OSB GROUP PLC Preliminary Results
**OSB GROUP PLC**
**Preliminary results**
For the year ended 31 December 2023
LEI: 213800ZBKL9BHSL2K459
*THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION*
*14 March 2024*
*Following the Combination with Charter Court Financial Services Group plc (CCFS) on 4 October 2019, this press release includes results on an underlying basis, in addition to the statutory basis, which Management believe provide a more consistent basis for comparing the Group’s results between financial periods**. Underlying results exclude **integration costs and other acquisition-related items (see the reconciliation in the Financial review). *
OSB GROUP PLC (OSBG or the Group), the specialist lending and retail savings group, announces today its results for the year ended 31 December 2023.
*Financial and operational highlights*
*The below results and KPIs reflect the impact of the adverse effective interest rate (EIR) adjustment*
· Underlying profit before tax reduced by 28% to £426.0m (2022: £591.1m) and statutory profit before tax reduced by 30% to £374.3m (2022: £531.5m)
· Underlying and statutory net loan book increased by 9% to £25.7bn and £25.8bn, respectively (2022: £23.5bn and £23.6bn) supported by organic originations of £4.7bn (2022: £5.8bn)
· Underlying and statutory net interest margin (NIM) reduced to 251bps and 231bps (2022: 303bps and 278bps respectively)
· Underlying and statutory cost to income ratios increased to 33% and 36% (2022: 25% and 27%, respectively)
· Underlying and statutory loan loss ratios were 20bps (2022: 14bps and 13bps, respectively) largely due to the transition of borrowers through modelled IFRS 9 impairment stages as well as a marginal increase in arrears to 1.4% for balances greater than three months (31 December 2022: 1.1%)
· Underlying and statutory return on equity reduced to 16% and 14% (2022: 24% and 21%, respectively) due to reduction in profitability
· Basic earnings per share (EPS) reduced to 75.0 pence and 66.1 pence on an underlying and statutory basis (2022: 99.6 pence 90.8 pence) in line with the lower profitability
· Excluding the impact of the adverse EIR adjustment, the underlying net loan book grew by 10%, underlying NIM would have increased to 314bps, underlying cost to income would have been 26%, underlying return on equity would have been 22% and underlying EPS would have increased to 106.7 pence
· The Common Equity Tier 1 capital ratio of 16.1% and total capital ratio of 19.5% remained strong (2022: 18.3% and 19.7%, respectively)
· The Group issued £250m of Tier 2 notes and £300m of senior debt in 2023, both MREL qualifying. In January 2024, the Group met its interim MREL requirement of 22.5%, including regulatory buffers, which comes into force in July 2024, following a further £400m issuance of senior debt
· A new share repurchase programme of £50m over the next six months to commence on 15 March 2024
· Total dividend of 32.0 pence (2022: 30.5 pence) including a recommended final dividend of 21.8 pence per share, in line with our stated desire to provide a progressive dividend per share
· April Talintyre has advised the Board that she will not be seeking re-election at the Group Annual General Meeting on 9 May 2024 and will retire as Chief Financial Officer and Executive Director on that date
· Victoria Hyde, the Deputy CFO will become the acting CFO, subject to regulatory approval, whilst the ongoing process to appoint a permanent replacement for April is completedThe table below presents KPIs on a statutory and underlying basis including and excluding the adverse EIR adjustment:
* * *Statutory* *Underlying*
*FY 2023* *as reported* *excl. EIR* * *
*difference* *as *
*reported * *excl. *
*EIR* * *
*difference*
Net loan book growth 9% 9% - 9% 10% (1)ppt
NIM 231bps 303bps (72)bps 251bps 314bps (63)bps
Cost to income ratio 36% 27% 9ppt 33% 26% 7ppt
Manex ratio 82bps 81bps (1)bp 81bps 81bps -
Pre-tax profit £374.3m £585.0m £(210.7)m £426.0m £607.6m £(181.6)m
EPS 66.1p 102.8p (36.7)p 75.0p 106.7p (31.7)p
RoE 14% 22% (8)ppt 16% 22% (6)ppt
CET1 ratio 16.1% 17.3% (1.2)bps - - -
*Andy Golding, Group CEO, said: *
“The Group performed well in its core market segments in 2023, growing its share of the Buy-to-Let sub-segment to deliver 9% net loan book growth against a backdrop of a subdued wider mortgage market. The Group’s target professional landlords continue to demonstrate resilience, supported by high levels of demand in the Private Rented Sector, long-term income improvement and a reduction in the cost of borrowing towards the end of the year. Our fair and attractively priced savings products were popular and we grew our retail deposits by 12% in the year.
As reported at the half-year, our financial results were significantly impacted by the adverse effective interest rate (EIR) adjustment, relating primarily to a shorter time spent on the reversion rate by our Precise Mortgages customers. Since then, their behaviour has remained broadly consistent with the c.5 months spent on reversion rate assumption.
The Board has recommended a final dividend of 21.8 pence per share, which together with the interim dividend of 10.2 pence per share, results in a total ordinary dividend for the year of 32.0 pence per share in line with our stated desire to provide a progressive dividend per share. The Group issued £250m of Tier 2 notes and £300m of senior debt in 2023, both MREL qualifying. In January 2024, the Group met its interim MREL requirement of 22.5%, including regulatory buffers, which comes into force in July 2024, following a further £400m issuance of senior debt. We have also announced a new £50m share buyback over the next six months and the Board will consider additional shareholder returns later in the year, subject to regulatory approval and further MREL issuance to support growth opportunities and to meet the final Basel 3.1 requirements when known.
April Talintyre, our Chief Financial Officer, will retire at the Group Annual General Meeting on 9 May 2024. April has been instrumental in shaping and delivering OSB’s strategy over the last 11 years, helping steward OSB through private equity ownership into a successful FTSE 250 listed business. She has been an excellent and trusted support to me through the years, and I wish her well for her retirement. The process to appoint a permanent replacement for April, considering both external and internal candidates, is progressing well and Victoria Hyde, the Deputy Chief Financial Officer will become acting CFO whilst the process is completed, subject to regulatory approval.
