CCFS and excludes exceptional items, integration costs and other acquisition-related items.Financial highlightsStatutory profit before tax increased 14% to £209.1m (2018: restated £182.8m¹). Pro forma underlying profit before tax increased 9% to £381.1m (2018: £350.8m)
 The net loan book grew 105% to £18.4bn (2018: £9.0bn) on a statutory basis and increased 16% to £18.2bn (2018: £15.6bn) on a pro forma underlying basis, or 23% excluding the impact of structured asset sales. Statutory gross originations grew by 36% to £4.1bn (2018: £3.0bn) and increased 10% on a pro forma underlying basis to £6.5bn (2018: £5.9bn)
 On a statutory basis, the cost to income ratio increased to 32%² (2018: 28%). On a pro forma underlying basis, the cost to income ratio remained excellent at 29% (2018: 28%), due to strong income growth alongside continued focus on cost discipline and efficiency
 Net interest margin (NIM) was 2.43% on a statutory basis (2018: restated 3.05%³) and 2.66% on a pro forma underlying basis (2018: 2.86%)
 Impairments remain low with a loan loss ratio⁴ of 13bps (2018: 10bps) on a statutory basis and 10bps (2018: 7bps) on a pro forma underlying basis
 Statutory return on equity (RoE)⁵ fell to 18% (2018: restated 25%⁵), however, on a pro forma underlying basis, RoE remained strong at 25% (2018: 28%). Statutory Common Equity Tier 1 (CET1) capital ratio increased to 16.0% (2018: 13.3%)
 Statutory basic earnings per share⁶ (EPS) fell 5% to 52.6 pence (2018: 55.5 pence), however pro forma underlying basic EPS increased 9% to 64.9 pence (2018: 59.4 pence)
 Recommended final dividend⁷ of 11.2 pence per share gives a full year dividend of 16.1 pence per share. Together with the pre-Combination CCFS interim dividend of 4.3 pence per share, this is in line with our target dividend payout ratio             Andy Golding, CEO of OneSavings Bank, said:“I am delighted with OneSavings Bank’s achievements in 2019. I am particularly pleased that we successfully completed our Combination with Charter Court, and that both businesses maintained momentum and delivered strong results whilst the transaction progressed. The rationale behind the Combination remains compelling and I am pleased with progress to date on integration.The combined Group delivered excellent shareholder returns in 2019. Both Buy-to-Let and Residential segments continued to grow, with strong demand from professional landlords and owner-occupiers. The Group’s organic originations grew by 36% to £4.1bn, including three months of Charter Court’s business, supporting 14% growth in statutory profit before tax to £209m.Our funding model has been enhanced through the Combination. Securitisations since 2013 across the combined Group now total £5.7bn and during 2019 CCFS generated a gain on sale of £59m on three structured asset sales and OSB completed an inaugural securitisation of £500m of organically originated mortgages. We continued to take advantage of high demand and attractive market pricing with additional deals completed early this year. In January, the Group disposed of its remaining notes under the Canterbury securitisation, generating a gain on sale of c. £18m and the notes in PMF 2020-1B resulting in a gain of c. £2m on a statutory basis and a £15m gain on an underlying basis. Retail funds remain the primary source of funding for the combined Group, reaching £16bn at the end of 2019. Both Banks achieved exceptional customer Net Promoter Scores which we are very proud of.The UK and global economies are currently experiencing unprecedented uncertainty stemming from COVID-19. Whilst we entered the year with a robust pipeline, strong application levels in our core businesses and stable margins, it is too soon to say what the impact will be and we therefore consider it imprudent to provide forward guidance for 2020.We enter this period of uncertainty as an enlarged business with the strength of our combined lending and funding franchises, robust capital position, secured loan book and strong risk management capabilities.”Key metrics—————————————Profit before tax was restated to recognise interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity.Administrative expenses as a percentage of total incomeTo align calculation methods post Combination, OSB amended NIM calculation to include average interest earning assets on a 13 point average from a simple average. The comparative NIM was restated.Loan loss ratio is defined as impairment losses as a percentage of 13 point average gross loans and advances.Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, as a percentage of a 13 point average shareholders’ equity (excluding £60m of AT1 securities). The comparative return of equity ratio was restated to include average shareholders’ equity on a 13 point average.Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, divided by the weighted average number of ordinary shares in issue.Representing 25% of pro forma underlying profit attributable to ordinary shareholders which will be paid on 13 May 2020, subject to approval at the Annual General Meeting on 7 May 2020, with a record date of 27 March 2020.Portfolio arrears rate of accounts for which there are missed or overdue payments by more than three months.
Enquiries:OneSavings Bank plc:              Alastair Pate t: 01634 835728Brunswick Group:                   Robin Wrench / Simone Selzer t: 020 7404 5959Analyst presentationA webcast presentation for analysts will be held at 9:30am on Thursday 19 March. The presentation will be webcast or call only and available on the OneSavings Bank website at www.osb.co.uk. The UK dial in number is 020 3936 2999 and the password is 215969. Registration is open immediately.About OneSavings Bank plcOneSavings Bank plc (OSB) began trading as a bank on 1 February 2011 and was admitted to the main market of the London Stock Exchange in June 2014 (OSB.L). OSB joined the FTSE 250 index in June 2015. On 4 October 2019, OSB acquired Charter Court Financial Services Group plc (CCFS) and its subsidiary businesses. OSB is a specialist lending and retail savings Group authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority.OneSavings BankOSB primarily targets market sub-sectors that offer high growth potential and attractive risk-adjusted returns in which it can take a leading position and where it has established expertise, platforms and capabilities. These include private rented sector Buy-to-Let, commercial and semi-commercial mortgages, residential development finance, bespoke and specialist residential lending, secured funding lines and asset finance.OSB originates mortgages organically via specialist brokers and independent financial advisers through its specialist brands including Kent Reliance for Intermediaries, InterBay Commercial and Prestige Finance. It is differentiated through its use of highly skilled, bespoke underwriting and efficient operating model.OSB is predominantly funded by retail savings originated through the long-established Kent Reliance name, which includes online and postal channels as well as a network of branches in the South East of England. Diversification of funding is currently provided by securitisation programmes, the Term Funding Scheme and the Bank of England Indexed Long-Term Repo operation.
Charter Court Financial Services GroupCCFS focuses on providing Buy-to-Let and specialist residential mortgages, mortgage servicing, administration and credit consultancy and retail savings products. It operates through its three brands – Precise Mortgages, Exact Mortgage Experts and Charter Savings Bank.It is differentiated through risk management expertise and best-of-breed automated technology and systems, ensuring efficient processing, strong credit and collateral risk control and speed of product development and innovation. These factors have enabled strong balance sheet growth whilst maintaining high credit quality mortgage assets.CCFS is predominantly funded by retail savings originated through its Charter Savings Bank brand. Diversification of funding is currently provided by securitisation programmes, the Term Funding Scheme and the Bank of England Indexed Long-Term Repo operation.Important disclaimerThis document should be read in conjunction with the documents distributed by OneSavings Bank plc (OSB) through the Regulatory News Service (‘RNS’). This document is not audited and contains certain forward-looking statements, beliefs or opinions, including statements with respect to the business, strategy and plans of OSB and its current goals and expectations relating to its future financial condition, performance and results. Such forward-looking statements include, without limitation, those preceded by, followed by or that include the words ‘targets’, ‘believes’, ‘estimates’, ‘expects’, ‘aims’, ‘intends’, ‘will’, ‘may’, ‘anticipates’, ‘projects’, ‘plans’, ‘forecasts’, ‘outlook’, ‘likely’, ‘guidance’, ‘trends’, ‘future’, ‘would’, ‘could’, ‘should’ or similar expressions or negatives thereof. Statements that are not historical facts, including statements about OSB’s, its directors’ and/or management’s beliefs and expectations, are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that may or may not occur in the future. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by OSB or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in exchange rates, stock markets, inflation, deflation, interest rates and currencies; policies of the Bank of England, the European Central Bank and other G8 central banks; the ability to access sufficient sources of capital, liquidity and funding when required; changes to OSB’s credit ratings; the ability to derive cost savings; changing demographic developments, and changing customer behaviour, including consumer spending, saving and borrowing habits; changes in customer preferences; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the potential for countries to exit the European Union (the EU) or the Eurozone, and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural and other disasters, adverse weather and similar contingencies outside OSB’s control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts; geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards or practices, including as a result of an exit by the UK from the EU; regulatory capital or liquidity requirements and similar contingencies outside OSB’s control; the policies and actions of governmental or regulatory authorities in the UK, the EU or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; market relating trends and developments; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and the success of OSB in managing the risks of the foregoing.Accordingly, no reliance may be placed on any forward-looking statement and no representation, warranty or assurance is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved.  Any forward-looking statements made in this document speak only as of the date they are made and it should not be assumed that they have been revised or updated in the light of new information of future events. Except as required by the Prudential Regulation Authority, the Financial Conduct Authority, the London Stock Exchange PLC or applicable law, OSB expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this document to reflect any change in OSB’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. For additional information on possible risks to OSB’s business, please see the “Risk Review” section of the OSB 2019 Annual Report and Accounts. Copies of this are available at www.osb.co.uk and on request from OSB.Nothing in this document and any subsequent discussion constitutes or forms part of a public offer under any applicable law or an offer to purchase or sell any securities or financial instruments. Nor does it constitute advice or a recommendation with respect to such securities or financial instruments, or any invitation or inducement to engage in investment activity under section 21 of the Financial Services and Markets Act 2000. Past performance cannot be relied on as a guide to future performance. Nothing in this document is intended to be, or should be construed as, a quantified financial benefits statement for the purposes of Rule 28 of the City Code on Takeovers and Mergers or a profit forecast or estimate for any period.Liability arising from anything in this document shall be governed by English law, and neither the Company nor any of its affiliates, advisors or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. Nothing in this document shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.Certain figures contained in this document, including financial information, may have been subject to rounding adjustments and foreign exchange conversions. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this document may not conform exactly to the total figure given.Non-IFRS performance measures                                     OneSavings Bank believes that the non-IFRS performance measures included in this document provide valuable information to the readers as they enable the reader to identify a more consistent basis for comparing the business’ performance between financial periods, and provide more detail concerning the elements of performance which the Group is most directly able to influence or are relevant for an assessment of the Group. They also reflect an important aspect of the way in which operating targets are defined and performance is monitored by OneSavings Bank’s Board. However, any non-IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well. Refer to Alternative performance measures in the Financial review for further details, reconciliations and calculations of non-IFRS performance measures included throughout this document, and the most directly comparable IFRS measures. 
Chief Executive’s StatementI am delighted with OneSavings Bank’s achievements in 2019 and particularly pleased that we successfully completed our Combination with Charter Court Financial Services Group plc (‘CCFS’), whilst delivering strong results for the year, in both Banks. We are in the early stages of integration, however, I am pleased with progress so far and I am particularly happy to have so many talented staff from both organisations working really well together to benefit the combined Group. I am also pleased with progress to date on integration.The logic for the Combination remains compelling: to create a leading specialist lender, focused on providing fair financial solutions to our customers, with greater scale and resources to deploy on growth opportunities.Statutory pre-tax profit was up 14% to £209m for 2019, as a result of strong growth at attractive margins and the inclusion of CCFS’ profits from the date of Combination, more than offsetting the impact of exceptional items, integration costs and other acquisition-related adjustments. Despite the increase in profit, statutory basic earnings per share decreased by 5% to 52.6 pence per share, due to the increased share count post Combination. On a pro forma underlying basis, profit before tax and basic earnings per share increased both by 9%, due to strong growth at attractive margins and continued cost-efficiency and discipline.Statutory net interest margin (‘NIM’) for 2019 reduced to 243bps (2018: restated 305bps¹), primarily due to the dilutive impact of including CCFS’ results post Combination and the impact of the changing mix of the OSB loan book, despite broadly stable asset pricing.The CCFS business has a lower NIM than the OSB business and statutory NIM in 2019 was also negatively impacted by the amortisation of the fair value uplift on acquisition of the CCFS loan book. The mix of the OSB loan book continued to change as the higher yielding back book refinanced onto front book pricing. The impact of this mix effect had largely run its course by the end of the first half, assuming stable mortgage pricing, cost of funds and swap spreads going forward.On a pro forma underlying basis NIM was 266bps (2018: 286bps) and reflected the changing asset mix of the OSB loan book and marginally higher cost of funds of CCFS’ business.Our customer-focused propositions are designed to position the Group as a credible partner of choice with intermediaries in the specialist mortgage markets in which we operate. The complementary nature of OSB’s bespoke, manual underwriting approach and CCFS’ automated risk assessment, together with strong risk management and enhanced stress testing, give us a deep understanding of our lending market segments.We strengthened our funding model during the year as OSB returned to the securitisation market with our inaugural transaction under the self-originated Canterbury Finance programme, and CCFS successfully executed a transaction in its Buy-to-Let PMF programme. The expertise in securitisation funding and balance sheet management is a capability that has been enhanced through the Combination and demonstrates efficiency in accessing the capital markets. I am pleased that in early 2020, we had the opportunity to execute further transactions, demonstrating our agility in this market by selling notes we held from the Canterbury securitisation generating a gain on sale of c. £18m. In addition, the Group sold its entire economic interest in PMF 2020-1B resulting in a gain of £2m on a statutory basis and £15m on an underlying basis.An award-winning secured lender
