LEI: 213800WTQKOQI8ELD692
Published:
Trading update
Highlights
- Organic originations of £1.5bn in the first three months of 2020 (Q1 2019 statutory: £799m for OSB and £710m for
Charter Court Financial Services Group (‘CCFS’)). - Underlying1 net loans and advances increased by 5% in the first quarter, excluding the impact of structured asset sales. On an underlying1 basis, after structured asset sales, net loans and advances as at
31 March 2020 remained unchanged at £18.2bn (31 December 2019 : pro forma underlying2 £18.2bn). On a statutory basis, net loans and advances were £18.4bn (31 December 2019 : £18.4bn).
- Underlying1 and statutory retail deposits of £16.3bn as at
31 March 2020 (31 December 2019 : pro forma underlying2 £16.2bn, statutory £16.3bn).
- Underlying1 net interest margin (‘NIM’) for the first three months of 2020 broadly flat to full year 2019 pro forma underlying2 NIM of 266bps.
- On a pro forma basis the CET1 ratio would have been 17.2% as at the end of
December 2019 (reported 16.0%), after removing the final dividend and reducing risk weighted assets (‘RWAs’) by c. £287m relating to structured asset sales inJanuary 2020 . - Strong operational resilience across both the
UK andIndia .
1. Underlying refers to results and ratios which exclude exceptional items, integration costs and other acquisition-related items arising from the Combination with CCFS.
2. Pro forma underlying refers to ratios and results which assume that the Combination with CCFS occurred on
“I am extremely proud of the resilience that OSB has demonstrated in the current difficult conditions. Our customers are at the heart of everything we do and we have concentrated on delivering the continuity and quality of service they expect of us. We entered the crisis with exceptionally strong capital and liquidity positions which allowed us to rapidly assist those concerned about potential financial difficulty by offering payment holidays on a self-certified basis. We demonstrated our flexibility by redeploying our employees to meet the large increase in call volumes. We started the year with a strong pipeline of new business and continue to lend to new and existing customers, prudently and with a reduced suite of products. We have enhanced our underwriting to accept desktop valuations due to the inability to perform physical valuations at present.
The
Operational resilience
Our current priority is to assist our customers to the best of our ability through the coronavirus crisis, and it is paramount to protect the safety and wellbeing of our employees. More than 75% of our employees, including 85% in
As expected, the Group saw an increased level of enquiries relating to both mortgage and savings products as soon as the crisis began. Resources were redeployed to best respond to additional call volumes from mortgage borrowers requesting our assistance in providing payment holidays. We are pleased with how quickly we were able to act, and mortgage call volumes have now reduced to normal levels.
Integration
We are making good progress on the integration with CCFS. There are detailed plans for each workstream in place with a number of them already completed. An early success is the integration of the capital markets team, who delivered three successful securitisations and two remunerative structured asset sales during the first quarter.
Capital and liquidity
A strong capital and liquidity position is crucial in the current uncertain economic environment in order for us to maintain our position as a leading specialist lender and to continue to support all of our stakeholders.
OSB entered 2020 with an extremely strong CET1 ratio of 16.0% (pro forma CET1 of 17.2% as at
The Group remains highly liquid and in March took early action to increase liquidity given the uncertain economic outlook, by drawing an additional £645m through the Index Long-Term Repo (‘ILTR’) scheme on 19 March. We closed the first quarter with total drawings under the scheme of £855m. To date, we have also seen steady net retail deposit inflows for both
The liquidity coverage ratios increased during the first quarter to 247% and 170% for OSB and
The Group has applied for the Bank of England’s Term Funding Scheme for SMEs (‘TFSME’) and anticipates an initial borrowing allowance of c. £1.7bn. It is intended to use the funding from the initial allowance to refinance and extend the duration of drawings under the Bank of England’s ILTR scheme and the previous TFS scheme.
In
Net interest margin (‘NIM’)
Underlying NIM1 for the first quarter of 2020 was broadly flat to full year 2019 pro forma underlying NIM2 of 266bps. However the cost of the additional liquidity the Group is prudently holding, and delays in the retail savings market passing on the base rate cuts in full, are a current and potential future drag on NIM. In partial mitigation, rates in the retail savings market are continuing to fall and the Group has kept pricing on fixed rate mortgages unchanged and also expects to benefit from the
New business
We are continuing to focus on serving our customers as well as we can, despite the wider standstill and impact of Government restrictions on the housing market. Towards the end of March and throughout April, we concentrated on our existing pipeline of applications, and ensured that resources were available to support those customers who wished to take a payment holiday.
OSB continues to support existing and new customers by accepting applications across our core businesses. However, given the current uncertain economic situation, we are operating with tightened criteria for LTVs and loan sizes to remain within our risk appetite, and meet valuer criteria for enhanced desktop valuations whilst physical property valuations remain unavailable. We continue to offer product transfers to qualifying customers whose mortgages approach maturity.
Payment holidays
OSB has responded rapidly to support our customers who may be facing financial difficulty by offering self-certified payment holidays of up to three months. Take-up levels have been high, but many people requesting payment holidays are doing so to prudently safeguard cashflow. Market research amongst
As at the end of
Credit
The percentage of loans and advances in three months plus arrears as at the end of March, was 1.3% for OSB and 0.4% for CCFS (
The Group, in line with the industry and guidance from regulators, does not consider payment holidays as an automatic transfer from stage 1 to stage 2 under IFRS 9. It is too early to predict how borrowers will behave after the end of the payment holiday or what the potential macroeconomic impact of the current crisis will be. However the Group receives updated macroeconomic scenarios from its advisors on a regular basis, the latest version of which is shown in the table below. Applying these updated scenarios as at
Scenario (%) | |||||
Scenario | Probability weighting (%) | Economic measure | Year end 2020 | Year end 2021 | |
Base case | 40 | GDP Unemployment House price growth | (6) 7.8 (14.3) | 4 7.1 (0.3) | |
Upside | 30 | GDP Unemployment House price growth | (3) 7.0 (11.9) | 4 5.5 6.5 | |
Downside | 23 | GDP Unemployment House price growth | (9) 9.3 (19.4) | 3 9.5 (10.0) | |
Severe Downside | 7 | GDP Unemployment House price growth | (10) 9.8 (21.0) | 3 10.4 (14.8) |
The economic outlook remains uncertain, and the future level of arrears and impairment charges may worsen depending on the longevity of the COVID-19 pandemic and related containment measures, as well as the longer term effectiveness of central bank, government and other support measures.
2020 Executive remuneration
Members of the Group Executive Committee have volunteered to forgo their 2020 cash bonus. Half of their 2020 cash bonus will be retained in the business and the remaining half will be donated to charity. The minimum to be donated has been underwritten at £250k by the Group, with a £100k donation to Shelter which offers support and advice to those facing housing issues or homelessness across the
1 Underlying NIM excludes exceptional items, integration costs and other acquisition-related items arising from the Combination with CCFS.
2 Pro forma underlying NIM assumes that the Combination with CCFS occurred on
3 Independent research conducted for OSB by BDRC and Savanta,
4 Excludes development finance, asset finance and funding lines.
Enquiries:
Robin Wrench /
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About
OSB 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
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
CCFS focuses on providing
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
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