Our specialist market sub-segments continue to perform well and the Group’s target professional landlords provide much needed homes with exceptional support to the Private Rented Sector. Our specialist residential and commercial brands have good levels of demand as customer confidence improves.
Based on current application volumes and against the backdrop of the subdued mortgage market, the Group expects to deliver underlying net loan book growth of c.5% for 2024. The underlying net interest margin is expected to be broadly flat to the 2023 underlying NIM of 251bps, reflecting the impact of a higher cost of funds and the full year impact of some lower margin lending in 2023, due primarily to delays in mortgage pricing reflecting the rate rises and higher swap costs. The cost of funding is expected to increase in 2024, primarily due to the normalisation of retail deposit spreads, the impact of planned TFSME repayment and the cost of MREL qualifying debt issuance. We will maintain our cost discipline and efficiency, however the underlying cost to income ratio is expected to be broadly flat to the 2023 underlying ratio of 33%, commensurate with the NIM guidance.
The Group remains well capitalised, with strong liquidity and a high-quality secured loan book. We have demonstrated the strength of our customer franchises and intermediary relationships and continue to focus on delivering good outcomes for our stakeholders and strong returns for our shareholders.”
*Enquiries:*
*OSB GROUP PLC Brunswick Group **
*Alastair Pate, Investor Relations Robin Wrench/Simone Selzer
t: 01634 838973 t: 020 7404 5959
*Results presentation *
A webcast presentation for analysts will be held at 9:30am on Thursday 14 March.
The presentation will be webcast or call only and will be available on the OSB Group website at www.osb.co.uk/investors/results-reports-presentations.
The UK dial in number is 020 3936 2999 and the password is 672091. Registration is open immediately.
*About **OSB GROUP PLC*
OneSavings 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. On 30 November 2020, OSB GROUP PLC became the listed entity and holding company for the OSB Group. The Group provides specialist lending and retail savings and is authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority. The Group reports under two segments, OneSavings Bank and Charter Court Financial Services.
*OneSavings Bank (OSB)*
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 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 and InterBay Commercial. 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 and the Bank of England’s Term Funding Scheme with additional incentives for SMEs.
*Charter Court Financial Services Group (CCFS)*
CCFS focuses on providing Buy-to-Let and specialist residential mortgages, mortgage servicing, administration and retail savings products. It operates through its brands: Precise Mortgages 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 and the Bank of England’s Term Funding Scheme with additional incentives for SMEs.
*Important disclaimer *
This document should be read in conjunction with any other documents or announcements distributed by OSB GROUP PLC (OSBG) through the Regulatory News Service (RNS). This document is not audited and contains certain forward-looking statements with respect to the business, strategy and plans of OSBG, its current goals, beliefs, intentions, strategies 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 but are not the exclusive means of identifying such statements. Statements that are not historical facts, including statements about OSBG’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 that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. 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 OSBG 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, energy prices and currencies; policies of the Bank of England, the European Central Bank and other G7 central banks; the ability to access sufficient sources of capital, liquidity and funding when required; changes to OSBG’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 OSBG’s control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war (including, without limitation, the Russia-Ukraine war, the Israel-Hamas war and any continuation and escalation of such conflicts) or hostility and responses to those acts; geopolitical events and diplomatic tensions; the impact of outbreaks, epidemics and pandemics or other such events; changes in laws, regulations, taxation, ESG reporting standards, accounting standards or practices, including as a result of the UK’s exit from the EU; regulatory capital or liquidity requirements and similar contingencies outside OSBG’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; the success of OSBG in managing the risks of the foregoing; and other risks inherent to the industries and markets in which OSBG operates.
Accordingly, no reliance may be placed on any forward-looking statement. Neither OSBG, nor any of its directors, officers or employees provides any representation, warranty or assurance 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, OSBG 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 OSBG’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 OSBG’s business, please see the Risk review section in the OSBG Annual Report and Accounts 2023. Copies of this are available at www.osb.co.uk and on request from OSBG.
Nothing in this document or any subsequent discussion of this document constitutes or forms part of a public offer under any applicable law or an offer or the solicitation of 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. Statements about historical performance must not be construed to indicate that future performance, share price or results in any future period will necessarily match or exceed those of any prior period. Nothing in this document is intended to be, or should be construed as, a profit forecast or estimate for any period.
In regard to any information provided by third parties, neither OSBG nor any of its directors, officers or employees explicitly or implicitly guarantees that such information is exact, up to date, accurate, comprehensive or complete. In no event shall OSBG be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for inaccuracies or errors in, or omission from, any third-party information contained herein. Moreover, in reproducing such information by any means, OSBG may introduce any changes it deems suitable, may omit partially or completely any aspect of the information from this document, and accepts no liability whatsoever for any resulting discrepancy.
Liability arising from anything in this document shall be governed by English law, and neither OSBG 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 *
OSBG believes that any non-IFRS performance measures included in this document provide a more consistent basis for comparing the business' performance between financial periods, and provide more detail concerning the elements of performance which OSBG is most directly able to influence or which are relevant for an assessment of OSBG. They also reflect an important aspect of the way in which operating targets are defined and performance is monitored by the 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. For further details, refer to the Alternative performance measures section in the OSBG Annual Report and Accounts 2023. Copies of this are available at www.osb.co.uk and on request from OSBG.
*Chief Executive’s Statement*
The Group reported strong performance in its core lending and savings franchises during 2023, with robust demand for its specialist mortgages delivering 9% net loan book growth, despite a challenging interest rate environment that subdued demand in the wider mortgage market.
We grew market share in our core Buy-to-Let sub-segment and I am proud that we remain a trusted partner for professional multi-property landlords who provide homes in the Private Rented Sector.
Our fair and attractively priced savings products were popular, and we grew our retail deposits book by 12% in the year. Our debt issuance programme was well-received by investors, and following the January issuance of £400m of MREL qualifying debt securities, we met the interim MREL requirement, including regulatory buffers.