Through the Combination and underlying growth, the Group’s statutory loan book more than doubled in 2019 to £18.4bn. On a pro forma underlying basis, it grew by 16% from £15.6bn in 2018, or 23% excluding the impact of structured asset sales in CCFS.Mortgage originations in the year were £6.5bn for the combined Group on a pro forma underlying basis. Such strong new business volumes reflect the attractiveness of our lending propositions to borrowers, particularly to professional landlords, and the excellent levels of customer service the Banks provide.Our Buy-to-Let businesses grew in the year as landlords continued to professionalise and look for a reliable lender with specialism and expertise in lending to limited companies and portfolio landlords. Both OSB and CCFS have distinct, but complementary, propositions in their target lending market segments, meaning different customer and intermediary preferences can be satisfied, ensuring the Group can maximise its share of new originations. We intend to preserve and build on the value of OSB’s and CCFS’ individual lending brands through a multi-brand lending strategy.OSB and CCFS have further strengthened broker networks and relationships with mortgage intermediaries in the year, especially amongst those that support borrowers with more complex needs. The Combination allows us to underwrite a wider range of customer cases than would have been possible as standalone businesses. On a pro forma underlying basis, the Group sustained its market share as industry-wide gross Buy-to-Let advances reached £41bn² in the year.For 2019, the Group reported under two segments; OSB and CCFS.The OSB’s Buy-to-Let/SME sub-segment performed well during 2019, with new Buy-to-Let/SME mortgage originations of £2.8bn, as we continued to target both professional, large portfolio landlords and those investing in commercial and semi-commercial property.Our target market of professional/multi-property landlords accounted for 81% of completions by value for OSB during 2019, with a continued high proportion of professional landlords choosing to remortgage with us as their existing mortgage reaches maturity. This performance demonstrates the success of our Choices programme and the sustainable strength of OSB’s proposition, in particular our specialist, manual underwriting, as well as our deep and historical relationships with mortgage intermediaries.The OSB Buy-to-Let sub-segment gross loan book grew by 19% to £7,727m from £6,518m in 2018.The commercial sub-segment of Buy-to-Let/SME, which lends through the InterBay brand had a very successful year, with the loan book reaching £888m at 31 December 2019 (2018: £548m), an increase of 62%. We used our strong understanding of this sub-segment and our investment in products, service and innovation to build a proposition that proved increasingly popular with commercial borrowers. In 2019, we further increased distribution among our intermediaries who focus more on this market sub-segment. This business lends at sensible loan to values (‘LTVs’), and generates strong returns on a risk-adjusted basis.We continue to be cautious in our approach to asset finance, however, InterBay Asset Finance performed well in the year as we saw high-quality opportunities.OSB’s Heritable Development Finance business provides development finance to small and medium-sized residential developers operating in areas of the UK where demand for housing is consistently strong. The business had commitments to finance the development of just over 2,000 residential units as at the end of 2019.The Bank’s secured funding lines business in both Buy-to-Let/SME and Residential segments continued to grow, with cautious risk fundamentals applied. Total commitments have increased by 31% to £571m, with total loans outstanding of £234m. This increase was due to increased commitments with certain existing customers and three new funding lines were added during the year.The OSB residential net loan book grew by 14% to £1,837m (2018: £1,616m) largely through increased originations, as we saw attractive opportunities in more complex prime and second charge segments and the products we introduced in 2018 continued to prove popular with our borrowers.CCFS originated £1.9bn of new Buy-to-Let mortgages on a pro forma underlying basis, an increase of 15% from £1.6bn in 2018. This growth reflects the continuing demand, whilst maintaining a disciplined approach to underwriting. As with OSB, CCFS observed a continued trend that is supportive of professional landlords, with increased use of limited company structures and a move towards higher yielding property types. CCFS proactively improved service standards early in the year, which was well received by intermediaries. As a result, CCFS was ranked highly according to research by BVA BDRC, as the lender mortgage intermediaries are most likely to recommend to portfolio landlords.The CCFS residential net loan book grew by 27% to £2,167m on a pro forma underlying basis, despite a small reduction in originations, as no portfolio asset sales took place in the year and there were fewer maturities in the portfolio. We focused on segments of residential lending where competitive pressure has not seen significant margin erosion, such as self-employed applicants. CCFS’ second charge originations performed strongly with an increase of 44% in the year on a pro forma underlying basis, as both products and distribution were enhanced.CCFS bridging finance activities maintained their focus on high-quality lending in the year, and as a consequence saw strong repayments as well as originations, leading to a reduction in net loans of 12% to £214m during the full year on a pro forma underlying basis. We chose to be cautious and did not react to increased price competition during the year.Both segments concentrate on new and existing customers, investing in and improving our sales capability across our brands. We continued to gain recognition from mortgage customers and intermediaries, and in 2019 we won multiple awards. For OSB these included Best Buy-to-Let Lender and Best Specialist Lender from Mortgage Strategy Awards. I am particularly pleased that Kent Reliance was awarded Best Specialist Lender from the UK’s largest mortgage distributor: L&G Mortgage Club. Our more specialist businesses were also recognised with Bridging Funding Partner of the Year award from Bridging and Commercial Awards. CCFS was recognised by Mortgage Introducer, being named as both Mortgage Lender of the Year and Specialist Lender of the Year.Through OSB’s mortgage product transfer scheme, Choices, the proportion of borrowers who choose a new product within three months of their initial product ending, remained strong at around 69% by December 2019. This is driven by success in highlighting opportunities available to borrowers who might otherwise leave the Group and enables them to actively choose appropriate mortgage pricing and features.We are excited about opportunities arising from the Combination with CCFS and continue to believe in the advantages that will come from more resilient, diversified funding platform, together with greater scale and resources. We now have a larger footprint in the UK Buy-to-Let and residential markets, with an enhanced proposition to the broker community to ensure we remain at the forefront of UK specialist mortgage lending.Sophisticated funding model
Through the Combination with CCFS we brought together OSB’s established Kent Reliance retail deposit franchise with Charter Savings Bank’s savings deposit platform, and CCFS’ sophisticated securitisation funding and balance sheet management. These capabilities create a more resilient and diversified funding platform to support our future growth, with cost efficient funding for the combined Group.The combined Group remained predominantly retail funded in 2019 and we had £16bn of retail deposits at the end of 2019. On a pro forma underlying basis, retail deposits were up 23% from £13bn at the end of 2018. We offer a competitive retail savings proposition, which allows the Group to raise significant funds as we require them. Over 40,000 new savings customers joined Kent Reliance in 2019 and Charter Savings Bank grew customer numbers by nearly 27,000 for the full year of 2019. Our vision remains to become our customers’ favourite bank and we continue to put our customers at the heart of everything we do. This was reflected in a retention rate of 91% amongst Kent Reliance customers with maturing fixed rate bonds and ISAs and a Net Promoter Score (‘NPS’) of +66 for the year. 97% of Charter Savings Bank’s customers had a good or excellent experience with the Bank³ and the NPS was exceptional, at +72 for 2019. Charter Savings Bank had a retention rate of 88% at the end of 2019. I am delighted that Kent Reliance was highly commended with Savers’ Choice Award by Savings Champion and we won Best Business Easy Access Account Provider also from Savings Champion.CCFS won ISA Provider of the Year and Best Bank Savings Provider from Moneyfacts and Best Savings Provider from Savings Champion amongst others.Our enhanced wholesale funding platforms enable us to maintain optionality and benefit from the potential to execute structured balance sheet management transactions across the combined Group’s enlarged balance sheet. Our track record in 2019 was impressive; CCFS successfully executed a £734m securitisation transaction of Buy-to-Let mortgages and took advantage of a strong residuals market, generating gains of £59m on three structured asset sales prior to the Combination. In July, OSB completed an inaugural transaction of £500m of organically originated Buy-to-Let mortgages.We have further demonstrated our expertise in the securitisation market post Combination, with additional deals completed in early 2020, benefiting from high demand and attractive market pricing. In January 2020, the Group disposed of its remaining notes under the Canterbury securitisation and the notes in PMF 2020-1B. The capability and experience of CCFS in sophisticated securitisation funding and balance sheet management have been adopted across the Group and pave the way for future transactions.Retail savings and securitisation funding were complemented in the year by the Bank of England’s funding schemes; drawdowns under the Term Funding Scheme remained unchanged for OSB and CCFS at £1.5bn and £1.1bn, respectively, and Indexed Long-Term Repo borrowings were £160m and £130m for OSB and CCFS, respectively as at 31 December 2019.In addition, through the Combination, the Group now has access to contingent wholesale funding, with a total of up to £600m available to it through warehouse facilities, £94m of which was utilised at the year end.Our strong and sustainable business
The Combination provides opportunities to create centres of excellence for core processes and capabilities on a best-in-class basis across OSB’s and CCFS’ existing locations in Chatham, Wolverhampton and India. This work is fully under way and we will report on progress later in the year.The combined Group achieved a statutory cost to income ratio of 32% for the year, 29% on a pro forma underlying basis, reflecting our efficient and scalable operating platform, despite additional investment in the business, including our ongoing Internal Ratings-Based (‘IRB’) projects. We also continued with improvements to our technology infrastructure. As ever, we focus on delivering further efficiencies in the cost of running the Bank on a ‘business as usual’ basis, through continued disciplined cost management, benefits of scale and leveraging our unique operating platform in India (‘OSBI’), as well as delivering on the synergies identified due to the Combination. OSBI undertakes a range of primary processing services at a significantly lower cost than an equivalent UK-based operation, whilst delivering consistently high-quality service levels. I am especially pleased that we continue to achieve this whilst maintaining our focus on our customer-led vision, borne out by an increase in customer NPS to an outstanding +66 in 2019 (2018: +63).Both OSB and CCFS are working towards IRB applications and we remain pleased with the progress made and are seeing benefits from using the enhanced risk models developed as part of the process. We remain of the view that achieving IRB will be beneficial to the Group’s capital requirements especially under the new calibrations and final IRB output floors as outlined in Basel III.The Group continued to exercise strong diligence over loan and customer assessment. The Group’s statutory loan loss ratio of 13bps as at 31 December 2019 (2018: 10bps) includes an additional provision due to the initial recognition of expected credit losses on CCFS’ loan book and reflects an alignment of IFRS 9 modelling methodologies. It also includes the impact of a number of high-value Buy-to-Let cases in OSB having Law of Property Act (‘LPA’) receivers appointed during the first half of 2019, which attracted higher provision requirement under the IFRS 9 modelling approach. During the second half of 2019, the number of LPA appointments stabilised.The weighted average LTV of OSB’s mortgage book remained low at 68% at the end of 2019, with an average LTV of 70% on new origination during the year. CCFS had similarly low LTVs with the overall book weighted average LTV of 70% and 71% for new origination in the year on a pro forma underlying basis.2019 was a year of significant change for the Group and I would like to thank my colleagues for their hard work and continued commitment throughout the year. I look forward to us all working together for a successful future.Looking forward to 2020
I am delighted that the Combination with CCFS was successfully completed and that all the hard work to achieve it did not distract the OSB and CCFS teams from continuing to develop, manage and grow the underlying businesses, achieving strong levels of originations during the year. We have made good progress to date on the integration.
       
The UK and global economies are currently experiencing unprecedented uncertainty stemming from COVID-19. Whilst we entered the year with a robust pipeline, strong application levels in our core businesses and stable margins, it is too soon to say what the impact will be and we therefore consider it imprudent to provide forward guidance for 2020.We enter this period of uncertainty as an enlarged business with the strength of our combined lending and funding franchises, robust capital position, secured loan book and strong risk management capabilities.Andy GoldingChief Executive Officer19 March 20201. To align calculation methods post Combination, OSB amended NIM calculation to include average interest earning assets on a 13 point average from a simple average. The comparative NIM was restated.2. UK Finance, New and outstanding buy-to-let mortgages, 6 Feb 2020.3. Based on the Charter Court Savings Bank Customer Satisfaction Survey conducted throughout 2019.
Operating reviewGroup highlights2019 was not only a year of continued strong business performance, but also a year when we advanced on our strategic objective to create a leading specialist lender of scale in the UK, through the Combination with CCFS. The Combination provides us with the scale and resources to deploy on growth opportunities across the economic cycle, to deliver long-term value for our shareholders. We are committed to delivering on that strategy, by leveraging our complementary strengths across products, brands, distribution, underwriting, funding and team culture.Against the backdrop of a competitive mortgage market, organic originations in 2019 proved resilient at £4.1bn on a statutory basis (2018: £3.0bn) with £0.8bn contributed by CCFS in the final three months of the year. On a pro forma underlying basis, organic originations were £6.5bn in 2019, compared with £5.9bn in 2018.During 2019, 69% of Kent Reliance borrowers chose a new product within three months of their initial product ending, totalling £885m (2018: 69%, £722m). This performance demonstrates the success of our Choices programme.Buy-to-Let performed strongly in both businesses, due to continued activity from professional landlords. OSB also saw exceptional growth in lending through its InterBay Commercial brand and a strong performance from its first charge residential sub-segment, where new product ranges launched in 2018 proved popular and continued to gain momentum during 2019. CCFS’ residential segment also benefited from an improved product range, with the gross loan book up 27% in the year on a pro forma underlying basis. During 2019, OSB’s net loan book increased by 20% to £10,785.0m (2018: £8,983.3m) and CCFS’ net loan book grew by 15% to £7,661.8m (2018: £6,661.5m), or 27% excluding the impact of structured assets sales, both on a statutory basis. The combined Group’s net loan book reached £18,446.8m by the end of 2019 on a statutory basis. Buy-to-Let comprised approximately 67% of the Group’s total gross loan book at the end of 2019.The combined Group remained predominantly retail funded in 2019 with £16,255.0m of retail deposits on a statutory basis (2018: £8,071.9m). On a pro forma underlying basis, retail balances were up 23% from £13,166.4m as at 31 December 2018. The savings proposition offered by the Kent Reliance brand continued to be in demand, as we welcomed over 40,000 new retail customers in the year. Excellent customer service was reflected in a +66 customer Net Promoter Score and retention rate for maturing fixed term bond and ISA balances of 91% in 2019. Charter Savings Bank saw customer numbers grow by almost 27,000 during the year as savings customers continued to value the competitive interest rates and excellent customer service it provides. CCFS also achieved an exceptional Net Promoter Score of +72 and a retention rate of 88% for 2019.Diversification of funding was provided by access to the securitisation market and Bank of England funding. Both Banks were active in the securitisation market during the year. OSB completed an inaugural transaction of c.£500m of organically originated mortgages under the Canterbury Finance RMBS programme in July 2019. CCFS successfully executed a £734m securitisation transaction of Buy-to-Let mortgages and recognised gains of £58.7m on three structured asset sales in the year, prior to the Combination. For further information on the Group’s securitisation platforms.As at 31 December 2019, drawings under the Term Funding Scheme remained unchanged at £1.5bn for OSB and £1.1bn for CCFS. In addition, the Group had £290m of borrowings under the Bank of England’s Indexed Long-Term Repo across the two Banks at base rate +15bps, a total of 90bps, as at 31 December 2019 (2018: OSB £80m, CCFS £nil). Through the Combination, the Group now has access to contingent wholesale funding, with up to £600m available to it through the CCFS warehouse facilities, £94m of which were utilised at year end.Statutory pre-tax profit was up 14% to £209.1m for 2019 (2018: restated £182.8m¹), as a result of strong growth at attractive margins and the inclusion of CCFS’ profits from the date of Combination, more than offsetting the impact of exceptional items, integration costs and other acquisition-related items. On a pro forma underlying basis, profit before tax increased by 9% due to strong growth at attractive margins and continued cost efficiency and discipline.Profitable lending and cost discipline and efficiency contributed to a return on equity of 18% on a statutory basis (2018: restated 25%²) and 25% on a pro forma underlying basis (2018: 28%).The Group ended the year with a CET1 ratio of 16.0% (2018: 13.3%), demonstrating the strength of the capital generation capability of the business to support significant growth through profitability and the beneficial impact of the fair value uplift on CCFS’ net assets on Combination. The Group’s total capital ratio of 17.3% and leverage ratio of 6.5% remained strong (2018: 15.8% and 5.9% respectively).1. Net interest income and profit before tax were restated as a result of the recognition of interest expense on the £22m of Perpetual Subordinated Bonds previously classified as equity.2. To align calculation methods post Combination, OSB amended its calculation of return on equity to include average equity on a 13 point average from a simple average. The comparative return on equity ratio was restated.Segment reviewFollowing the Combination, the Group segmented its lending business into two segments: OSB and CCFS.Segment review – OneSavings Bank (‘OSB’)The following tables show the OSB segment’s statutory loans and advances and contribution to profit:1. In 2019, the Group restated the prior year comparatives to recognise interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity.
