Supporting the financial wellbeing
of our members by providing
a safe and good return on the
savings they entrust with us and
promoting home ownership
through responsible lending.
Annual Report and Accounts
Year ended 31 March 2022
1627-05/22-01
Braille, audio and large print versions of this document are
available upon request. Please contact us on 0345 241 3784.
Head Office: 2 Providence Place, West Bromwich B70 8AF.
www.westbrom.co.uk
Registered Number: 651B
Calls and electronic communications may be monitored and/or
recorded for your security and may be used for training purposes.
Your confidentiality will be maintained.
The West Brom is authorised by the Prudential Regulation Authority
and regulated by the Financial Conduct Authority and Prudential
Regulation Authority. Register No. 104877. ‘the West Brom’ is a trading
name of West Bromwich Building Society.
Contents
Overview 2
Chair’s Statement 2
Chief Executive’s Review 4
Business Review 8
Strategic Report 8
Risk Management 36
Board of Directors 50
Governance 56
Directors’ Report 56
Directors’ Report on Corporate Governance 62
Audit Committee Report 68
Directors’ Remuneration Report 72
Independent Auditor’s Report 84
Financial Statements 92
Income Statements 93
Statements of Comprehensive Income 94
Statements of Financial Position 95
Statements of Changes in Members’ Interest and Equity 96
Statements of Cash Flows 98
Notes to the Accounts 100
Country-by-Country Reporting 168
Annual Business Statement 171
Glossary 174
1
Average market rates sourced from Bank of England Bankstats table A6.1
2
Net Promoter Score and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.
Key highlights of the 2021/22
financial year
A Net Promoter Score
®2
of
+81
(2020/21: +76) with customer
satisfaction maintained at
96%
.
Net Promoter Score
+
+
81
81
Supporting refugees from the
Ukrainian conflict by making homes
primarily from our rental property
portfolio available to
house families
impacted by the crisis
.
Supporting
Supporting
refugees
refugees
Strong capital position maintained
with an improved Common Equity Tier
1 (CET 1) capital ratio of
17.0%
(2020/21: 16.4%) and a leverage ratio of
6.5%
(2020/21: 6.8%).
Common Equity
Tier 1 (CET 1)
17.0
17.0
%
%
Statutory profit before tax of
£23.2m
(2020/21: £4.7m), driven by strong net interest income, fair value gains, the release of residential mortgage provisions that increased
during the pandemic and a lower commercial impairment charge. This statutory profit
includes the one-off charge of taking £5.6m of previously capitalised costs relating to
the ongoing development of our online savings platform to the income statement; our
underlying profit, which excludes this and the hedge ineffectiveness impact was £26.6m
(2020/21: £2.4m).
Profit before tax
£23.2
£23.2
m
m
£756m
in new mortgage lending
(2020/21: £784m), with
54%
of loans for house purchase supporting first-
time buyers onto the property ladder
(2020/21: 48%).
New
mortgage
lending
£756
£756
m
m
Recognised in three categories of the
Moneyfacts 2021 awards, including
Winner of Best Building Society
Mortgage Provider
. Also awarded
the highest accolade in the Financial
Adviser Service Awards for the 4th
consecutive year.
Best in class
#
#
1
1
Savers rewarded with rates that
were, by the end of the year,
more
than three times
the average rates
paid by the market
1
(end of 2020/21:
more than double). Only passed on
a quarter of the increases led by the
Bank Rate to borrowers on Standard
Variable Rate (SVR); equivalent to a
combined benefit to our members of
£9.2m
(2020/21: £5.3m).
3 times
3 times
more
more
than the market
average
2 3
Annual Report and Accounts
Year ended 31 March 2022
Overview
Chair’s Statement
In my first year as Chair, the
passion of my colleagues to
make a real difference to the
lives of the members and
communities we serve, has
been abundantly evident.
- John Maltby,
Chair
Moving on from the pandemic
Whilst we’ve recently experienced a return to some form of
normality as levels of COVID-19 restrictions were lifted by the end
our financial year, the period was dominated by the ongoing
consequences of the pandemic. The full economic consequences
have still to become clear as the various government support
schemes unwind and, despite some initial positive signs, such
as the strength of the employment market, a level of uncertainty
remains. Recent events such as the Russian invasion of Ukraine
with its significant humanitarian and geopolitical consequences
have added to this uncertainty. With inflation at its highest level for
three decades, and set to stay relatively high for some time, we are
also faced with a ‘cost of living’ challenge, which will undoubtedly
affect the household budgets of many. Guided by our Purpose
we were pleased to play our part in supporting our members,
colleagues and communities throughout the pandemic. We now
stand ready to support them through what could be a challenging
economic period.
A strategy underpinned by Purpose
During the latter part of the year the Board undertook a strategic
review. As a strong Society with high levels of capital we are
looking to the future and how we can support the changing
needs of our current and future members and provide a wider
contribution to our communities and to the environment. We are
committed to being a modern, distinctive and Purpose-led mutual
building society and we will make the required investments in
systems, people and processes to deliver our strategy and live to
our Purpose.
Governance
During the financial year, we welcomed two new non-Executive
Directors and one new Executive Director. Anne Gunther and Dave
Dyer were appointed as Non-Executive Directors and Manjit Hayre,
our Chief Risk Officer, joined the Board in September.
A board effectiveness review was undertaken during the year by
an external firm. The scope of this review considered composition,
Committee processes and how the Board oversees our
responsibilities to our members, our colleagues and the regulatory
authorities. I am pleased to report that this review concluded that
the Board operated effectively and also has the culture to look for
ways in which performance can be enhanced further. A key part of
the Board’s effectiveness stems from its engagement with two key
stakeholder groups, the Member and Employee Councils. Both of
these bodies input to a wide range of Board topics detailed in the
Chief Executive’s Review.
Sadly my predecessor, Mark Nicholls, tragically passed away
earlier this year. For ten years Mark led the Board, during the most
challenging period in its history, with great integrity and passion.
He is remembered with great fondness by all his colleagues.
Looking forward
In my first year as Chair the passion of my colleagues to make a
real difference to the lives of the members and communities we
serve has been abundantly evident. Building on this, the Board’s
strategic review has identified what is required going forward and
we will invest as needed to ensure we continue to serve the needs
of our members, colleagues and communities throughout what
is expected to be an ongoing period of uncertainty, and pressure
on incomes and beyond. The dedication and commitment
demonstrated by our colleagues throughout this period has been
outstanding. I would like to express my gratitude, on behalf of the
Board, to all of the Society’s colleagues and members throughout
the last financial year.
John Maltby
Chair
25 May 2022
4 5
Annual Report and Accounts
Year ended 31 March 2022
Overview
Chief Executive’s Review
Delivering on our Purpose for
our members
Supporting the financial wellbeing of our members has underpinned
our decision making throughout the pandemic and will remain at
the fore as we now navigate the economic impacts of not just the
actions taken to manage the economy throughout the last two
years but also the effects of the invasion by Russia of Ukraine.
Although the housing market remained buoyant and competitive
throughout the year, the downside consequences of this tend to
affect those seeking to purchase their first home, as price inflation
makes affordability more challenging, and can further marginalise
other borrowers who do not fit the standard mortgage market
offerings.
For savers the abundance of low cost funding, primarily via the
Bank of England’s liquidity scheme (the Term Funding Scheme),
which was put in place at the start of the pandemic to ensure
banks and building societies had sufficient access to funding to
support their lending activities, meant that average rates in the
market drifted lower for most of the year, and did not always
benefit from material increases when interest rates in general
began to increase in the second half of 2021 and early 2022.
Our Purpose focus enabled us to respond positively to these
circumstances. More than half of all new home purchase lending
was for first-time buyers (2020/21: 48%), with not only competitive
rates but with a strong focus on structuring our underwriting to
ensure we could support affordability. In addition, we remained
at the forefront of helping mortgage prisoners escape from
being unintentionally trapped by regulations introduced as a
consequence of the 2008 financial crisis.
54
54
%
%
of loans for house purchase supporting
first-time buyers onto the property
ladder (2020/21: 48%).
To support our savers, we were in the minority of those who
restricted the impact of the excess low cost funding to hold interest
rates where we could, but passed on benefits of the general
increase in interest rates led by the Bank Rate. This meant that,
whilst we already started the year with average savers rates for
our members that were double the market average, by the end
of the year, our rates were on average more than three times
those of the market
1
. For our borrowing members on the Society’s
SVR, however, we restricted interest rate increases, to just 25% of
the increases led by Bank Rate. Combined, we believe that these
approaches delivered some £9.2m in direct financial benefit to our
members (2020/21: £5.3m).
3 times more
3 times more
Savers rewarded with rates that were, by
the end of the year, more than three times
the average rates paid by the market
1
(end of 2020/21: more than double).
Financial strength
Delivering these benefits of mutuality to our members can only
be achieved on the back of ensuring we remain financially
strong. The previous two financial years demonstrated how we
have to be ready to withstand downside risks, with concerns
at that time of severe financial hardship during the pandemic
requiring a cautious modelling of potential credit losses which
meant profits of just £1.5m (2019/20) and £4.7m (2020/21) across
those periods. However, with schemes such as furlough having
successfully mitigated against the severe downside scenarios,
credit impairment provisions and related charges were some
£16.2m lower than the previous financial year. Also, the strength of
the housing market meant that a further £5.8m was added to the
value of the Society’s residential letting portfolio (West Bromwich
Homes Limited (WBHL)).
Supporting the financial wellbeing
of our members has underpinned
our decision making.
- Jonathan Westhoff, Chief Executive
1
Average market rates sourced from Bank of England Bankstats table A6.1
6 7
Annual Report and Accounts
Year ended 31 March 2022
Overview
When combined with a £4.4m improvement in net interest income
this financial performance meant that, after delivering the £9.2m
of member benefits described on page 5 and writing off £5.6m of
previously capitalised costs in relation to the project to implement
a new digital savings platform, £24.4m post-tax profit was added
to reserves, strengthening the Society’s capital. The key measure
of capital, the Common Equity Tier 1 (CET 1) ratio, improved to 17.0%
(31 March 2021: 16.4%), which provides not only a strong protection
for the Society’s members should further economic shocks occur,
but moreover a capability for the Society to support future home
ownership.
£23.2
£23.2
m
m
Profit before tax
(2020/21: £4.7m).
17.0
17.0
%
%
Common Equity Tier 1 Capital Ratio
(2020/21: 16.4%).
Environmental, Social and
Governance (ESG)
For us ESG is embedded in how we operate our Society and,
increasingly, in what we offer to our members and how we
engage with them.
Our Member Council, which continued to meet remotely via
videoconferencing or hybrid meetings since the onset of the
pandemic, has been engaged on a range of strategic and
operational topics. These have included decisions concerning
Executive Director remuneration, operating model changes
including those to branch operations, as well as strategic
discussions around values and our culture.
Our colleagues are, of course, another key stakeholder group with
whom we have ongoing interactions, which include all colleague
surveys, sub-working groups and the Employee Council which
considers the same elements as those of the Member Council.
In designing our customer offerings, as well as delivering on our
Purpose, the social aspects of what we offer increasingly shape
our strategy. In addition to the core social purpose of enabling
homeownership, we aim to do more to help support those who
are potentially being charged more than is appropriate for their
mortgage. Our strongest move in this way has been to support
mortgage prisoners as detailed earlier. The impact has been
very significant to the members we have welcomed, who have
benefitted by up to £1,000 per month in reduced payments.
In addition to our well established community and charity support
activities and contributions, at the end of our financial year, we
unexpectedly had an opportunity to extend our social responsibility
to support families displaced by the tragic events unfolding in
Ukraine, through the provision of an initial 11 homes from our
rental property portfolio and living accommodation above some
of our branches. We have also geared up to offer employment
opportunities to those displaced either directly, or by giving support
to those individuals seeking employment with others.
Conflict in Ukraine
11 homes made available, primarily from our
rental property portfolio, for Ukrainian refugees
Outlook
As we emerge from pandemic conditions and prepare for the
economic consequences of the Russian invasion of Ukraine, there
is a looming cost of living crisis. Inflation is not only at levels not
experienced for decades, but it is being driven by everyday basics
and necessities such as energy and food essentials. The pressure
on incomes that becomes almost unavoidable will potentially
mean that some may temporarily find meeting their mortgage
payments a challenge. As a mutual we will be looking to help our
members, if affected in this way, through such periods. This goes
beyond having the financial strength to withstand even the most
difficult of economic downturns; it is about supporting people to
remain in their homes.
Beyond that, as the Chair has outlined in his report, the future is
all about continuing to develop our strategy to ensure the benefits
of mutuality continue to accrue to our members and other key
stakeholders.
Jonathan Westhoff
Chief Executive
25 May 2022
Environmental, Social and
Governance principles are embedded
in how we operate our Society.
8 9
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Strategic Report
Our strategy
Our strategy continues to focus on the delivery of our Purpose –
to
support the financial wellbeing of our members by providing a
safe and good return on the savings they entrust with us and
promote home ownership through responsible lending.
To meet this Purpose the Society’s strategy is focussed on meeting
the home ownership ambitions of both current and future
members. Following our strategic review in the second half of the
financial year, the Society’s lending strategy is, and will increasingly
be, concentrated on assisting existing and potential homeowners
who are excluded or overcharged by more traditional lenders. The
Society’s launch into the mortgage prisoner market being a prime
example of this.
The provision of mortgage finance is supported by our saving
members depositing funds with us. Our broad range of savings
products offer simplicity of terms, security of deposit, and a good
rate of return. As a mutual Building Society, run for the benefit of
our members, we are able to offer a better return than the market
average for the banking sector whilst continuing to offer access
to a local branch for those in our West Midlands heartland. Our
commitment to members’ financial wellbeing is supported by
offering insurance products and access to independent financial
advisers through our high street branch network.
As part of our strategy we implemented our new branch operating
model during the year. This maintains the presence of the ‘local
branch’ for our members by putting our network on a sound
financial footing by reducing the overall cost of running our branch
estate.
The Society continues to invest in order to deliver on our Purpose;
this means investment in systems, to keep pace with technological
change, but also in ensuring that our suite of products continues
to meet the emerging needs of future and current members
across both mortgage and savings offerings. One area of ongoing
investment is the development of a new digital savings platform;
whilst this will result in significant benefits to both new and existing
members, as explained on page 11 we have written off £5.6m of
previously capitalised costs during 2021/22.
Key to our strategy is engagement with our stakeholders. Feedback
on the strategic review undertaken has been received from both
our Member and Employee councils. We also take seriously our
responsibilities to our local communities – as detailed in the
Corporate Social Responsibility section of this Strategic Report –
and look to continue to identify ways we can provide targeted
support to them.
As well as our core saving and lending activities, the Society
holds, via its property investment subsidiary WBHL, a portfolio of
residential properties. These generate rental income and provide
quality homes for those in the rented sector.
Our ability to offer high quality products and services continues to
be supported by the effective management and reduction of non-
core lending. Since 2009, the Society has been managing down
these exposures further to achieve the most favourable economic
outcome on behalf of members.
An overview of our strategy and
our financial and non-financial
performance in 2021/22.
10 11
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Delivering our
purpose by supporting
financial wellbeing
A safe, good
home for savers
Supporting
people in their
homes
Generating
income
Protecting
deposits and
investing for
the future
Running the
business efficiently
Our Funding:
The vast majority of our
funding comes from our retail
savers, supported by funding
from wholesale markets.
• Savers deposits
• Wholesale funding
Our Profits:
Our profits, the difference
between our income and
expenses, is used to support
our capital position - which
provides a buffer in case of
losses from future shocks or
stresses - and to invest in our
systems which enable us to
continue to provide excellent
service to both our current
and future membership.
Our Costs:
We use our income to run the
business efficiently, paying our people, our suppliers,
maintaining our branch network and head office.
We also provide for any losses and pay our taxes.
• Our people, property and equipment
• Our suppliers
• Provisions for bad debts
• Taxes
Our Lending:
Our funding is used to support
our lending purposes. In line
with our Purpose, our lending
is focussed on supporting
home ownership with a
greater than market average
proportion to first-time buyers
and products designed to
provide greater access to
the mortgage market, thus
supporting home ownership.
• Lending for home
ownership
• Lending to support the
private rented sector
• Lending to legacy positions
Our Income:
We generate income through
the difference in the rates
we charge to borrowers and
commission from savers, the
sale of selected third party
financial products and our
role as a responsible landlord.
• Net interest margin
• Other income
• Role as a responsible
landlord
Our business model
The Society’s business model is aligned to its Purpose and strategic objectives. The diagram below sets out the aspects of the business
model which are key to delivery of our Purpose - supporting the financial wellbeing of members.
Retail -
savings, mortgage, investment and insurance products offered either directly or by third party
partnerships through our 34 branches, customer services teams and online, with new mortgage lending
also delivered through our intermediary partners.
Property -
a portfolio of residential properties held to generate rental income. The Group recognises its
role as a responsible landlord with the portfolio actively managed by a well-respected property management
company. The Board acknowledges the inherently fluctuating nature of revaluation gains/losses associated
with the portfolio to both the benefit and detriment of the Group’s financial performance. The Board continues
to manage the portfolio economically in the long-term interests of the membership.
Commercial real estate -
the historic provision of finance for commercial real estate investment which
is deemed strategically as non-core.
To support our business model the Group is organised into three main business segments, this allows the Society to focus its strategic
intent on the delivery of its Purpose whilst maintaining a concentrated effort to manage the orderly run-off of non-core activity.
The above business segments are supported by central functions providing Finance, HR, IT, Compliance and Risk Management.
Funding is reviewed at a Group-wide level with Treasury and Finance functions managing day-to-day cash flow, along with providing
wholesale funding and ensuring allocation of capital and liquidity.
Our Purpose
Support the financial wellbeing of our members by providing a safe and good return
on their savings they entrust with us and promote home ownership through responsible lending.
Our Strategic Intent
Customer
‘Developing products &
services that support the
principles of our Customer
Proposition - individual, ease
and trust’.
Safe & Responsible
‘Understanding the risks
we take and making
responsible decisions that
generate sustainable levels
of retained profit’.
Efficient
‘Driving efficiencies in our
processes and structures
to improve the customer
experience and level of
member value’.
Future Ready
‘Investing in and delivering
the change required to meet
the needs of current and
future members’.
Colleagues
‘Investing in the development
of our colleagues and
creating a diverse
and inclusive working
environment to improve our
organisational capability’.
How we are progressing
Across the year we have made good progress against our five statements of strategic intent, just some of this progress is detailed below:
Customer
• Welcomed 5,612 new borrowers, including 2,222 first-time
home owners, and 6,912 new savers to the Society.
• Extended £756m in new residential lending, with a 2% increase
in owner occupied mortgage balances. 54% of loans for home
purchases were to support first-time buyers onto the property
ladder (2020/21: 48%).
• Rewarded savers with rates that were, by the end of the year
on average, more than three times those paid by the market
1
(end of 2020/21: more than double) and for borrowers on
the Standard Variable Rate (SVR), only passed on 25% of the
increases led by the Bank Rate; this meant £9.2m (2020/21:
£5.3m) of member benefit was passed on through either higher
interest earned on savings or lower interest cost on mortgages.
• Increased rates paid to savings members, including loyalty
fixed savings rates for existing customers; resulting in an
increase in fixed rate savings balances of 26%.
• An improved Net Promoter Score
®2
increasing to +81 (2020/21:
+76) with customer satisfaction maintained at 96%.
• Awarded, for the fourth year in a row from the annual Financial
Adviser Service Awards, a Five Star Service Award for the
exceptional service we provide to our valued intermediary
partners.
• Recognised as the Best Regional Building Society by Mortgage
Finance Gazette Awards 2022. Winner of Best Building Society
Mortgage Provider and Highly Commended Best Fixed Rate
Mortgage Provider in the Moneyfacts Awards 2021.
• Recognised at the Moneyfacts 2021 awards with a Commended
Innovation in Personal Finance for the continued support with
mortgage prisoners through our Modified Affordability product
range.
• Held a further three meetings of our Member Council providing
valued input to Board decision making covering Future
Operating Model, Executive Director Remuneration and Culture
Dashboard.
Safe & Responsible
• Maintained our financial strength with a CET 1 capital ratio of
17.0% (2020/21: 16.4%) providing greater resilience to potential
stresses in the future.
• Delivered improved statutory profit before tax of £23.2m
(2020/21: £4.7m), with underlying profit of £26.6m (2020/21:
£2.4m).
• Provided £8.1m in respect of ECLs across our residential and
commercial lending portfolios which includes a release of
£4.4m from the residential portfolio and a reduced commercial
impairment charge of £12.5m.
• Reduced legacy commercial exposures by 79% since 2008/09
while increasing provision coverage to 28.7% (2020/21: 23.1%).
• Maintained arrears rates at levels well below industry averages
with core residential arrears at 0.31% (UK Finance: 0.77%) at 31
March 2022.
• Donated over £24,000 of food to food banks across the Black
Country. This sits alongside other volunteering and fundraising
activities and our partnerships such as that with Barnardo's
which is being used to deliver four ‘Gap Homes’ across the
region.
Efficient
• Although our management expense ratio increased to 0.89%
(2020/21: 0.83%), excluding the decision to write off certain
costs previously capitalised in relation to the digital savings
platform, the ratio would have been 0.84%, in line with the prior
year.
• Ensuring our cost structures remain aligned with our strategy.
Targeting expenditure in those areas where investment is
needed to meet the expectations of current and future members
and remain operationally resilient while seeking cost reductions
in other areas.
1
Average market rates sourced from Bank of England Bankstats table A6.1
2
Net Promoter Score and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.
Our Strategic Framework
Our Strategic Framework helps support and guide the delivery of our Purpose to members.
12 13
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Future Ready
• Continued to progress our IT strategy to support both members
and colleagues, including enhancements to our IT applications
(product development agility in Mortgages) and infrastructure
improvements to ensure the Society is able to adapt to the
rapid advances in technology while remaining cost efficient and
operationally resilient.
• Committed to reducing our carbon footprint by setting ambitious
environmental targets across our physical estate.
Colleagues
• Launched and embedded our new Society Leadership
Competencies that define how we go about what we do and
what it means to be part of the West Brom.
• Made clear our commitment on diversity and inclusion,
including the following highlights:
•
Continued to meet our original targets for female
representation and announced revised targets to make even
greater progress by the end of 2024.
• Achieved Level 3 - Disability Leader status, being the first
in the Building Society sector to reach this highest level of
accreditation under the government’s Disability Confident
scheme.
• Published our first Ethnicity Pay Gap report, being one of
the few companies both in financial services and the wider
industry to voluntarily do so.
• Our diversity and inclusivity group, ‘Connect’, continued
to play a key role in raising awareness and creating an
environment where all colleagues from different diversities
feel welcomed, supported and valued.
• Held three meetings of our Employee Council which provides
valued input to Board decision making, including on topics such
as culture, strategy, hybrid working and remuneration.
• Supported 21 colleagues who are undertaking Apprenticeship
qualifications in disciplines such as Learning and Development,
Business Administration, Business Analysis, Project Management,
Internal Audit, Cyber Security, DevOps Engineering and Digital
Technology Solutions. This includes 3 colleagues studying
Masters in Strategic Leadership (Apprenticeship route), in
conjunction with Loughborough University and the Building
Societies Association.
• Continued support for colleagues through the pandemic with
circa 90% agreeing they are clear in respect of where to
go for support at the Society regarding their health, safety
and wellbeing; and on being able to strike the right balance
between home and work life while putting the customer first
(Source: West Brom Employee Survey 2021).
• Adopted hybrid working for all roles, with the exception of
the branch network, under the overarching principle of ‘what
is best for the customer is paramount’. As part of re-thinking
the way we work under a hybrid working environment, work
has commenced towards re-purposing our head office
space to accommodate further social and collaborative
work. Standardised ‘working from home kits’ have also been
distributed to colleagues to replicate the head office workstation
when working from home.
Our Key Performance Indicators have been aligned to the key
elements of our Strategic Framework.
1
Net Promoter Score and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.
Key performance indicators
The Society monitors and assesses its performance against strategic objectives using a range of financial and non-financial key
performance indicators (KPIs). The Society’s KPIs are selected to support the Society’s strategic pillars which are listed within the Business
Model section of the Strategic Report. These KPIs, and the Society’s performance against each, are described below. KPIs for our Future
Ready pillar are currently only used internally to measure performance against the application of digital technology.
Customer satisfaction
(Customer)
96%
Measure
Following a branch visit or call to our Customer Services department,
members are asked to rate us across a number of different measures,
including how easy they found the West Brom to deal with. A customer
satisfaction score is subsequently captured.
2022 analysis
Customer satisfaction remains high reflecting our customer centric approach.
94%
94%
96%
96%
96%
2018
2019
2020
2021
2022
Gross residential lending
(Customer)
£756m
Measure
Delivering the Society's core Purpose of home ownership, this is the value of
residential lending advanced this year.
2022 analysis
Gross residential lending saw a slight decrease from the prior year of 4% to
£756m reflecting a reduction in market activity in the second half of the year.
We remain committed to delivering our Purpose that supports responsible
lending and delivers an appropriate level of return from our diverse product
range.
£837m
£691m
£569m
£784m
£756m
2018
2019
2020
2021
2022
Net Promoter Score
®
(NPS
®
)
1
– customer satisfaction
(Customer)
+81
Measure
A measure of how likely a customer is to recommend the West Brom’s
products and services. The NPS ranges between -100 and +100.
2022 analysis
Our positive Net Promoter Score improved for another consecutive year,
representing the high levels of service standards recognised by our
members.
+65
+72
+73
+76
+81
2018
2019
2020
2021
2022
14 15
Annual Report and Accounts
Year ended 31 March 2022
Business Review
2
Average market rates sourced from Bank of England Bankstats table A6.1
Common Equity Tier 1 (CET 1) ratio
(Safe & Responsible)
17.0%
Measure
CET 1 capital is the highest quality form of capital for a financial institution,
comprising retained earnings, other reserves and qualifying CET 1 capital
instruments.
The CET 1 ratio, calculated as CET 1 capital divided by risk-weighted assets,
is a measure of financial strength and is required to be maintained above a
regulatory threshold.
2022 analysis
CET 1 capital further strengthened this year due to improved profit generation
and a reduction in risk-weighted assets. The CET 1 ratio was comfortably
maintained at levels in excess of our regulatory Total Capital Requirement
(TCR) throughout the year.
Current Total Capital
Requirement (TCR) 9.3%
CET 1 ratio
2018
2019
2020
2021
2022
14.8%
15.9%
15.9%
16.4%
17.0%
Net owner occupied lending
(Customer)
£116m
Measure
Gross residential owner occupied lending less repayments of principal and
redemptions. This includes all owner occupied lending, including non-
traditional elements (e.g. Shared ownership, Help to Buy, Self-Build and
Assisted mortgages) and excludes buy to let lending.
This measure reflects growth in the owner occupied lending book and
reflects both new lending and customer retention.
2022 analysis
Since re-entering the prime owner occupied residential lending market in 2012,
the lending balances in this area have grown by 142%. The position in 2022
reflects an increase in redemptions and repayments in the year.
£322m
£146m
£52m
£256m
£116m
2018
2019
2020
2021
2022
Member mutual benefit
(Customer)
£9.0m
Measure
The Society's average savings rate above the rest of the market is paid in
mutual benefit to our savings members.
2022 analysis
We paid our savers 103% (more than twice) above the market average
2
,
enabling the Society to deliver £9.0m in mutual benefit to our members.
£6.5m
£11.4m
£13.0m
£5.3m
£9.0m
2018
2019
2020
2021
2022
Key performance indicators
(continued)
Underlying profit before tax
(Safe & Responsible)
£26.6m
Measure
Profit contributes to capital which provides financial resilience and facilitates
future growth and investment.
Underlying profit before tax excludes the impact of hedge ineffectiveness
and the writing off of certain previously capitalised costs in relation to the
project to implement the digital savings platform. A reconciliation of statutory
to underlying profit is presented on page 18.
2022 analysis
Growth in underlying profit before tax was driven by an improvement in
net interest income, fair value gains and releases of residential impairment
provisions and a reduced commercial impairment provision charge.
£8.8m
£10.5m
£1.6m
£2.4m
£26.6m
2018
2019
2020
2021
2022
Net interest margin
(Safe & Responsible)
1.05%
Measure
Net interest margin is calculated as net interest income expressed as a
percentage of mean total assets.
The drivers of this measure are the level of return received from assets held
and the interest paid on borrowings.
2022 analysis
Net interest margin improved in the year. This was largely driven by the lower
wholesale cost of funding supported by TFSME funding. Higher margins on
new lending in the first half of the year, and an increased proportion of non-
retail funding balances have further contributed to the year end position.
As a mutual, it is not our objective to maximise margin but to manage
interest income at a level that covers costs, enables investment in the future
and maintains a strong capital position.
0.96%
1.03%
1.06%
1.02%
1.05%
2018
2019
2020
2021
2022
16 17
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Exiting non-core positions
(Safe & Responsible)
£349m
Measure
Exiting the commercial real estate sector has been a longstanding strategy
of the Board and is measured by the reduction in the gross carrying value of
non-core commercial gross exposures, which totalled £1.7bn in 2008/09.
2022 analysis
Non-core commercial mortgage balances have continued to reduce
annually, down 13% in the year to £349m at 31 March 2022.
Of the remaining exposure, £10m is securitised thereby transferring the
residual risk out of the Group.
£435m
£53m
£412m
£32m
£394m
£23m
£379m
£19m
£339m
£10m
2018
2019
2020
2021
2022
Securitised
Non-securitised
Core residential arrears
(Safe & Responsible)
0.31%
Measure
The internal measure, reported to the Board, is the number of cases
where the borrower has missed more than three monthly payments, as a
proportion of the total number of loans.
2022 analysis
Core residential arrears reduced from the prior year and stood at 0.31% at
31 March, which compares favourably against the published UK Finance
average of 0.77%.
The rising levels of inflation and energy costs along with recent increases to
Bank Rate have not yet resulted in rising levels of arrears, but could impact in
the future should borrowers face more long term difficulties.
0.38%
0.31%
0.34%
0.43%
0.31%
2018
2019
2020
2021
2022
Cost efficiency
(Efficient)
0.89%
Measure
The management expense ratio is a measure of cost efficiency, reflecting
costs (including depreciation and amortisation) as a percentage of mean
total assets.
2022 analysis
The management expense ratio increased to 0.89% (2020/21: 0.83%);
excluding the writing off of certain previously capitalised costs in relation to
the project to implement the digital savings platform the ratio would have
been 0.84%, in line with the prior year.
Over the last five years costs excluding depreciation and impairment of
intangible assets reduced by circa 8%.
0.87%
0.87%
0.83%
0.83%
0.89%
2018
2019
2020
2021
2022
Gender diversity
(Colleagues)
34%, 40%
Measure
The Society is a signatory to the Women in Finance Charter and has targets
to maintain female representation of at least 30% on the Board and in
senior management. Building on this continued success, we announced a
revised target for our senior management population to achieve 40% female
representation by the end of 2024.
2022 analysis
The 30% target for female representation continues to be exceeded at both
Board and senior management levels.
2018
2019
2020
2021
2022
Senior management Board
33%
29%
38%
35%
38%
33%
40%
34%
11%
27%
Ethnic representation
(Colleagues)
20%, 18%, 33%
Measure
The Society is a signatory of the Race at Work Charter and recently published
the Society’s first Ethnicity Pay Gap report, one of the few companies in
financial services to do so, to achieve better transparency and drive the
diversity agenda. In 2021, the Society began reporting ethnic representation
across the colleague base and management group.
2022 analysis
All levels show ethnic minority representation above the West Midlands
average of 17.4%.
Given the Society is predominantly in one of the most ethnically diverse
regions in the UK, having 33% of the Society’s ‘other colleagues’ drawn from
ethnic minority communities is valuable for our branches in areas with a
mixed ethnic profile.
2021
2022
Ethnic Minorities - Board
Ethnic Minorities - Senior Management
Ethnic Minorities - Other colleagues
33%
18%
20%
32%
13%
20%
2020
31%
13%
19%
Key performance indicators
(continued)
18 19
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Financial review
Financial performance
Summary income statement
Year to 31 March
Income statement overview
Group
2022
£m
Group
2021
£m
Net interest income
62.1
57.7
Fees, commissions and other income
5.6
5.7 Fair value gains on financial instruments
10.6
3.4
Total income
78.3
66.8
Management expenses
(52.9)
(47.2)Operating profit
25.4
19.6
Gains on investment properties
5.8
4.0 Impairment on loans and advances
(8.1)
(18.8)Provisions for liabilities
0.1
(0.1)Profit before tax
23.2
4.7
Taxation
1.2
0.4 Profit for the financial year
24.4
5.1
*Fair value gains include fair value losses on derivatives used to hedge commercial
loans of £6.9m (2020/21: £1.4m), included within the amounts presented in note 5
to the accounts.
A strong performance in the year saw statutory profit before tax
increase to £23.2m (2020/21: £4.7m). The Group’s operating
profit, which shows profit before impairments, improved to £25.4m
supported by strong net interest income and fair value gains on
financial instruments.
Significant additional impairment provisions were recorded in
the prior year, primarily to cover for the additional exposure
to the legacy commercial portfolio, reflecting the pessimistic
economic outlook expected to result from actions taken to mitigate
the impact of COVID-19. These expected credit losses have
reduced significantly in the current financial year, especially
on the residential portfolio where we see provision releases
predominantly driven by the improvement in house prices and
pandemic-related risks not crystallising.
The improvement in house prices is reflected in the current year
gain on our investment property portfolio of £5.8m. Included within
the valuation gains is an adjustment to reflect planned property
improvements which were delayed during the pandemic due to
operating constraints.
A year on year comparison of underlying profit before tax is shown
in the summary below.
Year to 31 March
Reconciliation of statutory to underlying
profit before tax
2022
£m
2021
£m
Statutory profit before tax
23.2
4.7 Hedge ineffectiveness
(2.2)
(2.3)Write off of previously capitalised costs
5.6
- Underlying profit before tax
26.6
2.4
Net interest income
Net interest income increased in the year to £62.1m (2020/21:
£57.7m), with an improved net interest margin of 1.05% (2020/21:
1.02%). Higher margins on new lending in the first half of the year
combined with the lower non-retail funding costs due to the Term
Funding Scheme (TFSME), which was introduced at the start of the
pandemic contributed to the year end position.
This improved net interest income was after increasing our
savings rates across the year as the Society remained committed
to supporting its members by continuing to pay rates above the
market average. For the 12 months to 31 March 2022, we paid our
savers 0.21% above the market average
1
(31 March 2021: 0.14%).
This represents a considerable £9.0m (2020/21: £5.3m) provided
in mutual benefit to savers.
Fees, commissions and other income
The Society partners with a number of third party providers to offer
home insurance, financial advice, will writing and life cover. Fees
and commissions of £1.9m (2020/21: £2.0m) were earned on
these products and services, which are made available to support
our members’ wider financial wellbeing.
In its capacity as a responsible landlord, the Group earned net
rental income of £3.7m (2020/21: £3.8m) on residential properties
let through the subsidiary company WBHL.