As reported at the half-year, the Group’s 2023 results were significantly impacted by the total net adverse effective interest rate (EIR) adjustment of £181.6m on an underlying basis. This related to the reduction in expected time spent on reversion rates for Precise Mortgages customers in response to rapid base rate rises and fluctuating interest rate expectations during the first half of the year. I am pleased that since then, there has been no material change in borrowers’ behaviour and we continue to observe a trend consistent with our EIR assumption of c.5 months on the reversion rate for Precise customers.
The credit quality of the book remained robust, and our strong origination, capital and liquidity positions allow us to announce further capital distributions. The Board has recommended a final dividend of 21.8 pence per share, which together with the interim dividend of 10.2 pence per share, results in a total ordinary dividend for the year of 32.0 pence per share. In addition we have announced a new £50m share repurchase over the next six months.
April Talintyre, our long-serving CFO will retire at the Group Annual General Meeting on 9 May 2024. She has been instrumental in shaping and delivering OSB’s strategy over the last 11 years, helping steward OSB through private equity ownership into a successful FTSE 250 listed business, as well as playing a key role in the Group’s combination with Charter Court Financial Services in 2019. She has been an excellent and trusted support to me through the years, helping to build one of the UK’s leading specialist lenders. I wish her well for her retirement.
*Financial performance*
The Group delivered an underlying pre-tax profit of £426.0m in 2023, down 28% from £591.1m in 2022, primarily due to the adverse EIR adjustment. The underlying basic earnings per share was 75.0 pence (2022: 99.6 pence). The underlying pre-tax profit would have increased to £607.6m and the underlying basic earnings per share would have improved to 106.7 pence, excluding the adverse EIR adjustment. On a statutory basis, profit before tax decreased to £374.3m and basic earnings per share was 66.1 pence (2022: £531.5m and 90.8 pence, respectively).
The underlying and statutory net interest margins reduced to 251bps and 231bps respectively (2022: 303bps and 278bps), largely due to the adverse EIR adjustment and as the benefit of the lower cost of retail funding was offset by the impact of some lower margin lending due primarily to delays in mortgage pricing reflecting the rate rises and higher swap costs. The underlying net interest margin would have been 314bps, excluding the adverse EIR adjustment.
The Group maintained its focus on cost discipline and efficiency during the year with the underlying and statutory management expense ratios remaining broadly unchanged at 81bps and 82bps respectively (2022: 80bps and 81bps, respectively). The anticipated impact of balance sheet growth, inflation and planned investment in people and digital solutions to enhance our customer propositions were reflected in a 14% increase in underlying administrative expenses to £232.9m. The underlying and statutory cost to income ratios of 33% and 36% respectively, were impacted by the reduction in income due to the adverse EIR adjustment and a loss on the Group’s hedging activities compared to a gain in the prior year (2022: 25% and 27%, respectively). Underlying cost to income would have been 26% excluding the adverse EIR adjustment.
The Group delivered an underlying return on equity of 16% for 2023 (2022: 24%) and 14% on a statutory basis (2022: 21%), which reflected the impact of the adverse EIR adjustment on the profit for the year. Underlying return on equity would have been 22% excluding the adverse EIR adjustment.
*Our lending franchises *
Strong demand for the Group’s lending products delivered underlying and statutory net loan book growth of 9% in the year to £25.7bn and £25.8bn, respectively (31 December 2022: £23.5bn and £23.6bn). Organic originations were £4.7bn in the year (2022: £5.8bn), despite difficult mortgage market conditions and subdued purchase activity, demonstrating the strength of our relationships with intermediaries, the continued professionalisation of Buy-to-Let landlords and our long-term positioning in specialist mortgage market sub-sectors. I am particularly pleased that our renewed focus on lending on smaller commercial properties through the InterBay brand led to originations of £406m, a 46% increase from 2022.
The rising costs of living and borrowing were reflected in subdued purchase activity across all mortgage market sectors and I am proud that the Group’s relationship managers and underwriters continued to work hand in hand with their broker partners, fully utilising our bespoke capabilities to find solutions for our borrowers. Refinancing was particularly strong in the year as borrowers sought to lock in lower monthly repayments to avoid further base rate rises, and as a result the proportion of Buy-to-Let completions due to refinancing were 62% for Kent Reliance and 48% for Precise Mortgages. There was also an improvement in retention as we continued to engage proactively with our borrowers offering new products, with 78% of Kent Reliance and 66% of Precise Mortgages customers choosing to refinance with the Group within three months of their fixed rate product ending.
The Group’s mortgage propositions continued to win industry awards and in 2023 Kent Reliance for Intermediaries won Best Specialist Lender from L&G Mortgage Club Awards, Precise Mortgages was awarded Best Specialist Lender from TMA Club and the Group was recognised as the Best Specialist Bank at the Bridging and Commercial Awards. During the year we became signatories to the Government’s Mortgage Charter, underlining our commitment to provide support to residential customers.
We continued to demonstrate our leadership and commitment to the Buy-to-Let sector through our Landlord Leaders initiative. In 2023, we set up the Landlord Leaders Community with 31 founding members, and in December we published the second research report that looked at tenants’ experiences and most frequent challenges.
*Credit and risk management*
The high quality of the Group’s loan book was demonstrated by a strong credit performance, with balances over three months in arrears at 1.4% of the loan book at the end of December (31 December 2022: 1.1%). The increase in arrears was largely due to the impact of the rising costs of living and borrowing on a small group of borrowers, and we continue to work closely with those needing assistance.
The Group recorded an impairment charge of £48.5m on an underlying basis, which represented an underlying loan loss ratio of 20bps for the year (2022: £30.7m and 14bps, respectively). The impairment charge principally reflected changes in the risk profile of borrowers as they transitioned through modelled IFRS 9 impairment stages and an increase in provisions for accounts with arrears of three months or more. The statutory impairment charge was £48.8m, equivalent to a loan loss ratio of 20bps (2022: £29.8m and 13bps, respectively).
The weighted average loan to value (LTV) of the Group’s loan book increased to 64% as at 31 December 2023, from 60% at the end of 2022, largely due to negative house price inflation in the year. The weighted average LTV of new business written by the Group reduced to 68% from 71% in 2022, and interest coverage ratios remained strong at 176% for OSB and 154% for CCFS, despite higher mortgage rates, reflecting the long-term income improvement enjoyed by professional landlords.