Buy-to-Let/SMEBuy-to-Let/SME sub-segment: gross loansThis segment comprises Buy-to-Let mortgages secured on residential property held for investment purposes by experienced and professional landlords, commercial mortgages
secured on commercial and semi-commercial properties held for investment purposes or for owner-occupation, bridge finance, residential development finance to small and medium-sized
developers, secured funding lines to other lenders and asset finance.The volume of new organic lending in our Buy-to-Let/SME sub-segment reached £2,847.2m in 2019, an increase of 3% on the prior year (2018: £2,769.7m). Gross loans were £8,983.2m, up 22% from £7,389.2m in 2018. The Buy-to-Let/SME net loan book represented 83% of total OSB loans as at 31 December 2019.Gross loans in the Buy-to-Let sub-segment increased by 19% to £7,727.0m (2018: £6,517.5m) with lending mostly dominated by professional, multi-property landlords who remained at 81% of completions by value for OSB in 2019. For our Kent Reliance brand, 75% (2018: 70%) of mortgage applications were from landlords borrowing via a limited company, as recent changes to personal taxation favour structuring portfolios in this way.Refinancing continued to represent 60% of Kent Reliance Buy-to-Let completions and five-year fixed rate mortgages were 52% (2018: 58% and 56%, respectively). This mix reflected the wider market which saw reduced purchases in 2019 and continued demand for five-year fixed rate products. Our retention programme, Choices, continued to be popular, with around 69% (2018: 69%) of existing borrowers choosing a new product with the Bank within three months of their original product ending.The weighted average loan to value (‘LTV’) of the Buy-to-Let book as at 31 December 2019 was 73% with an average loan size of £260,000 (2018: 70% and £260,000). The weighted average interest coverage ratio for Buy-to-Let origination during 2019 was 187% (2018: restated 185%¹).2019 was an exceptional year for our InterBay business with the commercial and semi-commercial gross loan book up 62% to £888.0m (2017: £547.8m) as we continued to expand our distribution network to reach those brokers who work with borrowers with needs closely aligned to InterBay’s products. Through this brand OSB lends to borrowers investing in commercial, semi-commercial and bridging, reported in the Commercial total, and more complex Buy-to-Let properties, reported in the Buy-to-Let total. Lending was supported by the business’ core strengths in rapid and effective underwriting and our ability to deal with large and complex cases. The weighted average LTV in the commercial sub-segment remained low at 67% and the average loan size was £375,000 in 2019 (2018: 66% and £360,000, respectively).InterBay Asset Finance, which predominantly targets UK SMEs and small corporates financing business-critical assets was launched in 2018. The gross carrying amount under finance leases was £47.7m as at 31 December 2019 (2018: £7.2m). Our Heritable residential development business continues to provide prudent development finance to small and medium-sized residential developers. The preference is to fund house builders who operate outside central London and provide relatively affordable family housing, as opposed to complex city centre schemes where affordability and construction cost control can be more challenging. New applications come primarily from a mixture of repeat business from the team’s extensive existing relationships and referrals.The residential development funding gross loan book at the end of 2019 was £146.1m, with a further £115.1m committed (31 December 2018: £155.8m and £90.3m, respectively). Since inception through to the end of 2019, the business has written £1,013m of loans of which £534m have been repaid to date. The business had commitments to finance the development of just under 2,000 residential units as at the end of 2019, the majority of which are houses located outside central London.In addition, OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as bridging finance and asset finance. Total credit- approved limits as at 31 December 2019 were £540.0m with total loans outstanding of £222.1m (31 December 2018: £385.0m and £168.1m, respectively). During 2019, three new funding lines were added and credit approved limits increased by a further £50.0m across three existing funding lines. The pipeline remains robust, however, given the macroeconomic uncertainty, the business continues to adopt a cautious approach.Buy-to-Let/SME made a contribution to profit of £231.7m in 2019, up 9% compared with the restated value of £212.8m² in 2018, primarily due to the growth in new lending, partially offset by higher impairment losses of £13.8m (2018: £5.7m). The increase in impairment losses was driven by an increase in the number of Law of Property Act receivers (‘LPA’) appointed in the first half of the year, which attract higher provision requirements under an IFRS 9 approach. During the second half of 2019, the LPA flow stabilised. Alignment of IFRS 9 modelling methodologies and loan book growth also contributed to the increase in loan losses.The Group remains highly focused on the risk assessment of new lending as demonstrated by the average LTV in the Buy-to-Let/SME segment as at 31 December 2018 of 72% (31 December 2018: 70%) with only 1.8% of loans exceeding 90% LTV (31 December 2018: 0.6%). The average LTV for new Buy-to-Let/SME origination remained at 70%.1. Interest coverage ratio was restated for 2018 from 171% to 185% due to an improvement in the calculation
methodology.
2. Net interest income and contribution to profit were restated as a result of the recognition of interest expense
on the £22m of Perpetual Subordinated Bonds previously classified as equity.
Residential mortgagesResidential sub-segment: gross loansThis segment comprises lending to owner-occupiers, secured via either first or second charges against the residential home. The Bank also provides funding lines to non‑bank lenders who operate in high‑yielding, specialist sub‑segments such as residential bridge finance.The Residential gross loan book was £1,837.4m as at 31 December 2019, up 14% compared with the previous year (2018: £1,616.0m) with organic originations nearly doubling in the year to £540.5m (2018: £280.1m).OSB’s first charge gross loan book grew in the year to £1,466.6m, which was 20% up from £1,223.9m in 2018. This strong performance was largely due to new organic lending as the Bank’s ability to make quick underwriting decisions and the product range launched in 2018 proved popular with borrowers.Our Kent Reliance brand provides bespoke first charge mortgages, typically to prime credit quality borrowers with more complex circumstances, for example, high net worth borrowers with multiple income sources and self-employed borrowers. These circumstances often preclude them from the mainstream lenders, as most favour automated decision-making over manual underwriting. The extended product range launched in 2018 also includes near-prime residential products. Kent Reliance also operates in the shared ownership sector, where borrowers buy a property in conjunction with a housing association and in 2019 the Bank’s share of this sector increased.Our second charge mortgage brand, Prestige Finance, provides secured finance to good credit quality borrowers who are seeking a loan to raise funds without  refinancing their first charge mortgage. Competitive pressure in the second charge segment kept pricing low and OSB continued to focus on pricing for risk. The second charge residential loan book had a gross value of £358.6m as at 31 December 2019 (2018: £368.0m).OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as residential first and second charge finance. The Bank continued to adopt a cautious approach to these more cyclical businesses given macroeconomic uncertainty. Total credit approved limits as at 31 December 2019 were £31.0m with total loans outstanding of £12.2m (2018: £51.8m and £24.1m, respectively).Residential mortgages made a contribution to profit of £59.7m in 2019, broadly flat compared with the restated value of £60.2m¹ in 2018, despite growth in the loan book, primarily due to the changing mix of the book and EIR gains on acquired portfolios in the prior year, partially offset by provision releases resulting from falling arrears levels across both first and second charge lending.The average LTV remained low at 58% (2018: 56%) with only 3.3% of loans by value with LTVs exceeding 90% (2018: 3%). The average LTV of new residential origination during 2019 was 69% (2018: 68%).1. Net interest income and contribution to profit were restated as a result of the recognition of interest expense
on the £22m of Perpetual Subordinated Bonds previously classified as equity.Segment review – Charter Court Financial Services (‘CCFS’)The CCFS segment is presented on a pro forma underlying basis which assumes that the Combination occurred on 1 January 2018 and includes 12 months of results from CCFS. It excludes acquisition-related items.
1. Other relates to the net interest income from acquired loan portfolios and fee income from third party mortgage servicing.CCFS gross loans1. Other relates to the net interest income from acquired loan portfolios and fee income from third party mortgage servicing.Charter Court Financial Services targets underserved specialist mortgage market segments with a focus on specialist Buy-to-Let, residential, bridging and second charge lending.The CCFS gross loan book grew 11% to £7,374.4m at the end of 2019 (2018: £6,665.1m). Excluding the impact of structured asset sales, the gross loan book would have been £8,491.9m, 27% higher than in 2018. This growth was supported by organic originations of £3,108.2m at attractive margins (2018: £2,846.1m).Buy-to-Let sub-segment
During 2019, CCFS’ organic originations in the Buy-to-Let sub-segment were £1,895.2m, an increase of £253.2m versus the prior year (2018: £1,642.0m). The growth reflects continuing demand for the Group’s specialist lending proposition. The net loan book increased 5% in the year to £4,745.0m after structured asset sales and on a pro forma underlying basis, Buy-to-Let mortgages represented 64% of CCFS’ total net loan book.All CCFS’ Buy-to-Let products proved popular with borrowers, especially with those investing via limited companies, which increased 21% in the year, and those investing in specialist property types including houses of multiple occupation, multi-unit properties and holiday lets which increased 63% in 2019.In 2019, CCFS enhanced its product range which enabled it to grow in the specialist Buy-to-Let market segments. The Precise branded Buy-to-Let product mix became more diverse during the year, with particular growth in shorter-term fixed rate products, following the introduction of a top slicing proposition for landlords with excess income to contribute towards a stressed affordability assessment. This resulted in a fall in five-year fixed rate products as a percentage of total Buy-to-Let originations to 72% from 77% in 2018.The business maintained its position in the BVA BDRC’s Project Mercury rankings (effectiveness of lenders intermediary marketing) as the fourth most frequently mentioned lender by intermediaries for Buy-to-Let, reflecting CCFS’ broad product offering across the Buy-to-Let segment.On a pro forma underlying basis, Buy-to-Let made a contribution to profit of £112.3m in 2019, up 6% compared with £105.7m in 2018. Net interest income increased 9% to £114.3m and fees and commissions income reduced  due to early repayment charges being included in net interest income and not in fees and commisions as in 2018 following an accounting policy change. The increase in impairment losses in 2019 was primarily driven by alignment in
IFRS 9 modelling methodologies post Combination.On a statutory basis, the Buy-to-Let sub-segment made a contribution to profit of £12.3m.New lending average loan to value in this segment was 73% with an average loan size of £183,000 (2018: 74% and £169,000). The book loan to value was 71% as at 31 December 2019 (2018: 73%). The weighted average interest coverage ratio for Buy-to-Let origination during 2019 was 202% (2018: 201%).Residential sub-segment
CCFS’ specialist residential lending decreased in 2019 compared with 2018 albeit still at a high level, with new originations down 3% to £797.2m (2018: £825.4m). CCFS concentrated on lending in areas that had stronger risk-adjusted returns versus mainstream markets, where intense competition reduced residential mortgage rates. The Help to Buy proposition continued to perform particularly well and focus on self-employed borrowers led to an increase in the residential gross loan book of 27% to £2,170.8m in the year.In 2019, CCFS enhanced its residential proposition with new products targeting zero-hour contracts, Help to Buy in Scotland and Help to Buy remortgages. The Group continues to maintain a strong new product pipeline to support its growth in the specialist residential segment going forward.The average loan size for the residential sub-segment was £159,000 (2018: £152,000) with average LTV for new lending of 71% (2018: 72%) and book LTV of 67% (2018: 70%) as at 31 December 2019.On a pro forma underlying basis, residential mortgages represented 28% of CCFS’ total net loan book as at 31 December 2019.The residential sub-segment made a contribution to profit of £62.1m on a pro forma underlying basis, up 12% compared with £55.6m in 2018 reflecting growth in the loan book partially offset by higher impairment losses due to loan book growth and alignment in IFRS 9 modelling methodologies post Combination.On a statutory basis, the Residential sub-segment made a contribution to profit of £9.2m.Bridging sub-segment
Short-term bridging originations increased by 4% in 2019, reaching £333.7m (2018: £321.8m). The business maintained its focus on high-quality lending in regulated and unregulated markets, rather than reacting to increased competition in the short-term lending market. Strong repayments during the year saw the gross loan book reduce to £214.4m compared with £244.1m at the end of 2018.The Standard and Refurbishment segments both increased along with the Regulated and Non-Regulated segments. The Non-Regulated and Refurbishment segments saw the strongest growth, boosted by the launch of CCFS’ Refurbishment Buy-to-Let product at the end of 2018. These products require strong combined Buy-to-Let and bridging capability, areas of strength for CCFS. In addition, CCFS enhanced its distribution by expanding its reach to direct brokers.On a pro forma underlying basis, the bridging sub-segment made a contribution to profit of £15.1m in 2019, broadly flat compared with £15.2m in 2018 despite higher impairment losses of £0.5m (2018: £nil) due to IFRS 9 modelling enhancements made during 2019.On a statutory basis, the bridging sub-segment made a contribution to Group’s profit of £3.4m.Second charge sub-segment
The second charge gross loan book increased by 19% to £218.6m (2018: £184.2m), supported by strong originations of £82.2m, which were up 44% on 2018.During the year, CCFS enhanced its product offering and distribution network, whilst maintaining its focus on the quality of lending in this segment.In response to market feedback, from early 2019, CCFS removed early repayment charges in its residential second charge product range. This brought a significant increase in applications. Distribution was also enhanced in the year, with a focus on direct-to-broker business through major networks and panels, which provides the business with a competitive advantage over smaller players, which generally deal through master brokers.The second charge sub-segment made a contribution to profit of £7.0m on a pro forma underlying basis, up 8% compared with £6.5m in 2018.On a statutory basis, the contribution to profit from the second charge sub-segment was a loss of £0.1m as net interest income was more than offset by higher impairment losses.Wholesale funding overviewSecuritisation is a key strategic funding source for the combined Group, with historical issuances across CCFS and OSB since 2013 of £5.7bn.As well as providing cost-efficient funding through securitisation, the Group has benefited from the capability to accelerate organic capital generation through the sale of residual positions. The Group’s strategy is to be nimble and dynamic rather than deterministic with its securitisation issuance plans, enabling it to take advantage of a strong market with repeat issuances, and utilise other options when market conditions are less favourable. To that end, the Group’s activities in the wholesale markets during 2019 were more limited than was the case during the equivalent period in 2018. The ongoing uncertainty around negotiations of the UK’s exit from the European Union continued to hamper UK residential mortgage-backed securities market (‘RMBS’), with spreads tracking relatively wide throughout the year, as they had through the last few months of 2018.The introduction of a raft of regulatory changes at the beginning of 2019, together with the market transitioning away from LIBOR as an index, also acted as a brake on new issue supply, particularly during the first quarter of 2019.Nonetheless, the Group was able to complete a number of strategically important wholesale transactions during the year. In January 2019, despite facing a difficult political backdrop, CCFS was able to sell its residual interest in the PMF 2018-1B and PMF 2018-2B transactions, generating a gain on sale of £29.8m, equivalent to a 5.3% premium on the underlying £564.3m of mortgage assets. This excellent outcome was made possible through the earlier strategic sales of significant components of CCFS’ residual interest in these transactions through 2018, at a time when the market was notably stronger. This strategy minimised the market exposure faced by CCFS when selling its final residual positions in these transactions in January 2019. The trade enabled CCFS to increase its capital headroom and provide the capital capacity to fully take advantage of the commercial opportunities available to the business through its lending activities during the year.CCFS re-entered the debt securitisation market in May 2019 with the PMF 2019-1B transaction, securitising £733.7m of prime Buy-to-Let mortgages. PMF 2019-1B was the first SONIA-linked UK RMBS transaction to issue mezzanine notes referencing the index, and was well received by the market. The senior fast-pay notes in the transaction were sold at SONIA plus 93bps, equivalent to a spread over LIBOR of c. 80bps; on that basis the tightest such UK Buy-to-Let securitisation achieved by any issuer in 2019.In July 2019, CCFS sold its remaining junior residual interest in the transaction to generate a further gain on sale of £28.8m, bringing the total gains from such transactions for the year to £58.7m.In July 2019, OSB issued its inaugural RMBS transaction of own-originated Buy-to-Let mortgage assets, Canterbury Finance No.1. The transaction was well received, with senior funding in the order of SONIA plus 117bps achieved across the £200m of senior notes placed.In addition to providing the Group with attractively priced term funding, both the PMF and Canterbury transactions were structured in such a way as to provide the Group with a significant portfolio of retained senior bonds. These enhance the contingent funding options available to the Group, and can be used to access commercial as well as central bank repo facilities.The PMF transaction also enabled CCFS to refinance assets held on its committed warehouse facility. The facility, which provides committed senior finance of up to £350m (31 December 2018: £350m for CCFS only) against both prime residential and Buy-to-Let mortgage assets, was extended during the year for a further 15 months. In combination with a second facility available for such purposes, on a statutory basis, the Group had a total of up to £600m (31 December 2018: £nil) of contingent wholesale funding capacity available to it through its warehouse facilities, £94m of which was utilised at the year end.The Group maintains commercial repo lines with eight counterparties, as well as the ability to access ordinary course central bank funding facilities, such as the Bank of England’s Indexed Long-Term Repo auctions.
Financial reviewSummary statutory results for 2019 and 2018                                                Restated¹
Group                                      Group
31/12/2019                                31/12/2018
Summary Profit or Loss                                   £m                                           £mNet interest income                                            344.7                                        286.3
Net losses on financial instruments                    (3.4)                                          (5.2)
Net fees and commissions                                2.2                                            0.6
External servicing fees                                      (0.1)                                          (0.6)
Administrative expenses                                    (108.7)                                      (79.6)
Provisions                                                        –                                               (0.8)
Impairment losses                                             (15.6)                                        (8.1)
Gain on Combination with CCFS            10.8                                          –
Integration costs                                               (5.2)                                          –
Exceptional items                                              (15.6)                                        (9.8)
Profit before taxation                                        209.1                                        182.8
Profit after taxation                                           158.8                                        139.6Key ratios 
Net interest margin²                                           243bps                                    305bps
Cost to income ratio                                          32%                                          28%
Management expense ratio³                               0.76%                                       0.84%
Loan loss ratio²                                                 0.13%                                       0.10%
Basic EPS, pence per share                              52.6                                          55.5
Return on equity²                                               18%                                          25%
Dividend per share, pence per share                  16.1                                          14.6Extracts from the Statement of Financial Position£m                                           £mLoans and advances                                         18,446.8                                    8,983.3
Retail deposits                                                  16,255.0                                    8,071.9
Total assets                                                       21,417.1                                   10,460.2Key ratios                                                        Common equity tier 1 ratio⁴                                16.0%                                       13.3%
Total capital ratio                                               17.3%                                       15.8%
Leverage ratio                                                     6.5%                                         5.9%1.  The Group restated the prior year comparatives to recognise interest expense and taxation on the £22m Perpetual
Subordinated Bonds previously classified as equity.