Fair value gains on financial instruments
The Society is exposed to income statement volatility through
changes in the fair value of financial assets and liabilities which
are held at fair value through profit or loss (FVTPL).
The fair value movements on derivative financial instruments, used
purely for risk management purposes, are offset in the income
statement but only where the conditions for applying hedge
accounting are met.
Of the £10.6m fair value gains (2020/21: £3.4m gains) in the year:
• £6.9m gains (2020/21: £1.4m gains) represents fair value
movements on derivatives held to provide an economic hedge
against movements in impaired commercial provisions for
which the criteria to apply hedge accounting are not met. The
volatility arises from changes in the market view of interest rates
and is largely offset within impairment on commercial loans
and advances because of the impact of discounting future
cashflows at market rates. For example, where interest rates
increase, expected credit losses (ECL) will increase owing to
greater discounting of future cashflows. Equally, where interest
rates increase, we would see a fair value gain on our swap
offsetting the increase in ECL.
• £3.5m gains (2020/21: £2.3m gains) relates to the element of
ineffectiveness in the hedge relationships which still meet hedge
accounting criteria and the fair value movements on interest
rate swaps held to hedge the Society’s mortgage pipeline,
before an effective hedge relationship can be established.
• £0.2m gains (2020/21: £0.2m losses) arises due to the impact
of house price increases on the closed equity release portfolio.
Management expenses
Management expenses have increased from £47.2m in 2020/21
to £52.9m. The management expense ratio increased to 0.89%
(2020/21: 0.83%); excluding the decision to write off £5.6m of costs
previously capitalised in relation to the digital savings platform the
ratio would have been 0.84%, in line with the prior year.
In order to better serve our current and future members, a new
online savings platform has been under development. As a result
of delays to the build and implementation of this platform, and in
line with the requirements of
IAS 38: Intangible Assets
, we have written off £5.6m of previously capitalised costs. As this is a one-off
cost, we have adjusted for this in arriving at underlying profitability
as set out on page 18 of the Financial Review.
The Society has continued to focus its efforts on reducing costs
to remain efficient and agile. In the past five years management
expenses, excluding depreciation and the additional system write
downs explained above, have reduced by £3.6m (circa 8%) in
absolute terms, after absorbing inflation.
Depreciation has reduced from the prior year, from £8.1m to £7.4m.
Looking ahead, we anticipate the inflationary challenges being
experienced across the economy will impact the management
expense position.
Gains on investment properties
The Society provides residential housing for rent through its
subsidiary company, WBHL. The portfolio includes properties across
England and Wales, with substantial investments concentrated in
the West Midlands, the South West and South Wales.
House price inflation has continued in the year to March 2022, with
strong growth despite the end to the stamp duty payment holiday.
During the year, the market value of the properties held rose by
£5.8m compared with £4.0m in the previous year. Included in this
gain is an allowance for costs for planned property improvements
which were delayed due to the pandemic.
Impairment on loans and advances
The table below analyses the impairment charges on loans and
advances in the year:
Year to 31 March
Impairment on loans and advances
2022
£m
2021
£m
Residential loans
(4.4)
4.8 Commercial
12.5
14.0 Total impairment
8.1
18.8 Fair value movement on derivatives held
to hedge impaired commercial loans
(6.9)
(1.4)
Total impairment and related charges
1.2
17.4
Residential impairment
Impairment charges on the residential loan portfolio are based on
ECL calculations which take into account the credit risk of the loans
and assumptions of future economic scenarios in line with IFRS 9
requirements.
The residential impairment credit for the year was £4.4m (2020/21:
£4.8m charge). The predominant driver for the movement in
the current year has been house price inflation along with the
improved economic outlook factored into our year end model
assumptions.
We continue to hold post model adjustment overlays for
uncertainties not included in modelling. The most significant
overlay of £1.8m (2020/21: £1.3m) relates to the heightened risk of
default and reducing property values on flats where combustible
material, including combustible cladding, may be present. Further
detail is provided in note 1 to the accounts.
Group arrears at 0.31% (31 March 2021: 0.43%) have remained
low as employment levels remained strong, but this position will
be closely monitored as household incomes are expected to be
squeezed, in particular due to the increase in energy costs and
rising inflation. This could have a knock on impact on arrears levels
and subsequently generate potential credit losses.
1
Average market rates sourced from Bank of England Bankstats table A6.1
20 21
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Commercial impairment
Commercial loans are individually assessed using cash flow
scenario modelling, which considers a range of possible outcomes
to calculate ECL requirements.
Commercial impairment charges reduced in the year to £12.5m
from £14.0m in 2020/21. After adjusting for the offsetting
movements in derivatives held to hedge the impact of changes
in interest rates the net charges were £5.6m and £12.6m for the
current and prior year respectively.
The lifting of most COVID-19 restrictions in the second half of our
financial year resulted in signs of improvement in the retail, leisure
and hospitality sectors driving the lower impairment charge. The
commercial property sector remains exposed to changes in the
wider economic climate and we continue to make appropriate
provisions against our exposures, resulting in an increase in
commercial provision balances to £99.9m (2020/21: £91.9m),
which represents 28.7% of the current loan book (2020/21: 23.1%).
The majority of the Group’s commercial portfolio comprises loans
to the retail sector. Provision coverage against loans to the retail
sector has strengthened to circa 40% from circa 24% prior to
the onset of the pandemic. Note 33(c)(iii) to the accounts further
analyses the commercial portfolio by industry type.
At 31 March 2022, 63% (2020/21: 59%) of non-core commercial
balances were managed by a Law of Property Act Receiver,
appointed to assist in the management of future cash flows and
debt recovery.
The commercial lending segment is strategically deemed non-core
and we continue to manage the exit from this sector.
Taxation
There is a corporation tax credit of £1.2m for the year (2020/21:
£0.4m credit). This is as a result of utilisation of brought forward
tax losses and the recognition of deferred tax assets, based on
amounts expected to be recoverable against future taxable profits.
The Society fully complies with HMRC’s Code of Practice on
Taxation for Banks and has controls in place to ensure it maintains
appropriate tax accounting arrangements, with oversight provided
by the Audit Committee and the Board.
The Society maintains an open, honest and transparent relationship
with HMRC, engaging with the tax authority, where applicable, to
mitigate any uncertainty arising in relation to tax planning or
compliance matters. The Society’s tax strategy has been published
on its website.
Further analysis of the tax charge is given in note 9 to the accounts.
Financial position
Summary statement of financial position
At 31 March
Group
2022
£m
Group
2021
£m
Assets
Residential loans and advances
4,529.7
4,545.9 Commercial loans and advances
248.6
306.4 Liquid assets
1,012.1
700.3 Derivative financial instruments
52.4
6.5 Fixed and other assets
224.5
209.4 Total assets
6,067.3
5,768.5
Liabilities
Shares
4,183.6
4,234.1 Wholesale funding
1,395.4
1,046.7 Derivative financial instruments
11.5
40.5 Other liabilities
59.5
57.3 Total liabilities
5,650.0
5,378.6
Equity
General reserves
279.1
250.7 Other equity instruments
134.8
134.8 Other reserves
3.4
4.4 Total equity
417.3
389.9
Total liabilities and equity
6,067.3
5,768.5
Residential loans and advances
Analysis by lending type at 31 March 2022
64%
34%
2%
66%
33%
1%
69%
30%
1%
71%
28%
1%
61%
37%
2%
2018
2019
2020 2021 2022
70
80
%
0
10
20
30
40
50
60
Prime owner occupied Buy to let
Other
Total residential loans and advances increased marginally in the
year. New prime residential lending remained broadly stable year
on year, with advances of £756m (2020/21: £784m). The Society
has reinforced its commitment to Purpose-led lending through the
provision of responsible lending for its customers and to support
people into their homes. One element of this was our support for
mortgage prisoners for which we were awarded a ‘Commended
Innovation in Personal Finance’ at the Moneyfacts 2021 Awards.
Since launching this proposition we have increased our Loan to
Value (LTV) criteria expanding the offering to more borrowers.
The proportion of prime owner occupied loans has continued to
increase in line with the Board’s strategy of reducing the legacy
buy to let portfolio, which has reduced to 28% compared to 30%
in the prior year.
At the heart of our Purpose, the Society supported a further 2,222
first-time buyers, which represented 40% (2020/21: 33%) of all new
borrowers in the year.
At 31 March
Residential loans analysis by region
2022
%
2021
%
East Anglia
2.5
2.6East Midlands
10.5
10.5Greater London
10.7
10.8Northern Ireland
0.1
0.1North
4.7
4.3North West
13.3
12.7Scotland
1.6
1.8South East
17.5
17.3South West
8.0
8.5Wales
5.0
5.0West Midlands
15.3
15.9Yorkshire
10.8
10.5Total
100.0
100.0
The Society’s mortgage offerings are available through online,
branch and direct as well as intermediary distribution channels,
to ensure accessibility across the United Kingdom. The lending
portfolio is geographically diverse, with prominence in the West
Midlands where most of the Society’s branch network is based.
At 31 March 2022
Group arrears
Total balances
£m
3 months+
%
Prime owner occupied
3,234.4 0.29
Buy to let
1,300.5 0.25
Other
34.8 4.61
Core residential
4,569.7 0.31
Second charge lending
7.4 12.97
Total residential
4,577.1 0.47
At 31 March 2021
Group arrears
Total balances
£m
3 months+
%
Prime owner occupied 3,118.6 0.36
Buy to let 1,373.1 0.52
Other 40.6 3.51
Core residential 4,532.3 0.43
Second charge lending 9.0 13.21
Total residential 4,541.3 0.61
Group arrears are measured as the number of cases where a
borrower has missed more than three monthly payments. At 31
March 2022, Group arrears for the core residential book stood at
0.31% (31 March 2021: 0.43%), which continues to compare
favourably against the UK Finance average of 0.77% (2020/21:
0.85%).
22 23
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Since the onset of the pandemic, and even as restrictions have
eased, the Society has supported borrowers who have faced
unexpected periods of unemployment with a flexible and fair
approach to forbearance options. The Society’s effective credit
management practices alongside the backdrop of a low interest
rate environment and reduced unemployment have enabled
arrears levels to remain low. The wider economic outlook remains
uncertain due to the rising cost of living and this may impact
arrears levels going forward.
Commercial loans and advances
At 31 March
Commercial loan portfolio
2022
£m
2021
£m
Non-core commercial balances
excluding securitisation
338.5
379.7
Securitised commercial balances
10.0
18.6Impairment provisions
(99.9)
(91.9)248.6
306.4
The commercial loan book is included within loans fully secured
on land (FSOL) in note 13. Deemed as non-core, the commercial
loan book has reduced by 13% in line with the Board’s long term
strategy of exiting from the commercial real estate sector. Non-
core commercial exposures have reduced to just 21% (2020/21:
23%) of their peak position in 2008/09 of £1.7bn, which represents
a material de-risking of the balance sheet.
Liquid assets
At 31 March 2022
Liquidity portfolio
£m %
Cash and balances with the Bank of England
652.0 64.4
Supranationals
82.4 8.2
Covered bonds
130.3 12.9
Mortgage backed securities
59.2 5.8
Subsidiary/other liquidity
88.2 8.7
Total liquidity
1,012.1 100.0
At 31 March 2021
Liquidity portfolio
£m %
Cash and balances with the Bank of England 316.5 45.2
Supranationals 87.1 12.5
Covered bonds 120.1 17.1
Mortgage backed securities 69.2 9.9
Subsidiary/other liquidity 107.4 15.3
Total liquidity 700.3 100.0
Liquidity holdings comprise high quality liquid assets, with treasury
investment securities rated at least single A or held with a
Globally Systemically Important Counterparty. The Group has never
experienced a default on its Treasury investment portfolio. The
liquid asset impairment provision requirements were negligible for
both the current and prior year.
Liquidity was maintained at elevated levels throughout the year
to cover operational cash commitments during an uncertain
economic environment, and in excess of regulatory and Board
limits.
The Society’s Liquidity Coverage Ratio (LCR), which measures its
ability to meet cash outflows in the event of a stressed scenario,
was 304% at 31 March 2022 (2020/21: 180%), comfortably above
the regulatory minimum of 100%. At the year end liquidity levels
are particularly high following drawings under the Bank of England
TFSME funding scheme of £1.06bn.
The Net Stable Funding Ratio (NSFR) measures the proportion of
available stable funding to the required amount of stable funding,
representing a longer-term liquidity indicator than the LCR. Based
on the Society’s interpretation of the requirements, the NSFR at 31
March 2022 was well above the minimum regulatory requirement
of 100%.
Funding
Other retail
TFS
Branch accounts
Securitisation
Other wholesale
2018 2019 2020 2021 2022
1.22
0.46
0.34
0.29
2.77
0.99
0.46
0.27
0.51
2.85
1.25
0.74
0.22
0.11
2.98
1.03
1.06
0.17
0.17
3.15
1.36
0.46
0.49
0.25
2.69
Funding balances
5.00
6.00
£bn
4.00
3.00
2.00
1.00
0.00
As a building society, the primary source of funding are retail
savings. Retail savings balances reduced by 1% in the year to
£4.18bn (2020/21: £4.23bn). Within this total, branch based
accounts increased by 6% in the year to £3.15bn. The Society
continued to offer competitive savings products to its members
through a low interest rate environment, which delivered £9.0m of
mutual benefit paid to savers (2020/21: £5.3m).
Retail savings balances make up 74.9%, (2020/21: 80.0%) of total
funding with the remainder being wholesale funding. Accessing
the wholesale markets can reduce the overall cost of funding and
mitigate risk by diversifying the funding pool.
Wholesale funding balances increased to £1.40bn (2020/21:
£1.06bn), which increased the ratio of wholesale funding as a
proportion of total shares and borrowing to 25.1% (2020/21:
20.0%).
Wholesale funding ratio
22.8%
21.4%
24.4%
20.0%
25.1%
2018
2019
2020
2021
2022
The Society continued to make use of the low cost funding
available from various Bank of England funding schemes, utilising
residential mortgage-backed securities and residential mortgages
as collateral. The extension of the TFSME scheme has enabled us to
drawdown additional funding with current outstanding borrowing
at 31 March 2022 of £1.06bn (2020/21: £0.5bn). At the end of
the year, 27.2% (2020/21: 22.3%) of assets were encumbered to
support Bank of England and other wholesale funding initiatives,
as detailed in note 39 to the accounts.
24 25
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Regulatory capital is held for the protection of depositors and other
creditors by providing a buffer against unexpected losses. The
Society is required to maintain thresholds set by the Prudential
Regulation Authority (PRA) and our capital is assessed under the
revised Capital Requirements Regulation and Directive (CRR II
and CRD V). Requirements are continually monitored to ensure
minimum regulatory requirements are always met. At 31 March
2022, our CET 1 capital comprised accumulated retained profits in
general reserves, core capital deferred shares (CCDS) and other
reserves after regulatory adjustments.
The Society’s CET 1 ratio at 31 March 2022 increased to 17.0%
(2020/21: 16.4%), comfortably in excess of the Society’s Total Capital
Requirement (TCR) which, at the end of the year equated to 9.3%
of risk weighted assets. The TCR refers to the amount and quality
of capital a firm must maintain to comply with capital regulations.
The leverage ratio also remains strong at 6.5% (2020/21: 6.8%).
As explained in note 1 to the table above, transitional arrangements
have been utilised in relation to the adoption of IFRS 9 and its phased
impact to regulatory capital. Had the transitional arrangements not
been in place, the CET 1 ratio at 31 March 2022 would have been
16.2% (2020/21: 15.3%) and the leverage ratio would have been
6.1% (2020/21: 6.3%).
During the year the Society paid £2.9m as distribution on the
Society’s CCDS. In May 2022 the Directors declared they expect
to pay a final distribution for the period to 31 March 2022 of
£1.50 per CCDS which would be paid in August 2022, in line
with current distribution policy published on 24 November 2021.
The final distribution has been deducted from capital but is not
reflected in these financial statements as, for accounting purposes,
distributions to the CCDS holders are recognised with reference to
the date they are declared.
At 31 March
(unaudited)
Transitional
2022
£m
Full implementation
3
2022
£m
Transitional
2021
£m
Full implementation
3
2021
£m
Members' interests and equity 389.9
417.3 417.3
389.9Permanent interest bearing shares (PIBS) deduction (7.8)
(7.8) (7.8)
(7.8)Other adjustments¹ (26.5)
(19.1) (41.0)
5.5Common Equity Tier 1 (CET 1) capital
390.4 368.5
387.6 355.6
Additional Tier 1 capital -
- -
7.5Total Tier 1 capital
390.4 368.5
395.1 355.6
Tier 2 capital² 21.6
21.8 21.8
21.6Total regulatory capital resources
412.2 390.3
416.7 377.2
Risk weighted assets (RWA)
2,299.7 2,277.8
2,360.0 2,328.0
Leverage ratio exposure including claims on central banks
6,015.2 5,993.3
5,785.2 5,753.2
Leverage ratio exposure excluding claims on central banks
5,378.2 5,356.3
5,480.5 5,448.5
Capital ratios
% %
% %
Common Equity Tier 1 ratio
(as a percentage of RWA) 15.3
17.0 16.2
16.4Common Equity Tier 1 before IFRS 9 transitional arrangements
(as a percentage of RWA)
16.2 16.2
15.3 15.3
Tier 1 ratio
(as a percentage of RWA) 15.3
17.0 16.2
16.7Total capital ratio
(as a percentage of RWA) 16.2
17.9 17.1
17.7Leverage ratio including claims on central banks
6.5 6.1
6.8 6.2
Leverage ratio excluding claims on central banks
7.3 6.9
7.2 6.5
Capital
1
Other adjustments mainly comprise IFRS 9 transitional arrangements and deductions for intangible assets and deferred tax assets.
2
3
The Society approved in March 2022 to make an interest payment
in respect of the Permanent Interest Bearing Shares (the “PIBS”)
of 0.5%, which was paid on 5 April 2022. Whilst noting that any
interest payments on the PIBS are at the sole discretion of the
Society, the Society announced during its capital restructuring in
2018 that future payments on PIBS would be made only if and to
the extent that they would have been permitted had the Liability
Management Exercise (LME) not taken place, and in the context
of determining the equivalent annual yield that would have been
paid to holders of the Society's Profit Participating Deferred Shares
(the "PPDS") had they remained in issue on their original terms.
Under the terms and conditions of the PPDS (which are available
for viewing on the Society's website), the Society's ability to pay
PPDS distributions was constrained by reference to a percentage of
profits generated in the relevant financial year, and to the extent of
any positive balance on a special PPDS reserve account (to which
a percentage of profits or losses of the Society was allocated each
year).
Interest payments on the PIBS will therefore be limited to the lower
of (i) the equivalent annual yield that would have been paid to
holders of PPDS (had they remained in issue on their original
terms); and (ii) the annual rate set out in the Special Conditions of
Issue of the PIBS (the “Specified Rate”), being 6.15% prior to 5 April
2021 and thereafter, a rate of interest reset periodically and equal
to the applicable 5-year gilt rate plus a margin of 2.8% (currently
3.08%).
Whilst PPDS instruments no longer exist (having been exchanged
during the LME in April 2018), the Society has monitored a notional
PPDS reserve. The deficit of £3.9m at 31 March 2021 has been
extinguished during the year following the increase in reported
net statutory profit. For the year ended 31 March 2022, the Society
generated a reported profit after tax of £24.4m, including the
impact of £2.5m Tier 2 interest payable. The net profit disregarding
Tier 2 interest (after tax) would therefore have been £26.4m.
Accordingly, during the year the notional PPDS reserve account
deficit was extinguished, with a positive balance of £2.7m at 31
March 2022 that could have been distributed to PPDS holders. The
equivalent annual yield that would have been paid to PPDS holders
would therefore have been 1.48%.
Further details of our capital position are given in the Pillar 3
disclosure document, published on the Society’s website.
Principal risks and uncertainties
Effective risk management is integral to the Society’s operations.
The separate Risk Management Report on pages 36 to 49
identifies the principal risks and uncertainties faced by the Society
and describes, in detail, the West Brom’s approach to risk
management.
Financial outlook
The Society has delivered a strong performance in the current year,
with increased profitability supported by residential lending growth
following higher demand in the mortgage market. The outlook for
the UK economy going forward however remains unclear with
a range of challenges emerging from the current financial year.
Despite the easing of COVID-19 restrictions and the success of
the vaccination rollout and booster programmes, the emergence
of new variants is still a possibility. Inflation has continued to rise
during the year and is expected to rise further into the next financial
year to levels not seen for 30 years. To combat the rise in inflation,
the Bank of England raised Bank Rate, held at 0.10% since the start
of the pandemic, in consecutive months since December 2021 to
0.75% by the end of March 2022, with a further rise in May 2022
and additional increases expected over the next twelve months.
The cost of living has started to see a sharp rise with food costs and
energy bills increasing. The invasion of Ukraine by Russia has also
exacerbated concerns that energy and fuel prices could increase
further, creating increased uncertainty overall for the wider global
economic outlook.
In response to the societal challenges from climate change, we
are developing initiatives and implementing change to limit the
Society’s greenhouse gas (GHG) emissions by building upon
the past improvements we have made. Operational resilience
has been a key focus during the year. A centralised area has
been established to co-ordinate efforts across the business
in the development and delivery of the Society’s Operational
Resilience Plan and Business Continuity and Disaster Recovery
Risk Management Framework, all important components against
which to manage operational resilience.
Whilst the increase in interest rates will be welcomed by savers,
it will also increase the cost of borrowing for existing mortgage
customers on tracker and variable products. The cost of living
crisis could create a squeeze in household incomes, leading
customers to face difficulties meeting their financial commitments
and potentially leading to an increase in arrears levels.
Our responsible, Purpose-led approach to lending will seek out
growth opportunities that remains focused on our Purpose, without
adversely impacting our savers. Supported by a robust capital
position, the Society is well positioned for the challenges ahead.
26 27
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Our Stakeholders
How the Board has considered views within
decision making
How else we engage to ensure views are
considered
Our Members
- we exist
to fulfil our Purpose to
members. Listening to our
members helps us develop
our strategy in a way that is
for their long-term benefit.
Established in 2019 our Member Council acts
as a formal body that helps ensure the Board’s
long-term strategic decision making remains
considerate of member views. Across the year
the Council has met three times, with meetings
chaired by the Society’s Chief Executive or
Non-Executive Directors where appropriate.
Topics discussed have ranged from the
Society’s Operating Model to Executive Director
Remuneration.
• Monthly management information supplied to
Board covering key customer metrics including:
• NPS;
• Customer satisfaction;
• Ease of doing business; and
• Complaints.
• Customer feedback – members invited to
provide feedback on the Society’s services
through our ‘voice of the customer’ initiative.
• Customer panel – over 2,000 members that
regularly complete questionnaires to help
us shape our offering. This includes testing
literature for new products to make sure it is
clear, balanced and easy to understand.
Engaging our Stakeholders
The Society’s Board fundamentally believes that consideration
of stakeholder views is an integral part of the Society’s strategic
development and long-term direction; part of the mutual ethos on
which the Society was founded and continues to be guided by.
The Society goes to great lengths to ensure the perspectives of
a wide range of stakeholders are included both formally and
informally within its decision making structures.
As discussed further in the Corporate Governance section of
this report on page 62, the UK Corporate Governance Code (the
Code) provides the basis for the Society’s approach to corporate
governance. As a building society, although the West Brom is not
required to comply with the Code, aligned to the fundamental
belief referred to above, the Society includes information on how
the Board listens to, hears and acts upon the views of stakeholders
within its decision making by way of a Section 172 Statement (in so
far as this statement is relevant to a building society).
Obligations included within the Statement require directors to act
in the way they consider, in good faith, would be most likely to
promote the success of the Society for the benefit of its members
as a whole, and in doing so have regard to a number of key areas:
• The likely consequences of any decision in the long term;
• How the interests of employees are considered;
• How constructive relationships with wider stakeholder groups,
including suppliers are fostered;
• How any community and environmental impacts of our
operations are considered;
• How a reputation for high standards of business conduct is
maintained; and
• The need to act fairly and balance the interests of members.
While the Society’s commitment to the principle of stakeholder engagement is evidenced throughout this report, the table below provides
a summary of how the views of stakeholders have been considered within Board decision making.
28 29
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Our Stakeholders
How the Board has considered views within
decision making
How else we engage to ensure views are
considered
Our Employees
- our
colleagues underpin the
delivery of our Purpose.
By listening to and acting
upon the views of our
colleagues we create a
culture that enables the
delivery of our Purpose.
Like our Member Council, our Employee Council
acts as a formal body that helps ensure the
Board’s long-term strategic decision making
remains considerate of the views of the Society’s
colleagues. Across the year the Council has met
three times, with meetings chaired by the Society’s
Chief Executive or Non-Executive Directors where
appropriate. A Non-Executive Director also
joins meetings of the Council as an attendee
to strengthen the link between the Council and
the Board. Topics discussed have ranged from
our employee survey to culture, strategy and
remuneration.
• Regular colleague surveys which, this year,
included a survey focused on wellbeing
through the pandemic. This survey provided
a chance for colleagues to feedback on the
Society’s approach and measures introduced
to support colleague wellbeing through this
difficult time. Results were overwhelmingly
positive with over 90% of colleagues feeling
supported by the Society.
• The ongoing activity of our diversity and
inclusion employee group, Connect, chaired by
a member of the Executive. Further details of
the activity of our Connect Group can be found
on page 34 of this report.
• Ongoing dialogue through our intranet
platform WeBe, which allows open,
transparent and conversational discussions
across all of our colleagues including the
Executive.
• A number of ‘all hands’ meetings hosted by
our Chief Executive providing an opportunity for
our colleagues to ask questions.
Our Communities
- as
a business we do not
exist in isolation but
form an integral part
of the communities we
serve. Listening to and
understanding the role
we play helps ensure
our decisions remain
sustainable.
As a regional building society the strength of our
community relationships helps contribute to being
a sustainable business – one which cares about
the communities it serves. As detailed on pages
30 to 32 of this report, the significant work the
Society undertakes to support local community
causes is very much fundamental to what we do
and how we operate.
The Board receives regular updates on the
Society’s community activities. Funding from
the Society’s Community Account has been
used to provide grants which have benefitted
vulnerable groups across our region. The Society’s
partnership with Barnado’s to build four ‘Gap
Homes’ is another example of targeted support
towards vulnerable people.
• Much needed funding to local causes through
our Community Account, affinity savings
products and grants administered through the
Mercian Community Trust;
• Fundraising and volunteering in support of
causes covering a wide array of community
needs; and
• A community apprentice programme offering
business mentoring support to young people
through local charity Envision.
Full details of our considerable community
engagement programme can be found on pages
30 to 32 of this report.
Our Stakeholders
How the Board has considered views within
decision making
How else we engage to ensure views are
considered
Our wider stakeholder
groups
- intermediaries,
suppliers and investors. We
recognise our reliance on a
number of key third parties
to support core elements
of our business model.
Listening to the views of
these groups helps foster
constructive working
relationships and is key to
our mutual success.
The Board regularly receives updates from the
working relationships we foster with our wider
stakeholder groups including:
• The results of our annual broker survey which
provides our much valued intermediary
partners the chance to let us know how we’re
doing and to give us ideas for how we can
improve. The results of this survey are used to
inform product, policy, process, service and
system developments.
• Representation from chosen suppliers on
the Steering Committee for our Core Savings
System Transformation Programme, which also
includes Executive members of the Board.
• Relationships with our wholesale investors
overseen by the Assets & Liabilities Committee.
• Regular attendance at supplier user groups
which help provide a constructive feedback
loop between clients and providers; and
• Engagement with investors to support
the development of constructive working
relationships.
Our Environment
-
understanding and actively
reducing the impact of
the Society’s operations
ensures we are able
to support the financial
wellbeing of generations
to come.
Understanding and seeking to actively reduce the
environmental impact of our physical operations
is a growing priority of the Board. Our current
environmental policy includes aims and targets to
be met by continuous improvement:
• A programme of work to reduce our resource
consumption, re-using and recycling where
possible;
• Accelerating our target to become carbon
neutral for all operations under our direct
control by 2025.
• Procurement of goods and services in a
socially, environmentally and economically
responsible manner.
An environmental policy that requires the
following aims and targets to be met through
continuous improvement which includes:
• Carbon neutrality;
• Energy and water;
• Waste;
• Travel and transport;
• Procurement;
• Health and wellbeing; and
• Training, awareness, and communication.
Further details on this policy can be found on
pages 34 to 35 of this report.
Our Regulators
- as a
dual regulated Financial
Services firm having an
open, transparent and
constructive dialogue with
our regulators ensures
the decisions we make
regarding our long-term
future are safe and sound.
The Society’s Board maintains an open and
transparent relationship with both the FCA and the
PRA. Key engagement includes:
• The management of any actions raised by
regulatory reviews at Board level with key
updates provided at regular intervals; and
• Attendance of Board members, both Executive
and Non-Executive, at key regulatory update
meetings so the Society’s position is considered
in light of emerging developments.
• Monthly updates provided on key regulatory
items covered within the material supplied to
the Board.
• Regular dialogue with regulatory supervisors
covering principal risks and other matters.
• Regular regulatory ‘horizon scanning’
completed by our Legal and Regulatory
team to ensure the Society is well informed
regarding latest updates and actions required.
30 31
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Corporate Social Responsibility
Making mutuality count
As a key mutual organisation within our operating region, we
are aware of the potential we have to improve the lives of local
people by acting as a genuine force for good. This is expressed
through our commitment to social responsibility and, through our
fundraising efforts, charity schemes and affinity partnerships, we
have supported a wide range of causes. In 2021 we launched
our member commitments, two of which show our commitment
to members regarding the environment and our support for the
communities we serve:
Commit to acting responsibly and in a
sustainable way to support our future
members and wider society
Play an active role in our
local communities, working
with local community groups,
schools and charities
Not taken for granted
In the past year, the Society has responded to requests for
financial support from multiple charities and community groups,
most working at a grassroots level to alleviate the difficulty and
disadvantage faced by many vulnerable groups across our region.
The Society does this by means of funding from our Community
Account, an affinity savings product arising from the Society’s well-
established partnership with the Diocese of Lichfield.
Grants to help local causes are administered through the Mercian
Community Trust, which has been formed from this partnership,
and it has enabled us to provide much-needed assistance to
causes covering a wide array of needs such as:
• XY2 LGBT youth group promotes social inclusion and preserves
the mental health of LGBTQ in Wolverhampton and the Black
Country. The Charity promotes equality and challenges
discrimination particularly on the grounds of age, gender,
identity and sexual orientation. The £1,000 donation enabled
the charity to continue their drop in sessions each week and
support counselling in schools.
• Through colleague fundraising and member support, we
have donated over £24,000 worth of food to food banks
predominantly across the Black Country. Wednesbury Breaking
Bread Foodbank, West Bromwich Foodbank, Black County
Foodbank, George Dixon Primary School in Birmingham, Hope
Food in Sutton Coldfield and Act of Kindness Foodbank in
Redditch, have all received donations as part of the Society’s
ongoing efforts to support causes in the local area.
“We really appreciate the donations provided
by the West Brom. The support this year has
been invaluable for so many families, some
of whom have been hit hard by the pandemic. The Society
also donated Christmas meals this year, so some of our most
vulnerable families were able to enjoy a Christmas dinner.
These donations make a huge difference and we want to
thank all the staff for their generosity.”
John Clarke (Learning Mentor)
George Dixon Primary School Foodbank
• The Birmingham Community Healthcare NHS Foundation Trust
Charity (BCHC). A donation of £1,000 helped the patients at
the West Heath Hospital, who are mainly older adults aged
70 years and over. It has been a difficult year for patients and
visiting is still limited to two one-hour slots a week, so it’s been
vital for the charity that they continue to raise money for patient
activities. The donation has enabled the charity to buy a range
of crafts and games to alleviate boredom and help patients
have an enjoyable stay, pushing them to get better more
quickly.
“The donation from the West Brom will enable
us to bring a smile to the patients at West
Heath Hospital by providing presents, crafts
and games to keep their spirits up whilst they recover. Visiting
is unfortunately still restricted, which is why patient activities
are even more important during these difficult times.”
Angela Corry (Charity Manager)
Birmingham Community Healthcare
• Crafting for Communities crafts items for the local community.
They make useful items to help dementia patients, local
hospitals and vulnerable people. All items are made by
volunteers and the charity provides all the materials to make
the items including thread, needles and even buttons. The
Charity has made and distributed over 50,000 items to the local
community. They make a wide range of items like: neonatal
clothing, sensory items, incubator covers, dementia items,
blankets, hats and angel baby gowns and cribs.
“We are so thankful for the donation the West
Brom has provided, it will help us to buy more
wool and fabric so we can continue making
our crafted items for the community. Just as important as
the making is the wonderful community we have created, a
community of mostly women - Merry Makers - who are there
to support and lift each other up. We are so grateful that
people value what we do and want to support us.”
Colleen Cator (Trustee)
Crafting for Communities
• Serenity Counselling was set up in 2014 to help victims that
had experienced domestic violence and sexual abuse in the
Wolverhampton and neighbouring areas. The charity has
now expanded its services across the West Midlands and
currently offers therapy sessions for individuals, couples and
groups. In addition to this, they also offer workshops based on
safeguarding, well-being and healthy relationships to students
in secondary school, college or at university.
“We are extremely grateful for the grant
received from the West Brom. The pandemic
has resulted in many more people requiring
support with their mental health and has also seen a high
increase in more service users coming to us. The grant will
help generously towards the running costs and payments to
our trained counsellors, to ensure we can continue to serve
those that need us.”
Rebecca Williams (Director and Company Secretary)
Serenity Counselling
“We are proud to be able to provide the grant to
Serenity Counselling. We will be working closely
with the charity to see how we can help further
and are excited to assist.”
Mel Bradburn (Manager)
the West Brom’s Wolverhampton branch
• Ironbridge Museum Trust in Shropshire, with a £500 grant
which has helped fund its Madeley Wood Company outdoor
adventure project. The Trust has developed a brand new family
attraction in the woodlands at Blists Hills Victoria.
• Sandwell Multicare with a £1,000 grant which will help the
charity to continue to support both children and adults with
severe learning disabilities and additional difficulties. The
charity has used the donation to build a wooden pergola in the
garden of their holiday bungalow in Skegness. Situated near the
beach, their service users and their families can visit for a long
weekend break or holiday to relax and enjoy the fresh air and
garden views.
• Compton Care with a £1,000 grant. Our donation enabled the
charity to support both their patients and their family members,
including children affected by loss and grief, with items such as
the provision of bereavement materials like specialised books
designed to help young people understand their feelings during
very difficult times.
Through colleague fundraising and
member support, we have donated
over £24,000 worth of food to food
banks across the Black Country.
32 33
Annual Report and Accounts
Year ended 31 March 2022
Business Review
The value of volunteering
For the Society, being part of the community means engaging
in ways that have a real meaningful impact. This is where
volunteering is invaluable as an expression of our commitment
to the community where staff give their time and talents for the
sake of others. Its relevance and significance is indicated by the
gratitude of charities and community groups but, for staff from the
Society, volunteering has clear benefits too.