*Multi-channel funding model *
Retail deposits remained the primary source of funding for the Group and the deposit book grew by 12% to £22.1bn by the end of 2023 (31 December 2022: £19.8bn), as we continued to offer fair and attractively priced savings products to our customers.
We opened more than 210,000 new savings accounts in the year, and retention rates remained very high at 91% for customers with maturing fixed rate bonds and ISAs at Kent Reliance and 85% for Charter Savings Bank. To supplement our savings propositions, we maintained a strong focus on customer service, which was reflected in Net Promoter Scores for the year of +71 for Kent Reliance and +62 for Charter Savings Bank.
We complement retail deposits funding with our expertise in the wholesale markets and in June we completed a £330m securitisation of owner-occupied prime mortgages, originated by Precise Mortgages under the CMF programme. In February 2024, we completed another transaction, securitising £509m of Buy-to-Let mortgages under the PMF programme. We saw an exceptional level of demand from our growing investor base and this allowed us to achieve very attractive pricing. We will continue to access the wholesale markets when conditions are favourable, to benefit from diversification of funding and support a smooth transition as we repay drawings under the Term Funding Scheme for SMEs (TFSME). In the year, we repaid £900m of TFSME funding with the remainder due to be repaid by October 2025. As at 31 December 2023, the Group’s drawings under this Bank of England facility reduced to £3.3bn (31 December 2022: £4.2bn). We have repaid a further £600m so far in 2024.
*Capital management*
The Group’s capital position, which reflects the £150m share repurchase programme announced in March 2023 and the post-tax impact of the adverse EIR adjustment, remained strong with a CET1 ratio of 16.1% as at 31 December 2023 (31 December 2022: 18.3%). We expect to continue to operate above our 14% CET target as we wait for clarity on the final Basel 3.1 rules, which are expected to be published in the second quarter of 2024.
Following the January issuance of £400m of MREL qualifying debt securities, we met the interim MREL requirement, plus regulatory buffers, of 22.5% of risk weighted assets, under the current standardised rules.
OSB Group has strengthened its compliance with the IRB requirements and has reflected upon the PRAs feedback to the industry. The Group continues to engage with the regulator ahead of commencing the formal application process. Underlying IRB capabilities and disciplines have become progressively more integrated into the Group’s business planning, risk, capital, IT and data management disciplines. In particular, enhanced IRB capabilities have played a vital role in informing and shaping the Group’s response to the rising costs of living and borrowing.
The Board has recommended a final dividend per share of 21.8 pence (2022: 21.8 pence), which together with the interim dividend per share of 10.2 pence (2022: 8.7 pence), results in a total ordinary dividend per share for the year of 32.0 pence (2022: 30.5 pence), in line with our stated desire to deliver a progressive dividend per share.
The Board remains committed to returning excess capital to shareholders and has today announced a new £50m share repurchase programme over the next six months. When combined with the ordinary dividend, the announced share repurchase represents a total return to shareholders of £177m and demonstrates the Board’s intention to use multiple levers to deliver shareholder returns. The Board will consider the potential for additional capital returns later in the year, subject to further MREL issuance to support growth opportunities and meet the final Basel 3.1 requirements once published, subject to regulatory approval.
*Investing in our future *
The Group is recognised for its efficiency and excellent customer service, and throughout 2023 we continued to invest to remain agile and nimble. We made progress on our digitalisation journey, which will enable us to meet the future needs of our customers, brokers and wider stakeholders, whilst delivering further operational efficiencies. This investment will be a key focus going forward as we deliver digital solutions to enhance our customer propositions.
Our success is dependent on our 2,459 employees across the UK and India, and we took further actions in the year to become a more diverse and inclusive organisation. By the end of the year, we reached our target to have 33% of women in senior management roles in the UK and we set a new target of 40% by the end of 2026. We also made major upgrades to all policies relating to maternity and family benefits in the UK to support our employees who are parents and carers.
I am pleased that in 2023, we also laid solid foundations for achieving our 2050 net zero emissions target in our inaugural Climate Transition Plan that will be published with the annual report. It outlines actionable steps in reducing our operational emissions as well as those from the housing stock we finance.
*Looking forward*
Our specialist market sub-segments continue to perform well, despite the subdued mortgage market. The Group’s target professional landlords demonstrate resilience and provide much needed homes with exceptional support to the Private Rented Sector, and our specialist residential and commercial brands have good levels of demand as customer confidence improves. Our savers remain loyal to the Group, as we offer them good value, with improving customer NPS results. We are confident this will continue as proposition enhancing digital solutions are delivered.
Based on current application volumes and against the backdrop of the subdued mortgage market, the Group expects to deliver underlying net loan book growth of c.5% for 2024.
The underlying net interest margin is expected to be broadly flat to the 2023 underlying NIM of 251bps, reflecting the impact of a higher cost of funds and the full year impact of some lower margin lending in 2023, due primarily to delays in mortgage pricing reflecting the rate rises and higher swap costs. The cost of funding is expected to increase in 2024, primarily due to the normalisation of retail deposit spreads, the impact of planned TFSME repayment, and the cost of MREL qualifying debt issuance.
We will maintain our cost discipline and efficiency, however the underlying cost to income ratio is expected to be broadly flat to the 2023 underlying ratio of 33%, commensurate with the NIM guidance.
The Group remains well capitalised, with strong liquidity and a high-quality secured loan book. We have demonstrated the strength of our customer franchises and intermediary relationships and continue to focus on delivering good outcomes for our stakeholders and strong returns for our shareholders.
*Andy Golding*
*Chief Executive Officer*
*14 March 2024*
*Segment review*
The Group reports its lending business under two segments: OneSavings Bank and Charter Court Financial Services.