2. To align calculation methods post Combination, OSB amended the NIM, loan loss ratio and return on equity
calculations to include average interest earning assets for NIM, average gross loans for loan loss ratio and average
shareholders equity for return on equity on a 13 point average rather than a simple average. The comparative ratios
were restated.
3. Administrative expenses as a percentage of 13 point average of total assets.
4. Fully-loaded under Basel III/CRD IV.

Strong profit growth
The Group reported 14% growth in statutory profit before taxation to £209.1m (2018: restated £182.8m¹) after exceptional items, integration costs and other acquisition-related items of £33.2m² (2018: exceptional cost of Heritable option of £9.8m) and including £28.0m of profit before taxation from the CCFS business, after exceptional transaction costs of £15.7m.Statutory profit after taxation in 2019 increased by 14% to £158.8m (2018: restated £139.6m¹) including the after tax exceptional items, integration costs and other acquisition-related items of £27.4m² (2018: exceptional cost of Heritable option of £7.2m) and including £24.8m of profit after taxation from the CCFS business, after post tax pre-combination transaction costs of £15.5m.The Group’s effective tax rate was 22.8%³ in 2019 (2018: 23.7%), primarily due to a lower proportion of the Group’s profits being subject to the Bank Corporation Tax Surcharge.Statutory return on equity for 2019 fell to 18% (2018: restated 25%⁴), primarily due to exceptional items, integration costs and other acquisition-related items. Statutory basic earnings per share fell by 5% to 52.6 pence per share (2018: 55.5 pence per share), due to the 14% increase in profit after taxation being more than offset by the impact of the additional shares issued for the all-share Combination with CCFS.Net interest margin (‘NIM’)
The Group reported an increase in net interest income of 20% to £344.7m in 2019 (2018: restated £286.3m¹), reflecting strong growth in the loan book and the inclusion of CCFS’ net interest income post Combination.Net interest income included effective interest rate (‘EIR’) reset gains of £5.0m in 2019 (2018: £5.6m) due to assuming a period spent on standard variable rate (‘SVR’) on additional products, as behavioural trends emerged, and cash out-performance on purchased mortgage portfolios.Statutory NIM for 2019 reduced to 243bps (2018: restated 305bps^{1, 4}), primarily due to the dilutive impact of including CCFS’ results post Combination and the impact of the changing mix of the OSB loan book, despite broadly stable asset pricing.The CCFS business has a lower NIM than the OSB business and statutory NIM in 2019 was also negatively impacted by the amortisation of the fair value uplift on acquisition of the CCFS loan book.The mix of the OSB loan book continued to change as the higher-yielding back book refinanced onto front book pricing. The impact of this mix effect had largely run its course by the end of the first half, assuming stable mortgage pricing, cost of funds and swap spreads going forward.Losses on financial instruments
The statutory fair value loss on financial instruments in 2019 of £3.4m (2018: £5.2m) includes a net loss of £1.3m from the Group’s hedging activities (2018: £0.3m net loss), £5.5m amortisation of fair value adjustments on hedged assets relating to cancelled swaps (2018: £4.6m) and a gain of £3.3m due to acquisition-related inception adjustments under hedge accounting.The net gain on hedging activities includes a loss of £4.8m in respect of the ineffective portion of hedges and net gains on unmatched swaps of £3.5m (2018: £2.7m loss and £2.4m gain respectively). The net gains on unmatched swaps, which primarily relate to mortgage pipeline hedges, include the impact of gains in CCFS post Combination due to movements in the LIBOR curve.The amortisation of fair value adjustments on hedged assets in both years, includes the impact of accelerating the amortisation in line with the run-off of the underlying legacy long-term fixed rate mortgages, due to faster than expected prepayments.Net fees and commission
Statutory net fees and commission income of £2.2m (2018: £0.6m) comprised fees and commission receivable of £3.4m (2018: £1.7m) partially offset by commission expense of £1.2m (2018: £1.1m).Fees and commissions receivable doubled in the year mostly as a result of the inclusion of £1.5m of fees and commissions from CCFS.Fees and commissions payable in 2019 remained broadly flat and related to branch agency fees and commissions paid to the Kent Reliance Provident Society for conducting member engagement activities for OSB.Efficient and scalable operating platform
Statutory administrative expenses were up 37% to £108.7m in 2019 (2018: £79.6m), due to growth in the balance sheet and the inclusion of £19.2m of CCFS administrative expenses post Combination.The Group’s statutory cost to income ratio of 32% (2018: 28%) was impacted by the acquisition-related adjustments which reduced total income on a statutory basis and the inclusion of CCFS income and administrative expenses post Combination.The management expense ratio was 0.76% (2018: 0.84%) reflecting cost efficiencies in the day to day running of the Group on a business as usual basis and further economies of scale, despite continued investment in the business.Provisions
Statutory regulatory provisions were £nil in 2019 as the provision expense was fully offset by an FSCS refund.  In 2018, regulatory provisions were £0.8m and included levies due to Financial Services Compensation Scheme and other regulatory provisions on acquired books.Impairment losses
Statutory impairment losses increased to £15.6m in 2019 (2018: £8.1m) representing 13bps on average gross loans and advances (2018: 10bps).Impairment losses included a provision relating to the initial recognition of expected credit losses on the CCFS portfolios of £3.6m and the impact of aligning IFRS 9 provision methodologies post Combination. Impairment losses were also impacted by a number of high-value Buy-to-Let cases in OSB having Law of Property Act (‘LPA’) receivers appointed during the first half of 2019, which attracted a higher provision requirement under an IFRS 9 modelling approach. During the second half of 2019, the number of LPA appointments stabilised.Gain on Combination with CCFS
The Group recorded a gain of £10.8m which represents negative goodwill on the Combination with CCFS. Negative goodwill arose as a result of a decrease in the OSB share price between announcement and completion dates and an increase in the fair value of the loan book acquired due to movements in the LIBOR curve between announcement and completion. For more information, see note 4 to the Financial statements.Integration costs
There were £5.2m of integration costs incurred in 2019 post completion of the Combination.Exceptional items
Statutory exceptional items of £15.6m in 2019 comprise transaction costs incurred by OSB in relation to the Combination with CCFS.The exceptional item of £9.8m in 2018, related to the fair value of the Heritable option.Dividend
The Board recommends a final dividend for 2019 of 11.2 pence per share. Together with the 2019 interim dividend of 4.9 pence per share and the pre-Combination CCFS interim dividend of 4.3 pence per share, this represents 25% of pro forma underlying profit attributable to ordinary shareholders. For calculation of 2019 final dividend, see Appendix.The proposed final dividend will be paid on 13 May 2020, subject to approval at the AGM on 7 May 2020, with an ex-dividend date of 26 March 2020 and a record date of 27 March 2020.Balance sheet growth
Net loans and advances to customers more than doubled in 2019 to £18,446.8m (31 December 2018: £8,983.3m) on a statutory basis, reflecting strong gross originations and the inclusion of the CCFS loan book.Retail deposits increased to £16,255.0m from £8,071.9m in 2018 on a statutory basis, commensurate with the growth in the loan book.Drawings under the Term Funding Scheme (‘TFS’) increased from £1.5bn to £2.6bn for the Group, due to the inclusion of CCFS’ drawings of £1.1bn. The TFS drawdowns are offered in the form of collateralised cash loans. The scheme closed to new drawings at the end of February 2018 and the Group has four years from the date of drawing to repay the existing loans.The Group also took the opportunity to complement its retail and TFS funding in 2019 with further borrowing under the Bank of England’s Indexed Long-Term Repo scheme (‘ILTR’) which is an auction with borrowings offered as a collateralised cash loan repayable in six months. At 31 December 2019, the Group had £290.0m (2018: £80.0m) of borrowings under the ILTR scheme at base rate +15bps, a total of 90bpsThe Group had up to £600m (2018: £nil) of contingent wholesale funding capacity available to it through the CCFS warehouse facilities, £94m of which was utilised at the year end.The Group also utilises sophisticated securitisation platforms to complement its funding requirements.Liquidity
Both OSB and CCFS operate under the Prudential Regulation Authority’s liquidity regime and are managed separately for liquidity risk. Both Banks hold their own significant liquidity buffer of liquidity coverage ratio (‘LCR’) eligible high-quality liquid assets (‘HQLA’).As at 31 December 2019, OSB had £1,231.8m (2018: £1,354.6m) and CCFS had £1,077.3m (2018: £868.3m) of HQLA LCR eligible assets. CCFS also held a £186.2m (2018: £131.9m) portfolio of RMBS qualifying as Bank of England level 3 collateral.Both Banks operate within a target liquidity runway in excess of the minimum LCR regulatory requirement, which is based on internal stress testing. Both Banks have a range of contingent liquidity and funding options available for possible stress periods.As at 31 December 2019, OSB had a liquidity coverage ratio of 199% (2018: 224%) and CCFS 145% (2018: 173%), both significantly in excess of the 2019 regulatory minimum of 100%.Capital
The Group’s fully-loaded CET1 capital ratio under CRD IV strengthened to 16.0% as at 31 December 2019 (31 December 2018: 13.3%), demonstrating the strong organic capital generation capability of the business to support significant growth through profitability and the beneficial impact of the fair value uplift on CCFS’ net assets on acquisition.The Group had a total capital ratio of 17.3% and a leverage ratio of 6.5% as at 31 December 2019 (31 December 2018: 15.8% and 5.9% respectively).The combined Group had a Pillar 2a requirement of 1.67% of risk-weighted assets (excluding a static integration add-on) as at 31 December 2019 (31 December 2018: 1.1% for OSB only).Summary cash flow statement1. The Group restated the prior year comparatives to recognise interest expense and taxation on the £22m Perpetual Subordinated Bonds previously classified as equity.Cash flow statement
The Group’s cash and cash equivalents increased by £778.6m during the year to £2,102.8m as at 31 December 2019.Loans and advances to customers increased by £2,230.8m during the year, partially funded by £1,637.8m of deposits from retail customers. The movements in loan book and retail funds exclude the acquired positions from CCFS due to the merger being a share for share exchange. Additional funding was provided by cash generated from financing activities of £488.1m and included £170.0m of net drawings under the Indexed Long-Term Repo scheme, £220.4m of proceeds from securitisation of mortgages, warehouse funding of £93.5m and £41.3m from commercial repos offset by dividend payment of £37.3m. Cash generated from investing activities increased to £826.6m largely as a result of £870.4m of cash and cash equivalents acquired on the Combination with CCFS.In 2018, the increase in the Group’s loans and advances to customers of £1,689.5m was largely funded by £1,421.6m of deposits from retail customers and contributed to £85.1m of cash used in operating activities. The remaining funding came largely from the final drawdown under the TFS of £250.0m and £80.0m of funding under the Bank of England’s Indexed Long-Term Repo scheme, which generated £289.0m of cash from financing activities. Cash used in investing activities was £45.6m, primarily driven by net purchases and maturities of investment securities of £40.0m.1. The Group restated the prior year comparatives to recognise interest expense and taxation on the £22m Perpetual
Subordinated Bonds previously classified as equity.
2. This comprises £48.9m (£42.9m after tax) of acquisition-related items as shown in the reconciliation of statutory to pro forma underlying results below, less CCFS’ pre-acquisition transaction costs of £15.7m (£15.5m after tax).
3. Effective tax rate excludes £2.7m of adjustments relating to prior years.
4. To align calculation methods post Combination, OSB amended the NIM, loan loss ratio and return on equity calculations to include average interest earning assets for NIM, average gross loans for loan loss ratio and average shareholders equity for return on equity on a 13 point average ratgher than a simple average. The comparative ratios were restated.Alternative performance measures
The Group presents alternative performance measures (‘APMs’) in this Strategic Report as management believes they provide a more consistent basis for comparing the Group’s performance between financial periods. Pro forma underlying results assume that the Combination occurred on 1 January 2019, and include 12 months of results from CCFS. They also exclude exceptional items, integration costs and other acquisition-related items.APMs reflect an important aspect of the way in which operating targets are defined and performance is monitored by the Board. However, any APMs in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well.For more information on the APMs and the reconciliation between APMs and the statutory equivalents, see appendix.Summary pro forma results for 2019 and 2018                                               
Group                                      Group
31/12/2019                                31/12/2018
Summary Profit or Loss                                   £m                                           £mNet interest income                                            518.4                                        466.8
Gain on sale of loans                                        58.6                                          36.4
Net losses on financial instruments                    (20.3)                                        (5.2)
Net fees and commissions                                5.9                                            8.6
External servicing fees                                      (0.1)                                          (0.6)
Administrative expenses                                    (165.1)                                      (144.2)
Provisions                                                        –                                               (0.8)
Impairment losses                                             (16.3)                                        (10.2)
Profit before taxation                                        381.1                                        350.8
Profit after taxation                                           294.2                                        267.6Key ratios 
Net interest margin                                            266bps                                    286bps
Cost to income ratio                                          29%                                          28%
Management expense ratio                                0.84%                                       0.88%
Loan loss ratio                                                   0.10%                                       0.07%
Basic EPS, pence per share                              64.9                                          59.4
Return on equity                                                25%                                          28%Extracts from the Statement of Financial Position£m                                           £mLoans and advances                                         18,151.4                                    15,644.8
Retail deposits                                                  16,248.6                                    13,166.4
Total assets                                                       21,166.5                                   18,246.7
Strong profit growth
Pro forma underlying profit before taxation was £381.1m in 2019, up 9% from £350.8m in 2018, due primarily to strong growth in the loan book, net of structured asset sales, at attractive margins and continued cost discipline.Pro forma underlying profit after taxation was £294.2m in 2019, up 10% from £267.6m in 2018. On a pro forma underlying basis, the Group’s effective tax rate was 22.8% in 2019 (2018: 23.7%), with a lower proportion of the Group’s profits subject to the Bank Corporation Tax Surcharge.On a pro forma underlying basis, return on equity for 2019 remained strong at 25% (2018: 28%) and basic earnings per share increased by 9% to 64.9 pence per share (2018: 59.4 pence per share), broadly commensurate with the increase in profit after taxation.Net interest margin
On a pro forma underlying basis, net interest income was up 11% from £466.8m in 2018 to £518.4m in 2019 due to growth in the loan book at attractive margins.Net interest income included EIR reset gains of £5.0m in 2019 (2018: £5.6m) due to assuming a period spent on standard variable rate on additional products, as behavioural trends emerged, and cash out-performance on purchased mortgage portfolios.On a pro forma underlying basis NIM reduced to 266bps (2018: 286bps), primarily reflecting the impact of the changing asset mix of the OSB loan book, despite broadly stable asset pricing and a marginally higher cost of funds in the CCFS business.The mix of the OSB loan book continued to change as the higher-yielding back book refinanced onto front book pricing. The impact of this mix effect had largely run its course by the end of the first half, assuming stable mortgage pricing, cost of funds and swap spreads going forward.Gain on sale of loans
The gain on sale of loans of £58.6m on a pro forma underlying basis relates to sales of residual interests in three CCFS securitisations to third party investors in 2019, prior to the Combination (2018: £36.4m).Losses on financial instruments
Pro forma underlying net fair value loss on financial instruments increased to £20.3m (2018: £5.2m loss). This increase was largely due to £13.3m of losses on unmatched swaps, primarily relating to mortgage pipeline hedges, due to movements in the LIBOR curve during 2019.Net fees and commissions
Pro forma underlying net fees and commissions of £5.9m (2018: £8.6m), primarily relate to CCFS’ fees for servicing third party mortgage portfolios.Administrative expenses
Pro forma underlying administrative expenses were £165.1m in 2019, up 14% from £144.2m in 2018, primarily due to balance sheet growth.The cost to income ratio on a pro forma underlying basis remained strong at 29% (2018: 28%) as the business retained its focus on cost efficiency and discipline.The management expense ratio reduced to 0.84% on a pro forma underlying basis (2018: 0.88%), reflecting this cost discipline and benefits of scale, despite continued investment in the business.Provisions
Provisions on a pro forma underlying basis  were £nil in 2019 as the provision expense was fully offset by an FSCS refund. In 2018, provisions were £0.8m and included levies due to Financial Services Compensation Scheme and other regulatory provisions on acquired books.Impairment losses
Impairment losses on a pro forma underlying basis increased to £16.3m in 2019 (2018: £10.2m) representing 10bps (2018: 7bps) on average gross loans and advances.The loan loss ratio remained strong as both Banks delivered strong credit performance driven by robust underwriting and prudent lending policies. The year-on-year increase in the loan loss ratio was primarily due to the impact of aligning IFRS 9 modelling approaches post Combination and the impact of a number of high value Buy-to-Let cases having LPA receivers appointed during the first half of 2019, attracting higher provision requirements under the IFRS 9 modelling approach. The number of LPA appointments stabilised in the second half of 2019.Balance sheet
On a pro forma underlying basis, the loan book increased by 16% to £18,151.4m (2018: £15,644.8m), primarily due to strong levels of originations in the year for both OSB and CCFS, partially offset by structured asset sales by CCFS prior to the Combination. The loan book growth would have been 23% excluding the impact of these sales.Retail deposits increased by 23% during 2019 to £16,248.6m (2018: £13,166.4m) as both Banks continued to attract new savers by offering attractively priced savings products and outstanding customer service.Total assets increased in the year by 16% to £21,166.5m (2018: £18,246.7m).Drawings under the TFS scheme were £2.6bn on a pro forma underlying basis, unchanged from 2018.  In 2019, the Group also took the opportunity to complement its retail and TFS funding with further borrowing under the Bank of England’s ILTR and at 31 December 2019 it had £290.0m (2018: £80.0m) of borrowings under the ILTR scheme at base rate +15bps, a total of 90bps.The Group had up to £600m (2018: £600m) of contingent wholesale funding capacity available to it through the CCFS warehouse facilities, £94m of which was utilised at the year end.The Group also utilises sophisticated securitisation platforms to complement its funding requirements.Reconciliation of statutory to pro forma underlying results1.  Amortisation of the net fair value uplift to CCFS’ mortgage loans and retail deposits on Combination.