It can expand their understanding of what other people have to go
through in life, giving them a sense of emotional satisfaction that
their practical contribution is visible and appreciated.
Staff at the Society are entitled to two volunteering days every year
and, despite the restrictions because of the pandemic, staff strived
to support local charities and community causes, which, given the
restrictions on their activities, was needed more than ever.
The strength of partnerships
The Society’s affinity partnerships have proved a way for members
to show their commitment to a specific organisation that might
carry a particular resonance for them. It could be a local hospital,
a partnership concerned with social disadvantage, or sporting
bodies to facilitate opportunities for young people.
Members are able to do this by saving with the Society through
special affinity accounts where bonus payments, based on total
savings held, are allocated on a yearly basis to those preferred
organisations.
The Society’s partnership with the Diocese of Lichfield is one such
example where it is able to respond to pressing social need
through the medium of the Mercian Community Trust.
Another longstanding and immensely successful partnership for
the Society is with Birmingham Children’s Hospital, which enjoys
a richly-deserved reputation, nationally and internationally, for its
treatment and care of children and adolescents. Thanks to the
Society’s Red Balloon Appeal, some £940,000 has been generated
for the hospital since 2006.
Total raised since 2006
£933,966.39
Over 90,000
patients supported each and every year
Birmingham
Children’s
Hospital
In August 2021 the West Brom formed a partnership with Barnardo’s
to build four ‘Gap Homes’ for young vulnerable people leaving the
care system in the Black Country area.
The Society is looking to join the Dormant Assets Scheme, operated
by Reclaim Fund Ltd (RFL), to fund £500,000 for the new homes,
with further colleague fundraising planned in the future to provide
continued support to the charity.
The ‘Gap Homes’ initiative utilises vacant land within a local
authority and builds energy-efficient, easy to maintain homes for
care leavers, offering vulnerable young people a vital transition
home whilst also being supported by Barnardo’s staff. Barnardo’s
and the West Brom are in discussions with local councils to explore
building the 'Gap Homes' within the region and to ensure the
project is delivered in the heart of the Black Country.
The partnership will last for at least two years whilst the homes
are being built, with further support from the Society providing
other services such as financial education, internships and work
placements for the individuals that will be using the new homes.
At the launch Jonathan Westhoff, West Brom Chief Executive, said:
“As a mutual business, supporting the
communities in which we operate is a core
part of our ethos, and forms part of our
commitments to our members. This partnership links directly
to our Purpose of supporting homeownership and we’re
passionate about being able to support care leavers in the
local area by providing safe and suitable accommodation.
As well as this, we will be offering our services to provide
financial education to the care leavers, to give them the tools
to manage their money and make good financial decisions.
We will also be providing work placements to gain valuable
experience within the workplace and help build confidence.
When a young person leaves the care system, it can be
an incredibly difficult time as they usually do so without
a support network to help them. Having affordable and
suitable accommodation can make a huge difference and
help young people make a positive start to their adult life.”
Jonathan Westhoff (Chief Executive)
the West Brom
“Leaving home is challenging for anyone yet
many care leavers have no one to turn to for
support in making that next step. This is why
the Gap Homes initiative is so important.
Supporting young people to become independent and
develop life skills is at the heart of Gap Homes and we are
delighted to be partnering with the West Brom and having
discussions with Sandwell Council to try and make this
happen.
Vulnerable young people need us now more than they
ever have and this will help to transform the future of West
Midlands’ care leavers for years to come.”
Hugh Sherriffe (Central Regional Director)
Barnardo’s
Equity, Inclusion & Diversity
It is our view that diversity of backgrounds in an environment of
equity and inclusion is essential to bringing richness of thought,
resulting in a more successful business. For this reason the Society
actively seeks a diverse range of employees, and continually looks
for ways to ensure all colleagues are included and empowered to
bring their best, at all times, regardless of their background.
Despite the backdrop of a highly competitive labour market, our
belief in attracting and retaining a broad range of individuals
has remained unchanged to ensure the Society benefits from the
best talent. Given that the Society’s heartland is in one of the most
ethnically diverse regions of the UK, diversity in our employees
is essential to understanding and delivering for the needs of our
customer base.
We demonstrate our commitment to equity, inclusion and diversity
in a number of ways. Being one of the original signatories to the
Women in Finance Charter with our CEO as the Executive Sponsor,
we have continued to meet our originally set targets and this
year announced revised targets to make even greater progress
by the end of 2024. In our second year as a signatory to the
Race at Work charter, we have continued to progress our public
commitments to improve outcomes of employees from ethnic
minorities. Furthermore, following on from achieving the Level 2
- Disability Confident accreditation in 2018, an audit conducted in
2021 resulted in the awarding of Level 3 - Disability Leader status,
the Society being the first in the building society sector to reach this
highest level of accreditation under the government’s Disability
Confident scheme. We also welcomed the latest regulatory
proposals to measure progress in a wider range of diversity
characteristics; and contributed our experience and feedback to
the ‘Diversity and inclusion in the financial sector’ discussion paper
(issued by the Bank of England, Prudential Regulation Authority
and Financial Conduct Authority) and took part in the initial data
gathering survey in November 2021.
We published our fifth annual Gender Pay Gap report,
acknowledging that closing of gaps in these published metrics
remains a key focus for the Society. One of the main actions
required to make meaningful progress on closing the gap is
to ensure greater balance between genders into entry level
Volunteering is invaluable
as an expression of our
commitment to the community.
34 35
Annual Report and Accounts
Year ended 31 March 2022
Business Review
roles, many of which are part-time positions in branches and
currently female dominated. As such, we are encouraging and,
where suitable, taking positive actions for more male applicants
to consider entry level roles both on full and part-time bases.
The ultimate aim is to have a gender balance at all levels of the
organisation, not just to remove the pay gap, but to ensure a
balance of views and perspectives across the Society, as one key
element of the diversity agenda.
As a signatory to the Women in Finance Charter, we set a
target for female representation of both the Board and senior
management to be 30% by end of 2020. This was achieved well
ahead of the deadline and has been maintained, with the latest
reported position to the Charter in November 2021 being 40%
Board representation and 30% senior management, including
senior specialist roles. Building on this continued success, this
year we announced a revised target for our senior management
population to achieve 40% female representation by end of 2024.
In total, out of 627 colleagues at the year end (including Non-
Executive Directors), women make up 400 (64%). Details of staff
composition at the end of the year is outlined below, compared
to 2021:
At 31 March
2022
Female
2022
Male
2021
Female
2021
Male
Directors
Number
4 6
3 5
Percentage 62%
40% 60%
38%Senior managers
Number
27 53
27 56
Percentage 67%
34% 66%
33%Other colleagues
Number
369 168
393 178
Percentage 31%
69% 31%
69%Senior managers include divisional directors and employees
categorised as ‘Senior Managers’ and ‘Senior Specialists’. Many
‘Senior Specialist’ positions are within areas such as Finance and
IT, both divisions that historically attract more men than women
at all levels, so a concerted effort is required to proactively attract
more women to commence careers in these divisions, this needs
actions that will have a long-term impact.
As part of our ongoing commitment to develop an ethnically
diverse and inclusive employee base, this year we voluntarily
published our first Ethnicity Pay Gap report, being one of the few
companies both in financial services and the wider industry to
do so. Although our ethnicity pay gap statistics are in a strong
position, compared to some of the other organisations in the
financial services industry who have voluntarily published this data,
we acknowledge there is more work to be done to further reduce
the gap. As the overarching aim of pay gap reporting is to create
an environment for a balanced and diverse workforce across all
levels of an organisation, we have taken practical steps to tackle
potential barriers people from ethnic minorities face in recruitment
and progression, with initiatives such as diversity and inclusion
training to all employees and monitoring ethnicity statistics across
the employee lifecycle.
Looking at the ethnicity of colleagues at the Society based on
respondent data, the composition (compared with 2021) is as
follows:
At 31 March
2022
Ethnic
minority
2022
White
2021
Ethnic
minority
2021
White
Directors
Number
2 8
1 7
Percentage 87%
20% 80%
13%Senior managers
Number
14 66
16 66
Percentage 80%
18% 82%
20%Other colleagues
Number
176 360
180 390
Percentage 68%
33% 67%
32%All levels show ethnic minority representation above the West
Midlands average of 17.4%. Having 33% of the Society’s ‘other
colleagues’ drawn from ethnic minority communities is particularly
valuable for branches in areas with a highly diverse ethnic profile.
By having colleagues with multi-lingual skills, we are better
positioned to offer a service for customers in such localities that are
culturally sensitive and relevant.
Our new Disability Confident Leader status recognises the Society’s
commitment to raise colleague awareness, promote a culture
of disability confidence, record and report on disability, mental
health and wellbeing, and undertake activities to be a Disability
Confident Leader in the wider community. While being proud of this
achievement, further planning is under way to make the Society
an even more equitable and inclusive environment for disabled
colleagues.
“It has been a pleasure to see that the
West Brom is committed to making genuine
improvements in what you are doing and you
are willing and able to make changes quickly.
The report highlights your good practice which can be used
in stories, case studies and when you are sharing good
practice with others as part of the Leader role.”
Kathryn Wood (Disability Training and Consultancy
Specialist)
Health Management Ltd (formerly Remploy)
The Society appreciates that a diverse employee base requires a
fully inclusive culture and a broad understanding and acceptance
of the value differences between employees brings. Promotion
of such understanding was the thinking behind the creation of
‘Connect’ in 2018, our colleague-led equity, inclusion and diversity
focus group. The group is sponsored by the Society’s Group
Finance & Operations Director ensuring two–way communication
between employees and the Executive; and has continued to play
a key role throughout the year in raising awareness and creating
an environment where all employees from different backgrounds
and diversities feel welcomed, supported and valued.
Environment
Climate change has been identified as one of the greatest
challenges facing nations, governments, business and citizens
over future decades. Climate change has implications for both
human and natural systems and is leading to significant changes
in resource use, production, and economic activity. In response,
we are developing initiatives and implementing change to limit the
Society’s greenhouse gas (GHG) emissions by building upon the
past improvements we have made.
All our initiatives will be based upon the quantification, monitoring,
reporting and verification of GHG emissions and removals, and
waste elimination for all future reporting periods.
The health and wellbeing of our staff, visitors, and customers
is of equal importance to us. We will be taking steps to ensure
that those elements of our operations that affect the environment
in which people use our facilities, such as indoor environment
quality and local building emissions, are maintained to well within
recommended limits.
Our current environmental policy requires the following aims and
targets to be met by continuous improvement:
•
Carbon neutrality
– we will become carbon neutral for all
operations under our direct control by 2025 and aspire to being
carbon positive (removing more carbon than we use) by 2050.
We will report on, and significantly reduce the carbon emissions
of our supply chain by 2025.
•
Energy and water
– to efficiently operate and maintain our
buildings such as to maintain healthy indoor environments,
using less energy and water, reducing carbon emissions and
promoting the use of renewable energy and resources.
•
Waste
– reduce our resource consumption, to re-use where
possible and to recycle unwanted materials e.g. paper,
furniture, carpets, equipment, food etc.
•
Travel and transport
– minimise emissions from business
travel, commuting, and deliveries, and to promote more
sustainable travel by staff and visitors.
•
Procurement
– to procure goods and services in a socially,
environmentally and economically responsible manner. This
can range from the ordering of Fairtrade products to the
purchase of materials and consumables containing recycled
and sustainably produced materials.
•
Health and wellbeing
– to contribute to the positive mental and
physical health and wellbeing of staff and visitors.
•
Training, awareness, and communication
– to increase
sustainability literacy amongst staff, contractors, suppliers,
partners and visitors.
This section of the report summarises the energy usage, associated
emissions, energy efficiency actions and energy performance
for the Society, under the government policy Streamlined Energy
& Carbon Reporting (SECR), as implemented by the Companies
(Directors’ Report) and Limited Liability Partnerships (Energy and
Carbon Report) Regulations 2018.
2021-2022
2020-2021
Energy Use
2021-2022 kWh p.a.
tCO
2
(tonnes) p.a.
kWh p.a.
tCO
2
(tonnes) p.a.
Buildings
electricity
2,229,617 473.4
2,368,823 552.3
Buildings
natural gas
1,221,067 223.7
1,315,695 241.9
Transport 24.3
126,202 29.4
102,245Totals
3,576,886 726.5
3,786,763 818.5
This represents an overall reduction of 11.24% in the 12 month period.
The challenges presented by the pandemic have impacted
progress on our environmental plans but in the year 2021/22 we
have continued with environmental actions where possible:
•
LED Lighting:
LED fittings are currently used to replace existing
lamps that fail as a matter of course.
•
Electric Vehicle Use:
We have introduced an additional EV
charging point as we increase the use of electric vehicles for our
maintenance team and pool car.
•
Site Optimisation:
• A review of Mechanical and Electrical (M&E) facilities/
installations across the sites has been undertaken to
enhance the effective and efficient operation of services.
• A sample branch has been identified and surveyed as a
potential test bed for environmental improvements. A report
by an external consultant has been submitted and actions
are currently being considered.
• The Society has now moved to accredited Green Energy
contracts which now enable zero emission reporting.
• Ventilation improvements have been made at both Head
Office and across the Branch network to improve air quality.
Don’t take our word for it
We are proud that we continue to be formally
recognised as a responsible and caring
business and employer.
The Good Business Charter seeks to acknowledge and
encourage responsible business practice. The charter covers
a range of criteria such as prioritising employee wellbeing,
fair tax compliance, care for the environment, and treatment
of customers and suppliers. The goal is to raise awareness of
those businesses that take action and introduce initiatives to
benefit communities and colleagues, rather than just being
profit driven.
To qualify for the accreditation, firms must
demonstrate commitment across 10
categories that include paying at least the real
living wage, action on employee wellbeing,
diversity and inclusion, sustainable practice
and other Corporate Social Responsibility (CSR) initiatives.
Other non-financial information
The Society adheres to the highest standards with regards to anti-
bribery and corruption. All colleagues are trained in recognising
and understanding the associated risks and are required to
complete mandatory training. Additionally, the Society has in place
policies to comply with applicable laws, including the Bribery Act
2010 and the Criminal Finances Act 2017. The Society publishes a
Modern Slavery and Human Trafficking Statement annually on its
website and continually seeks to improve its vigilance in respect of
modern slavery issues via its Supplier Selection and Management
policy and related procedures. The Society has a zero tolerance
approach to slavery and human trafficking in all its forms, both in
its supply chain and its business operations.
On behalf of the Board
Ashraf Piranie
Group Finance & Operations Director
25 May 2022
36 37
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Risk Management
Overview
Effective management of risks and opportunities is essential to
achieving the Society’s objectives. The Board aims to manage
effectively all the risks arising from its activities and believes that its
approach to risk management reflects an understanding of actual
and potential risk exposures, the quantification of the impact of such
exposures, and the development and implementation of controls
that manage exposures within the Board’s risk appetite.
The Society operates entirely within the UK financial services market
and only takes on risks which it has the capability to understand and
manage effectively.
Risk management framework
The Society’s activities are governed by its constitution, principles
and values. The Directors have also agreed a set of statements
which describe the Board’s risk appetite in terms of a number of
principal risk categories to which the Society is inherently exposed as
a building society: business, credit, capital, liquidity, market, margin
compression stress, operational, retail conduct, pension liability, and
information risk (the Society’s Risk Appetite Statements). The Board
also reviews the key strategic risks that may impact the delivery of
its business plan.
These Risk Appetite Statements drive corporate planning activity,
including capital and liquidity planning, as well as providing the
basis for key risk measures. The measures are categorised as:
• Level 1 - These are set by Risk Committee (RC) and Board has full
visibility;
• Level 2 - These are set by Executive sub-committees but are
reported to RC and Board; and
• Level 3 - These are fully delegated to sub-committees and
reported to RC and Board by exception.
The reporting of these Level 1, 2 and 3 measures are grouped within
the following five risk pillars: Conduct, Compliance and Financial
Crime; Operational Resilience; Capital (including Credit); Liquidity;
and Business.
The final element of the framework is the formal structure for
managing risk across the Group. This is based on the ‘Three Lines of
Defence’ model which is illustrated below.
First Line
Second Line
Third Line
Day-to-day
risk management
Divisional Director Internal Audit and Board Audit Committee
Board Risk Committee
Chief Risk Officer
Independent Assurance
• Defines culture and values
• Establishes risk appetite and strategy
• Approves frameworks, methodologies, policies, and roles and responsibilities
• Operational areas are accountable for management of risk and execution of risk controls
• Independent oversight and risk governance through monitoring and reporting responsibilities
• Promote the importance of senior management and business line managers in identifying
• Internal Audit provide the Board (via the Audit Committee) with independent assurance over
Executive
Board
Chief Executive
Risk Oversight
This section outlines the risks
that the Society is exposed to
and how they are managed.
38 39
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Business conditions and the economic
environment
COVID-19 continued to impact the economic environment and
whilst many of the government support schemes have now been
removed, uncertainty remains as to how the UK economy will
recover as we all learn to live with the pandemic. Gross Domestic
Product (GDP) growth has improved but the Ukraine/Russia conflict
has exacerbated the supply chain issues caused by the COVID-19
shutdowns across global economies and this has fed through into
higher rates of inflation which is causing energy costs and day-
to-day living costs to increase. The Bank Rate has continued to
increase from the historic low of 0.1% to 0.75% in March 2022, with
a further rise in May 2022 and additional increases expected over
the next twelve months.
House prices have continued to rise and whilst there is an
expectation that consumer confidence will impact on the rate
of growth, the ongoing supply and demand imbalance is still
supporting the second consecutive year of double digit growth.
The Society has shown appropriate prudence in its modelled
macroeconomic scenarios to take account of this downside risk.
Following the government’s announcement of the mortgage
payment deferral scheme in 2020, the Society confirmed that
borrowers who advised they were experiencing financial difficulty
as a result of COVID-19 would be supported with forbearance.
The vast majority of borrowers who requested this assistance have
gone onto continuing full repayments following the end of their
deferral periods. The very small proportion of accounts in arrears
following payment deferral periods have overwhelmingly been
those accounts which were already in arrears before a request for
a deferral was made.
The Society is exclusively focused in the UK and, therefore, the
general UK macroeconomic environment is key to its success. The
Society considers macroeconomic risks on a regular basis, under
central, downside, stressed and upside conditions to understand
and manage the impact on its business model.
In addition to the ongoing risks posed by living with the COVID-19
pandemic and although the UK has left the EU, there still remains
uncertainty around the UK’s future relationship, in specific areas
such as financial services, which has the potential to further impact
on consumer and business confidence. The external factors that
impact the Society include:
• Interest rates (Bank Rate, LIBOR (including discontinuation) or
SONIA);
• Inflation;
• Unemployment; and
• The residential housing and commercial property markets.
decisions
reached
KEY
The Risk Committee met eight times during the year and reviewed all of the matters relating to its responsibilities included
within its Board approved Terms of Reference. Whilst a broad range of topics were considered, the following five key
decisions were reached by the committee in the year:
1. COVID-19 - residential lending policy was reviewed and amended to capture the emerging risks associated with the
pandemic and to factor in the introduction and subsequent withdrawal of the government support schemes, e.g.
furlough. A prudent position was adopted to reflect the uncertainty and ambiguity but balanced with supporting home
ownership for members.
2. Operational Resilience - Important Business Services and associated Impact Tolerances were recommended for
approval to the Board along with its approach to Third Party and Outsourcing arrangements to meet the regulatory
authorities deadline of 31 March 2022. The next steps over the coming three years were also approved.
3. Climate Change related financial risks - Climate Change Risk Management Framework was approved, which included
details of the risk appetite and it was agreed that this would form a part of the Board's Business Principal Risk and
included within regular reporting thereof.
4. Retail Conduct Risk - approach to managing customers with mortgage payment deferrals was reviewed to ensure it
was aligned to the emerging regulatory support - FCA's Tailored Support Guidance and therefore enhanced credit risk
reporting was seen to evidence the ongoing performance and customer outcomes of forbearance provided.
5. Margin Compression Risk - approved the revised approach to measuring net interest income (NII) risk of negative Bank Rate
beyond just the simple parallel rate shift to include the behavioural aspects of introducing floors at zero etc. with ongoing
review following the significant change in Bank Rate outlook that has seen it rise from 0.1% to 0.75% in March 2022.
Anne Gunther
Victoria Mitchell
Dave Dyer
Lynne Shamwana
David Thomas (Chair)
The Risk Committee meets at least quarterly to review the Society’s exposure to the risk categories. During this financial year, the Committee
met on eight occasions.
Governance structure
During the year, risk governance was provided by a structure
consisting of ten key risk management committees/groups:
Risk Committee (RC)
- Comprising five of the Non-Executive
Directors, this Committee is responsible for the oversight and
management of the principal and key strategic risks identified by
the Board.
Audit Committee (AC)
- Comprising four Non-Executive Directors,
the Audit Committee provides the Board with assurance regarding
the integrity of the financial statements, the adequacy of the
provisions and the adequacy and effectiveness of the Society’s risk
management frameworks.
Independent assurance is provided by the Internal Audit function
which has a direct reporting line into the Chair of Audit Committee.
Executive Risk Committee (ERC)
- This Committee is chaired by
the Chief Risk Officer (CRO) and is responsible for providing the
Executive and the Risk Committee with an enterprise wide view of
the risk profile of the Society, including current and potential risks.
The ERC is also accountable for driving the detailed implementation
of the Society’s Risk Management Framework.
Assets & Liabilities Committee (ALCo)
- This Committee is
chaired by the Group Finance & Operations Director (GFOD) and is
responsible for overseeing the assets and liabilities risk, including
the assessment of exposure to Treasury counterparty credit,
market, liquidity, pension liability, margin compression, basis and
interest rate risk.
Residential Credit Committee (RCC)
- This Committee is chaired
by the CRO and is responsible for overseeing the Society’s
residential lending activity and its exposure to credit risks in the
retail loan books.
Commercial Loans Risk Committee (CLRC)
- This Committee is
chaired by the CRO and is responsible for overseeing the Society’s
exposure to credit risks in the commercial loan book.
Operational, Conduct and Information Risk Group (OCIRG)
- This
Group is chaired by the CRO and is responsible for overseeing the
management of operational, information and retail conduct risks
arising from the Society’s business activities.
Operational Resilience Group (ORG)
- This Group is chaired by
the GFOD and is responsible for overseeing and embedding all
aspects of operational resilience across the Society.
Capital Review Group (CRG)
- This Group is chaired by the GFOD
and is responsible for overseeing the Group’s capital position.
Model Risk Committee (MRC)
- This Committee is chaired by the
CRO and is responsible for overseeing the Society’s exposure to
model risk across the business.
Risk categories
The Board has identified ten principal risk categories, which
together define its overall risk universe. These are defined below:
Business risk
The risk of the Society failing to meet its business objectives
through: the inappropriate selection or implementation of strategic
plans; inadequate assessment and mitigation of climate change
related risks; and/or failure to implement a diverse and inclusive
culture.
Credit risk
The risk that losses may arise as a result of the Society’s borrowers,
debtors or market counterparties failing to meet their obligations
to repay.
Capital risk
The risk that the Society has insufficient capital to cover stressed
losses or to meet regulatory requirements.
Liquidity risk
The risk that the Society either does not have sufficient financial
resources to enable it to meet its obligations as they fall due or can
secure such resources only at excessive cost.
Market risk
The risk of changes in the value of, or income arising from, the
Society’s assets and liabilities as a result of unexpected changes
in financial prices, primarily interest rates, property prices, bond
yields and inflation.
Margin compression risk
The risk of a margin squeeze caused by having limited ability to
increase margins on the mortgage book if the Society were to
experience a relative increase in funding costs affecting variable
rate retail funding, and in particular the administered rate retail
balances.
Operational risk
The risk of loss and/or negative impact to the Society resulting
from inadequate or failed internal processes, systems or people,
or from external events.
Retail conduct risk
The risk that inappropriate behaviours by the Society result in
adverse outcomes for retail customers.
Pension liability risk
The risk that there will be a shortfall in the value of the Society’s
pension fund assets over and above the liability to its employees
under the defined benefit pension scheme. This may result from
a number of sources including investment strategy, investment
performance, market factors and mortality rates.
Information risk
The risk that customer or Society information assets are managed
or processed incorrectly or are not adequately protected. It
includes inadequate data quality and failure to comply with data
protection and data privacy requirements.
For each risk category the Board has agreed an appetite statement
and key metrics which, together, define the level of risk the Board
is prepared to accept or tolerate. In addition, key threats and
the corresponding Society responses or mitigants, as well as
opportunities, have been identified. The mitigating controls and the
effectiveness of the controls are monitored by line management,
with control functions providing a Second Line of Defence. Internal
Audit, through an approved assurance programme, provides the
Third Line of Defence.
40 41
Annual Report and Accounts
Year ended 31 March 2022
Business Review
The Society is not exposed to any direct trade with the European
Economic Area (EEA), does not rely on regulatory pass-porting
into the EEA and is not directly dependent on EEA based financial
market infrastructure.
Day-to-day management of key risks
Primary responsibility for risk management, including the design
and operation of effective controls, rests with the management of
each business function - the ‘First Line of Defence’. Support and
challenge is provided through specialist risk functions - Credit
Risk, Operational and Conduct Risk, Compliance and Financial
Crime, and the Prudential Risk team – the ‘Second Line of Defence’.
These functions develop and review policies, monitor and support
compliance with those policies, and support the business functions
in their management of risk.
Governance and oversight is provided through a number of
management and executive committees as detailed on page 38.
Credit risk
The Society’s Board establishes the credit risk appetite and
supporting lending policy for the year. All new lending is monitored
against risk appetite limits, with any breaches reported through the
Society’s risk committees so that the need for corrective action may
be considered.
The Society’s exposure to residential and commercial credit risk is
managed by a specialist Credit Risk team, which is responsible for
setting the Credit Risk Management Framework and associated
limits. It also provides regular reports to the Risk Committee, which I
chair and includes four other Non-Executive Directors as members.
In response to the ongoing COVID-19 pandemic, the Society kept
its credit risk policies and procedures under constant review. New
lending policies and procedures were amended to take account of
the continuing economic uncertainty, market movements, and the
impact of the removal of government support.
Similarly, the Society’s approach to collections and recoveries has
evolved to reflect the removal of mortgage payment deferrals and
the moratorium on possessions, and will continue to be updated
in line with any ongoing government and regulatory guidance.
The Society’s approach has been fully cognisant of the Financial
Conduct Authority’s (FCA) Tailored Support Guidance.
The Society’s internal credit risk reporting has evolved to ensure
that the risk committees have the required information in relation
to account performance once the payment deferral ended and
details of any ongoing forbearance provided.
Additionally, credit risk can arise within treasury transactions (used
to meet liquidity requirements and those hedging instruments used
for interest rate risk purposes). This type of credit risk is managed by
the Treasury Middle Office team. On a daily basis, this team monitors
exposures to counterparties and countries, and ensures operations
remain within Board approved limits. ALCo and the Board review
the Treasury Policy and limits, with reports presented to ALCo on a
monthly basis confirming compliance with such policy limits.
Throughout the last financial year, a conservative approach to
liquidity management has been maintained, holding the vast
majority of liquidity in the Bank of England Reserve Account and
other high quality, Liquidity Coverage Ratio (LCR)-eligible assets.
Treasury operates a strict control framework and exposures are
monitored on an intra-daily basis.
Market risk
Market risk exposures are managed through the Treasury
department which is responsible for managing exposure to all
aspects of market risk within parameters set by the Board.
ALCo reviews the Treasury & Financial Risk Management Policy,
recommending changes to the Board as appropriate, and ensures
that regular reports on all aspects of market risk are assessed
and reported to the Board. The key market risk is interest rate risk,
which arises as a result of differences in the timing of interest rate
re-pricing of assets and liabilities. To mitigate this, Treasury uses
natural balance sheet hedging (e.g. matching 2 year fixed rate
mortgages with 2-year fixed rate saving bonds) and derivative
instruments. The Building Societies Act 1986 restricts the use
of derivatives strictly to hedge against the impact of fluctuating
external factors, such as interest rates.
The maximum level of interest rate risk is governed by the Board
approved Treasury & Financial Risk Management Policy in line with
the Board’s risk appetite.
In line with regulatory requirements and best practice, the impact
on NII of a parallel shift in interest rates in both directions is
considered. In addition, the impacts of alternative non-parallel
scenarios upon NII and market value are also considered. Both
are reported monthly to ALCo. The potential impact of Bank Rate
reducing to negative rates has been addressed this year with the
negative shift in interest rates no longer floored at zero. Mitigating
actions have been taken to ensure the resulting impact on NII
remains within the Board’s risk appetite.
Interest rate sensitivity also arises from the potential for different
interest rates to move in different ways, e.g. Bank Rate mortgages
are partially funded by administered rate liabilities. The impact
of these mismatches (basis risk) is monitored by Treasury and
reported to ALCo.
The FCA withdrew support for LIBOR by the end of 2021; SONIA
has been chosen as the preferred benchmark rate in the UK. The
Society transitioned its new exposures to this benchmark ahead of
the deadline.
The Society’s main exposure to equities is through the defined
benefit pension scheme. There is no direct exposure to foreign
exchange rates.
The Society has invested in property through its subsidiary West
Bromwich Homes Limited (WBHL) and offers residential property
for rent. This exposes the Society to movements in house prices.
Liquidity risk
The Society’s primary purpose is to make loans secured by
way of mortgages on residential property. It funds these loans
substantially from short term deposits provided by its saving
members. The contractual maturity of the mortgages is typically up
to 30 years although loans are often repaid early due to borrowers
moving house or remortgaging.
Savers’ deposits, whilst accessible predominantly on demand, at
short notice or for fixed periods, nevertheless tend to remain with
the Society for longer periods. A substantial proportion of savers
have long-established relationships with the Society.
This difference in the nature of borrowers’ and savers’ relationships
causes a structural mismatch between the speed at which the
Group can generate cash from its business assets and the
demand for funds to meet its liabilities. To mitigate this risk, the
Group holds sufficient liquid resources to meet the normal day-to-
day operations of the business and, in addition, maintains a buffer
of high quality liquid assets, which can be converted quickly into
cash to cover outflows in severely stressed conditions. Processes
are in place to ensure that the quantity, quality and availability of
these liquid resources is adequate at all times.
The Board undertakes a detailed review of its liquidity adequacy
under the Internal Liquidity Adequacy Assessment Process (ILAAP)
and submits this to the Prudential Regulation Authority (PRA) for
supervisory review upon their request. The ILAAP specifies the
daily processes that the Society will use to determine the amount
of liquidity required to cover its potential cash flow needs under
a range of stresses including three PRA standard scenarios:
‘idiosyncratic’, ‘market-wide’ and ‘combined’.
The supervisory review also informs the PRA’s view of the amount
of ‘buffer’ or highest quality liquid assets that the Society should
hold to meet the three standard regulatory stress scenarios and
the maximum allowable gap between maturing wholesale assets
and wholesale liabilities (wholesale refinancing gap). Treasury
maintains liquid resources at the greater of the LCR requirement or
the internal assessment of liquidity adequacy.
The Net Stable Funding Ratio (NSFR) is a longer-term stable funding
metric, which measures the sustainability of the Society’s long-term
funding requirement. The Society’s NSFR is in excess of 100%, and
the Society holds sufficient stable funding to meet this.
The Board has established a Liquidity Risk Policy which lays down
a rigorous framework of limits to control the Society’s liquidity risk.
The governance process surrounding liquidity risk management
activities is as follows:
• The Risk Committee has delegated authority for the governance
of liquidity risk management to the Assets & Liabilities Committee
(ALCo) which meets monthly;
• Operational management of liquidity risk is further delegated
to the Liquidity Management Committee (LMC) which meets
weekly. LMC looks at liquidity stresses over a horizon of up to
three months and plans cash flows over a rolling 12 month
planning period;
• Treasury is responsible for day-to-day management and
maintenance of adequate liquid resources under delegated
authority from ALCo; and
• The Risk Committee monitors independently the overall liquidity
adequacy process, including the activities of ALCo, LMC and
Treasury. It also reviews and recommends for approval to the
Board the ILAAP at least annually.
The Society is responsible for the liquidity and cash flow
requirements of wholly owned subsidiaries.
Capital risk
The Society conducts an Internal Capital Adequacy Assessment
Process (ICAAP) covering all risks. This is used to assess the
Society’s capital adequacy and determine the levels of capital
required going forward to support the current and future risks in
the business. This analysis is collated through the ICAAP that is
approved by the Board. The ICAAP incorporates expected future
capital requirements from changes in business volumes, mix of
assets and activities within the context of current and anticipated
future risks, and stressed scenarios. The ICAAP is reviewed by the
PRA to set the Society’s Total Capital Requirement.
Society capital requirements are reviewed on a monthly basis and
the results of this monitoring are reported to the ALCo, RC and the
Board. RC reviews and recommends for approval to the Board the
ICAAP at least annually.
The detailed breakdown of the Society’s capital position can be
found on page 24.
Operational risk
Each business function has a clearly articulated responsibility
for identifying, monitoring and controlling its operational risks.
The business function receives support and guidance from the
Operational and Conduct Risk team, which has regular dialogue
with function managers and collates management information for
review by executive management, the Operational, Conduct and
Information Risk Group and the Risk Committee.
The Operational and Conduct Risk team also provides independent
input and challenge to the business functions, both through the
regular review of operational risks and day-to-day business
initiatives. They also oversee the scenario analysis undertaken that
feeds into the ICAAP.
A key focus during the year has been to meet the operational
resilience regulatory requirements by 31 March 2022, which
is defined by the FCA and the PRA as ‘the ability of firms to
prevent, adapt, respond to, recover and learn from operational
disruptions’. The centralised team has co-ordinated efforts
successfully across the business in the delivery of the Society’s
Operational Resilience Plan and Business Continuity and Disaster
Recovery Risk Management Framework, all important components
against which to manage operational resilience. The Society has
established its Important Business Services and their associated
Impact Tolerances, with the next steps established to meet the
2025 regulatory deadline.
The COVID-19 pandemic and subsequent lockdowns resulted in a
number of changes to working practices, with a significant number
of colleagues working from home, impacting the operational
risk profile. Where required, controls have been strengthened
by First Line business areas and more widely, the risk and
control environment is being monitored by Second and Third Line
functions. The Society has now conducted its business on the basis
of this new operating model for over two years.
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Business Review
Retail conduct risk
Conduct risk is overseen by the FCA who continue to increase the
regulatory focus on it. This continues to go beyond the previous
focus on compliance with rules, on process and on treating
customers fairly, to now embrace a holistic approach of how a
firm organises itself and does business in order to ensure good
customer outcomes.
The management of conduct risk is a key component in the
successful delivery of the Society’s strategy and objectives, and
protection of its members and customers.
Information risk
Understanding and managing information risk is imperative to the
successful achievement of the Society’s business objectives.
Effective policies, procedures and processes complemented by
technological defences and detection tools, provide for successful
information risk management.
To this end, the Society has determined a risk management
strategy based on defined principles and managed against a
clearly articulated and Board approved, Risk Appetite Statement.