*OneSavings Bank (OSB) segment*
The following tables present OSB’s loans and advances to customers and contribution to profit on a statutory basis:
* *
*Year ended 31-Dec-2023* *BTL/SME *
* £m* * Residential*
*£m* *Total *
*£m*
Gross loans and advances to customers *12,175.1* *2,334.2* *14,509.3*
Expected credit losses *(102.4)* *(8.7)* *(111.1)*
Net loans and advances to customers *12,072.7* *2,325.5* *14,398.2* * * * * * *
Risk-weighted assets *6,117.9* *1,068.4* *7,186.3* * * * * * *
*Profit or loss for the year* * * * * * *
Net interest income *394.4* *79.4* *473.8*
Other expense *(2.5)* *(0.6)* *(3.1)*
Total income *391.9* *78.8* *470.7*
Impairment of financial assets *(36.9)* *(4.7)* *(41.6)*
Contribution to profit *355.0* *74.1* *429.1*
* * * * * *
* *
*Year ended 31-Dec-2022* *BTL/SME *
* £m* *Residential*
* £m* *Total *
*£m*
Gross loans and advances to customers 10,920.0 2,324.7 13,244.7
Expected credit losses (95.2) (8.0) (103.2)
Net loans and advances to customers 10,824.8 2,316.7 13,141.5
Risk-weighted assets 5,258.8 1,033.7 6,292.5
*Profit or loss for the year*
Net interest income 383.1 77.6 460.7
Other income 7.1 1.8 8.9
Total income 390.2 79.4 469.6
Impairment of financial assets (23.5) 1.2 (22.3)
Contribution to profit 366.7 80.6 447.3
*OSB Buy-to-Let/SME sub-segment*
*Loans and advances to customers* *31-Dec-2023*
*£m* *31-Dec-2022*
*£m*
Buy-to-Let *10,764.5* 9,755.0
Commercial *1,095.7* 881.3
Residential development *280.8* 184.5
Funding lines *34.1* 99.2
*Gross loans and advances to customers* *12,175.1* 10,920.0
Expected credit losses *(102.4)* (95.2)
*Net loans and advances to customers* *12,072.7* 10,824.8
This sub-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, residential development finance to small and medium-sized developers, secured funding lines to other lenders and asset finance.
The Buy-to-Let/SME net loan book increased supported by strong retention and organic originations of £2,163.7m, which reduced by 5% from £2,283.8m in 2022 in a subdued mortgage market.
Net interest income in this sub-segment increased by 3% to £394.4m (2022: £383.1m), largely reflecting growth in the loan book and an adverse effective interest rate (EIR) adjustment of £0.1m was recognised for the year (2022: £20.0m gain).
Other expenses were £2.5m and related to losses from the Group’s hedging activities (2022: £7.1m gain). The impairment charge increased to £36.9m (2022: £23.5m) primarily due to changes in the macroeconomic outlook, model and post-model enhancements, modelled IFRS 9 stage migration and increased arrears. Overall, the Buy-to-Let/SME sub-segment made a contribution to profit of £355.0m, a decrease of 3% compared with £366.7m in 2022.
The Group remained highly focused on the risk assessment of new lending, as demonstrated by the average loan to value (LTV) for Buy-to-Let/SME originations of 70% (2022: 73%).^1 The average book LTV in the Buy-to-Let/SME sub-segment increased to 67% (31 December 2022: 63%)^1 as a result of negative house price inflation in the year. Only 4.0% of loans in this sub-segment exceeded 90% LTV (31 December 2022: 3.2%).
*Buy-to-Let*
The Buy-to-Let gross loan book increased by 10% to £10,764.5m at the end of December 2023 (31 December 2022: £9,755.0m) benefitting from an increase in refinance activity, as borrowers sought to lock in lower monthly repayments in expectation of further base rate rises. During the year, the Group’s originations decreased by 13% in the Buy-to-Let sub-segment to £1,575.4m from £1,804.6m at the end of 2022 as overall market segment volumes reduced significantly.
The proportion of Kent Reliance Buy-to-Let completions represented by refinance increased to 62% from 61% in 2022 as purchase activity fell. In addition, there was also an upward trend in product transfers, with 78% of existing borrowers choosing a new product, under the Choices retention programme, within three months of their initial rate mortgage coming to an end (2022: 72%).
The Group’s borrowers continued to favour five-year fixed rate mortgages, which represented 74% of Kent Reliance completions in 2023 (2022: 83%), however an increasing proportion of customers elected to take shorter-term mortgages in anticipation of falling interest rates.
1. Buy-to-Let/SME sub-segment average weighted LTVs include Kent Reliance and InterBay Buy-to-Let, semi-commercial and commercial lending
Landlords continued to optimise their businesses from a tax perspective, with 87% of Kent Reliance mortgage applications for purchases coming from landlords borrowing via a limited company (2022: 78%), and overall professional, multi-property landlords represented 91% of completions by value for the Kent Reliance brand in 2023 (2022: 86%).
Research conducted by BVA BDRC on behalf of the Group, showed that the proportion of landlords planning to purchase properties was low relative to historical averages, reflecting wider macroeconomic conditions, although this increased modestly year-on-year to 11% in the fourth quarter (Q4 2022: 9%). There was positivity in the Group’s Landlord Leaders research which found that 42% are optimistic about operating as a landlord in the future while 24% have a neutral outlook. The research also found that 65% of of landlords are considering or have already transitioned to become incorporated entities, reflecting ongoing landlord professionalisation.
The weighted average LTV of the Buy-to-Let book as at 31 December 2023 was 66% with an average loan size of £255k (31 December 2022: 62% and £255k). The weighted average interest coverage ratio for Buy-to-Let originations during 2023 were 176% (2022: 207%).
*Commercial*
Through its InterBay brand, the Group lends to borrowers investing in commercial and semi-commercial property, reported in the Commercial total, and more complex Buy-to-Let properties and portfolios, reported in the Buy-to-Let total.
The Group experienced an increased level of business following the launch of new products in February and March. The refreshed range of InterBay products included the reintroduction of two-year fixed rate mortgages, lower LTV mortgages and a reduced minimum loan size. Organic originations increased by 46% to £405.6m in 2023 (2022: £278.7m) supporting a 24% increase in the gross loan book to £1,095.7m as at 31 December 2023 (2022: £881.3m). The Group also expanded its bridging finance range offered by the InterBay brand in July, relaunching products to support landlords seeking to purchase or renovate commercial and semi-commercial properties.