2.  Inception adjustment on CCFS’ derivative assets and liabilities on Combination.
3.  Amortisation of intangible assets recognised on Combination.
4.  Recognition of expected credit losses arising on acquisition of CCFS’ loan book.
5.  Recognition of negative goodwill on Combination as a result of a decrease in the OSB share price between announcement and completion and an increase in the fair value of the loan book acquired due to movements in the LIBOR curve between announcement and completion.
6.  Costs of integration of the two Banks post Combination.
7.  Transaction costs include consultant, legal, professional and success fees in relation to the Combination.
8.  Recognition of a fair value uplift to CCFS’ loan book of £317.0m less amortisation of the fair value uplift of £22.6m and a movement on credit provisions of £1.0m.
9.  Fair value adjustment to hedged assets of £63.2m.
10. Adjustment of £0.7m to deferred tax asset and £19.1m relating to recognition of acquired intangibles on Combination.
11. Fair value adjustment to CCFS’ retail deposits of £7.4m at Combination less amortisation of £1.0m.
12. Fair value adjustment to hedged liabilities of £10.0m.
13. Adjustment to deferred tax liability of £63.1m relating to the fair value adjustments on the loan book and retail deposits and other acquisition related adjustments.
14. The Group restated the prior year comparatives to recognise interest expense and taxation on the £22m Perpetual Subordinated Bonds previously classified as equity
.
Risk reviewExecutive summary
During the year, the Group maintained a low and stable risk profile, in line with the Board’s risk management objectives. The Group continued to enhance its risk identification and management capabilities to ensure ongoing compliance with industry and regulatory standards.By leveraging its Strategic Risk Management Framework (‘SRMF’), the Group actively managed its risk profile in accordance with the Board-approved risk appetite. Through continuous monitoring and assessment of underlying risk drivers, the Group took appropriate and timely actions in response to the changing economic, political, business and regulatory environment.The Group maintained its focus on risk-based investment to enhance data governance and controls, and made good progress towards building Internal Ratings-Based (‘IRB’) approach capabilities.The discipline associated with effective operational resilience continued to be an area of focus. The Group established effective and scalable operating models across all risk types, which included leveraging its OSBI operations.The Group delivered strong and profitable growth whilst maintaining a low and stable risk profile. Loan assets continued to perform strongly in 2019 and the Group maintained high quality capital and liquidity buffers to meet both current and future requirements.Ongoing stress testing demonstrates that the Group is resilient to extreme, but plausible scenarios in the context of ongoing uncertainty surrounding the economic, political and regulatory environment. In particular, the Group continues to actively monitor the developments relating to Brexit negotiations.The Group successfully managed its funding and liquidity profile throughout the year, ensuring that it supported the continued growth of the balance sheet.Key achievements in 2019
Following the Combination with CCFS, significant progress was made on aligning a number of key risk management items, while two Chief Risk Officers were retained to ensure an appropriate level of oversight across the two regulated Banks. Significant work was undertaken during due diligence, and progress continued post completion to identify and manage risks associated with the integration. The risk management frameworks of the two Banks were well aligned pre-integration, which will support both the integration process and the ongoing risk management oversight of both Banks.Work is underway to produce a Combined Group Internal Capital Adequacy Assessment Process (‘ICAAP’) in addition to individual OSB and CCFS ICAAPs. A consistent approach has been agreed to ensure risks to capital are fully assessed across the two Banks and the Group.The Group also made significant progress throughout the year in further enhancing its SRMF,  with a view to ensuring that it is not only fit for purpose today but also in the future, as the Group continues to grow. The Group undertakes a full review of the appropriateness of its risk appetite at least twice a year. During 2019, enhancements were made across a number of risk types including credit, conduct and compliance and regulatory risk.Improvements were made to the Group’s data management and governance capabilities, driven by the Group’s strategic data management objectives. This initiative is designed to deliver integrated data controls, aggregation and reporting capabilities.During 2019, further enhancements were made to the Group’s credit risk management information and reporting capabilities, with more granular information being provided to the Credit and Group Risk Committees. Particular focus was given to providing more segmented information to allow management and the Board to identify any changes in sub-segment performance, with respect to organically-originated business and acquired portfolios.The Group continued to enhance its operational risk and operational resilience activities with increased training and awareness being rolled out across the organisation. A successful live scenario exercise was carried out with senior management and the Board over a two day period, testing the Group’s operational and financial resilience.The Group continued to positively drive forward the vulnerable customer agenda via the Vulnerable Customer Review Committee to ensure all customers continue to consistently receive fair outcomes.Priority areas for 2020
The Group will continue to enhance its risk management activities in 2020, ensuring appropriate oversight of both Banks, while also focusing on the risks posed by the Combination. The Group will manage integration risk as a principal risk, ensuring appropriate oversight by identifying and assessing key risks, developing a risk appetite and reporting to Management and Board Committees.During 2020, the Group will further refine and embed its risk management capabilities in the context of changing economic, business and operating conditions. Priority areas for enhancement include:Alignment of risk management frameworks across OSB and CCFS.Development of a combined Group risk appetite across all principal risk types, with supporting monitoring and reporting capabilities.Integration of second generation IRB credit risk models within credit portfolio monitoring, stress testing and capital planning, risk appetite and risk-based pricing.Development of IRB waiver documentation, demonstrating compliance with approval requirements.Alignment of operational risk management systems and integration of the operational risk management frameworks across OSB and CCFS.Enhancements to operational resilience and business continuity testing to incorporate live data to create a more realistic testing environment.Enhanced conduct risk awareness training, including bespoke face to face training for key business areas.The Board and senior Management continue to provide appropriate oversight and direction to all risk and compliance initiatives. The Group also engages external subject matter experts and consults with supervisory authorities to ensure appropriate levels of transparency and successful outcomes are achieved.Pandemic risk factors
The outbreak of Coronavirus (COVID-19) has now been labelled a global pandemic by the World Health Organisation. If this continues to spread through contagion, it is likely to further intensify the disruptive impact on the global and UK economy. This would result in deteriorating market sentiments, falling investment and consumer spending and diminishing trade flows. Government actions, both fiscal and monetary, may prove to be slow to take effect and/or uncertain in their impact.
The financial services sector in a global pandemic could be adversely impacted as a consequence of deteriorating credit risk profile, market uncertainty, declining liquidity and curtailed operational capacity. A spreading global pandemic could adversely impact the Group across a number of key financial and operational areas.The asset quality profile could be impacted through declining customer affordability, increasing delinquency and diminishing underlying security values. This would feed through into increasing credit write-offs, credit provisions and capital requirements. Use of forbearance may also need to be reassessed to manage the asset quality profile in a prudent and a conduct sensitive manner. The Group may also be required to re-evaluate the key judgements and assumptions underpinning its business, capital, provisioning and wider risk models.The Group’s capital requirements may reduce relative to the business-as-usual plans owing to reduced lending volumes. However this may be offset by increasing contingency and risk based requirements. Additionally, opportunities to effectively deploy capital may also diminish as capital generating capacity is impacted by declining net interest margins and increasing inefficiencies in the underlying operating model.        The Group’s funding sources could be impacted as retail savers prioritise their diminishing available funds towards daily essentials. Retail deposits may also decline as customers reduce savings and investments to operate within the deposit insurance scheme limit. Retail savings and investments could also be impacted by reduced confidence in the UK banking sector. Wholesale are also expected to experience reduced liquidity and risk appetite though this may be offset by more aggressive central bank open market operations. The Group’s operational capacity could be adversely impacted as a consequence of sickness based absenteeism, remote and distributed working arrangements and restricted international and local travel.The Group’s service quality levels could also be adversely impacted as a consequence of increased information requests and transactional support requirements. This would put additional pressure on already diminished customer facing teams. This would adversely impact service quality levels and may result in poor customer outcomes and rising remediation costs. The Group’s operational risk and resilience profiles would also be adversely impacted as a consequence of reduced staffing levels , declining effectiveness of third-party support services and increased propensity for human error owing to a reduced and stretched work force.Risk managementApproach to risk management
The Group views its capabilities to effectively identify, assess and manage its risk profile as critical to its growth strategy. The Group’s approach to risk management is outlined within the SRMF.The SRMF is the overarching framework which enables the Board and senior management to actively manage and optimise the risk profile within the constraints of the risk appetite. The SRMF also enables informed risk-based decisions to be taken in a timely manner by allowing for the interests and expectations of key stakeholders.The SRMF also provides a structured mechanism to align all critical components of an effective approach to risk management. The SRMF links overarching risk principles to day to day risk monitoring and management activities.The modular construct of the SRMF provides an agile approach to keeping pace with the evolving nature of the risk profile and underlying drivers. The SRMF and its core modular components are subject to periodic review and approval by the Board and its relevant Committees.The key modules of the SRMF structure are as follows:1. Risk principles and culture – the Group has established a set of risk principles which inform and guide all risk management activities and has a strong, proactive and transparent ‘risk culture’ where all employees across the Group are aware of their responsibilities in relation to risk management.
2. Risk strategy and appetite – the Group has a clear business mission, vision and strategy which is supported by an articulated risk vision and underlying principles. The Group calibrates its risk appetite to reflect the Group’s strategic objectives and business operating plans, as well as external economic, business and regulatory constraints.
3. Risk assessment and control – the Group’s business model and strategy exposes it to a defined risk profile and the risk governance structure is informed by this risk profile such that the Group can identify and manage its risks in an effective and efficient manner.
4. Risk definitions and categorisation – the Group sets out its principal risks which represent the primary risks to which the Group is exposed.
5. Risk analytics (including stress testing and scenario development) – the Group uses quantitative analysis and statistical modelling to help improve its business decisions.
6. Risk data and IT – the maintenance of high quality risk information, along with the Group’s data enrichment and aggregation capabilities, are central to the Risk function’s objectives being achieved.
7. Risk frameworks, policies and procedures – risk frameworks, policies and supporting documentation outline the process by which risk is effectively managed and governed within the Group.
8. Risk management information (‘MI’) and reporting – the Group has established a comprehensive suite of risk MI and reports covering all principal risk types.