The UK General Data Protection Regulation (UK GDPR) was
retained in UK law following the end of the Brexit transitional
period on 1 January 2021. This law extends the rights of consumers
in respect of their personal data and the Society has established
robust processes to ensure compliance.
The Society has a Recovery Plan in place that captures, inter alia,
management actions for a range of adverse scenarios that may
impact any of the above risks either individually or collectively.
Climate change
The Society recognises that climate change represents a threat
to financial stability as well as the natural environment and
recognising that it exacerbates existing risk, has incorporated
it within the Society’s Risk Management Framework. While the
financial risks from climate change may crystallise in full over
longer time horizons, there are also short term impacts. Financial
risks from climate change can arise through two primary channels:
physical and transition, which can manifest, for example, through
increased business risk, credit risk or market risk.
Physical risk can manifest through increasing frequency, severity
or volatility of extreme weather events impacting mortgaged
properties. Transition risks can arise from the process of adjustment
towards a low-carbon economy. The Society is working to quantify
its potential exposure to both of these climate change risks.
Climate change presents a risk to the Society and its members.
Since 2019, the Society has been enhancing and embedding its
capabilities to monitor and manage climate risk and meet the
requirements of the PRA Supervisory Statement 3/19 – enhancing
banks’ and insurers’ approaches to managing the financial risks
from climate change. The following information represents the
Society’s Taskforce on Climate-Related Financial Disclosure (TCFD)-
aligned disclosure in the areas of Governance, Strategy, Risk
Management, and Metrics & Targets.
Governance
RC, as delegated by the Board, has responsibility for the oversight
of climate change risk. The risks from climate change, and
progress towards identifying and managing them, are presented
to RC on a regular basis. RC is responsible for setting the overall
risk appetite, having ultimate approval of risk management
actions, oversight of climate risk Management Information (MI) and
metrics and approval of the Climate Change Risk Management
Framework (CCRMF) on a triennial basis. The Board has also
designated the Chief Risk Officer (CRO) as the relevant Senior
Management Function responsible for managing the financial risk
of climate change, in line with SS3/19.
ERC, chaired by the CRO, is responsible for managing climate
change risk. ERC can recommend proposals to RC for approval,
including those concerning risk appetites and risk management
actions. ERC reviews the CCRMF on an annual basis. Over the past
year ERC has reviewed a number of proposals relating to climate
change which have covered: outputs of the physical climate risk
stress model which analysed the future flood and subsidence
risk of Society assets under multiple time horizons and climate
scenarios; a climate change risk appetite statement; and MI on
flood/subsidence risk and Energy Performance Certificate (EPC)
distributions. On a day-to-day basis, climate change financial risk
is managed by the Prudential Risk team.
The AC has oversight of external disclosures relating to the Society’s
management of the financial risks arising from climate change.
Strategy
The nature of climate change risk means that unknown risks may
begin to crystallise which were not originally anticipated. Risks
could manifest along uncertain and/or extended time horizons
and are potentially non-linear and irreversible. While the exact
outcome is uncertain, there is a high degree of certainty that
financial risks from some combination of physical and transition
risk factors will occur.
Risk category Risk summary
Significance
/Impact
1
Ability to
control
2
Horizon
term risk
3
Business risk
‘Green’ competition in the mortgage lending and
retail deposit space.
Low High Short
Credit risk
Flood/subsidence risk materialising which
impacts property values and subsequent losses
to the Society.
Low Medium Long
Higher energy efficiency standards for Buy-to-Let
(BTL) properties may affect our BTL book and WB
Homes book.
Medium High Medium
Operational risk
Business continuity events as a result of
increasing frequency and severity of weather
events (Head Office, branches, suppliers).
Medium Medium Long
Increased cost base (insurance, energy etc). Low High Medium
Supplier/ third-party operational risk due to
climate events, or sourcing of supplies from
entities with poor climate change disclosures
or strategy.
Medium Medium Medium
Market, Liquidity,
Funding risk
Market/liquidity shocks in response to a specific
weather event or repricing for new information
causing disruption and volatility in specific asset
categories, sectors, individual names or regions.
Medium Medium Medium
Retail and wholesale participants only funding/
dealing with firms with strong environmental
credentials.
High Medium Short
Higher haircuts on Bank of England pledged
collateral with low energy efficiency ratings.
Medium Medium Medium
Conduct risk
Potential for borrowers with significant
uninsurable flood or subsidence risk to become
mortgage prisoners.
Low Medium Long
Inappropriate incentives for green products. Medium High Short
Potential for Shared Ownership borrowers to be
liable for 100% of costs of mitigating physical/
transitional risk, despite only owning a fraction of
the property.
Medium Medium Medium
Regulatory & Legal
Inadequate or inaccurate climate risk
disclosures on past or anticipated events.
Medium High Long
(Possible) capital add-ons for lack of governance
and control of risks.
Medium High Medium
Reputational risk
Foreseeable, material risks left undisclosed. High High Medium
Society seen as not proactively addressing risks,
but rather responding reactively to regulation
and guidance or 'greenwashing'.
Medium Medium Medium
For the Society, examples of these risks include:
¹ Significance/Impact is based on the risk drivers crystallising.
² Ability to control reflects the extent of mitigation that can be applied by the Society.
³ Horizon Term risk is defined by Short (1-2 years), Medium (3-4 years), and Long (5 years or more).
44 45
Annual Report and Accounts
Year ended 31 March 2022
Business Review
The Society has recognised the potential to offer products that align with the UK’s target to reach net zero greenhouse gas emissions by
2050 at the latest. For example, the Society has recognised that housing contributes a significant proportion of greenhouse gas emissions,
and therefore making homes more energy efficient is a critical step towards achieving net zero. To this end the Society is considering
lending products such as further advances to fund energy efficiency measures, and cashback or lower product rates for higher EPC
properties.
The Society has a number of policies and procedures which align with net zero; these are described fully in the Environment section of the
Strategic Report. Climate change has impacted lending policies with the Society no longer lending on properties with very high flood risk
or low EPC ratings. Climate change risks and opportunities are reviewed annually as part of Board strategy sessions. The financial risks
from climate change are assessed annually as part of the Society’s ICAAP process; the Society has not yet deemed it appropriate to hold
capital against this risk.
The Society’s simple business model of savings deposits funding residential lending is resilient to the financial risk from climate change.
The outputs of the Society’s physical climate risk stress model show very modest losses resulting from future flood and subsidence risk
under three climate scenarios as shown below.
Climate Scenarios
To model and predict future climate it is necessary to make assumptions about the economic, social and physical changes to our
environment that will influence climate change. Representative Concentration Pathways (RCPs) are a method for capturing those
assumptions within a set of scenarios. The conditions of each scenario are used in the process of modelling possible future climate
evolution.
The climate change scenarios used in our assessment are the scenarios published by the Met Office as part of UK Climate Projections ‘09
and UK Climate Projections ’18, including RCP 2.6 low emissions scenario and RCP 8.5 high emissions scenarios. Results for a medium
emissions scenario are interpolated from the RCP 2.6 and RCP 8.5 results (Figure 1).
Figure 1: Predicted outcomes of low and high emission scenarios for England and Wales.
Winter precipitation change
For a location in central England
3% drier to 22% wetter
2% drier to 33% wetter
For a location in central Wales
2% drier to 19% wetter
No change to 29% wetter
Summer rainfall change
For a location in central England
41% drier to 9% wetter
57% drier to 3% wetter
For a location in central Wales
39% drier to 3% wetter
56% drier to 2% wetter
Winter temperature change
For a location in central England
-0.1 ºC cooler to 2.4 ºC warmer
0.7 ºC warmer to 4.2 ºC warmer
For a location in central Wales
0.1 ºC warmer to 2.4 ºC warmer
0.7 ºC warmer to 4.1 ºC warmer
Summer temperature change
For a location in central England
No change to 3.3 ºC warmer
1.1 ºC warmer to 5.8 ºC warmer
For a location in central Wales
No change to 3.3 ºC warmer
0.9 ºC warmer to 5.9 ºC warmer
Low emission scenario High emission scenario
As expected, the projections for RCP 2.6 show less global warming than RCP 8.5 (see Figure 1). Similar increases in the global mean surface
air temperatures are seen for both emissions scenarios up to around 2040. The projections for RCP 8.5 then increase further whereas RCP
2.6 projections level off from the 2050s onwards.
Climate Model
The Climate Stress Model assumes that the risk of flooding is
continuously distributed across all at-risk properties and that
as global temperatures increase, the effect is to increase the
probability of flooding gradually and uniformly for each property
within a given climatological region.
This is implemented within the model by assigning a risk to each
property as of the “present” and scaling this risk upwards over
time, at a rate set by each climate change scenario. Properties
do not transition from “low” through “medium” to “high” risk over
time, but rather the thresholds of “low”, “medium”, and “high”
change are adjusted upwards and with it the average likelihood
of flooding within each risk grade. The rate at which flood risks
increase over time is taken from the UK 2017 Climate Change
Risk Assessment (‘CCRA2017’), which forecasts for the UK and its
constituent countries and regions the impact of flood damage by
2030, 2050, and 2080. From this information, continuous flood risk
scalars have been developed that provide country and region level
risk adjustments that have been applied to the risk ratings allowing
flood risk to be calculated at a property level for any year between
the present and 2090.
Risk management
Risk identification considers at least the following:
• Market-wide risks: These are risks that impact the whole of
market rather than just the Society, for example government
legislation on energy efficiency or disclosure standards, such
as expanding EPC disclosures, which can impact lenders’ Buy-
to-Let (BTL) books. Furthermore, changing climate scenarios,
when integrated into physical climate risk stress models, could
result in higher future expected credit losses (ECL) on mortgage
assets.
• Idiosyncratic risks: Any climate change related risks that are
specific to the Society should be identified. This should include a
review of relevant Society experience. For example, this includes
the risk to the rental income and valuations of WBHL properties
due to increasing energy efficiency standards for BTL properties.
• Emerging risks: Where possible, emerging risks should be
identified. These will typically be driven by forthcoming changes
in the external environment.
Any decisions on how to manage climate change risks consider
the following as a minimum:
• Regulatory constraints: Any constraints on the level of risk
that may be taken or the type of controls that may be used to
manage risk must take relevant regulation, such as SS3/19,
into consideration. A review of regulatory material in order to
ensure, at a minimum, that all mandatory risks are identified.
This review covers all existing regulation and guidance. Climate
change risk is a fast changing area both for financial firms as
well as regulators so guidance will most likely change at a rapid
pace. At a minimum this includes PRA Supervisory Statements;
and other best practice contained in PRA/FCA promoted
guidance including that of the Climate Financial Risk Forum and
the TCFD;
• Proportionality: The PRA expects a firm’s response to the
financial risks from climate change to be proportionate to the
nature, scale, and complexity of its business, as dictated by
SS3/19. The Society should therefore take this into account;
• Policy constraints: Only methods permitted within current
policies can be used to manage risks exposures. For example,
changes to residential security criteria to take account of
changing physical and transition risk should be made through
changes to the relevant Policy;
• Best practice: The Society should consider whether its approach
to managing climate change risks remains appropriate given
current industry best practice which continues to be outlined
by the Climate Financial Risk Forum. Any proposal to change
an approach used must go through the normal governance
process; and
• Effectiveness in a stress: The effectiveness of any risk
management approach adopted must also be assessed
against its performance in a stressed environment. A climate
stress event can manifest over a very short or longer time
period, often at short notice, e.g. flash flooding. The Society
also uses Scenario testing: Risks that can only be identified
through scenario analysis, whether in-house or conducted by
a third party. This mainly applies to physical risks which will be
exacerbated in coming decades by rising global temperatures,
but can also apply to the impact of changing energy efficiency
standards on the BTL or WBHL books, where it may become
apparent through analysis that it is uneconomical for certain
properties to be upgraded. Scenario testing will be mindful of
the latest PRA scenarios, such as those contained within the
Climate Biennial Exploratory Scenario.
The Society has developed a CCRMF to aid the embedding,
management and monitoring of climate change risk. The CCRMF
articulates how the Society identifies, measures, manages and
monitors the financial risks from climate change. The inaugural
CCRMF was reviewed by ERC and approved by RC.
46 47
Annual Report and Accounts
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Business Review
A risk appetite statement has also been defined for the financial
risk from climate change:
‘The Society will ensure that the impact of physical and transition
risks on its exposures do not give rise to potential losses that
threaten its business model or compromise its current or future
viability.’
This risk appetite statement was approved by RC. Climate change
was not considered a Board Principal Risk due to the modest losses
resulting from future flood and subsidence risk described above. It
was determined that it should be a sub-risk under Business Risk,
whilst still retaining full Board oversight. In support of this appetite,
MI and metrics will be presented to the Board so that the Society’s
exposure to physical and transition risk can be tracked.
Metrics and Targets
The Society’s physical climate risk modelling, as described above,
has yielded the following output with respect to future flood and
subsidence risk ECL:
2022
L M H
Additional flood risk
related expected loss £m
0.11 0.13 0.16
2027
L M H
Additional flood risk
related expected loss £m
0.31 0.41 0.52
2050
L M H
Additional flood risk
related expected loss £m
0.40 0.58 0.77
2080
L M H
Additional flood risk
related expected loss £m
0.47 0.73 0.98
Flood risk ECLs are modest, even under the high emissions
scenario, compared to the Society’s residential provisions. This
analysis was completed for the residential mortgage book as at
31 March 2022. The model is designed to calculate the additional
ECLs that the Society may incur due to flooding at different time
periods in the future under high, medium, and low emission
scenarios.
The mechanism through which the model translates flood and
subsidence risk into additional ECLs is by applying adjustments to
the value of the property to reflect the short and long-term costs
incurred due to flood and subsidence risk and by assessing the
impact of these events on the likelihood of a default occurring.
ECLs are calculated that incorporate these effects and which
are compared to a base ECL that assumes no such hazards to
determine for each account the increase in ECL attributable to
climate stress.
The Society will continue to monitor the outputs of the model and
will consider mitigating actions if future losses increase to material
levels.
The following describes the EPC rating distribution of the residential
mortgage book:
Current EPC rating
EPC rating
Total mortgage book Owner Occupied Buy-to-Let
A (92+)
0.1% 0.2% 0.0%
B (81-91)
10.1% 12.1% 5.5%
C (69-80)
25.6% 22.9% 31.6%
D (55-68)
44.8% 44.8% 44.7%
E (39-54)
16.3% 16.4% 16.1%
F (21-38)
2.6% 3.0% 1.7%
G (1-20)
0.5% 0.6% 0.4%
Average
D (64) D (64) D (64)
Potential EPC rating
EPC rating
Total mortgage book Owner Occupied Buy-to-Let
A (92+)
7.1% 9.3% 2.2%
B (81-91)
51.2% 52.1% 49.1%
C (69-80)
32.9% 30.5% 38.5%
D (55-68)
7.1% 6.5% 8.5%
E (39-54)
1.4% 1.3% 1.4%
F (21-38)
0.2% 0.2% 0.2%
G (1-20)
0.1% 0.1% 0.1%
Average
B (81) B (81) C (79)
EPC ratings have been gathered from the publicly available EPC
Register and matched to the Society’s mortgage book. The Society
will endeavour to increase the match rate, which is currently 76%.
The Society is committed to achieving an average EPC Rating of C
across our residential mortgage book (Owner Occupied and Buy
To Let) by 2028. The Society currently has an average EPC Rating
of D and will encourage lending on better EPC related products to
achieve this target.
The Society currently measures its energy usage under the
Streamlined Energy & Carbon Reporting (SECR), as implemented by
the Companies (Directors’ Report) and Limited Liability Partnerships
(Energy and Carbon Report) Regulations 2018:
Energy Use 2021-2022 kWh p.a. tCO
2
(tonnes) p.a.
Buildings electricity
2,229,617 473.4
Buildings natural gas
1,221,067 223.7
Transport
126,202 29.4
Totals
3,576,886 726.5
The Society is committed to become carbon neutral for all
operations under our direct control by 2025 and aspires to being
carbon positive (removing more carbon than we use) by 2050. We
will report on, and significantly reduce the carbon emissions of our
supply chain by 2025.
Principal risks and uncertainties
Set out in the following table are the Board’s principal external
threats which have been identified by RC, along with the Society’s
responses and mitigants in place.
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Annual Report and Accounts
Year ended 31 March 2022
Business Review
Risk category Principal external threats Society response and mitigants
Business risk
Adverse changes to the operating
environment arising from the general
uncertainty in the UK economy, due to the
ongoing disruption caused by COVID-19,
Ukraine/Russia conflict and rising cost of
living crisis leading to:
• Higher inflation resulting in Bank Rate
increasing towards 2%;
• Declining consumer confidence resulting
in reduced activity in the housing market
and possible adverse impact from both
lower lending and a potential fall in
house prices;
• Increased competition in the mortgage
market and rising cost of retail funding;
• Flat or declining economic growth and
associated rising unemployment causing
possible recession; and
• Increasing regulatory costs.
Business plans continue to model the impact of a range of
scenarios and stress tests, which have been expanded to include
potential macroeconomic impact of the COVID-19 pandemic and of
higher inflation due to global supply chain and rising energy costs.
This is reflected within the IFRS 9, ICAAP and ILAAP assessments.
These outcomes have Board visibility and are reviewed by a
number of risk management committees.
These Scenario and Stress Tests are complemented by Reverse
Stress Testing to identify the circumstances that puts the Society
into an unviable position, i.e. capital and/or liquidity falls below
minimum regulatory requirements.
The Society is based in the UK and has no EU operations limiting its
exposure to Brexit related operational risks.
Credit risk
Higher unemployment as a result of self-
employed/wider business failures, end of
government support schemes, and/or an
increase in Bank Rate (leading to increased
arrears and losses).
The Society’s IFRS 9 provisioning and stress testing models
assume a range of unemployment levels and varying interest
rate scenarios, including a stressed outcome. Should an increase
in arrears accounts occur, the Society would expand its credit
services resource.
Reduction in property prices (leading to a
higher incidence of voluntary possessions
and elevated shortfalls when properties
sold).
The Society is committed to work with its borrowers to avoid
possession wherever possible. In the event that possessions were
to increase, the Society’s regular reviews of its IFRS 9 provisions
would reflect this increase. Mortgage Indemnity Guarantee
insurance is obtained on lending originated at above 80% Loan to
Value to mitigate potential losses.
Low or flat economic growth combined
with higher inflation (leading to further
commercial property tenant failures).
The Society has a well-resourced and highly experienced team
dealing with commercial property mortgages and, as has been
the case throughout the year, works with borrowers and agents to
lessen the impact.
Capital risk
Rules for calculating capital (amount
required and/or amount held) are changed.
Maintain regular dialogue with the regulator and ensure full
understanding of and compliance with the relevant rules.
Liquidity risk
Intensification of competition for retail and
wholesale funding.
The Society has demonstrated the ability to attract new retail
deposits this year, despite intense competition. The Society also
has access to a diverse range of other funding sources, including
wholesale options and funding provided through the Bank of
England’s Sterling Monetary Framework.
Scenario and Stress testing is undertaken to assess the
requirements over a number of different time horizons. This
is also complemented by Reverse Stress Testing to identify the
circumstances that puts the Society into an unviable position, i.e.
liquidity falls below minimum regulatory requirements.
Margin
compression
risk
Reduction in returns from residential tracker
mortgage assets whose rate is linked to
Bank Rate with no floor.
The Society does not originate any new residential tracker
mortgages and is managing down its Bank Rate Tracker book,
replacing this with administered rate, or SONIA-linked assets.
David Thomas
Chair of Risk Committee
25 May 2022
Risk category Principal external threats Society response and mitigants
Margin
compression
risk
(continued)
A relative increase in funding costs affecting
variable rate retail funding, and in particular
the administered rate retail balances.
The Society has recently developed, and embedded into the
Risk Management Framework, a Margin Compression Stress
(MCS) model. The MCS model quantifies what could happen to
Net Interest Margin (NIM) following an increase in funding costs
exclusively outside of other benchmark rates (Bank Rate, SONIA
and LIBOR) and returns earned on existing mortgage assets (which
are mostly linked to benchmark rates through swaps).
Market risk
The risk of a reduction in the Society’s
net interest margin as a result of rising
competition amongst deposit takers.
The Society operates within Board approved limits and monitors
the exposure to increases in funding rates through ALCo.
Falling HPI, leading to a reduction in the
book value of WBHL properties.
No new homes have been added, containing the exposure and
properties continue to be sold where appropriate.
Operational risk
Single points of failure are identified,
potentially impacting on critical and
Important Business Services.
The Society has strengthened its operational resilience framework
to facilitate. Scenario analysis is also undertaken.
A significant business continuity event. Detailed business continuity plans are in place, which are regularly
tested and supported by scenario testing.
Investment in core technology introduces
execution risk with the benefits being
delayed or not delivered.
The Society has a robust change management framework in place
with regular updates provided to the Board. Notwithstanding this,
as explained elsewhere in this report, delays in the build and
implementation of our new online savings platform resulted in the
write off of certain previously capitalised costs.
Insurance arrangements do not sufficiently
cover an event (requiring the Society to pick
up the cost).
The annual review of insurance arrangements is based on advice
from brokers and an annual benchmarking exercise.
Information risk
One or more of the Society’s IT systems
are attacked for the purposes of financial
gain, theft of data or to cause the
Society disruption or negative exposure
and threaten the security of members’
information, and the availability of the
services offered to them. Cyberattacks
remain a significant risk for financial
institutions.
The Society recognises the need to maintain and develop its
defences and responses in this area in order to protect the
Society and maintain the trust of customers and the confidence of
regulators. The Risk Committee are kept updated as to the maturity
of the Society’s cyber defences and controls; projects focussed
on the mitigation of risks associated with phishing and data loss
are being progressed to further enhance the Society’s defences.
The RC also received a report on the potential threats posed by
the Ukraine/Russia conflict and how the mitigation measures
suggested by the National Cyber Security Centre’s updated
guidance has been applied.
Pension
liability risk
Increased longevity, poor or volatile returns
on scheme assets such as equities, gilts
or bonds linked to long term interest rates
(requiring the Society to contribute more to
the scheme).
The Defined Benefit Scheme is closed to new members and
existing members are no longer accruing service benefits. The
Scheme is subject to an actuarial review every three years to
calculate the current position (surplus/deficit) and was finalised
during the year. The Society has agreed a recovery plan with
the Trustee Board which will see the current deficit closed within
an appropriate timeframe set out by the pension regulator. The
Scheme’s investment advisors provide support on the strategies for
the Scheme to the Trustee Board which aims to fulfil future funding
requirements of the Scheme, as well as hedging interest rate
and inflation risks to protect the pension liabilities against market
volatility.
Retail conduct
risk
Actions of third party and outsourced
suppliers leading to adverse customer
outcomes.
A robust supplier framework is in place to oversee the activities
of key suppliers. The conduct risk appetite metrics monitoring is
reported to RC.
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Annual Report and Accounts
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Business Review
Board of Directors
This section provides
information about your
Board of Directors.
Board composition
Gender split
Female
4
Male
6
Ethnic diversity
BAME
2
Non-BAME
8
Tenure of Board members
1 1 1 1 1
3
years
11
2
years
1
year
3
<1
year
4
years
5
years
6
years
13
years
52 53
Annual Report and Accounts
Year ended 31 March 2022
Business Review
John Maltby MBE
Chair of the Board
Appointed January 2021
John is an experienced Board member in Financial Services and with public, private, not-for-profit and private-equity owned businesses,
and also has experience in chairing purpose-led organisations – having been Chair of Good Energy for over six years. He is currently Chair
of Allica Bank, Non-Executive Director of Nordea Bank and Chair of Max Nicholas Renewables, a developer of an innovative turbine for
hydro and tidal energy. John was previously on the Board of Trustees for the National Citizens Service Trust, a not-for-profit organisation
founded to help young people achieve their potential, and in recognition of this role was awarded an MBE in the 2022 Queen’s Birthday
Honours list. He was elected Chair of the Board on 26 May 2021 and is also Chair of the Nominations Committee and a member of the
Remuneration Committee.
“I believe companies should strive to improve the lives and prospects of their customers and their colleagues. As a mutual, the West
Brom is a wonderful example of an organisation that delivers in this regard and has done throughout its long history. I am proud to be
part of the Board that serves and supports our current and future members and colleagues.”
Julie Hopes
MBA, ACIB
Senior Independent Director and Deputy Chair
Appointed April 2016
Julie has many years of experience in retail financial services, with a particular focus on general insurance. An Associate of the Chartered
Institute of Bankers, she has Non-Executive Director roles with Saga plc where she is Chair of the Saga plc Risk Committee, Chair of Saga
Services Ltd, Saga Personal Finance and MS Amlin Underwriting Limited where she is Chair of the Risk Committee. Julie chairs the
Remuneration Committee and is a member of the Nominations and Audit Committees.
“I joined the West Brom because I believe in mutuals - businesses owned by and run in the interest of their members. I’ve stayed with the
West Brom for the last six years because it puts its members and the local community at the heart of its decision making. I bring broad
experience of retail financial services and in particular a strong focus on customer service, change and operational management. I am
proud to be part of the West Brom.”
Left to right:
Jonathan Westhoff, Dave Dyer, Victoria Mitchell, David Thomas
and
Lynne Shamwana.Left to right:
Julie Hopes, Ashraf Piranie, Anne Gunther, Manjit Hayre and
John Maltby.Annual Report and Accounts
Year ended 31 March 2021
Business Review
Dave Dyer
BA Hons. (Cantab.), MBA, FCMA
Non-Executive Director
Appointed September 2021
Dave joined the Board on 1 September 2021 and has many years’ experience in the retail banking sector. Prior to taking on the Non-
Executive Director role at the West Brom Dave was one of the founding members of Snoop – an app to consolidate finances in one place
allowing customers to see benefits (e.g. savings on bills). Previous to this Dave worked as Chief Financial Officer at Virgin Money Holdings
(UK) plc and Finance Director, Mortgages at Royal Bank of Scotland. Dave is a member of the Audit and Risk Committees.
“For me joining the West Brom was driven by two ‘Ps’ – good People, with a good Purpose. Many organisations talk about putting the
customer first – at the West Brom I see it unswervingly put into practice by a team dedicated to their members, their colleagues, and
their communities.”
Anne Gunther
BSc, MBA, ACIB, FSCIB
Non-Executive Director
Appointed November 2021
Anne is a highly experienced non-executive director with 10 years’ experience as a Board member in public and private companies
spanning retail financial services, insurance, wealth management, savings and lending. She has a proven track record of supporting
business growth in both her executive and non-executive career. Anne is a Non-Executive Director at Water Plus Ltd and Mattioli Woods
Plc. Anne is a member of the Remuneration and Risk Committees.
“Throughout my career I have worked at senior levels within major public companies and mutual firms, with a top up of NHS, charity
and university governance. Hence I continue to compare and contrast that which gives the best balance between all stakeholders and
particularly for customers. The West Brom represents building societies at their very best: a good understanding and response to the
commercial realities in a highly competitive world with nevertheless the expertise to maintain a key focus on our customers including
those that others find difficult to support. That’s why I’m a proud member of the team.”
54 55
Annual Report and Accounts
Year ended 31 March 2022
Business Review
Jonathan Westhoff
BA (Hons) Financial Services, FCMA, CGMA, ACIB
Chief Executive
Appointed May 2009
Formerly the Society’s Group Finance Director and Deputy Chief Executive, Jonathan was appointed as Chief Executive in May 2011. After
17 years with Barclays Bank, he moved into the mutual sector in 2000, serving as Finance Director at Portman and Newcastle building
societies. He chairs the Executive Committee, the Member and Employee Councils, and is a member of the Society’s Assets & Liabilities
Committee. Jonathan is a past Chair of the Building Societies Association.
“Having spent nearly 22 years in the building society sector, the last 13 at the West Brom, my passion for mutuality and the benefits we
bring to our members, as well as the communities we are part of, is stronger than ever. It is our members and my colleagues that make
the West Brom a building society that I am immensely proud to be part of.”
Ashraf Piranie
FCCA, MBA
Group Finance & Operations Director
Appointed March 2017
Ashraf has worked in financial services for most of his working life, including holding the positions of Finance Director and Joint Managing
Director at the Islamic Bank of Britain and Director of Finance at Alliance & Leicester plc. Prior to joining the West Brom, he was Deputy Chief
Executive & Finance Director at Nottingham Building Society. Ashraf, until 2020, was also Deputy Chair of the PRA Practitioner Panel. Ashraf
chairs the Society’s Assets & Liabilities Committee.
“I have been on the Board of the Society since 2017 and my key reason for joining was driven by the resilience demonstrated by the
Board and Management since the last financial crisis. I have over 25 years of experience in financial services which covers both
Operations and Finance; my objective has been to support the Society’s focus on its purpose to provide strong customer service and
provide value to its members whilst at the same time continuing to improve the financial resilience of the Society. It is therefore pleasing
to note that in both these areas the Society continues to demonstrate a strong and improving position.”
Lynne Shamwana
BA FCA
Non-Executive Director
Appointed February 2019
Lynne previously held the position of Chief Financial Officer at Virgin Care and before that Global Finance Director of Christie’s, the
international art auction house. She has held a variety of senior finance and management roles at Centrica plc, British Gas, Goldfish Bank
plc and Alliance & Leicester plc. Lynne is a Director and Chair of the Audit Committee of Antin Infrastructure Partners and a Director and
Governor of the Southbank Centre. She is a fellow of the Institute of Chartered Accountants in England and Wales. Lynne chairs the Audit
Committee and is a member of the Nominations and Risk Committees.
“I started my career in a mutual building society and I believe passionately that there needs to be real choice for customers. I was
delighted to be invited to join the West Brom Board and Chair the Audit Committee so I can play my part in ensuring its future success.
I am proud that at the West Brom colleagues feel cared for and everyone strives to put our members and customers at the heart of
everything we do.”
David Thomas
MSc, ACIB, FIB (Ireland)
Non-Executive Director
Appointed August 2020
David joined the Board on 1 August 2020. He brings a wealth of experience in general management, risk management, internal audit and
regulatory activities. David’s previous roles include Chief Risk Officer at SMBC, EMEA Region, Chief Risk Officer RBS Plc, Corporate Banking
Division and the Managing Director responsible for Ulster Banks Corporate and SME business on the Island of Ireland. David is a member
of the Audit and Remuneration Committees and Chair of Risk Committee.
"I joined the West Brom because it was clear to me that it puts its members first and is always looking to do the right thing for its
members. Having been on the Board for almost two years now I am also impressed by the ethical approach it takes, led by a strong
and professional team."
Manjit Hayre
Chief Risk Officer
Appointed September 2021
Manjit was appointed to the Board in September 2021 having joined the Society in 2006. Prior to this, Manjit was at the Britannia Building
Society for five years and has over 30 years of financial services experience, having started his career at NatWest Mortgage Services, and
in risk related roles since 1993. Manjit chairs the Society’s Executive Risk Committee and is a member of the Executive Committee and
Assets & Liabilities Committee.
“Having worked in mortgage related financial services for over 30 years, the last 20 or so has afforded me the opportunity to see first-
hand the benefits of mutuality for a Society’s members and this ethos is closely aligned to my personal values. Being born and living
locally in the heartlands of the Black Country and West Midlands, I am proud to be part of a team that puts its members’ interests and
supporting local communities at the heart of everything the West Brom does on a daily basis.”
Victoria Mitchell
LLB (Hons)
Non-Executive Director
Appointed April 2018
Victoria joined the Board on 1 April 2018 and is a legally trained businesswoman who brings to the West Brom a broad experience across
operations and risk within the financial services sector. Prior to taking on the Non-Executive Director role at the West Brom, Victoria held
the position of Chief Operating Officer at Capital One Europe plc. Victoria is Chair of Lookers Motor Group Ltd, a Non-Executive Director and
Chair of the Remuneration Committee at Lookers PLC and N Brown Group plc where she is the Chair of the Financial Services Board. Victoria
is a member of the Remuneration and Risk Committees.
“I have been with the West Brom for four years and in that time I have seen the passion everybody has about doing the right thing for
our members, putting customers at the heart of everything we do. I am proud to be part of a team dedicated to excellent customer
outcomes and the support provided to the communities we serve.”
57
Annual Report and Accounts
Year ended 31 March 2022
Governance
56
Directors’ Report
This section outlines the
Directors of the Society
and their responsibilities.
The Directors are pleased to present their Annual Report, together with the audited
Accounts, for the financial year ended 31 March 2022.
Business objectives
The main purpose of the Society and its subsidiaries (the Group) is
to work together to meet the prime financial needs of our
members. This entails provision of a range of personal financial
products, offering competitive pricing and excellent service.
Business review
The Group’s business and future plans are referred to in the Chair’s
Statement on pages 2 to 3, the Chief Executive’s Review on pages
4 to 7 and the Strategic Report on pages 8 to 35.
Key performance indicators
The Board measures performance against its strategic aims by
reference to a number of key performance indicators which are
described in the Strategic Report on pages 8 to 35.
Profit and capital
Profit before tax (on continuing operations) was £23.2m (2020/21:
£4.7m). The capital position is set out in the Strategic Report on
pages 24 to 25 and the Annual Business Statement on page 171.
Detailed Pillar 3 capital disclosures for the current year are
available on the Society’s website.
Country-by-country reporting
Information in respect of the Capital Requirements (Country-by-
Country Reporting) Regulations 2013, is provided on page 169.
Risk management
As the Society operates in a very competitive environment, the
management of risk and development of a suitable strategy are
critical activities in achieving business success.
The Board and the Board Committees ensure that risk management
and strategic direction are considered regularly and that
appropriate actions are implemented. These considerations are
detailed in the Society’s Internal Capital Adequacy Assessment
Process (ICAAP) document.
The principal risks inherent to our business and details of how
these risks are managed are set out in the Risk Management
Report on pages 36 to 49.
In addition to these principal risks there are, as a result of the
economic environment for banks and building societies, ongoing
actions under the PRA’s supervisory review process, which include
extensive stress testing exercises. The Directors are aware, in
arriving at their judgements, that the Society will be subject, in the
same way as others within the sector, to these ongoing tests of
capital and recognise the uncertainty inherent in the process as
factors within each test change.
Financial risk management objectives and
policies
The Board’s objective is to minimise the impact of financial risk
upon the Society’s performance. Financial risks faced by the Society
include interest rate, credit and liquidity risks. The Board manages
these risks through a risk management framework, Board policies
and its Treasury and Credit Risk functions. Governance and
oversight is provided through the Risk and Assets & Liabilities
Committees. Details of the Society’s financial instruments, hedging
activity and risk mitigation can be found in note 12 and notes 33 to
35 to the accounts.
Mortgage arrears
At 31 March 2022 there were 42 residential and 5 commercial
mortgage accounts (2020/21: 52 residential and 7 commercial
mortgage accounts) where payments were 12 months or more in
arrears based on current monthly repayments.
The total amount outstanding on these accounts was £79.8m
(2020/21: £92.4m), of which £76.6m (2020/21: £88.7m) related to
commercial mortgage accounts. The total amount outstanding
represented 1.58% (2020/21: 1.88%) of mortgage balances. The
amount of arrears was £14.6m (2020/21: £16.2m), relating primarily
to commercial mortgage accounts. Appropriate provisions were
made for potential losses on mortgages in accordance with the
provisioning policy set out in note 1 to the accounts.