The weighted average LTV of the commercial book increased to 73%, largely due to a reduction in commercial property values. The average loan size was £410k in 2023 (2022: 69% and £375k).
InterBay Asset Finance, which predominantly targets UK SMEs and small corporates financing business critical assets, continued to grow adding to its high-quality portfolio with the gross carrying amount under finance leases increasing by 36% to £222.7m as at 31 December 2023 (31 December 2022: £163.2m).
*Residential development*
Our Heritable residential development business provides development finance to small and medium-sized residential property developers. The preference is to fund house builders which operate outside of 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 represented repeat business from the team’s extensive existing relationships and Heritable continued to take an exacting approach to approving funding for new customers.
The residential development finance gross loan book at the end of 2023 was £280.8m, with a further £120.9m committed (31 December 2022: £184.5m and £162.2m, respectively). Total approved limits were £566.8m, exceeding drawn and committed funds due to the revolving nature of the facility, where construction is phased and facilities are redrawn as sales on the initially developed properties occur (31 December 2022: £502.6m).
At the end of 2023, Heritable had commitments to finance the development of 2,709 residential units, the majority of which are houses located outside of central London or other major cities in England.
*Funding lines*
OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, primarily secured against property-related mortgages. Total credit approved limits as at the end of 2023 were £197.1m with total gross loans outstanding of £34.1m (31 December 2022: £274.0m and £99.2m, respectively). During the year, the Group maintained a cautious risk approach focusing on servicing existing customers.
*OSB Residential sub-segment *
* * *31-Dec-2023*
*£m* * 31-Dec-2022*
*£m*
First charge *2,199.1* 2,152.9
Second charge *135.1* 171.8
*Gross loans and advances to customers* *2,334.2* 2,324.7
Expected credit losses *(8.7)* (8.0)
*Net loans and advances to customers* *2,325.5* 2,316.7
This sub-segment comprises first charge mortgages to owner-occupiers, secured against a residential home and under shared ownership schemes.
The Residential sub-segment net loan book was £2,325.5m as at 31 December 2023, broadly flat compared with £2,316.7m in the prior year and organic originations reduced to £342.2m in the year (2022: £575.9m) reflecting reduced customer demand in a subdued market.
Net interest income in the Residential sub-segment increased by 2% to £79.4m (2022: £77.6m) and this sub-segment recognised a favourable EIR adjustment of £1.0m based on updated customer behavioural trends (2022: £1.6m loss). Other expenses of £0.6m (2022: £1.8m other income) related to losses from the Group’s hedging activities and the impairment charge was £4.7m (2022: £1.2m credit). The impairment charge was largely due to modelled IFRS 9 stage migration and increased arrears. Overall, contribution to profit from this sub-segment reduced by 8% to £74.1m for the year compared with £80.6m in 2022.
The average book LTV increased to 48% (31 December 2022: 45%)1 as a result of negative house price inflation, with only 2.2% of loans with LTVs exceeding 90% (31 December 2022: 0.8%). The average LTV of new residential origination during 2023 decreased to 62% (2022: 64%)^1 as a result of an increase in lower LTV owner-occupied originations.
*First charge*
First charge mortgages are provided under the Kent Reliance brand, which largely serves prime credit quality borrowers with more complex circumstances. This includes high net worth individuals with multiple income sources and self-employed borrowers, as well as those buying a property in conjunction with a housing association under shared ownership schemes.
The first charge gross loan book increased 2% in the year to £2,199.1m from £2,152.9m at the end of 2022.
*Second charge*
The OSB second charge mortgage book is in run-off and managed by Precise Mortgages. Total gross loans were £135.1m at the end of 2023 (31 December 2022: £171.8m).
1. Residential sub-segment average weighted LTVs include first and second charge lending
*Charter Court Financial Services (CCFS) segment*
The following tables present CCFS’s loans and advances to customers and contribution to profit on an underlying basis, excluding acquisition-related items and a reconciliation to the statutory results.
*As at*
*31-Dec-2023* *Buy-to-*
*Let
£m* *Residential *
*£m* *Bridging*
*£m* *Second charge*
*£m* *Other^1,2*
*£m* *Total *
*underlying *
*£m* *Acquisition- related *
*Items^3*
*£m* *Total *
*statutory*
*£m*
Gross loans and advances to customers *7,921.5* *3,026.0* *333.1* *83.0* *13.6* *11,377.2* *24.3* *11,401.5*
Expected credit losses *(29.0)* *(5.4)* *(1.2)* *(0.2)* *-* *(35.8)* *1.1* *(34.7)*
Loans and advances to customers *7,892.5* *3,020.6* *331.9* *82.8* *13.6* *11,341.4* *25.4* *11,366.8* * * * * * * * * * * * * * * * *
Risk-weighted assets *3,138.9* *1,263.0* *167.5* *35.8* *5.4* *4,610.6* *48.7* *4,659.3*
*Profit or loss account*
*for the year ended 31-Dec-2023*
Net interest income *127.4* *75.2* *8.8* *4.8* *24.7* *240.9* *(56.1)* *184.8*
Other income *-* *-* *-* *-* *(3.8)* *(3.8)* *6.4* *(2.6)*
Total income *127.4* *75.2* *8.8* *4.8* *20.9* *237.1* *(49.7)* *187.4*
Impairment of financial assets *(5.0)* *(1.2)* *(0.7)* *-* *-* *(6.9)* *(0.3)* *(7.2)*
Contribution to profit *122.4* *74.0* *8.1* *4.8* *20.9* *230.2* *(50.0)* *180.2*
1. For loans and advances to customers ‘Other’ relates to acquired loan portfolios.
2. For Profit or loss account, ’Other’ relates to net interest income from acquired loan portfolios as well as gains on structured asset sales, fee income from third party mortgage servicing and gains or losses on the Group’s hedging activities.
3. For more details on acquisition-related adjustments, see Reconciliation of statutory to underlying results in the Financial review.