9. Risk governance and function organisation – risk governance refers to the processes and structures established by the Board to ensure that risks are assumed and managed within the Board-approved risk appetite, with clear delineation between risk taking, oversight and assurance responsibilities. The Group’s risk governance framework is structured to adhere to the ‘three lines of defence’ model.Further detail on these modules is set out in the Group’s Pillar 3 disclosures. The following diagrams outline the core components of the SRMF and the organisational arrangements to ensure that the Group operates in accordance with the requirements of the SRMF.Risk appetite
The Group aligns its strategic and business objectives with its risk appetite, enabling the Board and senior management to monitor the risk profile relative to its strategic and business performance objectives. Risk appetite is a critical mechanism through which the Board and senior management are able to identify adverse trends and respond to unexpected developments in a timely and considered manner.The Group risk appetite is articulated by means of a series of statements which outline the level and nature of risks that the Group is able and willing to assume in pursuit of its strategic and business objectives. These statements are further supported by a suite of risk thresholds which ensure that the Group’s risk profile is monitored and controlled within defined parameters and appetite breaches are subject to appropriate management and Board oversight. The Risk Appetite Framework also helps to outline roles and responsibilities pertaining to all aspects of the risk appetite, based on a defined structure, processes, procedures and governance.Risk appetite is calibrated to reflect the Group’s strategic objectives, business operating plans, as well as external economic, business and regulatory constraints. In particular, risk appetite is calibrated to ensure that the Group continues to deliver against its strategic and business objectives and maintains sufficient financial resource buffers to withstand plausible but extreme stresses. The primary objective of the risk appetite is to ensure that the Group’s strategy and business operating model is sufficiently resilient.The risk appetite is calibrated using statistical analysis and stress testing to inform the process for setting management triggers and limits against key risk indicators. The calibration process is designed to ensure that timely and appropriate actions are taken to maintain the risk profile within approved thresholds. The Board and senior management actively monitor actual performance against approved management triggers and limits.The Group risk appetite is subject to a full refresh annually across all principal risk types and an additional mid-year review where any metrics can be assessed and updated as appropriate.Risk appetite statementsStrategic and business risk appetite statementThe Group’s strategic and business risk appetite states that the Group does not intend to undertake any medium to long-term strategic actions that would put at risk its vision of being a leading specialist lender, backed by a strong and dependable saving franchise.The Group adopts a long-term sustainable business model which, while focused on niche sub-sectors, is capable of adapting to growth objectives and external developments.Reputational risk appetite statementThe Group does not knowingly conduct business or organise its operations to put its reputation and franchise value at risk.The Group seeks to maintain a high quality lending portfolio that generates adequate returns, under normal and stressed conditions. The portfolio is actively managed to operate within set criteria and limits based on profit volatility, focusing on key sectors, recoverable values, and affordability and exposure levels. The Group aims to continue to generate sufficient income and control credit losses to a level such that it remains profitable even when subjected to a credit portfolio stress of a 1 in 20 intensity stress scenario.The Group actively manages market risk arising from structural interest rate positions. The Group does not seek to take a significant interest rate position or a directional view on rates and it limits its mismatched and basis risk exposures.The Group actively maintains stable and efficient access to funding and liquidity to support its ongoing operations. It also maintains an appropriate level and quality of liquid asset buffer so as to withstand market and idiosyncratic liquidity-related stresses.Solvency risk appetite statementThe Group seeks to ensure that it is able to meet its Board level capital buffer requirements under a severe but plausible stress scenario. The Group’s solvency risk appetite is constrained within the leverage ratio-related requirements. We manage our capital resources in a manner which avoids excessive leverage and allows us flexibility in raising capital.Operational risk appetite statementThe Group’s operational processes, systems and controls are designed to minimise disruption to customers, damage to the Bank’s reputation and any detrimental impact on financial performance. The Bank actively promotes the continual evolution of its operating environment through the identification, evaluation and mitigation of risks, whilst recognising that the complete elimination of operational risk is not possible.Conduct risk appetite statementThe Group aims to operate and conduct its business to the highest standards which ensure integrity and trust with respect to how the Group operates and manages its relationships with key stakeholders. In this respect, the Group has no appetite to knowingly assume risks which may result in an unfair outcome for customers and/or cause disruptions in the market segments in which it operates. However, where the Group identifies potential conduct risks it will proactively intervene by managing, escalating and mitigating them promptly to ensure a fair outcome is achieved.Compliance / regulatory risk appetite statementThe Group views ongoing conformity with regulatory rules and standards across all the jurisdictions in which it operates as a critical facet of its risk culture. The Group does not knowingly accept compliance risk which could result in regulatory sanctions, financial loss or damage to its reputation. The Group will not tolerate any systemic failure to comply with applicable laws, regulations or codes of conduct relevant given its business operating model.Risk profile performance overviewCredit risk
Throughout 2019 the credit quality of both Banks remained strong, driven by robust credit risk management, deep knowledge of the specialist sectors in which both OSB and CCFS operate, coupled with prudent risk appetite.Strong organic loan book growth was underpinned by resilient new lending volumes across the Group’s core lending segments including Buy-to-Let, residential owner-occupier, semi-commercial and commercial. The Group’s asset finance and development finance businesses continued to operate in line with expectations. New business quality remained strong with broadly stable loan to value levels. Interest coverage ratios remained stable across both the OSB and CCFS segments. Loan to income multiples also remained stable across residential owner occupier lending.Arrears levels remained low during 2019 across both Banks. Across the CCFS segment greater than three months in arrears balances remained low at 0.3% of total loans and advances (2018: 0.2%). This marginal increase was driven by the lending portfolios maturing and was in line with management’s expectations. Performance of both new and existing loans remained strong.At OSB, the greater than three months in arrears ratio fell to a low of 1.3% (2018: 1.5%). Falling arrears levels across the residential owner-occupier lending segment drove the overall Group trend. Buy-to-Let lending arrears levels remained stable year on year, but improved during the second half of 2019 as more focused collections activity took effect. As at 31 December 2019, legacy problem loan balances reduced to £3.0m from £5.6m at the end of 2018.The Group observed strong demand for semi-commercial and commercial mortgage products originated via the InterBay commercial brand, where gross exposure grew to £888.0m with a weighted average loan to value of 67% and an average loan size of £375,000.Gross exposure to residential development finance remained low at £146.1m with a weighted average LTV of 34%.Expected Credit Losses (‘ECL’)
Low arrears and sensible loan to value levels resulted in strong loan loss performance during 2019.On a statutory basis, impairment losses were £15.6m (2018: £8.1m) representing 13bps on average gross loans and advances (2018: 10bps). On a pro forma underlying basis, loan loss ratio was 10bps¹ (2018: 7bps).The increase in the total value of loan losses was primarily due to three non-recurring items:i) More focused collections activity across the Buy-to-Let portfolio within the OSB segment resulted in an increase in the number of LPA receivers appointed during the first half of 2019, where under the IFRS 9 provisioning approach higher provisions are held.LPA receivers are appointed when a Buy-to-Let account falls into arrears, as an independent managing agent and collector of rents. This ensures that rent payments are passed back to the lender to bring the account back up to date, or to oversee a sale of the property paying back the lender, whilst supplying the borrower with any excess funds. During the second half of 2019 OSB observed low and stable new LPA receiver appointments.ii) On 4 October 2019 OSB acquired the lending portfolios of CCFS and consequently raised IFRS 9 provisions totalling £3.6m. This one-off charge was recognised in the Group’s profit and loss, increasing the total quantum of losses recognised in 2019.Importantly, the provisions raised do not reflect a change in the credit risk performance of the lending portfolios.iii) During the fourth quarter of 2019 OSB and CCFS aligned a number of IFRS 9 methodologies, including stage 2 and 3 transfer criteria and macroeconomic scenarios and probability weightings. The net impact of this alignment activity was a one-off provision charge recognised in the 2019.Removing the above one-off non-recurring items, the loan loss charge would have been broadly consistent with the underlying loan loss charge observed during 2018.The Group’s Risk and Audit Committees closely monitor the ongoing appropriateness of the provision coverage levels versus expected losses and peer institutions.As at 31 December 2019, provision coverage levels remained appropriate.The Group’s total coverage ratio fell slightly to 0.23% as at 2019 (2018: 0.32%). The fall was driven by the loan to value profile and low arrears performance of newly-originated mortgages and the CCFS lending portfolios acquired, resulting in balances growing faster than ECL provisions raised resulting in the ratio falling.Macroeconomic scenarios
The measurement of ECL under the IFRS 9 approach is complex and requires a high level of judgement. The approach includes the estimation of probability of default (‘PD’), loss given default (‘LGD’) and likely exposure at default (‘EAD’). An assessment of the maximum contractual period with which the Group is exposed to the credit risk of the asset is also undertaken.IFRS 9 requires firms to calculate ECL allowances simulating the effect of a range of possible economic outcomes, calculated on a probability weighted basis. This requires firms to formulate forward looking macroeconomic forecasts and incorporate them in ECL calculations.i. How macroeconomic variables and scenarios are selected
During the IFRS 9 modelling process the relationship between macroeconomic drivers and arrears, default rates and collateral values is established. For example, if unemployment levels increase the Group would observe an increasing number of accounts moving into arrears. If residential or commercial property prices fall the risk of losses being realised on the sale of a property would increase.The Group has adopted an approach which utilises four macroeconomic scenarios.Scenarios are provided by an industry leading economics advisory firm, who provide Management and the Board with advice on which scenarios to utilise and the probability weightings to attach to each scenario.A base case forecast is provided which broadly aligns with wider consensus forecasts, along with a plausible upside scenario. Two downside scenarios are also provided (downside and a severe downside).ii. How macroeconomic scenarios are utilised within ECL calculations
Probability of default estimates are either scaled up or down based on the macroeconomic scenarios utilised.Loss given default estimates are impacted by property price forecasts which are utilised within loss estimates should an account be possessed and sold.Exposure at default estimates are not impacted by the macroeconomic scenarios utilised.Each of the above components are then directly utilised within the ECL calculation process.iii. Macroeconomic scenario governance
The Group has a robust governance process to oversee macroeconomic scenarios and probability weightings used within ECL calculations. Updated scenarios are provided on a monthly basis where an assessment is carried out by the Group’s Risk function to determine whether an update is required.On a quarterly basis the Group’s Risk function and economic advisor provide the Asset and Liabilities Committee with an overview of recent economic performance, along with updated base, upside and two downside scenarios.The Risk function will then propose a course of action, which once approved will be implemented. Regular updates are provided to the Group’s Risk and Audit Committees, where the ongoing appropriateness of the macroeconomic scenarios and probability weightings are discussed.iv. Changes made during 2019
In December 2018, OSB implemented a fourth severe downside no-deal disorderly Brexit scenario, which increased the Group’s provision requirements. During the first half of 2019, the Group did not make any changes to the macroeconomic scenarios utilised or the probability weightings assigned.The CCFS business implemented a Brexit overlay in December 2018 to reflect the increasing risk of a no-deal Brexit. As at 30 June 2019, this overlay was adjusted with further provision raised.Following the Combination completing on 4 October 2019, the Group’s Risk function recommended aligning the macroeconomic scenarios and probability weightings utilised across both the individual OSB and CCFS businesses. This entailed moving to one service provider for economic modelling, aligning scenarios utilised and probability weightings.Forbearance
Where borrowers experience financial difficulties, which impacts their ability to service their financial commitments under the loan agreement, forbearance may be used to achieve an outcome which is mutually beneficial to both the borrower and the Bank.By identifying borrowers who are experiencing financial difficulties pre-arrears or in arrears, a consultative process is initiated to ascertain the underlying reasons and to establish the best course of action to enable the borrower to develop credible repayment plans and to see them through the period of financial stress.The specific tools available to assist customers vary by product and the customers’ status. The various treatments considered for customers are as follows:Temporary switch to interest only: a temporary account change to assist customers through periods of financial difficulty where arrears do not accrue at the original contractual payment. Any arrears existing at the commencement of the arrangement are retained.Interest rate reduction: the Group may, in certain circumstances, where the borrower meets the required eligibility criteria, transfer the mortgages to a lower contractual rate. Where this is a formal contractual change the borrower will be requested to obtain independent financial advice as part of the process.Loan term extension: a permanent account change for customers in financial distress where the overall term of the mortgage is extended, resulting in a lower contractual monthly payment.Payment holiday: a temporary account change to assist customers through periods of financial difficulty where arrears accrue at the original contractual payment. Any arrears existing at the commencement of the arrangement are retained.Voluntary-assisted sale: a period of time is given to allow borrowers to sell the property and arrears accrue based on the contractual payment.Reduced monthly payments: a temporary arrangement for customers in financial distress. For example, a short-term arrangement to pay less than the contractual payment. Arrears continue to accrue based on the contractual payment.Capitalisation of interest: arrears are added to the loan balance and are repaid over the remaining term of the facility or at maturity for interest only products. A new payment is calculated, which will be higher than the previous payment.Full or partial debt forgiveness: where considered appropriate, the Group will consider writing off part of the debt. This may occur where the borrower has an agreed sale and there will be a shortfall in the amount required to redeem the Group’s charge, in which case repayment of the shortfall may be agreed over a period of time, subject to an affordability assessment or where possession has been taken by the Group; and on the subsequent sale where there has been a shortfall loss.Arrangement to Pay (CCFS only): where an arrangement is made with the borrower to repay an amount above the contractual monthly instalment, which will repay arrears over a period of time.Promise to Pay (CCFS only) : where an arrangement is made with the borrower to defer payment or pay a lump sum at a later date.Bridging Loans more than 30 days past due (CCFS only): bridging loans which are more than 30 days past their maturity date. Repayment is rescheduled to receive a balloon or bullet payment at the end of the term extension where the institution can duly demonstrate future cash flow availability.The Group aims to proactively identify and manage forborne accounts, utilising external credit reference bureau information to analyse probability of default and customer indebtedness trends over time, feeding pre-arrears watch list reports. Watch list cases are in turn carefully monitored and managed as appropriate.Further information regarding forbearance can be found in note 45 to the Financial statements.Fair value of collateral methodology
The Group ensures that security valuations are reviewed on an ongoing basis for accuracy and appropriateness. Commercial properties are subject to annual indexing, whereas residential properties are indexed against monthly House Price Index data. Where the Group identifies that an index is not representative, a formal review is carried out by the Group Real Estate function to ensure that property valuations remain appropriate.The Group Real Estate function ensures that newly underwritten lending cases are written to appropriate valuations, where an inde-pendent assessment is carried out by an appointed, qualified surveyor accredited by RICS.Solvency risk
The Group has maintained an appropriate level and quality of capital to support its prudential requirements with sufficient contingency to withstand a severe but plausible stress scenario. The solvency risk appetite is based on a stacking approach, whereby the various capital requirements (Pillar 1, ICG, CRD IV buffers, Board and management buffers) are incrementally aggregated as a percentage of available capital (CET1 and total capital).Solvency risk is a function of balance sheet growth, profitability, access to capital markets and regulatory changes. The Bank actively monitors all key drivers of solvency risk and takes prompt action to maintain its solvency ratios at acceptable levels. The Board and management also assess solvency when reviewing the Group’s business plans and inorganic growth opportunities.The Group’s fully-loaded CET1 capital ratio under CRD IV increased to 16.0% as at 31 December 2019 (31 December 2018: 13.3%) demonstrating the strong organic capital generation capability of the business and the beneficial impact of the fair value uplift on CCFS’ assets. The Group had a total capital ratio of 17.3% and a leverage ratio of 6.5% as at 31 December 2019 (31 December 2018: 15.8% and 5.9% respectively).Liquidity and funding risk
The Group has a prudent approach to liquidity management through maintaining sufficient liquidity resources to cover cash flow imbalances and fluctuations in funding under both normal and stressed conditions arising from market-wide and Bank-specific events. OSB and CCFS’ liquidity risk appetites have been calibrated to ensure that both Banks always operate above the minimum prudential requirements with sufficient contingency for unexpected stresses, whilst actively minimising the risk of holding excessive liquidity which would adversely impact the financial efficiency of the business model.The Group continues to attract new retail savers and has high retention levels with existing customers. In addition the Combination allows the Group a wider range of wholesale funding options including securitisation issuances and use of retained notes from both Banks.In 2019, both Banks actively managed their liquidity and funding profiles within the confines of their risk appetite as set out in each Bank’s Internal Liquidity Adequacy Assessment Process (‘ILAAP’). Each Bank’s risk appetite is based on internal stress tests that cover a range of scenarios and time periods and therefore are a more severe measure of resilience to a liquidity event than the standalone liquidity coverage ratio (‘LCR’). Both OSB and CCFS’ LCR at 199% and 145% respectively remain above risk appetite and well above regulatory minimums.Market risk
The Group proactively manages its risk profile in respect of adverse movements in interest rates, foreign exchange rates and counterparty exposures. The Group accepts interest rate risk and basis risk as a consequence of structural mismatches between fixed rate mortgage lending, sight and fixed term savings and the maintenance of a portfolio of high quality liquid assets. Interest rate exposure is mitigated on a continuous basis through portfolio diversification, reserve allocation and the use of financial derivatives within limits set by the Group ALCO and approved by the Board.The Group’s balance sheet is completely GBP denominated. The Group has some minor foreign exchange risk from funding the OSBI business. This is minimised by prefunding a number of months in advance and regularly monitoring GBP/INR rates. Wholesale counterparty risk is measured on a daily basis and constrained by counterparty risk limits.Transition away from LIBOR
The PRA and FCA have continued to encourage banks to transition away from using LIBOR as a benchmark in all operations before the end of 2021. Throughout the UK banking sector LIBOR remains a key benchmark and for each market impacted, solutions to this issue are progressing through various industry bodies.In 2018, OSB set up an internal working group comprised of all of the key business lines that are involved with this change with strong oversight from the Compliance and Risk departments. Risk assessments have been completed to ensure this process is managed in a measured and controlled manner. CCFS no longer write any LIBOR-linked business and have started to transition back book swaps from a LIBOR to a SONIA basis. The OSB and CCFS projects have been aligned following the Combination.Interest rate risk
The Group does not actively assume interest rate risk, does not execute client or speculative securities transactions for its own account, and does not seek to take a significant directional interest rate position. Limits have been set to allow management to run occasional unhedged positions in response to balance sheet dynamics and capital has been allocated for this. Exposure limits are calibrated in proproportion to available CET1 capital in order to accommodate balance sheet growth.The Group sets limits on the tenor and rate reset mismatches between fixed rate assets and liabilities, including derivatives hedges, with exposure and risk appetite assessed by reference to historic and potential stress scenarios cast at consistent levels of modelled severity.Throughout 2019, both Banks managed their interest rate risk exposures within risk appetite limits.Basis risk
Basis risk arises from assets and liabilities repricing with reference to different interest rate indices, including positions which reference variable market, policy and managed rates. As with structural interest rate risk, the Bank does not seek to take a significant basis risk position, but maintains defined limits to allow operational flexibility.For both OSB and CCFS exposure is assessed and monitored regularly across a range of ‘business as usual’ and stressed scenarios.Throughout 2019, both Banks managed its basis risk exposure within its risk appetite limits.Operational risk
The Group continues to adopt a proactive approach to the management of operational risks. The operational risk management framework has been designed to ensure a robust approach to the identification, measurement and mitigation of operational risks, utilising a combination of both qualitative and quantitative evaluations in order to promote an environment of progressive operational risk management. The Group’s operational processes, systems and controls are designed to minimise disruption to customers, damage to the Group’s reputation and any detrimental impact on financial performance. The Group actively promotes the continual evolution of its operating environment through the identification, evaluation and mitigation of risks, whilst recognising that the complete elimination of operational risk is not possible.Where risks continue to exist, there are established processes to provide the appropriate levels of governance and oversight, together with an alignment to the level of risk appetite stated by the Board.A strong culture of transparency and escalation has been cultivated throughout the organisation, with the Operational Risk function having a Group-wide remit, ensuring a risk management model that is well embedded and consistently applied. In addition, a community of Risk Champions representing each business line and location has been identified. Operational Risk Champions ensure that the operational risk identification and assessment processes are established across the Group in a consistent manner. Risk Champions are provided with appropriate support and training by the Operational Risk function.Regulatory and compliance risk
The Group is committed to the highest standards of regulatory conduct and aims to minimise breaches, financial costs and reputational damage associated with non-compliance.The Group has an established Compliance function which actively identifies, assesses and monitors adherence with current regulation and the impact of emerging regulation.In order to minimise regulatory risk, the Group maintains a proactive relationship with key regulators, engages with industry bodies such as UK Finance, and seeks external expert advice. The Group also assesses the impact of upstream regulation on itself and the wider market in which it operates, and undertakes robust assurance assessments from within the Risk and Compliance functions.Conduct risk
The Group considers its culture and behaviour in ensuring the fair treatment of customers and in maintaining the integrity of the market segments in which it operates to be a fundamental part of its strategy and a key driver to sustainable profitability and growth. The Group does not tolerate any systemic failure to deliver fair customer outcomes.On an isolated basis, incidents can result in detriment owing to human and/or operational failures. Where such incidents occur they are thoroughly investigated, and the appropriate remedial actions are taken to address any customer detriment and to prevent recurrence.The Group considers effective conduct risk management to be a product of the positive behaviour of all employees, influenced by the culture throughout the organisation and therefore continues to promote a strong sense of awareness and accountability.Strategic and business risk
The Board has clearly articulated the Group’s strategic vision and business objectives supported by performance targets. The Group does not intend to undertake any medium to long-term strategic actions, which would put at risk the Group’s vision to become our customers’ favourite bank; one that delivers its very best, challenges convention and opens doors that others can’t.