Directors
The following served as Directors of the Society during the year:
Julie Hopes
Victoria Mitchell
Ashraf Piranie*
Mark Preston
(stepped down 28 July 2021)
Lynne Shamwana
Jonathan Westhoff*
David Thomas
John Maltby
(Chair)
Dave Dyer
(appointed 1 September 2021)
Anne Gunther
(appointed 1 November 2021)
Manjit Hayre*
(appointed 1 September 2021)
* Executive Directors.
All Directors are members of the Society. None of the Directors have,
at any time in the year or as at the year end, any beneficial interest
in shares or debentures of any associated body of the Society.
58 59
Annual Report and Accounts
Year ended 31 March 2022
Governance
Supplier payment policy
The Society’s policy is to agree the terms of payment before trading
with the supplier and to pay in accordance with its contractual and
other legal obligations. At 31 March 2022, the creditor days figure
was 28 days (2020/21: 29 days). This conforms with the aim of
paying creditors promptly.
Charitable donations
The Society raised significant sums through its community
programme, affinity accounts and voluntary staff initiatives. These
are outlined in the Corporate Social Responsibility section of the
Strategic Report. The Society also donated £1,811 (2020/21: £1,861)
to local food banks as a result of the number of votes received at
the AGM in 2021.
No donations were made for political purposes. While encouraging
any employees who wish to take part in community affairs, the
Group does not support any employees in the pursuit of political
activity.
Employees
The Society is an equal opportunities employer and gives proper
consideration to all applications for employment with regard to
vacancies that arise and to the applicant’s own aptitude and
abilities, regardless of race, creed, gender, sexual orientation,
marital status, age, physical or mental disability. If current staff
members become disabled, every effort is made to enable them to
maintain their present position or to receive relevant retraining.
The Society was one of the first signatories to the Women in
Finance initiative, which is a government sponsored initiative to
increase the numbers of female staff in financial services. The
Society produced a diversity strategy during 2017 to increase its
representation of people from all backgrounds.
The Society consults with the West Bromwich Building Society Staff
Union and assesses the results of staff surveys to ensure that staff
conditions and workload are maintained at an acceptable level.
Additionally, details of meetings, team briefings, circulars and
information updates are placed on the Society’s intranet to ensure
that employees are aware of the Society’s objectives and
performance and conscious of the wider financial and commercial
environment in which the Society operates.
Health and safety
The Society sets high standards to maintain the health and safety
of all staff, customers and those affected by any of its operations.
The Society is committed to ensuring that all employees receive
adequate training in health and safety to make them aware of their
individual responsibilities to enable them to carry out their work
without injury or damage to the health of themselves or others
affected by their work. All employees, on commencing employment
with any business area, receive induction training which is
reinforced through regular testing. Additional training is delivered
when a need has been identified, such as Manager Training,
Stress Awareness, Manual Handling, Fire Warden, First Aid etc.
The Society recognises the need to consult with its employees on
health and safety issues. Accredited safety representatives are
afforded every opportunity to effect this consultation and to receive
training. A Health and Safety Committee is in place with
representatives from across the business which usually meets every
six months to review health and safety. This was overtaken during
the year with more frequent meetings focused on ensuring the
Society complied with government guidance regarding COVID-19.
Health and safety issues are brought to the attention of all
employees through business specific communication channels.
Employees are similarly encouraged to raise issues through their
line management.
During the reporting year no enforcement notices were issued
against the organisation by any of the enforcing authorities and no
proceedings were instigated against the Society for breaches of
health and safety regulations within the reporting period.
Directors' responsibilities in respect of
the Annual Report, the Annual Business
Statement, the Directors' Report and the
Annual Accounts
The Directors are responsible for preparing the Annual Report,
Annual Business Statement, Directors' Report and the Annual
Accounts in accordance with applicable law and regulations.
The Building Societies Act 1986 (the Act) requires the Directors to
prepare Group and Society Annual Accounts for each financial
year. Under that law they are required to prepare the Group
Annual Accounts in accordance with applicable International
Financial Reporting Standards (IFRS) as set out in note 1 to the
accounts and applicable law and have elected to prepare the
Society Annual Accounts on the same basis.
The Group and Society Annual Accounts are required by law and
IFRS to present fairly the financial position and the performance of
the Group and the Society; the Building Societies Act 1986 provides,
in relation to such Annual Accounts, that references in the relevant
part of that Act to Annual Accounts giving a true and fair view are
references to their achieving a fair presentation.
In preparing each of the Group and Society Annual Accounts, the
Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable and
prudent;
• state whether they have been prepared in accordance with the
standards set out in note 1 to the accounts;
• assess the Group and Society’s ability to continue as a going
concern, disclosing, as applicable, matters related to going
concern; and
• use the going concern basis of accounting unless they either
intend to liquidate the Group or the Society or to cease
operations, or have no realistic alternative but to do so.
In addition to the Annual Accounts the Act requires the Directors to
prepare, for each financial year, an Annual Business Statement
and a Directors' Report, each containing prescribed information
relating to the business of the Group and Society.
A copy of the Annual Accounts is placed on the Society’s website.
60 61
Annual Report and Accounts
Year ended 31 March 2022
Governance
Directors’ statement pursuant to the
Disclosure and Transparency Rules
The Directors who held office at the date of approval of this
Directors’ Report confirm that, so far as they are each aware:
• the financial statements, prepared in accordance with IFRS as
set out in note 1 to the accounts, give a true and fair view of the
assets, liabilities, financial position and result of the Group; and
• the management reports in pages 8 to 49 include a fair review
of the development and performance of the business and the
position of the Group and Society, together with a description of
the principal risks and uncertainties that they face.
Directors’ responsibilities for accounting
records and internal control
The Directors are responsible for ensuring that the Group:
• keeps proper accounting records that disclose with reasonable
accuracy, at any time, the financial position of the Group and
Society in accordance with the Act; and
• takes reasonable care to establish, maintain, document and
review such systems and controls as are appropriate to its
business in accordance with rules made by the Financial
Conduct Authority and Prudential Regulation Authority under
the Financial Services and Markets Act 2000.
The Directors are responsible for such internal control as they
determine is necessary to enable the preparation of annual
accounts 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 Society and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Society’s
website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Going concern and business viability
The Directors’ responsibilities in respect of going concern are set
out below. In addition, the Directors have elected, with regard to
the UK Corporate Governance Code, to publish a business viability
statement which states whether there is a reasonable expectation
the Society and the Group will be able to continue in operation and
meet their liabilities as they fall due. The period assessed under the
business viability statement is required to be significantly longer
than the minimum period of 12 months over which going concern
is assessed.
Directors’ responsibilities in respect of going
concern
In preparing the financial statements the Directors must satisfy
themselves that it is reasonable for them to conclude it is
appropriate to adopt the going concern basis. The Group meets its
day-to-day liquidity requirements through managing both its retail
and wholesale funding sources and is required to maintain a
sufficient buffer over regulatory capital requirements in order to
continue to be authorised to carry on its business.
The Group’s business activities, together with the factors likely to
affect its future development, performance and position are set out
in the Chief Executive’s Review on pages 4 to 7 and the Strategic
Report on pages 8 to 35. The financial position of the Group, its
capital structure and risk management and control processes for
managing exposure to credit, market, liquidity and operational risk
are described in the Strategic Report on pages 8 to 35 and the Risk
Management Report on pages 36 to 49.
In addition, note 12 and notes 33 to 35 to the Accounts include
further information on the Group’s objectives, policies and
processes for managing its exposure to liquidity, credit and interest
rate risk, details of its financial instruments and hedging activities.
The Group’s forecasts and projections, taking account of possible
changes in trading performance and funding retention, and
including stress testing and scenario analysis, show that the Group
will be able to operate at adequate levels of both liquidity and
capital for the planning period.
Furthermore, the Group’s capital is in excess of the PRA minimum
requirement under each of the scenarios considered. Scenarios
considered continue to include scenarios considering the impact of
COVID-19 on future economic activity as well as from the impact on
the business of high inflation and the current geo-political situation
in Ukraine. Stresses consider both financial and operational
stresses.
After making enquiries the Directors are satisfied that the Group
has adequate resources to continue in business for the next 12
months and that, therefore, it is appropriate to adopt the going
concern basis in preparing the Annual Accounts.
Business viability statement
The Directors have assessed the viability of the Group over a longer
period than the 12 months required by the 'going concern'
provision noted above.
The Directors' assessment is based on a robust review of the
Group's principal risks, the Medium Term Plan (MTP) and the risk
management framework including risk appetite and risk culture
described within the Risk Management Report. This assessment is
further supported by the Internal Capital Adequacy Assessment
Process (ICAAP), Internal Liquidity Adequacy Assessment Process
(ILAAP), reverse stress testing, Recovery Plan and Resolution Pack.
The assessment covers a period of three years as this is within the
period covered by the Group’s MTP, ICAAP, ILAAP and regulatory
and internal stress testing. The time period chosen reflects the
consideration that the level of uncertainty relating to the assessment
increases the longer the period chosen. The pace of change of the
economic, market and regulatory environments in which the
Group operates may undermine the reliability of longer forecasts.
The MTP projects the Society's ongoing financial performance,
capital and funding positions as satisfactory to the end of the three
year plan period even in a range of adverse scenarios. Inherent
uncertainty with regard to a number of factors, including
geopolitical, economic and regulatory, inevitably increases over
the planning period.
Scenarios tested showed that the Society would be able to
maintain viability over the three year period under assessment,
after taking account of the actions available to management
including where appropriate actions undertaken by government to
support the economy to mitigate the impacts on capital and
liquidity in such scenarios.
Through the ICAAP the Society models the impact of the Bank of
England’s Annual Cyclical scenario on the Society’s Capital position,
throughout which a surplus over Total Capital Requirements is
maintained. The impact of the Annual Cyclical scenario is more
severe than that anticipated in the current economic climate even
after accounting for the high levels of inflation and uncertainty over
the situation in Ukraine.
Subject to the uncertainty in the outer years noted above and
based upon the assessment set out above, the Directors therefore
have a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due over
the period to March 2025.
Auditor
The auditor, PricewaterhouseCoopers LLP, has expressed its
willingness to continue in office. In accordance with Section 77 of
the Building Societies Act 1986, a resolution for its re-appointment
will be proposed at the Annual General Meeting.
The Directors who held office at the date of approval of this
Directors’ Report confirm that, so far as they are each aware, there
is no relevant audit information of which the Society’s auditor is
unaware; and each Director has taken all the steps that they ought
to have taken as a Director to make themselves aware of any
relevant audit information and to establish that the Society’s auditor
is aware of that information.
By order of the Board
John Maltby
Chair
25 May 2022
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Governance
Directors’ Report on
Corporate Governance
This is my first year as Chair of your Board and I am pleased to
present to you the Society’s report on Corporate Governance.
The Board is committed to high standards of corporate governance
and believes they are central to the Society’s culture and values.
The widely accepted articulation of good practice is the UK
Corporate Governance Code (the Code).
This Corporate Governance Report has been prepared in
accordance with the Principles of the UK Corporate Governance
Code. The Society is not required to comply with the Code, as it
applies to publicly listed companies, but where it is considered
relevant, the Society does have regard to its Principles. This Report
details the Society’s approach to corporate governance and,
where different to relevant Code Principles, explains why that is the
case.
For the financial year ending 31 March 2022 the Society met with
all the main Principles of the Code.
The 2018 Code’s Main Principles
What the Society does to meet the Principles
Board Leadership and Company Purpose
A successful company is led by an effective
and entrepreneurial board, whose role
is to promote the long-term sustainable
success of the company, generating value for
shareholders and contributing to wider society.
The board should establish the company’s
purpose, values and strategy, and satisfy
itself that these and its culture are aligned.
All directors must act with integrity, lead by
example and promote the desired culture.
The board should ensure that the necessary
resources are in place for the company to
meet its objectives and measure performance
against them. The board should also establish
a framework of prudent and effective controls,
which enable risk to be assessed and
managed.
In order for the company to meet its
responsibilities to shareholders and
stakeholders, the board should ensure
effective engagement with, and encourage
participation from, these parties.
The board should ensure that workforce
policies and practices are consistent with the
company’s values and support its long-term
sustainable success. The workforce should be
able to raise any matters of concern.
The principal functions of the Society’s Board include:
• Providing entrepreneurial leadership;
• Setting the Society’s strategic aims and risk appetite;
• Implementing and maintaining a framework of prudent and effective controls, which enables risk to be
assessed and managed;
• Ensuring the necessary financial and human resources are in place for the Society to meet its objectives;
and
• Reviewing management performance.
The Board meets as often as is necessary to fulfil its responsibilities. During the last financial year the Board
met on 10 occasions. Details of Director attendance at Board and Committee meetings can be found in the
table at the end of this Report. The minutes of Board and Committee meetings record all material discussion
and challenge, and are circulated to all Directors. The Chair of each Committee reports to the subsequent
Board meeting the key matters discussed.
A schedule of matters reserved to the Board is maintained and kept under regular review.
The Board is supported by a number of Committees each with Board approved terms of reference. Details
of the membership of those Committees and their key activities are reported elsewhere in this Report and
Accounts.
As a mutual, the Society does not have shareholders but is owned by its members; the Society seeks
feedback from members in a number of ways, including:
• Members’ ViewPoint events held around the branch network. Due to government restrictions these events
were not held for this financial year;
• Assessing enquiries from the Society’s contact centre and website;
• Analysing the quantity and nature of customer complaints;
• Customer research on specific topics;
• Customer satisfaction surveys ;
• Customer Panel to canvass views on products and services and give feedback on how the Society can
improve the way it operates;
• Member Council. A consultative group comprising of West Brom members whose purpose is to articulate
their views as a member of the Society back to the Society’s Board and Senior Leadership Team on
specific Board and Society matters; and
• Employee Council. A consultative group comprising of West Brom employees whose purpose is to
articulate views of the employees back to the Society’s Board and Senior Leadership Team.
Every member of staff has direct access to the Chief Executive by either email, phone or face to face. In
addition, the Society has an ‘Open Door’ (“Whistleblowing”) Policy which provides staff who may have serious
concerns about any aspect of the Society’s work, the ability to come forward and voice those concerns rather
than overlooking a problem. This process provides the opportunity for staff to leave an anonymous message
on a dedicated phone line. This policy has taken account of the Public Interest Disclosure Act 1998. During the
year, the Committee received a report summarising two reports received. The report was fully investigated
and was not regarding possible improprieties of financial reporting or other issues covered by the Public
Interest Disclosure Act 1998.
This section details how the
Society’s governance framework
operated during 2021/22.
64 65
Annual Report and Accounts
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Governance
The 2018 Code’s Main Principles
What the Society does to meet the Principles
Division of Responsibilities
The chair leads the board and is responsible
for its overall effectiveness in directing the
company. They should demonstrate objective
judgement throughout their tenure and
promote a culture of openness and debate.
In addition, the chair facilitates constructive
board relations and the effective contribution
of all non-executive directors, and ensures that
directors receive accurate, timely and clear
information.
The board should include an appropriate
combination of executive and non-executive
(and, in particular, independent non-executive)
directors, such that no one individual or
small group of individuals dominates the
board’s decision-making. There should be a
clear division of responsibilities between the
leadership of the board and the executive
leadership of the company’s business.
Non-executive directors should have sufficient
time to meet their board responsibilities.
They should provide constructive challenge,
strategic guidance, offer specialist advice and
hold management to account.
The board, supported by the company
secretary, should ensure that it has the
policies, processes, information, time and
resources it needs in order to function
effectively and efficiently.
The role of the Chair includes establishing and developing an effective Board to provide support and
constructive challenge to the management team.
The main responsibilities of the Chair are:
• Establish and develop an effective Board, including succession planning, recruitment and appraisal of
Non-Executive Directors (NEDs);
• Lead the Board as a team;
• Ensure that the Board has agreed clear values and guiding principles;
• Plan and manage the Board’s business, including ensuring that appropriate committees are established
with the right objectives and membership and that the Board has the right agenda and information;
• Ensure that the Board has established key priorities;
• Maintain and develop a productive and open relationship with the Chief Executive, agree the Chief
Executive’s objectives and carry out regular appraisals. The Chair is responsible for leading the
appointment process for the Chief Executive;
• Ensure there are appropriate arrangements for the evaluation and remuneration of senior executives;
• Act as an accountability focus for the Society, including chairing the Annual General Meeting;
• Represent the Society with Regulators and ensure that there is an open and trustworthy relationship; and
• Ensure that the Board and its Committees periodically evaluate their own performance.
The Board has satisfied itself that, both at the time of his appointment and during his tenure, the Chair was
independent in character and judgement and met the independence criteria set out in the Code.
The Chief Executive has overall responsibility for managing the Society and implementing Board agreed
strategy.
Board and Committee composition is kept under regular review by the Chair and the Nominations Committee
to ensure that it is of appropriate size, mix of Executive and Non-Executive Directors and has the right skills
and experience to oversee the Society’s business activities.
The positions of Chair and Chief Executive are held by different people.
The letter of appointment for Notified NEDs sets out that at least 30 days per annum is the expected time
commitment and explains what is required if there is any material change to their commitments. The time
commitment for the Chair and Chairs of Board Committees is expected to be much greater.
Board papers, including a management information pack, are issued to Directors prior to Board meetings.
Board agendas are agreed in advance of each meeting and focus on strategic matters, as well as ensuring
that Directors are kept informed of key business activities and regulatory developments.
Draft minutes of the previous Board meeting are included in the papers for the following meeting, for
approval. Approved minutes of all Board Committee meetings are also circulated to all Board Members.
Where appropriate, papers are presented by the relevant member of the management team.
The Board and its Committees are served by the Group Secretary who advises on governance matters and
procedures. Directors have access to independent professional advice should that be required.
Composition, Succession and Evaluation
Appointments to the board should be
subject to a formal, rigorous and transparent
procedure, and an effective succession plan
should be maintained for board and senior
management.
Both appointments and succession plans
should be based on merit and objective
criteria and, within this context, should
promote diversity of gender, social and
ethnic backgrounds, cognitive and personal
strengths. The board and its committees
should have a combination of skills,
experience and knowledge. Consideration
should be given to the length of service of the
board as a whole and membership regularly
refreshed.
Annual evaluation of the board should
consider its composition, diversity and how
effectively members work together to achieve
objectives. Individual evaluation should
demonstrate whether each director continues
to contribute effectively.
The Nominations Committee is responsible for the recruitment of all Board members as well as members of
the senior leadership team.
The Nominations Committee regularly reviews Board succession plans and uses a Skills Matrix as one of
the tools to identify future role needs. A self-assessment process using a Skills Matrix was completed during
the latter part of the financial year. The Society usually engages a professional recruitment firm to support
the recruitment process for all Board appointments. Three new appointments to the Board have been made
during this financial year, two NEDs and one Executive Director. The external recruitment firm Lygon was
engaged for the recruitment of the two NEDs and Warren Partners was engaged to conduct the assessment
of the Chief Risk Officer to join the Board as an Executive Director.
The Society has a range of induction activities and material for NED appointments which is tailored to their
individual experience. These include site visits, meetings with senior management and reports/information
concerning the Group’s operations. Internally organised events on topics of particular relevance to the Society
are used to aid development. NEDs are also encouraged to attend appropriate externally organised events.
A development log records relevant development activities undertaken by individual Directors.
As a principle, the Society requires that Board members serve a maximum of nine years except where this
may have a detrimental impact on the smooth running of the Board.
The Board believes that all NEDs should meet the Code’s independence criteria on appointment and
throughout their term of office and has determined that each of the current Directors is independent in
character and judgement and that there are no potential conflicts of interest which would affect their
judgement.
The Society adopts the approach of an externally led evaluation every three years supplemented by annual
internal evaluations in the intervening period. An externally led evaluation was conducted in the latter part of
the financial year culminating in a report with recommendations to the Board.
The 2018 Code’s Main Principles
What the Society does to meet the Principles
Audit, Risk and Internal Control
The board should establish formal and
transparent policies and procedures to ensure
the independence and effectiveness of internal
and external audit functions and satisfy itself
on the integrity of financial and narrative
statements.
The board should present a fair, balanced and
understandable assessment of the company’s
position and prospects.
The board should establish procedures to
manage risk, oversee the internal control
framework, and determine the nature and
extent of the principal risks the company is
willing to take in order to achieve its long-term
strategic objectives.
The Society’s Board is responsible for the development of strategies relating to risk management and internal
control. Operational responsibility rests with the Executive Directors and senior managers.
The risk management systems and internal controls are designed to allow the Society to achieve its objectives
in a controlled manner and remain within defined Risk Appetite Statements. These systems and controls are
designed to manage rather than eliminate risk.
The Board reviews the effectiveness of the risk management systems and internal controls in a number of
ways, including:
• Board review and approval of Risk Appetite Statements at least annually, with monthly reporting relating
to those statements;
• A formal committee structure, including an Audit Committee (see below for more detail) and a Risk
Committee. The minutes of the meetings of these Committees are reviewed by the full Board, the relevant
Committee Chair highlighting any key matters;
• Regular reports and presentations to the Board by the Executive Directors; and
• Monthly Board report on key business performance.
The Society’s Internal Audit function, with a dual reporting line to the Chief Executive and Chair of Audit
Committee, provides independent assurance regarding the adequacy and effectiveness of internal controls
across all Group activities. NEDs are involved in all key decisions and receive detailed management
information and reports to ensure they have a firm grasp of the Society’s business and external operating
environment.
The NEDs meet formally and informally without Executive Directors present.
The Board has both an Audit Committee and Risk Committee comprising only NEDs, all of whom are
considered independent according to the criteria contained in the Code. The Board is satisfied that at least
one member of each Committee has recent and relevant financial experience. The Chairs of the Audit
and Risk Committees receive additional fees in recognition of the additional responsibilities. The terms of
reference of the Committees are available from the Group Secretary on request.
The Society has a policy on the engagement of external auditors to supply non-audit services, which is
operated across the Group and in tandem with the external auditor’s own internal policy on providing
non-audit services. There have been four meetings of the Committee during the financial year 2021/22.
Executive Directors and other members of senior management (by invitation only) attended the meetings.
Those employees who regularly attend include the Chief Executive, Group Finance & Operations Director,
Group Secretary, Chief Risk Officer, Divisional Director Treasury & Finance and Divisional Director Internal
Audit. The Board receives regular reports on Committee meetings and also receives copies of the minutes of
these meetings.
During the last financial year, the Audit Committee:
• Validated the integrity of the Group’s financial statements (including formal announcements relating to
such statements);
• Reviewed and approved significant financial reporting judgements and accounting policies/issues;
• Reviewed the Group’s internal controls;
• Monitored and reviewed the effectiveness of the Group’s Internal Audit function;
• Reviewed the external auditor’s independence, objectivity and the effectiveness of the audit process,
together with the remuneration and terms of engagement;
• Confirmed that the Internal Audit function was appropriately resourced; and
• Met privately with the Divisional Director Internal Audit and the external auditor.
Remuneration
Remuneration policies and practices should
be designed to support strategy and promote
long-term sustainable success. Executive
remuneration should be aligned to company
purpose and values, and be clearly linked to
the successful delivery of the company’s
long-term strategy.
A formal and transparent procedure for
developing policy on executive remuneration
and determining director and senior
management remuneration should be
established. No director should be involved in
deciding their own remuneration outcome.
Directors should exercise independent
judgement and discretion when authorising
remuneration outcomes, taking account of
company and individual performance, and
wider circumstances.
The Board has established a Remuneration Committee, comprising only NEDs, which considers and makes
recommendations to the Board on key remuneration decisions relating to Society staff who have been
identified in the FCA’s Remuneration Code as Code Staff.
The Directors’ Remuneration Report on pages 72 to 83 explains how the Society, through the Remuneration
Committee and Board, approaches the remuneration of Directors and other executives.
The Society is subject to the FCA’s Remuneration Code, requiring the Society to have a remuneration policy
which promotes effective risk management, supports business strategy, objectives and values, and is in the
long-term interests of the Society.
During the last financial year, the Remuneration Committee:
• Reviewed the Society’s Remuneration Policy;
• Recommended to the Board the Performance-Related Pay Scheme and awards under that Scheme;
• Reviewed employee benefits arrangements;
• Made recommendations to the Board in respect of the annual salary review;
• Reviewed the employee benefits package; and
• Reviewed the terms of appointment and benefits of Code Staff.
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Meetings of the Nominations Committee
The Nominations Committee, which is chaired by the Society’s Chair, met on 4 occasions in the last financial year. The key matters
considered by the Committee were:
• Membership of Board committees;
• Board performance evaluation arrangements;
• NEDs reaching the end of their three year term of office;
• NED development;
• Board succession planning, including NED recruitment; and
• Training, development and succession planning of the wider leadership team.
The terms of reference of the Committee, which is made up of NEDs only, is available on request from the Group Secretary.
The attendance of individual Directors during the year, with the number of meetings each was eligible to attend shown in brackets, is set
out below.
John Maltby
Chair
25 May 2022
Attendance records –
Board and Board Committee meetings
Board Nominations Audit Risk Remuneration
John Maltby
10 (10) 4 (4) 1 (1) 4 (4)
Julie Hopes
10 (10) 4 (4) 3 (3) 2 (3) 6 (6)
Victoria Mitchell
10 (10) 1 (1) 8 (8) 3 (3)
Ashraf Piranie
10 (10)
Mark Preston (retired 28/07/21)
4 (4) 2 (2) 1 (1) 2 (3) 3 (3)
Lynne Shamwana
10 (10) 2 (2) 4 (4) 8 (8) 3 (3)
Jonathan Westhoff
10 (10)
David Thomas
10 (10) 4 (4) 8 (8) 3 (3)
Manjit Hayre (joined 01/09/21)
6 (6)
Dave Dyer (joined 01/09/2021)
6 (6) 3 (3) 5 (5)
Anne Gunther (joined 01/11/21)
4 (4) 3 (3) 2 (2)
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Governance
Audit Committee Report
Membership and attendees
The Audit Committee is appointed by the Board and, at 31 March 2022, comprised four Non-Executive Directors:
The Chair, Chief Executive, Group Finance & Operations Director,
Chief Risk Officer, Group Secretary, Divisional Director Treasury &
Finance, the external auditor and Divisional Director Internal Audit
also attend by invitation.
The Board is satisfied that the Committee has members with recent
and relevant financial experience.
The Committee met four times during the year, with attendance as
detailed on page 66. In addition, the Committee met privately with
the external auditor and the Divisional Director Internal Audit.
Roles and responsibilities
The roles and responsibilities of the Committee are in line with the
provisions of the Financial Reporting Council (FRC) Guidance on
Audit Committees (the ‘Smith Guidance’).
The main function of the Committee is to assist the Board in fulfilling
its oversight responsibilities in relation to:
• the provision of assurance to the Board regarding the integrity
of the financial statements of the Society, including its annual
and any interim reports, reviewing significant financial reporting
issues and judgements which they contain. Where Board
approval is required for other statements containing financial
information (for example significant financial returns to
regulators and release of price sensitive information), whenever
practicable the Audit Committee should review such statements
first (without being inconsistent with any requirement for prompt
reporting under the Listing Rules or Disclosure and Transparency
Rules);
• assessing the adequacy and effectiveness of the Society’s
internal controls and risk management systems (including
conduct risk);
• reviewing and approving the statements to be included in the
Annual Report concerning internal controls and risk
management;
• reviewing the Society’s arrangements for its employees to raise
concerns, in confidence, about possible wrongdoing in financial
reporting or other matters. The Committee shall ensure that
these arrangements follow proportionate and independent
investigation of such matters and appropriate follow up action;
• monitoring and reviewing the effectiveness of the Society’s
Internal Audit function in the context of the Society’s overall risk
management system;
• approving the appointment and removal of the Divisional
Director Internal Audit, and making recommendations regarding
performance objectives and remuneration to the Society’s
Remuneration Committee as required;
• considering and approving the remit of the Internal Audit
function and ensuring it has adequate resources and
appropriate access to information to enable it to perform its
function effectively and in accordance with the relevant
professional standards. The Committee shall also ensure the
function has adequate standing and is free from management
or other restrictions;
• reviewing and assessing the Internal Audit plan;
• considering and making recommendations to the Board, to be
put to members for approval at the Annual General Meeting
(AGM), in relation to the appointment, reappointment and
removal of the Society’s external auditor. The Committee shall
oversee the selection process for new auditors and if an auditor
resigns, the Committee shall investigate the issues leading to
this and decide whether any action is required;
• monitoring the effectiveness of the Society’s external auditor,
including (but not limited to):
• approval of their terms of engagement, including any
engagement letter issued at the start of each audit and the
scope of the audit;
decisions
reached
KEY
During the year, the Committee:
• Reviewed and approved significant financial reporting judgements and accounting policies/issues;
• Validated the integrity of the Group’s financial statements (including formal announcements relating to such statements);
• Monitored and reviewed the effectiveness of the Group’s Internal Audit function; and
• Reviewed the external auditor’s independence, objectivity and the effectiveness of the audit process, together with the
remuneration and terms of engagement.
David ThomasDave DyerJulie HopesLynne Shamwana (Chair)
This report sets out the work
carried out by the Audit
Committee throughout 2021/22.
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Annual Report and Accounts
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Governance
• approval of their remuneration, whether fees for audit or
non-audit services, and ensuring that the level of fees is
appropriate to enable an adequate audit to be conducted;
• reviewing the results of the latest FRC annual inspection in
respect of PricewaterhouseCoopers (PwC);
• assessing annually their independence and objectivity taking
into account relevant UK professional and regulatory
requirements and the relationship with the auditor as a
whole, including the provision of any non-audit services; and
• reviewing and approving in accordance with policy, any
proposed employment of employees or former employees
of the Society’s auditor.
The minutes of the Audit Committee are distributed to the Board,
and the Committee Chair provides a verbal report to the Board
meeting immediately following Committee meetings.
A copy of the Audit Committee terms of reference can be obtained
from the Group Secretary, on request.
Areas of focus for the Committee in the year
The Committee has an annual schedule, developed from its terms
of reference, with standing items that it considers at each meeting
in addition to any specific matters upon which the Committee has
decided to focus. The work of the Audit Committee falls under three
main areas as follows:
a) Financial reporting issues and judgements
The Committee considers the financial information published in the
Group’s annual and half year financial statements including the
accounting policies adopted by the Group, presentation and
disclosure of the financial information and, in particular, the key
judgements made by management in preparing the financial
statements. The Committee focuses its attention on matters it
considers to be important by virtue of their impact on the Group’s
results, and particularly those which involve a high level of
complexity, judgement or estimation by management.
The Committee also takes note of the audit procedures conducted
by the external auditor, PwC, with a view to ensuring that suitable
accounting policies have been implemented and appropriate
judgements have been made by management.
The key matters that the Committee considered in reviewing the
2021/22 financial statements are outlined below.
• Loan impairment provisions
For each mortgage portfolio in the scope of IFRS 9, the Committee
confirmed the suitability of the approach to calculating expected
credit losses. This included the treatment of accounts in receipt of
a payment deferral, the judgements included within the
calculation of Post Model Adjustments (PMAs) and the updates to
the macro-economic scenarios. For the commercial book, up to
date sector analysis, exposure and provision coverage was
considered, especially for sectors considered ‘at risk’. The
Committee had the opportunity to review and challenge the
impairment model assumptions, including probability-weighted
forecasts of future economic conditions (with sensitivity analysis)
and, for the non-core commercial loan book, account-specific
scenario data. Furthermore the Committee has reviewed the
credit risk disclosures. Based on this review, the Committee
agreed that the loss provision requirements were suitably
calculated and adequately disclosed.
• Income recognition
In accordance with IFRS 9, the Group applies the effective
interest method to recognise mortgage interest at a constant
yield over the expected behavioural lives of the loans, with the
key assumption being the expected loan redemption profile.
The Committee reviewed analysis comparing key model
assumptions with observed data, in order to determine that
interest has been appropriately recognised in the financial
statements. The Committee reviewed the change to model
assumptions implemented during the year, including the
supporting rationale. The Committee also considered the
population of fees captured within the effective interest rate
calculations.
• Investment property valuations
The Group applies IAS 40 ‘Investment Properties’ under which
the residential properties held by the Society’s subsidiary, West
Bromwich Homes Limited, are measured at fair value. The Audit
Committee has reviewed the methodology adopted to
determine the fair value of the properties, including the impact
of valuation adjustments, and concluded that the carrying value
of the portfolio at the year end date is appropriately supported
by market data and a sample validation exercise conducted by
an independent firm of specialist valuers.
• Financial instruments at fair value through profit or loss
and hedge accounting
Following the rules and guidance of IAS 39, the Society applies
hedge accounting to qualifying hedge relationships. The
Committee has reviewed the hedging requirements and
changes made to the hedge accounting processes as a result
of previous external audit findings.
• Deferred taxation
Following a detailed evaluation of the Group’s Medium Term
Plan, the Committee confirmed that the year end deferred tax
asset, in relation to carried forward tax losses, has been
recognised at an amount expected to be recoverable against
future taxable profits.
• Defined benefit pension liability
With respect to the Society’s funded defined benefit pension
scheme, the Audit Committee considered the key actuarial
assumptions, as disclosed in note 31 to the accounts, and
deemed them suitable for calculating the retirement benefit
obligation at 31 March 2022. Based on information provided by
the qualified independent actuary, the Committee is satisfied
that an appropriate allowance has been made for the
equalisation of Guaranteed Minimum Pension benefits between
males and females, an obligation falling on all UK defined
benefit schemes during the year.
• Accounting standard updates
The Committee confirmed the reasonableness of the disclosures
with regards to new or amended accounting standards.
• Going concern and viability statement
The Committee performed a thorough review of evidence
supporting the going concern and longer-term viability
assumptions, including adjustments made to assumptions in
light of the ongoing economic uncertainty. In doing so, it
examined the Group’s strategy and business model, together
with capital and liquidity adequacy assessments under current
market conditions and stressed scenarios. Thereafter the
Committee approved the preparation of the accounts on a
going concern basis and considered the longer-term viability
statement given in the Directors’ Report to be appropriate.
• Fair, balanced and understandable
The Committee considers that the Annual Report and Accounts,
taken as a whole, are fair, balanced and understandable and
provide the necessary information for members to assess the
Group’s position, performance, business model and strategy.
• External audit
The Committee considered matters communicated by the
statutory external auditor and concluded that no material
adjustments to the financial statements were required.
b) Risk and internal control
The Society recognises the importance of effective risk management
and strong systems of internal control in the achievement of its
objectives and the safeguarding of its assets, and also facilitates
the effectiveness and efficiency of operations, which help to ensure
the reliability of internal and external reporting and assist in
compliance with applicable laws and regulations. The Society
operates in a dynamic business environment and, as a result, the
risks it faces change continually. Management are responsible for
designing the internal control framework to ensure thorough and
regular evaluation of the nature and extent of risk and the Society’s
ability to react accordingly. Management are also responsible for
implementing the Board’s policies on risk and control, noting that
all employees are responsible for internal control as part of their
individual objectives.