*As at*
*31-Dec-2022* *Buy-to-*
*Let
£m* *Residential *
*£m* *Bridging*
*£m* *Second charge*
*£m* *Other^1, 2*
*£m* *Total *
*underlying *
*£m* *Acquisition- related *
*Items^3*
*£m* *Total *
*statutory*
*£m*
Gross loans and advances to customers 7,468.8 2,671.3 149.7 111.9 14.6 10,416.3 81.7 10,498.0
Expected credit losses (23.5) (3.8) (0.5) (0.2) - (28.0) 1.2 (26.8)
Loans and advances to customers 7,445.3 2,667.5 149.2 111.7 14.6 10,388.3 82.9 10,471.2
Risk-weighted assets 2,927.1 1,107.3 70.9 45.4 5.5 4,156.2 46.0 4,202.2
*Profit or loss account*
*for the year ended 31-Dec-2022*
Net interest income 206.0 96.0 5.0 5.9 (4.5) 308.4 (59.2) 249.2
Other income - - - - 46.2 46.2 10.4 56.6
Total income 206.0 96.0 5.0 5.9 41.7 354.6 (48.8) 305.8
Impairment of financial assets (9.5) 1.2 (0.2) 0.1 - (8.4) 0.9 (7.5)
Contribution to profit 196.5 97.2 4.8 6.0 41.7 346.2 (47.9) 298.3
1. For loans and advances to customers ‘Other’ relates to acquired loan portfolios.
2. For Profit or loss account, ’Other’ relates to net interest income from acquired loan portfolios as well as gains on structured asset sales, fee income from third party mortgage servicing and gains or losses on the Group’s hedging activities.
3. For more details on acquisition-related adjustments, see Reconciliation of statutory to underlying results in the Financial review.
* * *31-Dec-2023*
*£m* *31-Dec-2022*
*£m*
Buy-to-Let *7,921.5* 7,468.8
Residential *3,026.0* 2,671.3
Bridging *333.1* 149.7
Second charge *83.0* 111.9
Other^1 *13.6* 14.6
*Gross loans and advances to customers* *11,377.2* 10,416.3
Expected credit losses *(35.8)* (28.0)
*Net loans and advances to customers* *11,341.4* 10,388.3
1. Other relates to acquired loan portfolios
CCFS segment comprises Buy-to-Let mortgages secured on residential property held for investment purposes by both non-professional and professional landlords, residential mortgages to owner-occupiers secured against residential properties including those unsupported by the high street banks, short-term bridging secured against residential property in both the regulated and unregulated sectors and the second charge loan book which is in run-off.
The CCFS underlying net loan book grew by 9% to £11,341.4m at the end of 2023 (31 December 2022: £10,388.3m) supported by strong retention and organic originations of £2,186.8m, which decreased by 26% from £2,969.4m of new business written in 2022 reflecting a subdued mortgage market.
*CCFS Buy-to-Let sub‑segment*
Organic originations in the Buy-to-Let sub-segment through the Precise Mortgages brand decreased in 2023 to £1,006.0m (2022: £1,998.7m) reflecting the impact of the higher interest rate environment on smaller portfolio and individual landlords. The underlying gross Buy-to-Let loan book grew by 6% in the year to £7,921.5m from £7,468.8m at the end of 2022 supported by strong refinance activity.
Underlying net interest income in this sub-segment reduced to £127.4m compared with £206.0m in the prior year, as the benefit of loan book growth was more than offset by the underlying adverse EIR adjustment of £139.5m (2022: £37.5m loss). The EIR adjustment related to the expectation that Precise Mortgages customers would spend less time on the higher reversion rate before refinancing, based on observed customer behavioural trends.
This sub-segment recognised an impairment charge of £5.0m (2022: £9.5m) largely due to changes in the macroeconomic outlook, modelled IFRS 9 stage migration and increased arrears. On an underlying basis, Buy-to-Let made a contribution to profit of £122.4m, compared with £196.5m in the prior year, with the decline largely due to the impact of the adverse EIR adjustment.
On a statutory basis, the Buy-to-Let sub-segment made a contribution to profit of £82.1m (2022: £154.8m).
Refinance activity continued to represent nearly half of Precise Mortgages completions, at 48%, as landlords sought to lock in lower monthly repayments in expectation of further base rate rises (2022: 50%). Under the Precise Mortgages retention programme, 66% of existing borrowers chose a new product within three months of their initial rate mortgage coming to an end in the year (2022: 35%).
Five-year fixed rate products accounted for 67% of Precise Mortgages completions, down from 74% in 2022, as an increasing proportion of customers elected to take shorter-term mortgages in anticipation of falling interest rates. Borrowing via a limited company made up 68% of Buy-to-Let completions in 2023 (2022: 65%) and the proportion of completions for loans for specialist property types, including houses of multiple occupation and multi-unit properties remained at 21%.
Research conducted by BVA BDRC in the fourth quarter of 2023 on behalf of the Group found that over six in ten landlords that intended to acquire new properties planned to do so within a limited company structure, in line with an upward trend that has been observed over a number of years, reflecting ongoing landlord professionalisation.
The weighted average LTV of the loan book in this segment increased to 68% due to negative house price inflation in 2023 (2022: 66%). The new lending average LTV was 71% with an average loan size of £190k (2022: 73% and £191k, respectively). The weighted average interest coverage ratio for Buy-to-Let origination was 154% in 2023 (2022: 191%).
*CCFS Residential sub-segment*
The underlying gross loan book in CCFS’ Residential sub-segment reached £3,026.0m by 31 December 2023, an increase of 13% from £2,671.3m as at 31 December 2022, supported by organic originations of £743.6m (2022: £749.4m). The Group continued to benefit from CCFS’ expertise, with a strong focus on self-employed individuals and those with minor adverse credit records.
Underlying net interest income reduced to £75.2m (2022: £96.0m) as the benefit of loan book growth was more than offset by the underlying adverse EIR adjustment of £43.0m (2022: £4.0m loss). The EIR adjustment related to the expectation that Precise Mortgages borrowers would spend less time on the higher reversion rate before refinancing, based on observed customer behavioural trends. The Residential sub-segment recorded an impairment charge of £1.2m (2022: £1.2m credit) largely due to changes in the macroeconomic outlook, modelled IFRS 9 stage migration and increased arrears. Overall, on an underlying basis, the Residential sub-segment made a contribution to profit of £74.0m, compared with £97.2m in 2022 and £59.5m on a statutory basis (2022: £81.9m).