To deliver against its strategic objectives and business plan, the Group has adopted a sustainable business model based on a focused approach to core niche market segments where its experience and capabilities give it a clear competitive advantage.The Group remains highly focused on delivering against its core strategic objectives and strengthening its position further through strong and sustainable financial performance.Reputational risk
Reputational risk can arise from a variety of sources and is a second order risk – the crystallisation of a credit risk or operational risk can lead to a reputational risk impact.The Group monitors reputational risk through tracking media coverage, customer satisfaction scores, the share price and net promoter scores provided by brokers.Principal risks and uncertaintiesStrategic and business risk
The risk to the Group’s earnings and profitability arising from its strategic decisions, change in business conditions, improper implementation of decisions or lack of responsiveness to industry changes.Performance against targetsPerformance against strategic and business targets does not meet stakeholder expectations. This has the potential to damage the Group’s franchise value and reputation.MitigationRegular monitoring by the Board and the Group Executive Committee of business and financial performance against strategic agenda and risk appetite. The financial plan is subject to regular reforecasts. The balanced business scorecard is the primary mechanism to support the Board and assesses management performance against key targets. Use of stress testing to flex core business planning assumptions to assess potential performance under stressed operating conditions.Direction: unchangedThe benefits realised from the integration will support the Group in meeting the challenges posed by increasing levels of competition in our key market segments.Economic environmentThe economic environment is an important factor impacting the strategic and business risk profile. A macroeconomic downturn may impact the credit quality of the Group’s existing loan portfolio and may influence future business strategy as the Group’s new business proposition becomes less attractive due to lower returns.MitigationThe Group continued to utilise and enhance its stress testing capabilities to assess and minimise potential areas of macroeconomic vulnerabilities.Direction: unchangedThe Group’s strategic and business risk profile is impacted by the uncertainty surrounding the impact of trade negotiations following Brexit. Economic risks to which the Group is exposed remain high but stable compared with 2018.Regulatory requirementsThe potential for emerging regulatory requirements to increase the demands on the Group’s operational capacity and increase the cost of compliance.MitigationThe Group continues to invest in its IT and data management capabilities to increase the ability to respond to regulatory change.A structured approach to change management and fully leveraging internal and external expertise allows the Group to respond effectively to regulatory change.Direction: increasedIncreased levels of regulatory scrutiny and increased regulatory expectations are driven by the increased size of the Group post-Combination.Integration riskThe risk that the Combination with CCFS does not create operational and financial benefits as planned.MitigationThe Board will maintain oversight of the integration process through the Board Integration Committee. A dedicated Integration Management Office has been established to drive the integration process forward.Independent second line and third line assessment, monitoring and reporting will be undertaken by the Risk function and Internal Audit function respectively.Direction: increasedRisk of an ineffective integration or delays to integration may result in synergy and cost targets being missed, disruption to business as usual activities, operating and financial performance falling below expectations or damage to reputation.Reputational riskThe potential risk of adverse effects that can arise from the Group’s reputation being sullied due to factors such as unethical practices, adverse regulatory actions, customer dissatisfaction and complaints or negative/adverse publicity.Reputational risk can arise from a variety of sources and is a second order risk – the crystallisation of a credit risk or operational risk can lead to a reputational risk impact.Deterioration of reputationPotential loss of trust and confidence that our stakeholders place in us as a responsible and fair provider of financial services.MitigationCulture and commitment to treating customers fairly and being open and transparent in communication with key stakeholders. Established processes to proactively identify and manage potential sources of reputational risk.Direction: increasedExpectations are high to deliver the integration in a timely and effective manner while achieving strategic objectives. Expectations raised across all stakeholders including employees, customer, regulators and shareholders.Credit riskPotential for loss due to the failure of a counterparty to meet its contractual obligation to repay a debt in accordance with the agreed terms.Individual borrower defaultsBorrowers may encounter idiosyncratic problems in repaying their loans, for example loss of a job or execution problems with a development project.While in most of cases of default the Group’s lending is secured, some borrowers may fail to maintain the value of the security.MitigationAcross both OSB and CCFS a robust underwriting assessment is undertaken to ensure a customer has the ability and propensity to repay and sufficient security is available to support the new loan requested. At CCFS an automated scorecard approach is taken, whilst OSB utilises a bespoke manual underwriting approach.Should there be problems with a loan, the Collections and Recoveries team works with customers unable to meet their loan service obligations to reach a satisfactory conclusion while adhering to the principle of treating customers fairly.Our strategic focus on lending to professional landlords means that properties are likely to be well-managed, with income from a diversified portfolio mitigating the impact of rental voids or maintenance costs. Lending to owner-occupiers is subject to a detailed affordability assessment, including the borrower’s ability to continue payments if interest rates increase. Lending on commercial property is based more on security, and is scrutinised by the Group’s independent Real Estate team as well as by external valuers.Development lending is extended only after a deep investigation of the borrower’s track record and stress testing the economics of the specific project.Direction: unchangedThe Group continues to observe strong and stable credit profile performance but remains alert to potential macroeconomic uncertainty arising from Brexit-related negotiations.Macroeconomic downturnA broad deterioration in the economy would adversely impact both the ability of borrowers to repay loans and the value of the Group’s security. Credit losses would impact across the lending portfolio, so even if individual impacts were to be small, the aggregate impact on the Group could be significant.MitigationThe Group works within portfolio limits on LTV, affordability, name, sector and geographic concentration that are approved by the Group Risk Committee and the Board. These are reviewed on a semi-annual basis. In addition, stress testing is performed to ensure that the Group maintains sufficient capital to absorb losses in an economic downturn and continue to meet its regulatory requirements.Direction: unchangedThe economic outlook is uncertain driven by the unknown impact of trade negotiations following Brexit. Economic risks to which the Group is exposed remain high but stable compared with the previous year.Wholesale credit riskThe Group has wholesale exposures both through call accounts used for transactional and liquidity purposes and through derivative exposures used for hedging.MitigationThe Group transacts only with high quality wholesale counterparties. Derivative exposures include collateral agreements to mitigate credit exposures.Direction: unchangedThe Group’s wholesale credit risk exposure remains limited to high quality counterparties, overnight exposures to clearing bank and swap counterparties.Market riskPotential loss due to changes in market prices or values.Interest rate riskAn adverse movement in the overall level of interest rates could lead to a loss in value due to mismatches in the duration of assets and liabilities.MitigationThe Group’s Treasury department actively hedges to match the timing of cash flows from assets and liabilities.Direction: unchangedThe Group continues to assess interest on a regular basis ensuring that interest rate risk exposure is limited. The profile of the asset book has increased but this is offset by frequent hedging.Basis riskA divergence in market rates could lead to a loss in value, as assets and liabilities are linked to different rates.MitigationDue to the Group balance sheet structure no active management of basis risk has been required by OSB in 2019.CCFS actively replace back book LIBOR asset swaps with SONIA swaps to balance basis risk across assets and liabilities and reduce possible exposure of dislocation of market rates from base rate.Direction: unchangedProduct design, balance sheet structure and replacing LIBOR swaps with SONIA swaps has enabled the Group to maintain the overall level of basis risk across both Banks through the year.Liquidity and funding riskThe risk that the Group will be unable to meet its financial obligations as they fall due.Retail funding stressAs the Group is primarily funded by retail deposits, a retail run could put it in a position where it could not meet its financial obligations.Increased competition for retail savings driving up funding costs adversely impacting retention levels.MitigationThe Group’s funding strategy is focused on a highly stable retail deposit franchise. The large number of depositors provides diversification and a high proportion of balances are covered by the FSCS and so there is no material risk of a retail run.In addition, the Group performs in-depth liquidity stress testing and maintains a liquid asset portfolio sufficient to meet obligations under stress. The Group holds prudential liquidity buffers to manage funding requirements under normal and stressed conditions.The Group proactively manages its savings proposition through both the Liquidity Working Group and the Group Assets and Liabilities Committee. Finally, the Group has prepositioned mortgage collateral with the Bank of England which allows it to consider other alternative funding sources to ensure it is not solely reliant on retail savings. The Group also has a mature RMBS programme and access to warehouse facilities.Direction: unchangedThe Group’s funding mix remained stable throughout the year.Wholesale funding stressA market-wide stress could close securitisation markets or make issuance costs unattractive for the Group.MitigationThe Group continuously monitor wholesale funding markets for securitisation opportunities and will execute funding transactions or sell additional residual positions in the securitisations when market conditions are advantageous.The strong retail franchise, access to pooled deposits, Bank of England pre-positioned collateral and warehouse funding facilities through tier 1 investment banks provide the Group with a range of funding options.Direction: decreasedThe combined Group has a wider range of wholesale funding options available including repo or sale of retained notes, collateral upgrade trades and warehouse facilities.Refinancing of Term Funding SchemeThe Group has drawn a total £2.6bn of funding under the TFS scheme creating a refinancing concentration around the maturity of this scheme.MitigationThe Group has fully factored in repayment of TFS into the funding plans of both Banks, with planned repayment prior to the contractual date to minimize timing and concentration risk. The combined Group has a wider range of funding options to manage this process.Direction: unchangedThe overall TFS position for the Group has increased but the combined Group has a wider range of funding options.Solvency riskThe potential inability of the Group to ensure that it maintains sufficient capital levels for its business strategy and risk profile under both the base and stress case financial forecasts.Deterioration of capital ratiosKey risks to solvency arise from balance sheet growth and unexpected losses which can result in the Bank’s capital requirements increasing or capital resources being depleted such that it no longer meets the solvency ratios as mandated by the PRA and Board risk appetite.The regulatory capital regime is 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.MitigationCurrently the Group operates from a strong capital position and has a consistent record of strong profitability.The Group actively monitors its capital requirements and resources against financial forecasts and plans and undertakes stress testing analysis to subject its solvency ratios to extreme but plausible scenarios.The Bank also holds prudent levels of capital buffers based on CRD IV requirements and expected balance sheet growth.The Group engages actively with regulators, industry bodies, and advisers to keep abreast of potential changes and provides feedback through the consultation process.Direction: increasedThe Group maintained a prudent and stable CET1 capital and total capital position providing resilience against unexpected losses. The Group continued to fund its balance sheet growth using organic profit generation.Following the integration the Group will be subject to Minimum requirements for own funds and eligible liabilities (‘MREL’) requirements and will need to issue MREL qualifying debt instruments to meet this requirement.Operational riskThe risk of loss or negative impact to the Group resulting from inadequate or failed internal processes, people, or systems or from external events.IT Security (including cyber risk)The risks resulting from a failure to protect the Bank’s systems and the data within them. This includes both internal and external threats.MitigationThe Group has invested significantly in enhancing its protection against IT security threats, deploying a series of tools designed to identify and prevent network/system intrusions. This is further supported by documented and tested procedures intended to ensure the effective response to a security breach.Direction: unchangedWhilst IT Security risks continue to evolve the level of maturity of the Group’s controls and defences have significantly matured, supported by dedicated IT security experts. The Group’s ongoing penetration testing continues to drive enhancements by identifying potential areas of risk.Data quality and completenessThe risks resulting from data being either inaccurate or incomplete.MitigationThe Group established a dedicated Data Strategy Programme, designed to ensure a consistent approach to the maintenance and use of data. This includes both documented procedures and frameworks and also tools intended to improve the consistency of data use.Direction: unchangedWhilst the Data Strategy Programme enjoyed some notable achievements, there remains significant work in 2020 in order to ensure all data-related risks have been appropriately addressed.Change managementThe risks resulting from unsuccessful change management implementations, including the failure to respond effectively to release-related incidents.MitigationThe Group recognises that implementing change introduces significant operational risk and has therefore implemented a series of control gateways designed to ensure that each stage of the change management process has the necessary level of oversight.Direction: increasedThe Group continues to adopt an ambitious change agenda and recognises that it is entering a period of significant change following the Combination and that risks of integration will be heightened during this period.IT FailureThe risks resulting from a major IT application or infrastructure failure impacting access to the Bank’s IT systems.MitigationThe Group continues to invest in improving the resilience of its core infrastructure. It has identified its prioritised business services and the infrastructure that is required to support them. Tests are performed regularly to validate its ability to recover from an incident.Direction: unchangedWhilst progress was made in reducing both the likelihood and impact of an IT failure the Group has identified additional enhancements that it will look to implement in 2020.Organisational change and integrationThe risks resulting from the Group’s ongoing integration activities, including systems, people and infrastructure.MitigationThere is a low risk integration project plan (e.g. no large scale integration related IT project change planned). Experienced and capable project management office, with close oversight and direction provided by the Group Executive and Board Integration Committees.Direction: increasedThe Group is in the early stages of the integration project, with no material issues identified with respect to delivering agreed objectives within planned timelines to date. Close oversight of the integration risks will be carried out by the Group’s Risk and Compliance function.Conduct riskThe risk that the Group’s behaviours or actions result in customer detriment or negative impact on the integrity of the markets in which it operates.Product suitabilityWhilst the Group originates relatively simple products, there remains a risk that products (primarily legacy) may be deemed to be unfit for their original purpose in line with current regulatory definitions.MitigationThe Group has a strategic commitment to provide simple, customer-focused products. In addition, a Product Governance framework is established to oversee both the origination of new products and to revisit the ongoing suitability of the existing product suite.Direction: unchangedWhilst this risk remained low as a result of increased awareness and dedicated oversight, the Bank remains aware of the changes to the regulatory environment and their possible impact on product suitability.Data protectionThe risk that customer data is accessed inappropriately either as a consequence of network/system intrusion or through operational errors in the management of the data.MitigationIn addition to a series of network/system controls the Bank performs extensive root cause analysis of any data leaks in order to ensure that the appropriate mitigating actions are taken.Direction: unchangedDespite a number of additional controls being introduced in 2019, the network/system threats continue to evolve in both volume and sophistication.Integration riskThe risk that the integration programme directly or indirectly causes poor outcomes for customers and the market.MitigationDuring the integration process, the Group is committed to adopting a low-risk approach with a view to taking reasonable steps to avoid causing poor outcomes for our customers and the market. The Group will conduct detailed analysis of potential customer harm associated with particular integration steps.Direction: increasedThe Group is in the early stages of the integration project, with no material issues identified with respect to poor customer outcomes.Compliance and regulatory riskThe risk that a change in legislation or regulation or an interpretation that differs from the Group’s will adversely impact the Group.Prudential regulatory changesThe Group continues to see a high volume of key compliance regulatory changes that impact its business activities. These include: change in Standardised Approach capital rules and implementation of an IRB floor, implementation of the European Standardised Information Sheet, extending the Senior Managers and Certification Regime to all FCA regulated firms and introduction of Strong Customer Authentication requirements. The focus on external wall cladding for high rise buildings has recently been extended to cover all buildings regardless of height.MitigationThe Group has an effective horizon scanning process to identify regulatory change.All significant regulatory initiatives are managed by structured programmes overseen by the Project Management team and sponsored at Executive level.The Group has proactively sought external expert opinions to support interpretation of the requirements and validation of its response, where required.The Group has initiated a study into external wall cladding and is reviewing its own and lent portfolio.Direction : increasedThe Group has historically responded effectively to all significant regulatory changes. However, the level and sophistication of emerging regulation continues to increase.Conduct regulationRegulatory changes focused on the conduct of business could force changes in the way the Group carries out business and impose substantial compliance costs.MitigationThe Group has a programme of regulatory horizon scanning linking into a formal regulatory change management programme. In addition, the focus on simple products and customer oriented culture means that current practice may not have to change significantly to meet new conduct