Further details of actual risk management practices are provided in
the Risk Management Report on pages 36 to 49. Through the
Committee, the Society’s Internal Audit function provides
independent assurance to the Board on the effectiveness of the
internal control framework. The information received and
considered by the Committee during the 2021/22 financial year
substantial assurance that there were no material breaches of
control and that, overall, the Society maintained an adequate
internal control framework that met the principles of the UK
Corporate Governance Code.
Internal Audit utilise the services of external specialists for support
in providing assurance in technical areas, primarily, Information
Technology and Treasury. The Divisional Director Internal Audit
reports to the Chair of the Committee, and the Committee is
responsible for agreeing the annual budget for Internal Audit, in
addition to ensuring that the function retains adequate skills and
resource levels that are sufficient to provide the level of assurance
required.
The Audit Committee approves the Internal Audit plan of work,
including subsequent amendments, which is prepared on a risk
based approach by Internal Audit and reflects input from
management and the Committee. The Committee reviews the
work of, and output from, Internal Audit, in addition to progress
against the agreed plan of work. Internal Audit provides the
Committee with reports on material findings and recommendations
and updates on the progress made by management in addressing
those findings.
The Committee also reviews periodically the use of the confidential
reporting channel in the Society. Awareness of ‘whistle blowing’
arrangements is maintained through internal communication and
is covered as part of employees’ induction and ongoing
development.
As part of the external audit process, PwC performs testing over
certain controls supporting the preparation of the financial
statements, and reports any deficiencies to the Audit Committee.
The Audit Committee takes note of control deficiencies reported
and management resolution of these.
The Committee recommends an External Quality Assessment (EQA)
of Internal Audit every three years. A review was carried out during
the financial year, by an external body appointed by the Committee.
In performing their review, information was gathered from a variety
of sources including interviews with key business stakeholders,
workshops with the Internal Audit team, and a review of key
documentation covering all aspects of the Internal Audit function
(including file reviews). An external assessment of Internal Audit’s
readiness to comply with the Chartered Institute of Internal Auditors
recommendations on ‘Effective Internal Audit in the Financial
Services sector’, issued in July 2013 (and updated in September
2017), was also included.
The review concluded that the Internal Audit function generally
conforms to the Standards, which is the highest rating.
c) External auditor
PwC are in their second year as the Society’s external auditor.
The Committee regularly monitors the Society’s relationship with
the external auditor and has adopted a framework for ensuring
auditor independence and objectivity, which defines unacceptable
non-audit assignments, pre-approval of acceptable non-audit
assignments and procedures for approval of other non-audit
assignments across the Society.
Details of the fees paid to the external auditor for audit and non-
audit services are set out in note 6 to the Accounts.
The Committee assesses the effectiveness of the external auditor
annually, immediately after the completion of their year end audit,
the results of which are reported to and discussed at the next
appropriate Committee meeting. This assessment is facilitated by
the Group Secretary and is discussed, initially, without the presence
of the auditor in the meeting. The Committee considers that the
relationship with the auditor is working well and is satisfied with
their effectiveness and independence.
Audit Committee effectiveness
The effectiveness of the Committee was assessed by an external
firm during the year. The scope of this review considered time
management and composition, Committee processes and support,
the work of the Committee and future priorities. This review
concluded that the Committee operated effectively. An internal
review is conducted in the years there is no external review.
Committee members are expected to undertake relevant training as
part of their ongoing development and, periodically, the Committee
as a whole receives training on current topics.
On behalf of the Board
Lynne Shamwana
Chair of Audit Committee
25 May 2022
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Governance
Directors’ Remuneration Report
Annual Statement by the Chair of the
Remuneration Committee
As Chair of the Remuneration Committee, I am pleased to present
the Directors’ Remuneration Report. This report includes our
Remuneration Policy, details of pay and benefits for our Executive
Directors and fees paid to Non-Executive Directors.
The COVID-19 pandemic has continued to represent the backdrop
for much of the Society’s 2021/22 financial year but the uncertain
operating environment created by the pandemic has become
business as usual and, as such, no COVID-19 specific objectives
were set for the year. Notwithstanding this, business objectives
have been delivered with the safety of colleagues and members
as the overriding factor.
Excellent service to our members has remained as the Society’s
driving force throughout the year and rather than being a limiting
factor, the pandemic has presented an opportunity to provide
more flexibility to members and colleagues alike. Adherence to the
government’s COVID-19 regulations and guidance has been
rigorously maintained during the year and this, along with
additional protections, has ensured safe delivery to customers.
The physical, mental and financial wellbeing of colleagues has
been a key focus; colleagues have continued to be fully supported
through the various periods of lockdown and self-isolation through
the year, along with time off for vaccinations. The Society has an
extensive list of accredited Mental Health First Aiders, along with
an external confidential helpline colleagues can use to support
them through challenges.
Flexibility is becoming a more permanent feature of working lives
and along with supporting colleagues, this enhances the offering
to members as the Society is able to offer greater variation in
access to services. Hybrid working means that where the role
permits, colleagues can choose where they work; the overriding
principle is that what is best for our customers comes first. The
health and safety considerations for hybrid working have been
embedded through the year, with thorough assessments of office
and remote working environments which also ensures seamless
and safe delivery to our members.
Engagement, feedback and communication with all stakeholder
groups is central to the Society’s philosophy; one of the ways that
colleagues’ views are obtained is via surveys. This year a new
approach to surveys has been launched; an annual survey will be
undertaken where the same questions are asked year on year,
which will enable better tracking and comparison of how people
are feeling. The first iteration was undertaken in December and it
is pleasing to report that the results were extremely positive, with
constructive comments to support continual improvement of how
we work and in creating a positive, inclusive working environment
for all colleagues.
Turning to a review of the 2021/22 financial year, the Board
continued to adopt voluntarily the relevant requirements of the UK
Corporate Governance Code (the Code). The ratio of the Chief
Executive’s pay to the wider colleague population has again been
published. A salary benchmarking review was undertaken for
every role in the Society, against the market rate for that role,
ensuring that we pay fairly and competitively for the level of
responsibility of every position. We are committed to paying all our
employees the real living wage as an absolute minimum.
The tables marked ‘audited’ in this report meet the requirements of
the Building Societies Act 1986. The report also complies with EU
Capital Requirements Directive V and the detailed requirements of
the Financial Conduct Authority’s (FCA’s) Remuneration Code (the
Remuneration Code). Details of the Remuneration Code can be
found at www.fca.org.uk.
Under the Remuneration Code, the Society is required to identify
those staff who are considered to have a material impact on the
Society’s risk profile (Code Staff). This includes all Executive and
Non-Executive Directors and all members of the Society’s Executive
Committee (ExCo). The key focus of the Remuneration Committee is
to set the Remuneration Policy for the pay and benefits, including
performance-related pay, for such Code Staff. It also has oversight
of reward practices for all other employees to ensure alignment to
the Society’s culture, and the Policy for Executive Directors.
This section explains our
approach to rewarding
Directors and colleagues.
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Annual Report and Accounts
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Governance
This report is presented in two sections:
• The Remuneration Policy – setting out the Remuneration
Committee’s forward-looking Policy with regard to pay and
benefits. The Society continues to strive to create an inclusive
environment where diversity in all forms is encouraged and that
the Society’s Remuneration Policy is inclusive in both its design
and practice.
• The Annual Remuneration Report – detailing the amounts
earned by Directors in respect of the financial year ended 31
March 2022 and how the Policy will operate for the year ending
31 March 2023.
All eligible members receive a copy of the Remuneration Report
and are entitled to participate in the advisory vote on the Annual
Remuneration Report at the 2022 AGM.
The Chief Executive’s Review reported that the Society performed
strongly in 2021/22, with statutory profit before tax of £23.2m, an
increase of 393% over the previous year. New residential lending
has contributed to a 2% increase in the residential owner occupied
book, while the Society’s exposure to riskier commercial lending, a
legacy exposure that is in run-off, was down 13% year on year. This
commercial exposure has reduced by 79% since the strategy was
introduced in March 2008.
Salary increases
The Society introduced a revised approach to pay and reward for
employees in 2020, ensuring all roles were externally benchmarked
for salary. As a result, salary changes in 2022 have been focused
on ensuring employees are appropriately paid taking into account
the market rate for their role and delivering a consistent approach
to pay throughout the organisation. There has been particular
pressure in the labour market this year, coupled with rising inflation
and it should be noted that both of these points are factored into
the benchmarking that is performed using external data. On this
basis, salary increases for eligible employees ranged between 0%
and 20%.
Consistent with this approach, a recent independent benchmarking
exercise of Executive Directors’ remuneration was undertaken by
our new Remuneration Advisor, FIT Consultants. As has been
reported in recent years, the overall remuneration of the Executive
Directors has not kept pace with the market. This year the
benchmarking demonstrated that the salaries of the Chief Executive
and the Chief Risk Officer were materially lower than the comparator
groups and that of the Group Finance & Operations Director was
broadly in line with comparator groups.
The drift from the average for the Chief Executive was exacerbated
by the voluntary action taken by the Executive Directors to waive
their 2.5% pay increase in 2020/21 given the uncertainty regarding
the potential economic impact of the pandemic at that time (March
2020). Consequently, reflecting the benchmarking information, the
performance of the Society under the Executive Directors’
leadership, and to ensure that remuneration keeps pace with the
market, the Remuneration Committee has agreed the following
pay increases for the Executive Directors:
• Chief Executive 9.5%;
• Group Finance & Operations Director 3.4%; and
• Chief Risk Officer 18.5%.
Furthermore, the pension allowances of the Chief Executive and
Group Finance & Operations Director will reduce by a further 4.4%
to 10.6% in 2022/23, thereby completing the planned alignment to
the maximum allowance for all employees of 10.6%, but also
presenting a challenge to total remuneration levels.
Performance-related pay awards
The Executive Director performance-related pay award payable to
the Executive Directors generated the following awards:
• Chief Executive 42.1%;
• Group Finance & Operations Director 38.1%; and
• Chief Risk Officer 37.8%.
These payments reflect the delivery of both personal and Society
objectives including financial, risk, customer and people measures.
These payments are being made based on the strong performance
of the Executive Directors through another year of considerable
uncertainty (both economic and operational) as a result of the
pandemic. Further detail on the Society objectives is provided
within page 81 of this report.
Deferred performance-related payments in relation to 2018/19,
2019/20 and 2020/21 for the Chief Executive, Group Finance &
Operations Director, and former Group Finance & Operations
Director have been approved for payment since the end of the
2021/22 financial year.
The Committee has, once again, not exercised its discretion in the
Policy to increase the maximum performance-related pay award
to 75% of basic salary. This will remain at 50% of salary for
2022/23.
Fees for the Chair and other Non-Executive Directors were reviewed
for the 2021/22 financial year and no increases were applied.
Non-Executive Director fees (other than the Chair) have remained
unchanged for the last eleven financial reporting periods. FIT
Consultants completed a recent review for the Non-Executive
Directors for the 2022/23 financial year and based on the
benchmarking data, whilst the standard fee for a Non-Executive
Director role will remain unchanged for the twelfth reporting
period, fees for the Chair and Chairs of Board Committees will
increase by £5,000 to reflect market benchmarking for their
additional responsibilities as Chair or Board Committee Chair.
Gender and ethnicity pay
In September 2021 the Society published its updated report on
gender and ethnicity pay gaps. The Society was pleased to be
amongst the first of the financial services firms to voluntarily publish
its ethnicity pay gap, shining a light on important issues. Addressing
the drivers of the pay gaps remains a key focus for the Society. Key
to this is achieving a greater gender and ethnicity balance across
the Society’s pay range. It is pleasing to note the number of female
and ethnic minority employees who are regarded as successors
for senior positions. A full copy of the report can be found on the
Society’s website at www.westbrom.co.uk.
Julie Hopes
Chair of Remuneration Committee
25 May 2022
76 77
Annual Report and Accounts
Year ended 31 March 2022
Governance
Remuneration Committee membership and responsibilities
Membership
The current members of the Remuneration Committee are:
All members of the Committee are Non-Executive Directors. Under
the Committee’s Terms of Reference, at least one member of the
Committee must also be a member of either the Risk Committee or
Audit Committee. The current composition of the Committee
complies with this requirement.
The Society’s Chief Executive, Group Secretary and Divisional
Director Human Resources attend meetings by invitation.
Responsibilities
The Committee is responsible for setting the Policy on remuneration,
overseeing its implementation and making recommendations to
the Board in respect of remuneration arrangements for Executive
Directors and other Code Staff.
Following each meeting, the Chair of the Committee reports to the
Board on all substantive issues discussed.
The Committee is required to meet at least twice a year. During the
year there were six meetings.
The Committee considered the following matters during the year:
• Determining the pay and benefits of Executive Directors, the
Chair, Code Staff and other senior managers, with consideration
for the increase in general basic salary for the wider colleague
population, recommending such to the Board for approval,
where appropriate;
• Determining the budget for salary and performance-related
pay for employees, including monitoring the effectiveness of a
revised approach to pay, reward and recognition introduced in
2019, aligned with the ethos of a mutual organisation and the
Society’s overarching Purpose;
• Determining the level of performance-related pay in relation to
the 2021/22 financial year and deferred awards due during the
year for Code Staff and recommending to the Board for
approval;
• Recommending to the Board, the Society and individual
performance-related pay objectives for Code Staff in relation to
the 2022/23 financial year;
• Considering the approach to be adopted in respect of disclosure
requirements in relation to this report; and
• Considering the approach for the Gender Pay Regulations and
Ethnicity Pay Gap data.
The Committee receives annual confirmation jointly from the Chief
Risk Officer and the Divisional Director Internal Audit that no activity
or behaviour by any individual has been identified or observed
which should affect their eligibility to participate in performance-
related pay arrangements. Confirmation of such has been received
this year.
The Terms of Reference for the Committee were last updated in
November 2021. The Terms of Reference are available on request
from the Group Secretary.
Advisors
The Remuneration Committee seeks the advice of independent,
external consultants, as required. During the 2021/22 year the
Committee commissioned FIT Consultants to undertake a thorough
benchmark of remuneration for Executive Directors.
Broader stakeholder views
As a mutual, we are committed to taking on board the views of our
members and employees, ensuring the topics discussed at the
Board are inclusive of these broader stakeholder perspectives. This
also applies to remuneration practices, and during the year the Chair
of the Remuneration Committee held discussions with the Member
and Employee Councils in respect of Executive Director remuneration,
seeking views on application of the Policy for 2022/23. The resultant
views expressed were communicated to the Remuneration
Committee, to ensure the views of the Society’s broader stakeholders
were taken into account as part of decision making.
Section 1 – The Remuneration Policy
Background
The Remuneration Policy (the Policy) provides the framework for the
Committee to make remuneration decisions and recommendations
to the Board in relation to Executive Directors and other Code Staff.
The Policy is designed to promote appropriate behaviours and
practices consistent with the Society’s risk appetite.
The approach of the Remuneration Committee is to ensure that
Executive Directors’ remuneration is designed to promote the long-
term success of the Society, with full consideration of other
stakeholders such as members, employees and regulators.
Remuneration decisions are made on the basis of total
compensation comprising salary, performance-related pay and
benefits, ensuring an appropriate balance between the fixed and
variable components of remuneration. The variable element of the
remuneration package creates flexibility to allow for changes in
current and future performance.
The Society’s remuneration principles are as follows:
• The Policy is in line with the strategy, objectives and values of
the Society, thereby aligning it with both short and long-term
interests;
• The policies, procedures, remuneration practices and
performance-related payment schemes are consistent with the
promotion of good and effective risk management and are
structured in such a way as to discourage risk taking which is
outside the Society’s risk appetite;
• The Society’s focus is on improving the underlying business
position where management can influence performance. The
Society’s performance-related pay schemes may therefore
exclude the impact of specific one-off items which would be
agreed at the outset by the Society’s Board following a
recommendation by the Remuneration Committee;
• All remuneration packages are designed such that the Society
can attract and retain high calibre individuals;
• Performance measures for individuals are challenging and
robust, and measured on a consistent basis; and
• Performance-related pay is performance dependent, 40% of
which is deferred over a four year period, to allow the
Remuneration Committee to review whether the payment
remains appropriate, and providing the ability to reduce or
cancel the payment. The Committee also has discretion to
recover payments previously made (clawback), should
information come to light subsequent to the payment being
made, that would have resulted in the Committee withholding
the payment, had this information been known.
The Policy follows, as a minimum, regulatory requirements and
good corporate governance practices.
Remuneration Policy and Practice
Components of remuneration
The table below describes the Society’s Policy with respect to each element of pay for Executive Directors:
Component
Operation and performance metrics
OpportunityBasic salary
Fixed remuneration set to
attract and retain Executives of
sufficient calibre through the
payment of competitive rates.
Reviewed annually (or more frequently if required).
Influencing factors include: role and experience, personal
performance, salary increases awarded across the Society,
and benchmarking comparisons against organisations of a
similar size/complexity, and roles of similar responsibilities.
Set at a level considered appropriate, taking into account the
relevant factors tabled. The Committee considers very carefully
any pay awards which do not reflect the wider increases
across the Society and will only make them where there is a
clear commercial rationale for doing so.
Performance-related pay
Linked to the delivery of Society
and personal objectives. Used
to reward Executive Directors
within the context of achieving
the Society’s goals and
objectives.
40% of the performance-related pay earned is deferred over a
four year period from 2021/22 (previously three years). Deferred
payments are made in equal instalments over the following four
years, are subject to annual review and recommendation by the
Committee and require approval by the Non-Executive members
of the Board. The Committee has discretion to make a reduction in
the level of award (down to zero) or recover awards if necessary
including withholding vested awards (malus arrangements) and
recovering payments (clawback arrangements) in line with
relevant regulation, which from April 2021 is for a period of seven
years for Executive Directors, and five years for deferred
payments/one year for non-deferred payments for Divisional
Directors after the award is paid (previously this ‘clawback’
arrangement was for a three year period for all Code Staff). The
annual review prior to payment of a deferred element will take
into account a number of factors, making sure management has
operated within the risk appetite of the Society, not exposed the
Society to regulatory or control failings, or taken other such actions
that would represent a poor outcome for members.
All awards are non-pensionable.
Based on a number of measures, including: financial, customer,
people, risk and new and enhanced operational capabilities.
Reviewed by the Committee annually to ensure that the measures
are appropriate.
The Committee has the discretion to allow maximum annual
opportunity of 75% of basic salary (as approved by voting
members at the 2018 AGM). However, the maximum
opportunity for 2022/23 remains at 50% of basic salary.
decisions
reached
KEY
• The Committee decided that the Society would voluntarily publish its ethnicity pay gap alongside its gender pay gap,
demonstrating a commitment to equity throughout the Society.
• The Committee appointed a new Remuneration Advisor (FIT Consultants) to ensure the robustness of the benchmarking
exercise that is undertaken on Director remuneration.
• The Committee reached decisions about the key aspects of Directors’ remuneration, with the input of key stakeholder
groups, to support the ongoing strength of the firm.
Julie Hopes (Chair) John Maltby Victoria Mitchell
David Thomas
Anne Gunther
78 79
Annual Report and Accounts
Year ended 31 March 2022
Governance
Recruitment Policy for Executive Directors
The appointment of an Executive Director could be either an
internal or external appointment. In principle, the Society would
look to provide no additional benefits to a new Director than those
provided to an existing Director.
The approach is to offer a package that is sufficient to recruit an
individual of sufficient calibre, but to pay no more than is necessary
to attract the appropriate candidate.
Component Application
Basic salary
A Director would receive an amount
commensurate with their experience and
responsibilities.
Benefits
A Director would receive comparable benefits to
existing Directors, although if required to attract
the right candidate these may be widened to
include additional benefits, such as a relocation
allowance.
Component Application
Performance-related pay
The maximum performance-related award
would be in line with current Policy, unless the
market rate required to recruit the individual
supported a higher amount. In any event, this
would be no more than what is considered
commercially justifiable.
Pension or pension
allowance
An Executive Director would have the option to
join the Society’s stakeholder pension scheme
or to receive a cash allowance up to the
maximum pension contribution available to all
employees, which is 10.6% of salary (with the
cash allowance option subject to deduction of
tax and national insurance).
Recruitment
compensation
Compensation arrangements are only
considered if the new Director was required to
forego an arrangement from their previous
employer. In such instances the award would
be no more in terms of amount than the award
due to be foregone. The timing and vesting
requirements of any payment would be
replicated as far as possible.
Whilst Non-Executive Directors do not participate in any performance-related pay scheme, their overall performance is reviewed annually
by the Chair.
*The UK Corporate Governance Code, updated in July 2018, includes a provision that pension contributions for Executive Directors, or payments in lieu, should be
‘aligned with’ those available to the workforce.
The table below shows the Policy for Non-Executive Directors:
Component
Operation and performance metrics
OpportunityPension or pension
allowance
A part of fixed remuneration
intended to attract and retain
Executive Directors of sufficient
calibre.
Executive Directors are invited to join the Society’s stakeholder
pension plan or, as an alternative, be provided with a cash
allowance (for example, where they have exceeded the
annual or lifetime allowance).
For all Executive Directors, a pension contribution or cash
allowance equal to the maximum pension contribution available
to all other employees (for 2022/23 10.6%)*.
Benefits
A part of fixed remuneration
intended to attract and retain
Executive Directors of sufficient
calibre.
Executive Directors receive benefits in line with market
practice, which include a fully expensed car or cash
allowance, private medical care for themselves and their
family, and life assurance (4 X basic salary). Other benefits
may be provided in individual circumstances.
Set at a level considered appropriate, as part of a review of total
compensation arrangements.
Component Operation Application
Fees
To attract and retain Non-
Executive Directors of the right
calibre for the Society.
Fees are reviewed annually for Non-Executive Directors by the
Chair and Executive Directors. Fees for the Chair are
recommended by the Remuneration Committee and approved
by the Board. The Chair is not present when these fees are
discussed or approved.
Fees are set at a level to attract individuals with the appropriate
knowledge and experience and to reflect the responsibilities
and time commitment for Board and Board Committees, taking
into account market practice.
Reimbursement is also made for reasonable travel expenses
for attending meetings/Society business.
The Remuneration Committee has the right to exercise discretion
within the Policy, and recommend to the Board an override of any
formulaic approach laid out in the Performance-Related Pay
Scheme Rules should it be deemed appropriate in line with good
corporate governance.
In recommending remuneration arrangements for new hires, the
Committee will consider the value of the total package on offer
compared to similar positions in the market, the structure of the
remuneration and the experience of the candidate, to ensure that
arrangements are in the best interests of both the Society and its
members, without paying in excess of what is deemed necessary
to recruit a Director of the required calibre.
Recruitment Policy for Non-Executive Directors
As with Executive Directors, the approach is to offer a package that
is sufficient to recruit an individual of sufficient calibre, but to pay no
more than is necessary to attract the appropriate candidate.
Component Application
Fees
A new Non-Executive Director would receive
fees. The level of fees would be set at a level
commensurate with the Director’s experience
and responsibilities and with due regard to the
fees of other Non-Executive Directors.
Service contracts
The terms and conditions of employment for Executive Directors
are detailed in their service contracts. The contract is terminable
with twelve months’ notice if given by the Society or six months’
notice if given by the Director.
Non-Executive Directors do not have service contracts and instead
have letters of engagement which set out their time commitments
and responsibilities.
Policy on payment for loss of office
The approach is to pay no more than is necessary in such
circumstances. Since 2012, the Society’s Policy is for new contracts
to require Executive Directors to mitigate the Society’s loss in the
event of receiving a ‘loss of office’ payment.
Component Application
Salary and benefits
A termination payment would be on the basis
of the relevant notice period. There would be no
payment in the event of misconduct or poor
performance.
Performance-related pay
Any performance-related pay awards would be
made solely at the discretion of the Committee.
Any deferred awards would remain payable in
future years subject to the normal rules of the
Scheme, including possible reduction or
cancellation.
Employment conditions elsewhere in the Society
The pay and benefits of employees are considered annually by the
Committee, which also determines the amount of general
performance-related pay. The Society, subject to eligibility, offers a
comprehensive range of benefits to employees, including pension,
life assurance, health care, employee car scheme and
performance-related pay. From April 2020 a revised approach to
pay and reward was implemented, with a review of salary for each
employee based on robust external benchmarking, taking into
account the market rate and level of responsibility for each role.
From April 2022, base salaries have increased between a range of
0% to 20%.
Remuneration scenarios
These charts show the breakdown of the component parts of the
remuneration package for Executive Directors for 2021/22 on the
following basis:
• Fixed remuneration – comprising of basic salary, pension and
benefits.
• Target remuneration – the anticipated annual remuneration
incorporating a performance-related award.
• Maximum remuneration – the maximum remuneration that
could be awarded.
Jonathan Westhoff
CEO
475 629
681
Ashraf Piranie
Group Finance & Operations Director
393 515
556
Manjit Hayre
Chief Risk Officer
219 291
316
Key
Total maximum remuneration £'000
Target remuneration £'000
Fixed remuneration £'000
Note: Mr Manjit Hayre (Chief Risk Officer) was appointed to the Board as an
Executive Director on 1 September 2021. The remuneration above reflects Mr
Hayre’s total remuneration for the year, including the period for which he was
not an Executive Director.
When developing the remuneration scenarios, the following
assumptions were made:
• Fixed remuneration includes basic salary, pension and benefits
only;
• Target remuneration is based on a performance-related award
of 37.5% of basic salary; and
• Maximum award is based on a performance-related award of
the maximum achievable which is 50% of basic salary (as
stated on page 77, the Remuneration Committee has the right
to allow an increase in performance-related award to 75% if
deemed appropriate, with effect from financial year 2019/20).
80 81
Annual Report and Accounts
Year ended 31 March 2022
Governance
Section 2 – Annual Report on Remuneration
Notes:
1. Fees for Non-Executive Directors, at the rate shown above, have been in place since April 2010. Fees for the Society’s Chair were last increased in April 2014.
2. In addition to the payment of fees, Non-Executive Directors receive expenses for travel and accommodation in relation to their attendance at meetings.
Executive Director Remuneration – 2021/22
(audited)
Executive Director
Basic salary
£000
Performance-
related pay
(1)
£000
Pension
£000
Other
benefits
£000
Total
£000
Jonathan Westhoff (Chief Executive) 411 173 62 2
648
Ashraf Piranie (Group Finance & Operations Director) 326 124 49 18
517
Manjit Hayre (Chief Risk Officer) 193 73 21 5
292
Total 930 370 132 25
1,457
For 2021/22 a review of performance against objectives agreed at the start of the year has generated awards for Executive Directors of
42.1% for the Chief Executive, 38.1% for the Group Finance & Operations Director and 37.8% for the Chief Risk Officer (against maximum
performance-related pay of 50%) resulting in the amounts shown in the ‘Executive Director Remuneration – 2021/22' table. These payments
are based on performance against both Society and personal objectives.
For Mr Westhoff and Mr Piranie, 30% of their maximum award is based on Society objectives and 20% on personal objectives. For Mr Hayre,
40% of his maximum award is based on personal objectives and 10% on Society objectives. A review of performance against personal
objectives agreed at the start of the year has generated awards of 17.5% for the Chief Executive, 13.5% for the Group Finance & Operations
Director and 29.6% for the Chief Risk Officer. Awards agreed against Society objectives are detailed below.
Non-Executive Director fees
(audited)
Non-Executive Director
Date
appointed
2021/22
Fees
(1)
£000
2021/22
Benefits
(2)
£000
2020/21
Fees
(1)
£000
2020/21
Benefits
(2)
£000
John Maltby (Society Chair since 01/03/21) 04/01/21 -
109 2
12Julie Hopes (Remuneration Committee Chair. Deputy Chair from 01/08/19)
01/04/16 -
70 -
70Lynne Shamwana (Audit Committee Chair since 23/07/20) 01/02/19 -
60 1
57David Thomas (Risk Committee Chair from 04/05/21) 01/08/20 -
59 1
33Victoria Mitchell
01/04/18 -
50 -
50David Dyer 01/09/21 -
29 1
-Anne Gunther 01/11/21 -
21 1
-Mark Preston (Risk Committee Chair until 03/05/21) 18/05/11 -
18 -
60Mark Nicholls (Society Chair until 28/02/21) 01/01/10 -
- -
110James Turner (until 23/07/20) 01/04/17 -
- -
19Total
416 6
411 -
Executive Director Remuneration – 2020/21
(audited)
Executive Director
Basic salary
£000
Performance-
related pay
(1)
£000
Pension
£000
Other
benefits
£000
Total
£000
Jonathan Westhoff (Chief Executive) 395 180 79 1 655
Ashraf Piranie (Group Finance & Operations Director) 314 138 63 31
(2)
546
Total 709 318 142 32 1,201
Notes:
1. Includes an element that is subject to deferral. The subsequent table headed ‘Executive Director deferred performance-related pay payable in future years’ details
the amount due for payment, subject to review by the Committee at the appropriate time.
2. Mr Piranie received compensation of £13,171 which was determined with reference to the amount of performance-related pay award that he would have received
from his previous employer if he had stayed in post.
As covered in the Chair’s statement, Mr Manjit Hayre was appointed to the Board during the year as Chief Risk Officer and I am therefore
pleased to include him in the reporting of Executive Directors’ remuneration. The remuneration below reflects his total remuneration for the
year, including the period for which he was not an Executive Director.
Society overall objectives for the year include:
Objectives
% of overall award potential % of award achieved
Financial
• Profitability
• Net interest margin
• Cost efficiency
15% 14%
Customer
• Gross residential lending
• Retention of lending
• Customer satisfaction
• Ease of doing business
20% 15%
Change
• System enhancement and implementation for savings and mortgages
15% 9%
Risk
• Operational resiliency
• Support capability for lending
15% 14%
People
• Strengthening leadership and management capability
• Enhancing diversity and inclusivity
15% 12.5%
Overall assessment by the Board of executive performance
20% 17.5%
Overall Society objectives
100% 82%
A proportion of the Executive Directors’ performance-related pay has been deferred as shown in the table below. Payment of any deferred
award is subject to review by the Remuneration Committee and approval by the Board, and may be reduced or cancelled as appropriate.
Executive Director deferred performance-related pay
Payable in future years
Payable after year ending
Executive Director
Deferred
from
2021/22
£000
2022/23
£000
2023/24
£000
2024/25
£000
2025/26
£000
Jonathan Westhoff 2018/19 22 - - - -
2019/20 20 20 - - -
2020/21 24 24 24 - -
2021/22 - 17 17 17 17
Total 66 61 41 17 17
Ashraf Piranie 2018/19 17 - - - -
2019/20 15 15 - - -
2020/21 18 18 18 - -
2021/22 - 12 12 12 12
Total 50 45 30 12 12
Manjit Hayre 2021/22
(1)
- 7 7 7 7
Total - 7 7 7 7
Notes:
1. The breakdown shown for Mr Hayre includes elements subject to deferral from his total performance-related pay awarded for the year, including the period for
which he was not an Executive Director.
Notes:
1. Includes an element that is subject to deferral. The subsequent table headed ‘Executive Director deferred performance-related pay payable in future years’ details
the amount due for payment, subject to review by the Committee at the appropriate time.
82 83
Annual Report and Accounts
Year ended 31 March 2022
Governance
Chief Executive Officer (CEO) pay ratio
The Companies (Miscellaneous Reporting) Regulations 2018, came into force for accounting periods starting 1 January 2019 and requires
the publication of the ratio of the CEO’s total remuneration. Whilst the requirement applies to ‘quoted’ companies with more than 250 UK
employees, the Committee has chosen to comply with the regulation.
We have chosen to use the government’s preferred methodology (option A) which requires calculation of total full-time equivalent of pay
and benefits of all its UK employees for the financial year, and compare the median, 25
th
and 75
th
percentiles against the CEO single figure.
The ratios shown below are based on the Society’s employee base as at 31 March 2022.
Year Method 25
th
percentile
Median
75
th
percentile
2021-2022 23:1 15:1
Option A
30:12020-2021 23:1 16:1
Option A
31:12019-2020 24:1 16:1
Option A
31:1Remuneration element
25
th
percentile (£) Median (£)
75
th
percentile (£)
Total pay and benefits
21,333 28,072 42,045
Salary 19,248 25,849 38,737
Statement on member voting at the 2021 AGM
At the 2021 AGM members voted on the Directors’ Remuneration Report, the results of which are shown below.
Approval of the Directors’ Remuneration Report (advisory vote, i.e. not conditional on resolution being passed):
Vote
Votes for % of votes Votes against
Withheld*To approve the Directors’
Remuneration Report
12,280 92.10 1,054 316
At the 2020 AGM members voted on the Directors’ Remuneration Policy and the Directors’ Remuneration Report, the results of which are
shown below:
Approval of the Directors’ Remuneration Policy (binding vote):
Vote
Votes for % of votes Votes against
Withheld*To approve the Directors’
Remuneration Policy
12,902 91.67% 1,173 330
Approval of the Directors’ Remuneration Report (advisory vote, i.e. not conditional on resolution being passed):
Vote
Votes for % of votes Votes against
Withheld*To approve the Directors’
Remuneration Report
12,973 92.12% 1,109 324
* The withheld figures are not included in the calculation of % ‘Votes for’.
Application of the Remuneration Policy for 2022/23
The Remuneration Committee is required annually to review the salaries of the Executive Directors.
The Remuneration Committee undertook a benchmarking exercise of remuneration for Executive Directors in March 2022. The Committee
has again chosen not to apply its discretion to increase the performance-related pay award.
The annual salary review for employees was based on robust benchmarking data for every role, taking into account the level of responsibility
and the external market rate for each position. This constitutes a change from previous practice of applying a standard increase across all
roles, and resulted in increases ranging between 0% and 20% from 1 April 2022.
At the start of the 2020 financial year, the Executive Directors voluntarily opted to reduce their existing pension arrangements to align with the
rest of employees. It was agreed that this would form part of a three year strategy for existing Executive Directors, with reductions as follows:
• From April 2020 reduced from 25% to 20%;
• From April 2021 reducing to 15%;
• From April 2022 reducing to 10.6% (or any such amount equal to the maximum contribution available to all employees at this date).
As we emerge from the pandemic, the operating environment and economy remain volatile; the Society is well placed to face the challenges
that lie ahead, with a strong financial foundation.
The Committee’s focus next year will be to support the leadership team in taking our Purpose-led strategy forward for the benefit of all
members.
The Remuneration Committee will continue to strive to align its decisions with industry best practice and regulatory requirements whilst
considering both the best interests of the Society and the interests of members.
Julie Hopes
Chair of Remuneration Committee
25 May 2022
84 85
Annual Report and Accounts
Year ended 31 March 2022
Governance
Report on the audit of the annual accounts
Opinion
In our opinion, West Bromwich Building Society’s Group annual accounts and Society annual accounts (the “annual accounts”):
• give a true and fair view of the state of the Group’s and of the Society’s affairs as at 31 March 2022 and of the Group’s and the Society’s
income and expenditure and the Group’s and the Society’s cash flows for the year then ended;
• have been properly prepared in accordance with UK-adopted international accounting standards; and
• have been prepared in accordance with the requirements of the Building Societies Act 1986.