The average loan size in this sub-segment was £160k (31 December 2022: £147k) with an average LTV for new lending of 63% (2022: 66%) and an increase in book LTV to 59% as a result of negative house price inflation in the year (31 December 2022: 57%).
*CCFS Bridging sub‑segment*
The Group’s short-term lending offering saw continued success in 2023 as borrowers made use of its regulated and non-regulated products to assist with chain-break finance, refurbishment works and property conversions, while the Group’s refurbishment Buy-to-Let proposition also remained popular. This sub-segment saw originations of £437.2m, double the amount of £217.5m recorded in 2022 and a growth in the underlying gross loan book to £333.1m as at 31 December 2023 (31 December 2022: £149.7m).
Underlying net interest income increased by 76% to £8.8m (2022: £5.0m), and the impairment charge was £0.7m (2022: £0.2m) largely due to balance sheet growth. The bridging sub-segment made a contribution to profit of £8.1m in 2023 on an underlying basis compared with £4.8m in 2022 and £6.9m on a statutory basis (2022: £4.2m).
*CCFS Second charge sub-segment*
The second charge gross loan book reduced to £83.0m compared with £111.9m as at 31 December 2022, as the Group no longer offers second charge products under the Precise Mortgages brand and the book is in run-off.
*Effective interest rate adjustment overview*
2023 results included a total net adverse effective interest rate (EIR) adjustment of £210.7m on a statutory basis and £181.6m on an underlying basis which was included in Net Interest Income. This adjustment was equivalent to 72bps of statutory net interest margin (NIM) and 63bps of underlying NIM.
*Interest rates and volatile outlook*
The Bank of England raised the UK’s Bank Base Rate (BBR) 13 times from the start of 2022 through to 31 December 2023, as summarised in Table 1. The interest rate outlook was also volatile across the same period and Table 2 shows the futures implied BBR peak since 30 June 2021 by quarter.
Table 1 Table 2
*Date changed* *Base rate * * * *Date* *Implied BBR peak^1* % %
December 2021 0.25 30 June 2021 0.70
February 2022 0.50 30 September 2021 0.99
March 2022 0.75 31 December 2021 1.37
May 2022 1.00 31 March 2022 2.52
June 2022 1.25 30 June 2022 3.09
August 2022 1.75 30 September 2022 5.88
September 2022 2.25 31 December 2022 4.74
November 2022 3.00 31 March 2023 4.65
December 2022 3.50 30 June 2023 6.29
February 2023 4.00 30 September 5.45
March 2023 4.25 31 December 2023 5.28
May 2023 4.50
June 2023 5.00
August 2023 5.25
* *
1.Bloomberg, implied peak interest rate futures pricing at the applicable date
*Impact on customer behaviour*
These rapid BBR rises and fluctuating interest rate expectations led to customer behavioural changes. Precise Mortgages (Precise) fixed rate products were designed to revert to a rate which was similar to the initial fixed rate and open market rates. This encouraged borrowers to spend significant time on the variable reversion rate before choosing a new fixed rate product or refinancing with another lender.
Over the course of the first half of 2023, the Group observed a step change in how long these customers were spending on the reversion rate, in particular the attrition rate of borrowers who historically stayed on the reversion rate for several months.
Precise customers generally contractually revert to a margin over BBR at the end of their fixed rate term.
As BBR continued to rise, customers saw steep increases in the BBR linked reversion rate, and as the Group continued to develop its Precise retention programme, customers chose to refinance earlier and spent less time on the higher reversion rate compared to previously observed behavioural trends.
In contrast, the Kent Reliance brand has historically had a higher reversion rate, its managed standard variable rate (SVR), resulting in a significant rate step-up in reversion versus both the fixed rate and open market rates. Due to this step up, Kent Reliance has a long and well-established broker led retention programme, Choices, to encourage borrowers to switch to a new product quickly. Kent Reliance customers have therefore spent less time on reversion historically than Precise customers and their behaviour is therefore less sensitive to increasing interest rates.
Table 3 illustrates the different way in which Precise and Kent Reliance mortgages have reverted since 2020, by showing the difference between the average fixed and reversion rates for five-year fixed Buy-to-Let products when they reached the end of their initial fixed rate term.
The table shows that the Precise Buy-to-Let five-year fixed rate products on average reverted to a variable rate broadly consistent with the fixed rate prior to the rapid rise in BBR. Conversely, the Kent Reliance five-year fixed rate products have consistently had a higher step-up in reversion providing an incentive to refinance quickly.
Table 3
* * *5 Year fixed Buy-to-Let*
*step up in reversion*
Precise Kent Reliance ppt ppt
2020 0.1 1.3
2021 (0.1) 1.7
2022 Q1 0.4 2.2
2022 Q2 1.1 3.0
2022 Q3 2.1 3.6
2022 Q4 3.7 4.5
2023 Q1 4.7 5.7
2023 Q2 5.6 6.4
2023 Q3 6.3 7.3
2023 Q4 6.8 7.4
The step-change in customer behavioural trends, observed over the course of the first half of 2023, led to a decrease in the weighted average number of months that Precise Mortgages borrowers who reach the end of their fixed term were expected to spend on the reversion rate before refinancing from c.17 months to c.5 months. The weighted average number of c.5 months remained unchanged as at 31 December 2023.
Kent Reliance borrowers, who reach the end of their fixed term were expected to spend on average 1-2 months on the reversion rate as at 31 December 2023.
*Impact of the step-change in behaviour in reversion for Precise customers*
The reduction in the expected time spent on reversion by Precise customers from c.17 to c.5 months, resulted in an adverse underlying EIR adjustment to the carrying value of Loans and Advances to Customers through Net Interest Income of £182.5m in 2023, of which £178.0m was recognised in the first half.
This moved the Precise EIR asset to an EIR liability. Other Group EIR adjustments totalled £0.9m as at 31 December 2023.
Table 4 details Precise Mortgages’ underlying EIR assets and liabilities, with the movement in the balance sheet recognised in Net Interest Income in each year:
Table 4
* *
*