regulations.Direction: increasedThe regulatory environment has tightened and this is likely to continue, exposing the Group to increased risk.Emerging risksThe Group proactively scans for emerging risks which may have an impact on its ongoing operations and strategy. The Group considers its top emerging risks to be:Integration riskThe risks resulting from the Group’s ongoing integration activities, including systems, people and infrastructure.MitigationThe Board is maintaining oversight of the integration process through the Board Integration Committee. A dedicated Integration Management Office has been established to drive the integration process forward.Independent second line and third line assessment, monitoring and reporting is being undertaken by the Risk function and Internal Audit function respectively.Political and macroeconomic uncertaintyAs the outcome of trade negotiations following Brexit remains unclear, there is an increased likelihood of a period of macroeconomic uncertainty. The Group’s lending activity is solely focused in the United Kingdom and, as such, will be impacted by any risks emerging from changes in the macroeconomic environment.MitigationThe Group implemented robust monitoring processes and via various stress testing activity (i.e. ad hoc, risk appetite and ICAAP) understands how the Group performs over a variety of macroeconomic stress scenarios and has subsequently developed a suite of early warning indicators, which are closely monitored to identify changes in the economic environment. The Group produces and reviews monthly loan portfolio management information.Climate changeAs the worldwide focus on climate change intensifies, both the physical risks and the transitional risks associated with climate change continue to grow. Physical risks can relate to specific weather events, such as storms and flooding, or to longer-term shifts in the climate, such as rising sea levels. Transitional risks may arise from the adjustment towards a ‘low-carbon’ economy, such as tightening energy efficiency standards for domestic and commercial buildings.MitigationThe Group developed an approach to addressing the increasing climate risks within its Strategic Risk Management Framework. This includes scenarios analysis, development of key risk indicators and inclusion of climate risks within operational resilience activities. A cross-functional working group will drive the Group’s climate change agenda with Board oversight ensuring climate change is considered in key business and strategic decision-making. To assess portfolio collateral sensitivities to climate change, the Group is engaging with a third party to assist with modelling physical risks (flood, subsidence and coastal erosion) and transitional risks (Government policy) against a series of scenarios relating to global temperature change.Model riskThe risk of financial loss, adverse regulatory outcomes, reputational damage or customer detriment resulting from deficiencies in the development, application or ongoing operation of models and ratings systems.Post the completion of the Combination with CCFS, the Group notes the increasing usage of models to conduct financial assessments whilst informing business decisions. The Group also notes changes in industry best practice with respect to managing model risk.MitigationBoth OSB and CCFS have well-defined model governance frameworks and processes in place, including Committees, frameworks, policies, model inventories and independent validation processes.In light of this emerging risk the Group implemented a Group Models and Ratings Committee to ensure an appropriate level of oversight is provided in 2020 by the Board, in conjunction with the Models and Ratings Management Committee.A key area of focus for 2020 will be further enhancing the Group’s model risk governance arrangements including developing and implementing Group level frameworks and policies, whilst implementing the planned target operating model.LIBOR reformThe LIBOR benchmark may cease to be set after the end of 2021 due to the low level of supporting unsecured loans in the wholesale interbank loan market. The Group has exposure to the LIBOR benchmark within some of its customer lending products and wholesale derivative hedging transactions. If the benchmark were to cease or become unreliable these loans and derivatives may reflect rates that do not accurately represent short-term funding costs, therefore having an adverse effect on returns.MitigationThe Group ALCO has set up a dedicated working group to focus on this risk and transition away from the LIBOR benchmark is underway. The priority is to remove the LIBOR component from all new loan products and new swap hedges. With regard to existing loans and derivative hedges it is planned that they are transitioned onto alternative benchmarks before LIBOR ceases.CoronavirusThe outbreak of Coronavirus (COVID-19) has now been labelled a global pandemic by the World Health Organisation. If it continues to spread through contagion, it is likely to further intensify the disruptive impact on the global and UK economy. This would result in deteriorating market sentiments, falling investment and consumer spending and diminishing trade flows. Government actions, both fiscal and monetary, may prove to be slow to take effect and/or uncertain in their impact.A spreading global pandemic could adversely impact the Group across a number of key financial and operational areas (as described in Pandemic risk factors).MitigationThe Group has taken a considered approach to minimising and managing the impact of a Coronavirus related global pandemic. The Group approach represents a comprehensive response strategy covering both severity and consequences of a global pandemic. The Group’s response strategy covers key aspects of an effective pandemic response approach, including prevention, continuity, impact assessment and stress testing. Supporting the Group’s response strategy are established underlying capabilities to facilitate operational and financial resilience testing and planning, active monitoring and reporting procedures, and active communications with all staff (UK and India) and supervisory authorities.Treating customers fairlyThe industry wide and firm specific practices in relation to arrears, collections and forbearance procedures resulting in poor customer outcomes and financial distress continue to be an important area of regulatory focus. The practices within the regulated residential mortgage market, both first and second charge mortgages, have in particular been subject to active supervisory monitoring through market data analysis, complaints to firms, notifications from firms and multi-firm thematic reviews.   If the Group’s arrears, repossession, forbearance and vulnerable customer policies and procedures are assessed to be misaligned to the individual needs of the customers and regulatory expectations, the Group runs the risk of causing harm to its customers, particularly those experiencing financial hardship or vulnerable customers, with the potential for reputational damage, redress and other regulatory actions.    MitigationAll Group entities operate under arrears, repossession, forbearance and vulnerable customer policies which are designed to comply with regulatory rules and expectations. These policies articulate the Group’s commitment to ensuring that all customers, including those that are vulnerable or experiencing financial hardship, are treated fairly, consistently and in a way that considers their individual needs and circumstances.The Group does not tolerate any systemic failure to deliver fair customer outcomes. On an isolated basis, incidents can result in detriment owing to human and/or operational failures. Where such incidents occur they are thoroughly investigated, and the appropriate remedial actions are taken to address any customer detriment and to prevent recurrence.
Viability statementIn accordance with Provision 31 of the 2018 UK Corporate Governance Code, the Group Board is required to assess the viability of the Group over a stated time horizon with a supporting statement in the Annual Report.The viability statement is required to include an explanation of how the prospects of the Group have been assessed, the time horizon over which the assessment has been performed and why the assessment period is deemed appropriate. The viability statement needs to be supported by an assessment of the principal risks and uncertainties to which the Group is exposed and based on reasonable expectations to conclude that the Group will be able to continue to operate and meet its liabilities as they fall due over that period.The Group uses a five year time frame in its business and financial planning and for internal stress test scenarios. The long term direction is informed by business and strategic plans which are reviewed on, at least, an annual basis and which include multi-year financial statements. The operating and financial plans consider, among other matters, the Board’s risk appetite, macroeconomic outlook, market opportunity, the competitive landscape, and sensitivity of the financial plans to volumes, margin pressures and capital requirements.While a five year time frame is used internally, levels of uncertainty increase as the planning horizon extends and the Group’s operating and financial plans focus more closely on the next three years. The Board therefore considers a period of three years to be an appropriate period for the assessment to be made.The Company is authorised by the PRA, and regulated by the FCA and the PRA, and undertakes regular analysis of its risk profile and assumptions. It has a robust set of policies, procedures and systems to undertake a comprehensive assessment of all the principal risks and uncertainties to which it is exposed on a current and forward-looking basis (as described in Principal risks and uncertainties).The Group identifies, assesses, manages and monitors its risk profile based on the disciplines outlined within the Risk Management Framework, in particular through leveraging its risk appetite framework (as described in the Risk review). Potential changes in the aggregated risk profile are assessed across the business planning horizon by subjecting the operating and financial plans to severe but plausible macroeconomic and idiosyncratic stress scenarios.The viability of the Group is assessed at both the Group and the underlying regulated Bank levels, through leveraging the risk management frameworks and stress testing capabilities of both regulated banks. Post Combination, the risk assessment and stress testing capabilities of OSB and CCFS will be progressively aligned, however, the strength of the capital and funding profiles of both Banks provides an appropriate level of assurance that the Group and its entities can withstand a severe but plausible stress scenario.Stress testing is an integral risk management discipline, used to assess the financial and operational resilience of the Group. The Group developed bespoke stress testing capabilities to assess the impact of extreme but plausible scenarios in the context of its principal risks impacting the primary strategic, financial and regulatory objectives. Stress test scenarios are identified in the context of the Group’s operating model, identified risks, business and economic outlook. The Group actively engages external experts to inform the process by which it develops business and economic stress scenarios. A broad range of stress scenarios are analysed, including the economic impact of differing outcomes for the UK leaving the European Union, regulatory changes relating to lending into the UK housing sector, governmental housing policy shifts and scenarios prescribed by the Bank of England. In addition COVID-19 pandemic scenarios have been introduced.Stresses are applied to lending volumes, capital requirements, liquidity and funding mix, interest margins and credit and operational losses. Stress testing also supports key regulatory submissions such as the ICAAP, ILAAP and the Recovery Plan. ICAAP stress testing assesses capital resources and requirements over a five-year period.The Group has identified a broad suite of credible management actions which can be implemented to manage and mitigate the impact of stress scenarios. These management actions are assessed under a range of scenarios varying in severity and duration. Management actions are evaluated based on speed of implementation, second order consequences and dependency on market conditions and counterparties. Management actions are used to inform capital, liquidity and recovery planning under stress conditions.
In addition, the Group identifies a range of catastrophic scenarios, which could result in the failure of its current business model. Business model failure scenarios (Reverse Stress Tests or ‘RSTs’) are primarily used to inform the Board and Executives of the outer limits of the Group’s risk profile. RSTs play an important role in helping the Board and Executives to assess the available recovery options to revive a failing business model. The RSTs exercise is based on analysing a range of scenarios, including an extreme macroeconomic downturn (1 in 200 severity), a cyber-attack leading to a loss of customer data which is used for fraudulent activities, extreme regulatory and taxation changes impacting Buy-to-Let lending volumes and a liquidity crisis caused by severe market conditions combined with idiosyncratic consequences.The Group has established a comprehensive operational resilience framework to actively assess the vulnerabilities and recoverability of its critical services. The Group also conducts regular business continuity and disaster recovery exercises.The ongoing monitoring of all principal risks and uncertainties that could impact the operating and financial plan, together with the use of stress testing to ensure that the Group could survive a severe but plausible stress, enables the Board to reasonably assess the viability of the business model over a three-year period.The UK’s departure from the European Union without defined and agreed terms could have a significant impact on the economic and business outlook for the Group. To address this uncertainty, the Group has developed a range of Brexit-related scenarios of varying severities and probabilities to inform its IFRS 9 and capital planning processes.The Board has also considered the potential implications of the COVID-19 pandemic in its assessment of the financial and operational viability of the Group and has a reasonable belief that the Group retains adequate levels of financial resources (capital and liquidity) and operational contingency. In assessing the viability of the Group, the Board has considered the potential impact and risks facing the Group with respect to the virus as set out in the Risk Review and the Principal risks and uncertainties.The Group has recently undertaken a comparative review of the macroeconomic stress scenarios used to assess the Group’s ongoing viability relative to the COVID-19 pandemic scenarios, as obtained from the Group’s third-party economic advisors. Given the evolving nature of the COVID-19 pandemic crisis, the Group will continue to refine and update the scenarios in consultation with its economic advisors.This exercise was undertaken to ensure that the shape and severity of the scenarios used to assess the Group’s financial viability are sufficiently severe to accommodate for the latest assessment of the potential economic impact of the COVID-19 pandemic.In particular, the Group has assessed the pandemic scenarios relative to the Bank of England ‘Rates-down scenario’, which is used to support the Group’s viability assessment. The Rates-down Scenario is deemed to be more severe relative to the current COVID-19 pandemic scenarios across all the key macro-economic variables. This gives the Board reasonable comfort that the Group’s viability positions have been assessed to a severity level which accommodates for the current assessment of the economic impact of the COVID-19 pandemic.The COVID-19 scenarios take into consideration the following drivers and implications relevant to a pandemic crisis:Government guidance and policy response to the crisisLost output and productivity as a consequence of travel restrictions, social distancing, self-isolation and sicknessImpact on employment levels, particularly for self-employed and flexible working segments of the labour forceImplication for consumer spending and business investmentImpact on other relevant economic variables, including residential and commercial property prices, BoE base rate, national output and lending volumes. The COVID-19 scenarios are designed to be extreme, but plausible, based on the assumption that the impact on the UK economy is immediate and quickly feeds through into rising unemployment rates, declining residential and commercial property prices and a rapid slowdown in lending volumes. The Treasury and Bank of England take proactive fiscal and monetary stimulatory actions, but given the invasive nature of the pandemic, the UK economy does not show signs of recovery until 2022.  The potential impact of a COVID-19 pandemic on the economy and the Group’s operations is subject to continuous monitoring through the Group’s management committees, operational resilience and business continuity planning working group, with appropriate escalation to the Board and supervisory authorities. The Group has progressively continued to enhance its approach to assessing the viability of its strategy and business operating model, in particular the Group has enhanced its capabilities by:Enhancing stress testing capabilities through more focused assessment of more vulnerable cohorts of its lending portfolio supported by increased granularity of monitoring and risk reportingIncreasing the diversification of its funding profile, supported by enhanced assessment of funding and liquidity risk profilesContinued improvements to the risk and controls self-assessment procedures across key areas of operational risk, including operations and technologyEnhancing the assessment of operational resilience through the ongoing review of priority business functions, including supporting infrastructure and dependencies through a simulated business continuity exerciseUndertaking a war-gaming exercise involving Board and senior management to review, practice and improve disaster recovery readiness.Based on the current financial forecasts, risk profile characteristics and stress test analysis, the Group’s capital, funding and operational capabilities support the Board’s assessment that they have a reasonable expectation that the Group will remain viable over the three year horizon.
Statement of Directors’ responsibilitiesThe Directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations.Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (‘IFRSs’ as adopted by the EU) and applicable law and have elected to prepare the parent Company financial statements on the same basis.Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the Directors are required to:select suitable accounting policies and then apply them consistently;make judgements and estimates that are reasonable, relevant and reliable;state whether they have been prepared in accordance with IFRSs as adopted by the EU;assess the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; anduse the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company’s transactions and disclose with reasonable accuracy at any time, the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.Responsibility statement of the directors in respect of the annual financial reportthe financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; andthe Strategic Report/Directors’ Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.Each of the persons who is a Director at the date of approval of this report confirms that:so far as the Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; andthey have taken all the steps they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.Approved by the Board and signed on its behalf by:Jason ElphickGroup General Counsel and Company Secretary19 March 2020           
¹ The Group has restated the prior year comparatives to recognise interest expense and taxation on the £22.0m Perpetual Subordinated Bonds previously classified as equity (see note 1).The above results are derived wholly from continuing operations.The notes form part of these accounts.The financial statements were approved by the Board of Directors on 19 March 2020.¹ The Group has restated the prior year comparatives to classify the £22.0m Perpetual Subordinated Bonds previously classified as equity as a liability (see note 1).The profit after tax for the year ended 31 December 2019 of OneSavings Bank plc as a Company was £155.2m (2018: £96.2m). As permitted by section 408 of the Companies Act 2006, no separate Statement of Comprehensive Income is presented in respect of the Company.The notes form part of these accounts. The financial statements were approved by the Board of Directors on 19 March 2020.Andy Golding                                                               April Talintyre
Chief Executive Officer                                                  Chief Financial Officer
Company number: 07312896
OneSavings Bank plc