We have audited the annual accounts, included within the Annual Report and Accounts (the “Annual Report”), which comprise: the
Group and Society statements of financial position as at 31 March 2022; the Group and Society income statements and statements of
comprehensive income, the Group and Society statements of cash flows, and the Group and Society statement of changes in members’
interests and equity for the year then ended; and the notes to the annual accounts, which include a description of the significant accounting
policies.
Our opinion is consistent with our reporting to the Audit Committee.
Separate opinion in relation to international financial reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union
As explained in note 1 to the annual accounts, the Group, in addition to applying UK-adopted international accounting standards, has
applied international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
In our opinion, the Group annual accounts have been properly prepared in accordance with international financial reporting standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
Basis for opinions
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the annual accounts section of our report. We believe
that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the annual accounts in
the UK, which includes the FRC’s Ethical Standard applicable to public interest entities and we have fulfilled our other ethical responsibilities
in accordance with these requirements.
Other than those disclosed in note 6 to the annual accounts, we have provided no non-audit services to the Group in the period from 1
April 2021 to 31 March 2022.
Our audit approach
Overview
Materiality
• £4.0m (2021: £3.9m) - Group annual accounts
• Based on 1% of Group net assets
• £3.8m (2021: £3.8m) - Society annual accounts
• Based on 1% of Society net assets
Scoping
• We conducted all of our audit work over the Group and its components using one audit team, using information obtained from the
Groups’ staff and records based in West Bromwich.
• Audit procedures were performed over all material account balances and financial information in the Society due to its significance to
the Group’s financial performance and position.
• The Group consists of the Society and twelve other entities. Our audit procedures provide coverage over 100% of the interest income of
the Group and 100% of the total assets of the Group.
Key audit matters
• Risk of inappropriate judgements and estimates relating to the significant management judgement involved in determining the
appropriateness of commercial account specific scenarios and associated weightings (Group).
• Risk of inappropriate judgements and estimates relating to LGD modelling decisions, future economic assumptions and post model
adjustments applied to the expected credit loss (ECL) allowance on loans and advances to customers in the residential portfolios (Group
and Society).
• Risk of error in the application of hedge accounting for swaps and hedge effectiveness adjustments made in relation to the interest rate
hedges entered into (Group and Society).
• Risk of material misstatement in the valuation of investment property through inappropriate assumptions applied in the year end
valuation (Group).
• Risk of incorrect assumptions applied in the valuation of the year end defined benefit pension liability, in particular selection of
appropriate mortality, discount rate and inflationary assumptions (Group and Society).
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the annual accounts. In
particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that
involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk
of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a
risk of material misstatement due to fraud.
Capability of the audit in detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined in the Auditors’ responsibilities for the audit of the annual accounts section, to detect material misstatements
in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is
detailed below.
Based on our understanding of the Group/industry, we identified that the principal risks of non-compliance with laws and regulations
related to breaches of banking regulations including, but not limited to, the Financial Conduct Authority’s regulations, the Prudential
Regulation Authority’s regulations and UK tax legislation, and we considered the extent to which non-compliance might have a material
effect on the annual accounts. We also considered those laws and regulations that have a direct impact on the annual accounts such
as the Building Societies Act 1986. We evaluated management’s incentives and opportunities for fraudulent manipulation of the annual
accounts (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal
entries to reduce expenditure and increase income and inappropriate management bias in accounting estimates. Audit procedures
performed included:
• Agreement of the financial statement disclosures to underlying supporting documentation;
• Review of correspondence with and reports to the regulators;
• Testing significant accounting estimates (see key audit matters below);
• Testing of the assumptions used within the effective interest rate method for recognising interest income for their appropriateness;
• Testing of journal entries which contained unusual account combinations back to corroborating evidence;
• Discussions with management and those charged with governance in relation to known or suspected instances of non-compliance
with laws and regulation and fraud; and
• Specific audit procedures over non-interest revenue streams significant to the Group accounts.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance
with laws and regulations that are not closely related to events and transactions reflected in the annual accounts. Also, the risk of not
detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve
deliberate concealment by, for example, forgery or intentional misrepresentations or through collusion.
Independent auditors’ report to the members of
West Bromwich Building Society
86 87
Annual Report and Accounts
Year ended 31 March 2022
Governance
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the annual
accounts of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the
audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures
thereon, were addressed in the context of our audit of the annual accounts as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
The impact of COVID-19 , which was a key audit matter last year, is no longer included because our consideration of the pandemic in the
current year are adequately captured by other key audit matters and it does not represent an area of increased audit focus in its own right.
Otherwise, the key audit matters below are consistent with last year.
Key audit matter How our audit addressed the key audit matter
Risk of inappropriate judgements and estimates relating to the significant
management judgement involved in determining the appropriateness of
commercial account specific scenarios and associated weightings.
The individual assessment used in the modelled solution within this portfolio
means there is a risk that non-linearities within the economic scenarios are
not captured as different loans may exhibit different repayment patterns and
optimal exit strategies in a stressed scenario.
See notes 14 and 33 to the financial statements for the directors’ IFRS 9
impairment disclosures.
The modelling of commercial loans, which is a closed book, is performed
separately to the residential portfolio, with management performing individual
assessments given the unique circumstances and large exposures. The focus
of our audit work was on the methodology used to determine the staging of
loans and the level of individual assessment required.
Management performs individual impairment assessments for stage 3 loan
exposures where unique circumstances mean that management judgement
is required to determine the different possible future scenarios and the level of
provision required for each one. Our focus was on the principal assumptions
applied by management in estimating impairment provisions such as the
valuation of collateral, forecast and timing of future cash flows and the
completeness and severity of future scenarios.
These assumptions are based on existing contracts between the Group
and borrowers or tenants and management’s best estimates of future work
out strategies, including alternative scenarios which are used as part of the
weighted final provision calculation.
We performed the following procedures to address the areas of judgement
and estimates used in the calculation of commercial ECL:
• We performed a walkthrough of management’s process of determining
the commercial loans expected credit loss. We tested the design and
implementation of key controls over the selection, review and approval of
assumptions used in determining the expected credit loss and over model
performance monitoring, including periodic model review and approval of
model changes.
• With the assistance of risk modelling specialists, we assessed the
methodology used to stage the commercial loans for compliance with the
standard, including the application of this within the model itself.
• We selected a sample of loans and tested them for consistency with the
individual scenarios modelled by management, agreeing key data points
back to supporting documents (e.g. contracts, lease agreements and
valuation reports).
• We challenged management’s assumptions where case reviews indicated
that alternative outcomes could occur and considered the impact on the ECL
of these.
• We tested completeness of the provision by selecting an additional sample
of loans with nil provision and testing the ECL calculation to confirm this was
reasonable.
Based on the procedures performed and the evidence obtained, we found
management’s judgements used in the determination of the commercial ECL
to be reasonable.
Key audit matter How our audit addressed the key audit matter
Risk of inappropriate judgements and estimates relating to LGD modelling
decisions, future economic assumptions and post model adjustments
applied to the expected credit loss (ECL) allowance on loans and advances
to customers in the residential portfolios
Under the IFRS 9 impairment models, losses are recognised on an ‘expected
credit loss’ (ECL) basis. The calculation of expected credit losses requires the
use of forward-looking information, reflecting management’s view of potential
future economic scenarios. The standard also requires management to make
judgments regarding when a loan has experienced a ‘significant increase in
credit risk’ and to make assumptions regarding expected customer default
rates and repayment behaviour.
See notes 14 and 33 to the financial statements for the directors’ IFRS 9
impairment disclosures.
We focused our audit work on the areas of the methodology and assumptions
that we identified as most judgemental. This was informed by our understanding
of the model and areas of increased management judgement.
For the residential book ECL, the key assumptions were:
• The key economic variables and scenarios used in the model, particularly
the severity and likelihood of the base and downturn economic scenarios
that form part of the forward looking modelling of default rates and house
price values and their impact on ECL;
• The post model adjustments made to account for areas of credit risk not
captured within the base modelling solution, including those introduced as
a result of additional risk identified in the valuation of properties impacted
by cladding.
We performed the following procedures to address the areas of judgement
and estimates used in the calculation of residential ECL:
• We performed a walkthrough of management’s process of determining the
residential expected credit loss. We reviewed changes made to the model
in the current year and assessed the appropriateness and implementation
of these changes.
• We compared the forward-looking economic assumptions to independent
forecasters. The severity and magnitude of the scenarios were compared
to external forecasts and data from historical economic downturns, and the
sensitivities of the scenarios were considered against consensus.
• We tested whether the economic scenarios used were appropriately
severe so as to capture nonlinear effects in credit losses which may arise
in economic downturns and weighted appropriately given the current
economic uncertainty.
• We tested the appropriateness of the post model adjustments made by
management, including testing the underlying assumptions used in these
adjustments and consideration of completeness of adjustments made
through review of ECL coverage and comparison with wider industry levels.
Based on the procedures performed and the evidence obtained, we found
management’s judgements used in the determination of the residential ECL to
be reasonable.
Risk of error in the application of hedge accounting for swaps and hedge
effectiveness adjustments made in relation to the interest rate hedges
entered into
Operations of the Group expose them to significant interest rate risk as a result
of a mismatch between fixed and floating interest rate cash flows.
Management have sought to mitigate the risk of future movements in market
interest rates affecting profitability through the use of derivative financial
instruments in the form of interest rate and cross currency swap contracts.
Management designates these swaps under hedge accounting arrangements
to reduce the effect of future movements in interest rates on amounts recorded
in the financial statements.
Where a designated hedge accounting relationship is formed, accounting rules
allow the Group’s fixed rate mortgage book to be re-measured for fair value
changes attributable to the hedged risk.
We focused on this area as hedge accounting rules are complex. Given the
size of both the fixed interest mortgages and interest rate swaps held on the
balance sheet, this gives rise to an increase in the risk of error in application.
The Group’s disclosures are given in Note 12.
We performed the following procedures to address the risks in relation to
hedge accounting:
• We performed a walkthrough of management’s end to end process for
performing hedge accounting in relation to fair value hedges.
• We obtained and read the hedge accounting documentation to evaluate
whether it was compliant with the accounting requirements of International
Accounting Standard 39 ‘Financial Instruments’. This included testing of
a sample of hedge designations and inspection of a sample of hedge
documentation.
• We independently re-performed a sample of hedge effectiveness tests
performed by management, considering both prospective and retrospective
testing.
• We also re-performed the valuation of a sample of derivatives and
underlying hedged items and tested the reconciliation between the
hedging models and the amounts recorded in the general ledger.
Based on the evidence obtained, we determined the application of hedge
accounting to be appropriate.
Risk of material misstatement in the valuation of investment property
through inappropriate assumptions applied in the year end valuation
The Group holds a portfolio of investment properties within the West Bromwich
Homes Limited subsidiary. In line with the requirements of the accounting
standard these properties are held at fair value with changes in the fair value
recognised within the income statement. Further disclosure is given within note
17 of the financial statements.
Management calculates the year end valuation with the assistance of external
valuation experts who assess the current valuation through comparison to
expected market values at the balance sheet date.
In certain situations, management makes adjustments to the valuations
provided by their experts to capture specific risks identified.
Given the overall valuation of the investment property portfolio at the year end
and the potential reasonable range of reasonable valuations we determined
that this represents a significant risk within our audit plan.
Our procedures over the year end valuation included:
• We performed a walkthrough of management’s process of determining the
fair value of the property portfolio.
• We evaluated the competence, objectivity and independence of experts
engaged by the directors to assist with the property valuations and review
of historical performance of the valuations against actual sales.
• We engaged our internal Real estate valuation experts to evaluate the work
performed by management’s experts and assessed the reasonableness of
any differences in the valuations used with regard to externally available
sources (such as land registry data).
• We tested adjustments to the expert valuation made by management,
including assumed costs in relation to cladding, back to supporting
documentation or evidence.
Based on the evidence obtained, we determined the methodologies, inputs
and assumptions used in the investment property valuations to be materially
appropriate.
88 89
Annual Report and Accounts
Year ended 31 March 2022
Governance
Key audit matter How our audit addressed the key audit matter
Risk of incorrect assumptions applied in the valuation of the year end
defined benefit pension liability, in particular selection of appropriate
mortality, discount rate and inflationary assumptions
The Group and Society operates a defined benefit pension scheme for certain
staff members. The present value of the scheme liability is materially sensitive
to a number of judgements including the discount rate, inflation and mortality.
Setting these judgements is complex and small changes can have a significant
impact on the year end liability valuation.
Given the scheme assets are invested with an external party in diversified
market funds, with a portion of the liabilities also insured, we deem the
significant risk to relate specifically to the liability valuation of the scheme.
We focused our work on the judgements made by management, in conjunction
with third party actuaries, relating to the discount rate, inflation rate and
pensioner mortality.
The Group’s disclosures are given in note 31 including relevant sensitivity
disclosures for the key assumptions used by the scheme actuary in the
valuation of the liability.
We performed the following procedures to address the valuation risks in
relation to the year end defined benefit pension liability:
• We independently assessed, using our actuarial experts, the discount
rate, inflation rate and mortality assumptions used and compared these
to observable market rates at the year end. We assessed instances where
management’s judgements and that of their experts differed from market
consensus and assessed the reasonableness of explanations for these
deviations.
• We considered the independence, objectivity and competence of the third
party actuaries engaged by management to perform their valuation.
• We considered the recognition of the surplus by the Society with reference
to the requirements of the accounting standards and terms between the
Society and the Trustee.
From the evidence obtained, we found the assumptions used by management
in the actuarial valuations for pension obligations to be appropriate.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the annual accounts as a
whole, taking into account the structure of the Group and the Society, the accounting processes and controls, and the industry in which
they operate.
Substantially all of the Group's activities are in the United Kingdom
retail, commercial real estate and property businesses (see note 38 of the financial statements).
We performed an audit of all material account balances and other financial information for the Society and thirteen subsidiaries, together
with the assessment of management’s going concern assumption.
All audit work over the Group and its components was performed by a single audit team.
Taken together, our audit procedures on the Society and its subsidiary undertakings provided us with sufficient audit evidence as a basis
for our opinion on the Group financial statements as a whole.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These,
together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit
procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually
and in aggregate on the annual accounts as a whole.
Based on our professional judgement, we determined materiality for the annual accounts as a whole as follows:
Group annual accounts Society annual accounts
Overall materiality
£4.0m (2021: £3.9m). £3.8m (2021: £3.8m).
How we determined it
1% of net assets. 1% of net assets.
Rationale for benchmark applied
We believe that the subscribed capital and reserves (“net assets”) is the most appropriate benchmark to
use for the Society and Group, whose strategy is not one of profit maximisation. Regulatory capital is a
key benchmark for management and regulators and hence we continue to use net assets, a proxy to
regulatory capital, as our benchmark.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range
of materiality allocated across components was £1.1m to £3.8m.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the
nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes.
Our performance materiality was 75% of overall materiality, amounting to £3.0m for the Group financial statements and £2.9m for the
Society materiality.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and
aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £201k (2021: £190k)
as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the Group’s and the Society’s ability to continue to adopt the going concern basis of
accounting included:
• Evaluation and challenge of key assumptions used by the directors in their determination of the going concern of the Group and Society;
• Review of key regulatory returns in relation to liquidity and capital and consideration of the stress testing performed;
• Consideration as to whether our audit work had identified events or conditions which may give rise to uncertainty as to the Group’s
future ability to trade; and
• Review of legal and regulatory correspondence to ensure that any compliance issues which may impact the going concern of the Group
had not been identified.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually
or collectively, may cast significant doubt on the Group’s and the Society’s ability to continue as a going concern for a period of at least
twelve months from the date on which the annual accounts are authorised for issue.
In auditing the annual accounts, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of
the annual accounts is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the Group’s and Society’s
ability to continue as a going concern.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this
report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the annual accounts and our auditors’ report
thereon. The directors are responsible for the other information. Our opinion on the annual accounts does not cover the other information
and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of
assurance thereon.
In connection with our audit of the annual accounts, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the annual accounts or our knowledge obtained in the audit, or otherwise appears to
be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures
to conclude whether there is a material misstatement of the annual accounts or a material misstatement of the other information. If, based
on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report
that fact. We have nothing to report based on these responsibilities.
With respect to the Annual Business Statement and Directors’ Report we also considered whether the disclosures required by the Building
Societies Act 1986 have been included.
Based on our work undertaken in the course of the audit, the Building Societies Act 1986 requires us also to report certain opinions and
matters as described below.
90 91
Annual Report and Accounts
Year ended 31 March 2022
Governance
Annual Business Statement and Directors’ Report
In our opinion, based on our work undertaken in the course of the audit:
• the Annual Business Statement and the Directors’ Report have been prepared in accordance with the requirements of the Building
Societies Act 1986;
• the information given in the Directors’ Report for the year ended 31 March 2022 is consistent with the accounting records and the annual
accounts; and
• the information given in the Annual Business Statement (other than the information upon which we are not required to report) gives a
true representation of the matters in respect of which it is given.
In light of the knowledge and understanding of the Group and Society and their environment obtained in the course of the audit, we did
not identify any material misstatements in the Directors’ Report.
Responsibilities for the annual accounts and the audit
Responsibilities of the directors for the annual accounts
As explained more fully in the Directors' responsibilities in respect of the Annual Report, the Annual Business Statement, the Directors'
Report and the Annual Accounts, the directors are responsible for the preparation of the annual accounts in accordance with the
applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control
as they determine is necessary to enable the preparation of annual accounts that are free from material misstatement, whether due to
fraud or error.
In preparing the annual accounts, the directors are responsible for assessing the Group’s and Society’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors
either intend to liquidate the Group and Society or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the annual accounts
Our objectives are to obtain reasonable assurance about whether the annual accounts as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when
it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of these annual accounts.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques.
However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek
to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to
draw a conclusion about the population from which the sample is selected.
A further description of our responsibilities for the audit of the annual accounts is located on the Financial Reporting Council’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the Society’s members as a body in accordance with Section 78
of the Building Societies Act 1986 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by
our prior consent in writing.
Other required reporting
Building Societies Act 1986 exception reporting
Under the Building Societies Act 1986 we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the Society; or
• the Society annual accounts are not in agreement with the accounting records; or
• we have not received all the information and explanations and access to documents we require for our audit.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the audit committee, we were appointed by the members on 28 July 2021 to audit the annual accounts
for the year ended 31 March 2022 and subsequent financial periods. The period of total uninterrupted engagement is 2 years, covering
the years ended 31 March 2021 to 31 March 2022.
Other matter
In due course, as required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these financial
statements will form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct
Authority in accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditors’ report provides no assurance over whether
the annual financial report will be prepared using the single electronic format specified in the ESEF RTS.
Daniel Brydon (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Manchester
25 May 2022
93
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
92
Financial statements
In this section you will find our
primary financial statements
and related notes.
Income
S
tatementsf
or the year ended 31 March
2022Notes
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Interest receivable and similar income
Calculated using the effective interest method 100.0 99.4 99.6 99.9
On instruments measured at fair value through profit or loss 15.2 ) 12.5 )
(12.7 )
( (10.2 )
(Total interest receivable and similar income 2 87.3 84.2 89.4 87.4
Interest expense and similar charges 3 26.5 ) 29.7 )
(25.2 )
( (28.2 )
(Net interest receivable 62.1 57.7 61.2 57.7
Fees and commissions receivable 1.9 2.0 2.1 2.3
Other operating income 4 3.7 3.7 - (0.1 )
Fair value gains on financial instruments 5 10.6 3.4 9.4 1.8
Total income 78.3 66.8 72.7 61.7
Administrative expenses 6 39.1 ) 36.4 )
(45.5 )
( (43.9 )
(Depreciation and amortisation
16,18 8.1 ) 8.1 )
(7.4 )
( (7.4 )
(Operating profit before revaluation gains, impairment and provisions 25.4 19.6 21.4 17.2
Gains on investment properties 17 5.8 4.0 - -
Impairment on loans and advances 14 18.8 ) 1.4 (0.1 )
(8.1 )
(Provisions for liabilities 25 0.1 (0.1 ) 0.1 (0.1 )
Provisions against investments in subsidiary undertakings 15 - - 29.7 )
(10.0 )
(Profit/(Loss) before tax 23.2 4.7 12.9
(12.7 )
Taxation 9 1.2 0.4 0.4 )
(0.4 )
(Profit/(Loss) for the financial year 24.4 5.1 12.5
(13.1 )
The profit/(loss) for the year derives wholly from continuing operations.
The notes on pages 100 to 167 form part of these accounts.
94 95
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Statements of
C
omprehensive I
ncomefor the year ended 31 March 2022
Notes
Group
2022
£m
Group
2021
£m
Profit for the financial year 24.4 5.1
Other comprehensive income
Items that may subsequently be reclassified to profit or loss
Fair value through other comprehensive income investments
Valuation (losses)/gains taken to equity 3.7
(1.0 )
Taxation 30 0.2 (0.7 )
Items that will not subsequently be reclassified to profit or loss
Actuarial gains/(losses) on defined benefit obligations 31 9.6 (0.3 )
Taxation 30 0.1
(2.9 )
Other comprehensive income for the financial year, net of tax 5.9 2.8
Total comprehensive income for the financial year 30.3 7.9
Notes
Society
2022
£m
Society
2021
£m
Profit/(Loss) for the financial year 12.5
(13.1 )
Other comprehensive income
Items that may subsequently be reclassified to profit or loss
Fair value through other comprehensive income investments
Valuation (losses)/gains taken to equity 3.7
(1.0 )
Taxation 30 0.2 (0.7 )
Items that will not subsequently be reclassified to profit or loss
Actuarial gains/(losses) on defined benefit obligations 31 9.6 (0.3 )
Taxation 30 0.1
(2.9 )
Other comprehensive income for the financial year, net of tax 5.9 2.8
Total comprehensive income for the financial year 18.4
(10.3 )
The notes on pages 100 to 167 form part of these accounts.
Statements o
f Financial Position
a
t 31 March
2022Notes
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Assets
Cash and balances with the Bank of England 10 652.0 316.5 652.0 316.5
Loans and advances to credit institutions 73.2 107.3 27.1 64.6
Investment securities 11 286.9 276.5 740.6 785.4
Derivative financial instruments 12 52.4 6.5 52.2 6.5
Loans and advances to customers 13 4,778.3 4,852.3 3,429.5 3,393.3
Current tax assets - 0.2 - 0.2
Deferred tax assets 19 27.1 21.3 18.4 14.4
Trade and other receivables 20 2.2 2.6 2.1 2.6
Investments 15 - - 1,027.3 1,081.8
Intangible assets 16 10.2 16.3 10.2 16.3
Investment properties 17 147.3 143.0 - -
Property, plant and equipment 18 22.8 24.9 22.8 24.9
Retirement benefit asset 31 14.9 1.1 14.9 1.1
Total assets 6,067.3 5,768.5 5,997.1 5,707.6
Liabilities
Shares 21 4,183.6 4,234.1 4,183.6 4,234.1
Amounts due to credit institutions 1,116.7 751.8 1,116.2 752.1
Amounts due to other customers 22 114.6 90.9 262.3 279.6
Derivative financial instruments 12 11.5 40.5 11.4 39.1
Debt securities in issue 23 171.2 217.9 - -
Current tax liabilities 0.3 - 0.3 -
Deferred tax liabilities 19 14.7 7.6 5.7 2.1
Trade and other payables 24 14.0 12.4 13.0 11.5
Provisions for liabilities 25 0.5 0.6 0.4 0.5
Subordinated liabilities 28 22.9 22.8 22.9 22.8
Total liabilities 5,650.0 5,378.6 5,615.8 5,341.8
Members' interests and equity
Core capital deferred shares 27 127.0 127.0 127.0 127.0
Subscribed capital 26 7.8 7.8 7.8 7.8
General reserves 279.1 250.7 243.1 226.6
Revaluation reserve 3.1 3.3 3.1 3.3
Fair value reserve 0.3 1.1 0.3 1.1
Total members' interests and equity 417.3 389.9 381.3 365.8
Total members' interests, equity and liabilities 6,067.3 5,768.5 5,997.1 5,707.6
The accounting policies and notes on pages 100 to 167 form part of these accounts.
Approved by the Board of Directors on 25 May 2022 and signed on its behalf by:
John Maltby Jonathan Westhoff Ashraf Piranie
Chair
Chief Executive Group Finance & Operations
Director
96 97
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Statements of Changes in Members’ Interests and Equity
f
or the year ended 31 March
2022Group
Core capital
deferred
shares
£m
Subscribed
capital
£m
General
reserves
£m
Revaluation
reserve
£m
Fair value
reserve
£m
Total
£m
At 1 April 2021 127.0 7.8 250.7 3.3 1.1 389.9
Profit for the financial year - - 24.4 - - 24.4
Other comprehensive income for the year (net of tax)
Retirement benefit obligations - - 6.9 - - 6.9
Realisation of previous revaluation gains - - - (0.2 ) -
(0.2 )
Fair value through other comprehensive
income investments
- - - - (0.8 )
(0.8 )
Total other comprehensive income - - 6.9 (0.2 ) (0.8 ) 5.9
Total comprehensive income for the year - - 31.3 (0.2 ) (0.8 ) 30.3
Distribution to the holders of core capital deferred shares
- - (2.9 ) - -
(2.9 )
At 31 March 2022
for the year ended 31 March 2021
Group
Core capital
deferred
shares
£m
Subscribed
capital
£m
General
reserves
£m
Revaluation
reserve
£m
Fair value
reserve
£m
Total
£m
At 1 April 2020 127.0 8.9 246.5 3.3 (1.9 ) 383.8
Profit for the financial year - - 5.1 - - 5.1
Other comprehensive income for the year (net of tax)
Retirement benefit obligations - - (0.2 ) - - (0.2 )
Fair value through other comprehensive
income investments
- - - - 3.0 3.0
Total other comprehensive income - - (0.2 ) - 3.0 2.8
Total comprehensive income for the year - - 4.9 - 3.0 7.9
Distribution to the holders of core capital deferred shares - - (1.3 ) - - (1.3 )
Buyback and cancellation of subscribed capital - (1.1 ) 0.6 - - (0.5 )
At 31 March 2021
Statements of Changes in Members’ Interests and Equity
for the year ended 31 March 2022
Society
Core capital
deferred
shares
£m
Subscribed
capital
£m
General
reserves
£m
Revaluation
reserve
£m
Fair value
reserve
£m
Total
£m
At 1 April 2021 127.0 7.8 226.6 3.3 1.1 365.8
Profit for the financial year - - 12.5 - - 12.5
Other comprehensive income for the year (net of tax)
Retirement benefit obligations - - 6.9 - - 6.9
Realisation of previous revaluation gains - - - (0.2 ) -
(0.2 )
Fair value through other comprehensive
income investments
- - - - (0.8 )
(0.8 )
Total other comprehensive income - - 6.9 (0.2 ) (0.8 ) 5.9
Total comprehensive income for the year - - 19.4 (0.2 ) (0.8 ) 18.4
Distribution to the holders of core capital deferred shares
- - (2.9 ) - -
(2.9 )
At 31 March 2022
The notes on pages 100 to 167 form part of these accounts.
for the year ended 31 March 2021
Society
Core capital
deferred
shares
£m
Subscribed
capital
£m
General
reserves
£m
Revaluation
reserve
£m
Fair value
reserve
£m
Total
£m
At 1 April 2020 127.0 8.9 240.6 3.3 (1.9 ) 377.9
Profit for the financial year - - (13.1 ) - - (13.1 )
Other comprehensive income for the year (net of tax)
Retirement benefit obligations - - (0.2 ) - - (0.2 )
Fair value through other comprehensive
income investments
- - - - 3.0 3.0
Total other comprehensive income - - (0.2 ) - 3.0 2.8
Total comprehensive income for the year - - (13.3 ) - 3.0 (10.3 )
Distribution to the holders of core capital deferred shares - - (1.3 ) - - (1.3 )
Buyback and cancellation of subscribed capital - (1.1 ) 0.6 - - (0.5 )
At 31 March 2021
98 99
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Statements of Cash Flows
for the year ended 31 March 2022
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Net cash inflow/(outflow) from operating activities (below)
(23.7 )
Cash flows from investing activities
Purchase of investment securities 37.5 ) 37.5 )
(101.9 )
((101.9 )
(Proceeds from disposal of investment securities 86.5 54.0 141.7 91.3
Proceeds from disposal of investment properties 2.1 0.2
-
-Purchase of property, plant and equipment and intangible assets 5.2 ) 5.2 )
(5.1 )
((4.6 )
(New funding to subsidiaries 44.4 )
-
-(52.4 )
(Repayment of funding from subsidiaries
- 93.7 67.6
-
Net cash flows from investing activities 11.5 76.5 71.8
(18.4 )
Cash flows from financing activities
Repayment of debt securities in issue 49.2 ) 1.0 )
(47.4 )
(-
(Interest paid on subordinated liabilities 2.5 ) 2.5 )
(2.5 )
((2.5 )
(Payment of lease liabilities 0.5 ) 0.5 )
(0.4 )
((0.4 )
(Distribution to the holders of core capital deferred shares 1.3 ) 1.3 )
(2.9 )
((2.9 )
(Buyback and cancellation of subscribed capital
-
(0.3 )
-(0.3 )
Net cash flows from financing activities
(53.2 )
(53.8 )
(5.8 )
(5.6 )
Net increase in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
For the purposes of the statements of cash flows, cash and cash equivalents comprise the following balances with less than 90 days original maturity:
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Cash in hand (including Bank of England Reserve account) 636.9 304.7 636.9 304.7
Loans and advances to credit institutions 73.2 107.3 27.1 64.6
Investment securities
- 4.0 - 4.0
The Group is required to maintain certain mandatory balances with the Bank of England which, at 31 March 2022, amounted to £15.1 m (2020/21: £11.8 m). The
movement in these balances is included within cash flows from operating activities.
The Group’s loans and advances to credit institutions includes £46.0 m (2020/21: £41.7 m) of balances belonging to the Society’s structured entities which are not
available for general use by the Society.
Statements of Cash Flows
(continued)
for the year ended 31 March 2022
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Cash flows from operating activities
Profit/(Loss) before tax 23.2 4.7 12.9 (12.7 )
Adjustments for non-cash items included in profit/(loss) before tax
Impairment on loans and advances 8.1 18.8 0.1
(1.4 )
Depreciation, amortisation and impairment 13.0 8.1 13.0 8.1
Disposal of property, plant and equipment
(0.1 )
--
-Revaluations of investment properties 4.0 )
(5.8 )
(-
-Changes in provisions for liabilities 0.1 0.1
(0.1 )
(0.1 )
Provisions against investments in subsidiary undertakings 10.0 29.7
-
-Interest on subordinated liabilities 2.5 2.5 2.5 2.5
Fair value (gains)/losses on equity release portfolio 0.2 0.2
(0.2 )
(0.2 )
Interest paid on lease liabilities 0.1 0.1 0.1 0.1
Changes in fair value 63.7 13.6 51.3 9.4
Changes in operating assets and liabilities
Loans and advances to customers 2.5 (193.3 ) 247.1 )
(85.7 )
(Loans and advances to credit institutions 0.5 ) 0.5 )
(3.3 )
((3.3 )
(Derivative financial instruments 15.7 ) 14.5 )
(74.9 )
((73.4 )
(Shares 388.0 388.0
(50.5 )
(50.5 )
Deposits and other borrowings 389.3 (134.9 ) 346.8 (181.8 )
Trade and other receivables 0.4 1.5 0.5 1.0
Trade and other payables 1.8 (2.3 ) 1.5 (1.9 )
Retirement benefit obligations 4.1 ) 4.1 )
(4.2 )
((4.2 )
(Subscribed capital 0.3 ) 0.3 )
-
(-
(Tax received 0.2 - 0.2 -
Net cash inflow/(outflow) from operating activities 365.7 82.5 220.0
(23.7 )
The notes on pages 100 to 167 form part of these accounts.
100 101
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
1. Accounting policies
The principal accounting policies applied consistently in the preparation of these consolidated Annual Accounts are set out below.
Basis of preparation
The Annual Accounts of the Group and the Society have been prepared in accordance with international accounting standards in conformity with the requirements
of the Building Societies Act 1986. In addition to complying with international accounting standards in conformity with the requirements of the Building Societies
Regulations, the consolidated financial statements also comply with international financial reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union.
The Annual Accounts have been prepared under the historical cost convention as modified by the revaluation of fair value through other comprehensive income
assets, derivatives, investment properties, property, plant and equipment and other financial assets at fair value through profit or loss.
The Annual Accounts are presented in pounds Sterling and, except where otherwise indicated, have been rounded to the nearest one hundred thousand.
Going concern
The Directors have prepared forecasts for the Group, including its capital position, for a period in excess of 12 months from the date of approval of these financial
statements. The Directors have also considered the effect upon the Group’s business, financial position, liquidity and capital of more pessimistic, but plausible,
trends in its business using stress testing and scenario analysis techniques.
The Society’s Medium Term Plan (MTP) has been updated to reflect the uncertainty caused by COVID-19, including the potential impacts on the UK housing and
mortgage markets and the wider economy. Through the Internal Capital Adequacy Assessment Process (ICAAP) the Society models the impact of the Bank of
England’s Annual Cyclical scenario on the Society’s Capital position, throughout which a surplus over Total Capital Requirements is maintained. Through the
Society’s Internal Liquidity Adequacy Process (ILAAP) the Society models the impacts of severe but plausible liquidity stresses throughout which a surplus over
minimum regulatory levels of liquidity is maintained. Scenarios tested showed that the Society would be able to continue as a Going Concern throughout the
period under assessment, after taking account of the actions available to management to mitigate the impacts on capital and liquidity in such scenarios. The
resultant forecasts and projections therefore show that the Group will be able to operate at adequate levels of both liquidity and capital for the next 12 months.
The Directors, therefore, consider that the Society and Group have adequate resources to continue in operational existence for the next 12 months. Accordingly
they continue to adopt the going concern basis in preparing the financial statements. For further details see page 60 of the Directors’ Report.
New or amended accounting standards
The International Accounting Standards Board (IASB) have issued a number of new or amended accounting standards and interpretations but are not effective
for the twelve months ended 31 March 2022. Other than the change noted below, which was adopted on 1 April 2021, all other changes are not expected to have
a significant impact on the Group’s financial statements.
• Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)
In August 2020, the IASB issued Phase 2 of Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. The amendments provide
practical expedients in respect of accounting for changes to financial assets and liabilities where the modification is as a direct result of the IBOR reforms. The
amendments allow firms to account for the modification to the asset or liability by applying the updated effective interest rate following a transition to a new
benchmark interest rate to value the financial asset or liability, rather than continuing to discount the asset or liability at the original discount rate and recognising
a gain or loss in the Income Statement as per the usual requirements under IFRS 9 for modifications of financial assets and liabilities. The Group has applied the
amendments for the current financial year which has had no material impact.
Further details of how the Group has managed its transition to replacement benchmark interest rates, and the amount of LIBOR exposure that remains as at 31
March 2022, are set out in note 12 (d).
Basis of consolidation
The Group financial statements consolidate the financial statements of the Society and its subsidiary undertakings.
Subsidiaries
Subsidiaries are all entities controlled by the Society. Under IFRS 10 ‘Consolidated Financial Statements’ control is achieved where the Group has the power to
govern the financial and operating policies of an entity, has the exposure or rights to the variable returns from the involvement with the entity, and is able to use
its power to affect the amount of returns for the Group. In assessing control, potential voting rights that presently are exercisable or convertible are taken into
account. The financial statements of the subsidiaries are included in the results from the date that control commences until the date that control ceases.
The purchase method of accounting has been adopted, under which the results of subsidiary undertakings acquired or disposed of in a year are included in
the Income Statement from the date of acquisition or up to the date of disposal. The excess of the cost of acquisition over the fair value of the Group’s share of
the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the
difference is recognised directly in the Income Statement.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated
unless the transaction provides evidence of impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to
ensure consistency with the policies adopted by the Group.
In the Society, investments in subsidiary undertakings are carried at cost less any provisions for impairment.
Notes to the Accounts
Securitisation transactions
The Group has entered into securitisation transactions in which it sells mortgages to structured entities. In accordance with IFRS 9 (and previously under IAS 39),
the Group continues to recognise securitised assets as loans and advances to customers. In subsequent periods, income from the securitised mortgages is
recognised by the Group.
The equity of the structured entities created for these securitisations is not owned by the Group. However, to comply with IFRS 10 ‘Consolidated Financial Statements’,
the structured entities are included as subsidiaries in the consolidated financial statements, where certain criteria are met. The analysis of whether the criteria are
met is subject to regular reassessment. Where IFRS 10 consolidation criteria are no longer met, securitised mortgage assets continue to be recognised with an
offsetting deemed loan liability recorded in the Group financial statements. Deemed loans are included within amounts due to other customers.
The Society has entered into securitisation transactions in which it sold residential mortgages to structured entities. Live mortgages were transferred and
repayments on these remain due at the time of securitisation. Cash flows received from the mortgage repayments are transferred to the structured entity.
However the Society has retained substantially all the risks and rewards including, but not limited to, holding the legal title of the mortgages. In accordance with
IFRS 9 (and previously under IAS 39), the Society continues to recognise the securitised assets as loans and advances to customers and consequently also shows
a deemed loan liability to the structured entities. The deemed loans are included within amounts due to other customers.
Interest in unconsolidated structured entities - Group
As outlined further below, management reassessed the accounting for Sandwell Commercial Finance no. 1 plc and Sandwell Commercial Finance no. 2 plc in
2020, and reached a judgement that these entities no longer met the consolidation criteria as set out in IFRS 10 ‘Consolidated Financial Statements’. The principal
activities of the entities is that of holding non-core commercial mortgage portfolios – these being the assets that were transferred when the securitisations
were established. Prior to deconsolidation, the deemed loan asset recorded in these entities was offset by an equal and opposite deemed loan liability in West
Bromwich Commercial Limited (WBCL). Following deconsolidation, the deemed loan asset and external loan note liabilities recognised in these entities are no
longer recognised in the Group financial statements. The deemed loan liability in WBCL is no longer eliminated and is recorded in the Group balance sheet. The
deemed loan liability is continually revalued to reflect the impairment provisions held against the underlying commercial mortgages given the impairments are
ultimately borne by the loan note holders as the Group is no longer exposed to the structure. In these entities, the Group has limited exposure to credit losses,
with risk transferred in part to third party investors who have purchased loan note securities issued by the entities.
The table below indicates the interests in structured entities.
31 March 2022
31 March 2021
Deemed
loan
balances
Mortgages
transferred
Notes
held in
structured
entities
Maximum
exposure to loss
in unconsolidated
structured entities
Deemed
loan
balances
Mortgages
transferred
Notes held
in structured
entities
Maximum
exposure to loss
in unconsolidated
structured entities
Group
7.1 10.0 0.6 0
13.9 18.6 0.9 0
Segmental reporting
IFRS 8 ‘Operating Segments’, requires operating segments to be identified on the basis of internal reports and components of the Group regularly reviewed by
the chief operating decision maker to allocate resources to segments and to assess their performance. In terms of the Group, the chief operating decision maker
has been deemed to be the Board of Directors.
Each segment is determined according to the distinguishable operating component of the Group that is regularly reviewed by the Group’s chief operating decision
maker and for which discrete financial information is available.
Information regarding the results of each reportable segment is included in note 38.
Interest receivable and expense
Interest receivable and expense are recognised in the Income Statement for all instruments measured at amortised cost or fair value through other comprehensive
income using the effective interest rate method. Interest income on defaulted loans categorised as ‘stage 3’ under IFRS 9 is recognised by applying the effective
interest rate to the balances net of the provisions for expected credit losses.
Effective interest rate
The effective interest rate method is the method used to calculate the amortised cost of financial instruments and to recognise interest receivable or payable over
the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash flows or receipts through the expected life of the instrument,
or where appropriate, a shorter period, to its carrying amount. The main impact for the Group relates to estimating the expected lives for mortgage advances, in
particular the average length of the reversion period subsequent to a fixed or discounted rate period coming to an end, as the effective interest rate is a blend of
the interest rates in both the initial fixed period and the expected reversion period. In addition, where mortgage advances have upfront fees, such as application
and arrangement fees, and costs, these are incorporated into the calculation. This has the effect of spreading these fees and costs over the expected life of the
mortgage.
102 103
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
1. Accounting policies
(continued)
Fees and commissions receivable and payable
Fees and commissions are generally recognised on an accruals basis when the service has been provided. Mortgage arrangement fees and other direct
costs are deferred and incorporated in the mortgage portfolio as part of the effective interest rate method. Commissions and fees arising from negotiating or
participating in the negotiation of a transaction with a third party are recognised on completion of the underlying transaction.
Investment properties
Investment properties are properties held for long-term rental yields and capital appreciation. Investment properties are carried in the Statement of Financial
Position at fair value, representing open market value determined annually and subject to review by independent specialist valuers. Changes in fair values are
recorded in the Income Statement in accordance with IAS 40 (revised 2003). Leasehold properties held for long-term rental yields are classified as investment
properties and carried at fair value.
Financial instruments
a) Financial assets
Under IFRS 9, financial assets are classified as amortised cost or fair value (through other comprehensive income or through profit or loss), based on the business
model under which they are held and the characteristics of their contractual cash flows.
Amortised cost
Financial assets are measured at amortised cost if they are held for the purpose of collecting contractual cash flows (“held to collect” business model) and have
contractual terms which give rise on specified dates to cash flows which are solely payments of principal and interest (SPPI) on the outstanding amount.
This category includes cash and balances with the Bank of England, loans and advances to credit institutions and the majority of the Group’s loans and advances
to customers. All of the Group’s mortgage portfolios were originated or purchased for the purposes of collecting contractual cash flows. With the exception of the
closed equity release portfolio, the contractual terms of the Group’s mortgage books indicate that the cash flows to be collected comprise capital and interest
on the outstanding balance.
For the Society, loans to subsidiary undertakings and holdings of certain investment securities issued by Group entities are also measured at amortised cost
based on the business model and SPPI assessments. In the case of mortgage-backed securities, the SPPI criteria are only met where the underlying asset pools
contain mortgages which are SPPI and the exposure to credit risk inherent in the tranches held by the Society is equal to or lower than the exposure to credit risk
of the underlying mortgage pools.
Assets measured at amortised cost are initially recognised at fair value, being the cash consideration to originate or purchase the asset including any directly
attributable transaction costs, and subsequently measured using the effective interest rate method.
Fair value through other comprehensive income (FVOCI)
Financial assets are classified as FVOCI where the associated business model objective is achieved by both collecting contractual cash flows and selling the
assets (“held to collect and sell” business model). The contractual terms of FVOCI assets give rise on specified dates to cash flows which are solely payments of
principal and interest on the outstanding balance.
This category comprises the Group’s portfolio of investment securities held in order to meet current and future liquidity requirements and which have been
assessed by the Group to be in a “held to collect and sell” business model. Consistent with the criteria for FVOCI, the Group collects contractual cash flows which,
without exception, meet the IFRS 9 SPPI definition and periodically sells a proportion of the portfolio to evidence the liquidity of the investment assets. In the case
of mortgage-backed securities, the SPPI criteria are only met where the underlying asset pools contain mortgages which are SPPI and the exposure to credit risk
inherent in the tranches held by the Society is equal to or lower than the exposure to credit risk of the underlying mortgage pools.
FVOCI assets are initially recognised at fair value, which is the cash consideration including any directly attributable transaction costs, and measured subsequently
at fair value. Gains and losses from changes in fair value are recorded in other comprehensive income via the fair value reserve, except for impairment losses
which are recognised in the Income Statement. Gains or losses arising on sale, including any cumulative gains and losses previously recognised in other
comprehensive income, are recognised in the Income Statement. Interest is calculated using the effective interest rate method.
The fair values of FVOCI assets are based on quoted prices or, if these are not available, valuation techniques developed by the Group. These include, but are not
limited to, the use of discounted cash flow models, option pricing models and recent arm’s length transactions.
Fair value through profit or loss (FVTPL)
Financial assets which do not meet the classification criteria to be held at amortised cost or FVOCI are measured at FVTPL.
This category includes derivative assets and the closed equity release portfolio (presented within loans and advances to customers). An assessment of the
contractual terms of the equity release loans concluded that the SPPI criteria, which must be satisfied to carry an asset at amortised cost or FVOCI, were not met.
In the Society’s Statement of Financial Position, certain investment securities issued by Group structured entities are measured at FVTPL.
The fair values of derivatives are based on level 2 valuation techniques, as described in section (f) below. Changes in the fair value of derivative assets are
presented within fair value gains/(losses) on financial instruments in the Income Statement offset, where the derivatives are hedging instruments in a qualifying
IAS 39 fair value hedge relationship, by the fair value movements on the corresponding hedged items. Interest arising on derivative financial instruments is
recognised within net interest on an accruals basis.
Due to the bespoke nature of equity release books, relevant market pricing data is not available. The fair value of the equity release portfolio is therefore
determined using an internal discounted cash flow model which estimates the amount and timing of future cash flows arising on redemption and discounts
these at assumed market rates to calculate the fair value of the mortgages. Model inputs are informed by a combination of the Society’s historic experience (e.g.
redemption rates) and economic forecast data (e.g. house price inflation indices). Under IFRS 13 ‘Fair Value Measurement’ and Amendments to IFRS 7 ‘Financial
Instruments: Disclosures’, the fair value measurement of equity release mortgages is categorised as level 3.
An entity may, at initial recognition or on adoption of IFRS 9, make an irrevocable designation to measure a financial asset at FVTPL, if doing so eliminates or
significantly reduces a measurement or recognition inconsistency that would arise if the asset were to be held at amortised cost or FVOCI. The Group and Society
have not designated any financial assets as FVTPL on adoption of IFRS 9 or subsequently.
b) Financial liabilities
In accordance with IFRS 9, all of the Group and Society’s financial liabilities are classified and subsequently measured at amortised cost except for financial
liabilities at fair value through profit or loss.
Amortised cost
This category includes shares, amounts due to credit institutions, amounts due to other customers, debt securities in issue and subordinated liabilities.
Liabilities subsequently measured at amortised cost are recognised initially at fair value, being the issue proceeds, net of premia, discounts and directly
attributable transaction costs incurred. They are subsequently measured at amortised cost using the effective interest rate method.
Fair value through profit or loss (FVTPL)
This category includes derivative liabilities for which changes in fair value are presented within fair value gains/(losses) on financial instruments in the Income
Statement offset, where the derivatives are hedging instruments in a qualifying IAS 39 fair value hedge relationship, by the fair value movements on the
corresponding hedged items. Interest arising on derivative financial instruments is recognised within net interest on an accruals basis.
The fair values of derivative liabilities are determined in accordance with the three tier valuation hierarchy as defined within IFRS 13 ‘Fair Value Measurement’
and in section (f) below.
An entity may, at initial recognition or on adoption of IFRS 9, make an irrevocable designation to measure a financial liability (that would otherwise be held at
amortised cost) at FVTPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency. The Group and Society have not designated
any financial liabilities as FVTPL on adoption of IFRS 9 or subsequently.
c) Impairment of financial assets
Impairment of financial assets
Expected credit losses (ECLs) are recognised for all financial assets carried at amortised cost or FVOCI under IFRS 9, and also for undrawn loan commitments
where a mortgage offer has been made but the loan is yet to be advanced and recognised in the Statement of Financial Position.
The year end modelled ECL has been updated where necessary, for example:
• Account level assumptions for commercial provisions have been refined to reflect the latest developments on an individual account level. Factors such as
strategy, rental cover and exit value valuation assumptions have been considered when informing these decisions.
• The macroeconomic scenarios have been updated to reflect the latest economic position in the UK at the reporting date, including assumptions of the
economy’s recovery following COVID-19 lockdowns, the cost of living squeeze and rising interest rates.
A number of overlays have been recorded at the year end, detailed below:
• Combustible materials overlay – exposures attached to flats where there is a risk of the presence of combustible materials which may result in reduced
valuations and/or an inability for borrowers to repay. In calculating the overlay a tiered increase in the Probability of Default (PD) based on risk categorisation
as set out by RICS has been assumed, together with costs of remedial work, leading to an overlay of £1.8m (2020/21: £1.3m).
• A PD overlay of £0.3m has been recorded as PDs are considered to be understated in the historic data under certain macroeconomic scenarios;
• The second charge book consists of legacy lending and it is anticipated that, for a proportion of accounts, underlying credit issues may exist which are not
reflected in our models. We therefore reflect an overlay for the impact of moving a proportion of loans from Stage 1 to Stage 2 of £0.2m (2020/21: £nil).
• The deferred payments overlay has reduced to nil (2020/21: £0.2m) as the majority of accounts in receipt of an overlay have returned to performing status. The
overlay recorded in respect of economic uncertainty in the prior year has also reduced to nil (2020/21: £3.0m across commercial and core residential mortgage
portfolios) as this has been incorporated into the ECL calculation.
104 105
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
1. Accounting policies
(continued)
Staging
At each reporting date, financial assets subject to the impairment requirements of IFRS 9 are categorised into one of three stages:
Stage 1
On initial recognition, financial assets which are not credit impaired and have not experienced a significant increase in credit risk (SICR) since initial recognition
are categorised as stage 1 and provision is made for 12 month ECLs, being the losses from default events expected to occur within the next 12 months. Assets
remain in stage 1 until such time as they meet the criteria for another stage or are derecognised.
Stage 2 (significant increase in credit risk)
Financial assets which are not in default, but have experienced a significant increase in credit risk (SICR) since initial recognition, are categorised as stage 2.
The loss allowance recognised is equivalent to lifetime ECL, being the loss arising from default events expected to occur over the lifetime of the financial asset.
Determining whether a SICR has occurred is a critical aspect of the IFRS 9 methodology and one which involves judgement, based on a combination of quantitative
and qualitative measures. As described in the ECL calculation sections which follow, the criteria applied vary across portfolios depending on the nature of the
portfolio and availability of relevant credit risk information but all include the IFRS 9 ‘backstop’ of 30 days past due as a stage 2 trigger.
Stage 3 (default)
Defaulted or credit-impaired financial assets are categorised as stage 3, requiring recognition of lifetime ECLs.
Transfers to lower stages (curing)
Financial assets in stages 2 or 3 can transfer back to stages 1 or 2, respectively, once the criteria for SICR or default cease to be met for a period of time defined
within the ECL methodology for that portfolio, sometimes known as the ‘cure’ period. In practice, this means that a stage 2 or 3 loan which ceases to breach the
threshold(s)/criteria for that stage will remain in the higher stage for a pre-determined number of months. The use of cure periods gives assurance that accounts
have rehabilitated before re-entering lower stages and reduces the level of volatility that might otherwise arise from accounts regularly migrating between stages.
Forward-looking ECL approach
ECL is measured as the present value of the difference between the cash flows contractually due on a financial asset or undrawn commitment and the cash flows
expected to be received. In the Statement of Financial Position, the loss allowance is presented as a reduction in the carrying value of the financial asset. In the
case of an undrawn loan commitment, the impairment provision is instead presented within provisions for liabilities.
For each of the Group and Society’s financial asset portfolios in the scope of IFRS 9 impairment, the estimate of ECL is unbiased and weighted to take into account
a range of possible outcomes.
In accordance with IFRS 9, forecasts of future economic conditions are integral to the ECL calculations for each portfolio. The Group currently models four forward-
looking macroeconomic scenarios: a central forecast with economic assumptions aligned to the Society’s Medium Term Plan (and therefore assigned the highest
weighting), together with upside, downside and stress scenarios. The scenarios have been updated with due regard to the latest market data available following
developments associated with the pandemic.
ECL calculation – core residential mortgages
For the core residential mortgage books, the impairment model employs industry-accepted statistical techniques to address the complex requirements of IFRS 9,
with model assumptions and parameters initially determined by regression analysis of historical default data. The assumptions are validated using ‘out of time’
samples, across a range of economic scenarios, enabling the predictive capabilities of the models to be confirmed.
The model incorporates quantitative factors for identifying a SICR by comparing reporting date lifetime probability of default (PD) with residual origination lifetime
PD. For the purposes of this quantitative staging assessment, mortgages are segmented by lending type (owner occupied or buy to let). Residual origination PD
curves and (relative and absolute) threshold levels are established via an iterative process involving statistical analysis of the Group’s default data. In addition, a
range of internally monitored potential impairment indicators has been selected as qualitative criteria for classifying an individual loan as stage 2. Examples of
qualitative indicators include cancelled direct debit instructions, certain forbearance measures and evidence of impaired credit history obtained from external
agencies.
The default criteria for core residential loans are entirely aligned with those used for capital and credit risk management purposes. Loans are considered to be in
default or credit-impaired if they are in arrears by three or more months, in litigation, possession or LPA receivership, or meet one of a range of internal ‘unlikely
to pay’ indicators.
Within the core residential model, ECL is calculated by multiplying the forward-looking PD, exposure at default (EAD) and loss given default (LGD). The model
outputs monthly ECLs, which are aggregated over the first 12 months to obtain 12 month ECL and over the life of the loan to calculate lifetime ECL.
The model combines a number of account-specific variables and forecasts of future economic conditions within the calculation of PD. Macroeconomic variable
inputs to the model are reviewed quarterly and include house price index (HPI), interest rates, unemployment and GDP. The variables were selected based on
statistical tests and other analysis which evidenced their correlation with credit risk.
The core residential impairment model aligns the Group’s capital and accounting approaches to the estimation of credit losses as closely as possible.
ECL calculation – undrawn commitments
The loss allowance for undrawn commitments is inferred from the core residential mortgage impairment model outputs for existing loans with similar risk
characteristics.
All undrawn commitments are currently allocated to stage 1 such that a 12-month ECL calculation is appropriate.
The Group's IFRS 9 provision requirements for undrawn commitments at 31 March 2021 and 31 March 2022 were negligible.
ECL calculation – second charge residential mortgages
For the closed second charge loan book, a SICR is assessed using external credit agency PD indicators. Absolute thresholds have been set based on analysis of
monthly PD scores from origination (or earliest available date) to point of default.
Second charge mortgages are considered to be in default if they are in arrears by three or more months or in bankruptcy, litigation or possession.
Impairment provisions for the closed second charge mortgage book are determined using a simple discounted cash flow model which segregates accounts by
payment status. Estimated future cash flows, which consider the forced sale property valuation and level of first charge debt remaining, are discounted to their
present value using the effective interest rate of the loan and compared with the account balance at the reporting date. This estimated loss on possession is
multiplied by the probability of possession occurring to calculate the ECL requirement.
The key macroeconomic variable affecting the level of second charge impairment losses is HPI, as forecast within the Group’s central, upside, downside and
stress scenarios.
ECL calculation – commercial mortgages
The key indicator of a SICR for a commercial loan is a downward migration in internal credit rating, determined via an established internal credit risk assessment
process. The internal grade is determined at an individual account level, combining expert judgement with prescriptive measures including, but not limited to,
loan to value and income/debt service coverage ratios.
Commercial loans are categorised as default if an LPA Receiver (or equivalent) has been appointed, if they are in arrears by greater than or equal to three months,
and/or are past scheduled maturity (unless past maturity by no more than 3 months and active negotiations to extend are in progress with the customer). Loans
not meeting these criteria may be classified as stage 3 based on expert management judgment of the perceived risk of non-payment.
The ECL requirements for commercial mortgages are assessed on an individual loan basis, with the right to off-setting ECL requirements where cross-
collateralisation exists between connected commercial mortgages, using cash flow scenario modelling. This involves estimating the timing and amount of future
cash flows, in the event of default, for one or more probability weighted account-specific scenarios based on the Group’s central forecast of economic conditions.
Applying the Group’s macroeconomic scenarios effectively creates a range of alternative outcomes in addition to the central forecast.
Estimated future cash flows, comprising rental receipts and final sales proceeds (each net of costs), are discounted at the effective interest rate of the loan and
compared with its carrying value to determine the ECL under each combination of account-specific and macroeconomic scenarios. The relevant macroeconomic
weightings are then applied to calculate the overall provision requirement at the reporting date.
ECL calculation – liquid assets
For liquid assets, comprising cash and balances with the Bank of England, loans and advances to credit institutions and investment securities, a SICR is
determined by counterparty type and adverse movements in counterparty credit rating beyond specified thresholds. None of the Group’s liquid assets are
categorised as stage 2 at the reporting date.
Liquid assets are in default if categorised as such by external credit rating agencies. The Group has never experienced an impairment loss or default on its
Treasury investment portfolio.
The ECL calculation for liquid assets multiplies the carrying value of the asset by a PD applicable to its credit rating at the reporting date. The PD is obtained from
publically available external credit rating agency data tables. The macroeconomic weighted scenarios are translated to shifts in counterparty credit ratings
thereby changing the PDs applied in the calculation.
The Group’s liquid asset provision requirements at 31 March 2021 and 31 March 2022 were negligible.
Write off of financial assets
Where a loan is not recoverable, it is written off against the related provision for loan impairment once all the necessary procedures have been completed and
the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in
the Income Statement.
d) Derecognition of financial assets and liabilities
The Group’s policy is to derecognise financial assets when the contractual right to the cash flows from the financial asset expires. The Group also derecognises
financial assets that it transfers to another party provided the transfer of the asset also transfers the right to receive the cash flows of the financial asset and
substantially all the risks and rewards of ownership.
The Group derecognises financial liabilities only when the obligation specified in the contract is discharged, cancelled or has expired.
106 107
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
1. Accounting policies
(continued)
e) Modification of contractual cash flows
The Group may, in certain circumstances, renegotiate or otherwise modify the contractual cash flows of loans and advances to customers. If qualitative
assessments conclude that the new cash flows are substantially different to the original cash flows, the original loan is derecognised and a new financial asset
recognised in the Statement of Financial Position. If the modified cash flows are not substantially different, a modification gain or loss is recognised in profit or
loss, calculated by adjusting the loan’s gross carrying amount to the present value of the modified contractual cash flows discounted at the asset’s original
effective interest rate.
Where contractual terms are modified due to financial difficulties of the borrower (forbearance), the modification gain or loss is included within impairment on
loans and advances; otherwise it is presented within interest receivable.
For residential mortgages, a change of product at the end of a fixed rate deal period is not considered to be a modification to the contract but instead a repricing
to market interest rates which was envisaged at the start of the customer relationship.
f) Determination of fair value
The Group determines fair values by the three tier valuation hierarchy as defined within IFRS 13 ‘Fair Value Measurement’ and Amendments to IFRS 7 ‘Financial
Instruments: Disclosures’.
Level 1:
For financial instruments traded in active markets, the determination of fair values of financial assets and financial liabilities is based on quoted market
prices or dealer price quotations. This includes listed equity securities and quoted debt instruments on major exchanges (for example, FTSE) and broker quotes
(for example, from Bloomberg).
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry
group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions in an orderly transaction between
market participants. If the above criteria are not met, the market is regarded as being inactive. Indications that a market is inactive are when there is a wide bid-
offer spread or significant increase in the bid-offer spread or there are few recent transactions.
Level 2:
For all other financial instruments, fair value is determined using valuation techniques. In these techniques, fair values are estimated from observable
data in respect of similar financial instruments, using models to estimate the present value of expected future cash flows or other valuation techniques, using
inputs (for example, SONIA yield curve, volatilities and counterparty spreads) existing at the reporting dates.
The Group uses widely recognised valuation models for determining fair values of non-standardised financial instruments of lower complexity, such as interest
rate swaps. For these financial instruments, inputs into models are generally market observable.
Level 3:
Fair value is determined using valuation techniques where significant inputs are not based on observable market data.
The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would
have been determined by market participants acting at arm’s length.
g) Sale and repurchase agreements
Investment and other securities may be lent or sold subject to a commitment to repurchase them. Where substantially all of the risks and rewards of ownership
remain with the Group, the securities are retained on the Statement of Financial Position. The counterparty liability is recognised separately in the Statement of
Financial Position as appropriate. The difference between the sale and repurchase price is accrued over the life of the agreements.
h) Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments to hedge its exposure to interest rate risk arising from operational, financing and investment activities.
In accordance with its Treasury and Financial Risk Management Policy and the Building Societies Act 1986, the Group does not hold or issue derivative financial
instruments for trading purposes.
Derivative financial instruments (both assets and liabilities) are initially recognised and subsequently held at fair value in the Statement of Financial Position with
changes in their fair value going through the Income Statement. However, by applying the hedge accounting rules set out in IAS 39, the changes in fair value of
derivatives used to hedge particular risks can be offset in the Income Statement.
i) Fair value hedges
– The Group undertakes hedges of the fair value of recognised assets or liabilities (fair value hedges) provided that certain criteria are met.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Income Statement, together with any changes in
the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment
to the carrying amount of a hedged item, for which the effective interest rate method is used, is amortised to profit or loss over the remaining expected life of the
previously hedged item.
The Group documents, at the inception of any hedging transaction, the relationship between the hedging instrument and the hedged items, as well as its risk
management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an
ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged
items.
ii) Derivatives that do not qualify for hedge accounting
– Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any
derivative instrument that does not qualify for hedge accounting are recognised immediately in the Income Statement.
i) Offsetting
Offsetting financial assets and financial liabilities are offset and the net amount presented within the Statement of Financial Position when, and only when,
the Group has a legally enforceable right to offset the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability
simultaneously. There are no financial assets or liabilities which are offset within the Statement of Financial Position and all financial assets and liabilities are
presented on a gross basis. Income and expenses are presented on a net basis only when permitted under IFRS.
Equity instruments
Equity instruments, comprising core capital deferred shares (CCDS), subscribed capital and, in previous years, profit participating deferred shares (PPDS) are
financial instruments issued which do not give rise to a contractual obligation to deliver cash or another financial asset to the holder. Where such an obligation
exists, the instrument is classified as a financial liability.
The proceeds of issuing equity instruments are recognised within equity, net of directly attributable costs and tax.
Distributions to holders of equity instruments are recognised directly in equity as a deduction from general reserves.
Intangible assets
Computer software
Computer software which is not an integral part of the related hardware is recorded as an intangible asset. The identifiable and directly associated external and
internal costs of acquiring and developing software are capitalised where the software is controlled by the Group, and where it is probable that future economic
benefits that exceed its cost will flow from its use over more than one year. Intangible assets are held at amortised cost; amortisation is charged to the Income
Statement on a straight line basis over the estimated useful life of 3 to 10 years. Intangible assets are subject to regular impairment reviews. Costs associated
with maintaining software are recognised as an expense when incurred.
Property, plant and equipment
Land and buildings comprise mainly branches and offices. All property, except the Head Office, is stated at valuation less depreciation. The Head Office building
and plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the
items. All gains on the revaluation of property are recognised in the revaluation reserve when they arise. Freehold branches are revalued every 3 to 5 years by
an independent firm of valuers
Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the
Income Statement during the financial period in which they are incurred.
Land is not depreciated. Depreciation on other assets is calculated using the straight line method (unless otherwise stated) to allocate their cost less their residual
values over their estimated useful lives, as follows:
Freehold branches
Up to 50 years
Head office
Up to 25 years
Leasehold improvements
Annual instalments over the period of the lease
Equipment, fixtures and fittings and motor vehicles
• Office equipment
3 to 7 years
• Computer equipment
3 to 7 years
• Motor vehicles
25% per annum reducing balance
• Refurbishments
5 to 10 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each year end date. Assets that are subject to amortisation are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written
down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the
higher of the asset’s fair value less costs to sell and value in use.
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the Income Statement.
108 109
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
1. Accounting policies
(continued)
Leases
When the Group enters into a contract which conveys the right to control the use of an identified asset for a period of time in excess of 12 months in exchange
for consideration, it recognises a right-of-use (ROU) asset and a corresponding lease liability in the Statement of Financial Position. The majority of the Group's
leases relate to its branch property network.
The lease liability is measured at the present value of the remaining lease payments at the commencement date, discounted using the Group's incremental
borrowing rate. The lease term incorporates lease extension or termination options where they are reasonably certain to be exercised. The incremental borrowing
rate is determined with reference to the market pricing of securities with similar risk characteristics and terms to the leased assets at the commencement date.
The carrying value of the lease liability is adjusted for interest charged and repayments. The lease liability is remeasured for changes in future lease payments,
the lease term or the Group's assessment of whether it will exercise a lease extension or termination option. Any remeasurement results in a corresponding
adjustment to the ROU asset. Interest is charged on the lease liability at the Group's incremental borrowing rate and recorded in interest expense and similar
charges within the Income Statement.
The ROU asset is measured at cost, less any accumulated depreciation and impairment losses, and adjusted for remeasurement of the corresponding lease
liability. The initial measurement of the ROU asset includes the lease liability, initial direct costs, lease payments made prior to the commencement date and lease
incentives received. It is subsequently depreciated using the straight line method over the shorter of the asset's estimated useful life and the period to the end of
the lease term. ROU assets are subject to an annual impairment assessment.
As permitted by IFRS 16, the Group does not recognise a ROU asset or lease liability for leases of low value or with lease terms of less than 12 months. For these
leases, payments are recognised on a straight line basis over the lease term and disclosed within administrative expenses in the Income Statement.
The Group has elected to separate its lease components and non-lease components for its property leases (e.g. service charges).
In the Statement of Cash Flows, payments of lease liabilities are categorised as cash flows from financing activities.
Where the Group acts as a lessor, these leases are treated as operating leases. The Group recognises lease payments received in line with receipt of payments
in the Income Statement.
Determining the incremental borrowing rate used to discount the future lease payments involves a degree of estimation uncertainty. However, these judgements
and estimates are not deemed critical, as they do not materially impact the financial statements.
Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash comprises cash in hand and loans and advances to credit institutions repayable on demand. Cash
equivalents comprise highly liquid investments that are convertible into cash with an insignificant risk of changes in value, with maturities of 90 days or less from
the date of acquisition.
Taxation
Tax on the profit/loss for the year comprises current tax and deferred tax. Income tax is recognised in the Income Statement except to the extent that it relates
to items recognised directly in equity, in which case it is recognised in other comprehensive income within the Statement of Comprehensive Income or directly
in equity.
Current tax is the expected tax payable/receivable on the taxable income/expense for the year, using the tax rate which applies to the accounting period ending
at the date of the Statement of Financial Position, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided in full, using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is determined using tax rates (and laws) that have been substantively enacted by the year end date and are expected to apply when the related
deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can be utilised.
Provisions and contingent liabilities
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of
resources will be required to settle the obligation and the amount can be reliably estimated.
A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events, not wholly within the control of the Group, is a contingent liability. A contingent liability is disclosed but not recognised in the Statement of Financial
Position.
Employee benefits
The Group provides both a defined benefit scheme (closed to new employees from 2002/3 and accruals from 2009/10) and a defined contribution scheme
on behalf of staff and Directors. The defined benefit scheme is funded by contributions from the Society at rates assessed by independent actuaries. These
contributions are invested separately from the Group’s assets. The Scheme assets are measured at market value at each year end date and the liabilities are
measured using the projected unit valuation method, by qualified actuaries, discounted using a corporate bond rate. The resulting pension scheme surplus or
deficit is recognised in the Statement of Financial Position.
Actuarial gains and losses are recognised in full in the period in which they occur. As permitted by the revised standard (IAS 19), actuarial gains and losses are
recognised outside profit or loss in other comprehensive income, as an increase or decrease in general reserves.
Net interest, comprising interest income on plan assets less interest costs on scheme liabilities, and other expenses relating to the defined benefit pension
scheme are recognised in the Income Statement. Actuarial gains or losses, that are gains or losses arising from differences between previous actuarial
assumptions and actual experience, are recognised in the Statement of Comprehensive Income.
For defined contribution plans, the contributions are recognised as employee benefit expenses in the Income Statement when they are due, in accordance with
the rules of the scheme. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
Critical accounting estimates and judgements in applying accounting policies
In the process of applying accounting policies, the Group makes various judgements, estimates and assumptions which affect the amounts recognised in the
financial statements. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of
future events that are believed to be reasonable under the circumstances.
Significant judgements in applying accounting policies
Impairment
For IFRS 9 impairment, judgement is required to define the staging criteria, i.e. what constitutes a significant increase in credit risk (stage 2) and what circumstances
give rise to a default (stage 3). Where assets meet the stage 2 or 3 criteria, lifetime ECL must be recognised.
The staging methodologies for each portfolio are detailed within the financial assets (impairment) accounting policy in this note. Model monitoring and model
validation procedures are used to continually evaluate the appropriateness of the staging criteria and macroeconomic variable inputs.
Securitisation transactions
In order to determine whether the Group controls a structured entity or not, the Group has to make judgements about the degree of control and assess the ability
to make operational decisions for the structured entity in question. In many instances, elements are present that, when considered in isolation, indicate control
or lack of control over a structured entity, but when considered together make it difficult to reach a clear conclusion. When assessing whether the Group has to
consolidate a structured entity it evaluates a range of factors following the rules and guidance of IFRS 10 ‘Consolidated Financial Statements’.
Where the Group has concluded that it does, in substance, control the entity to which financial assets have been transferred, the structured entity is included in
these financial statements and the transferred assets are recognised in the Group’s Statement of Financial Position. Where the securitised assets were originated
by the Society they continue to be recognised in the Society’s Statement of Financial Position. Management reassessed the accounting for Sandwell Commercial
Finance no. 1 plc and Sandwell Commercial Finance no. 2 plc, and reached a judgement that these entities no longer met consolidation criteria as set out in
IFRS 10 ‘Consolidated Financial Statements’. In particular, the Group’s limited exposure to credit losses in these entities (through deferred consideration and
subordinated debt) has been fully written down, with little prospect of recovery, meaning that there is no longer any future exposure to variability of returns from
these entities. As a result, these entities were deconsolidated with effect from 31 December 2019 and a gain on deconsolidation was recorded; had the judgement
to deconsolidate been reached in an earlier accounting period, this gain would also have been recognised earlier. Consequently the Group accounts do not
include the results of these entities after deconsolidation.
Sources of estimation uncertainty
Impairment on loans and advances – forward-looking ECL approach
The estimation of ECLs is inherently uncertain and the IFRS 9 impairment models incorporate a number of assumptions and estimates, changes in which could
materially affect the carrying amounts of assets and liabilities within the next financial year. The IFRS 9 requirements to incorporate forward-looking information
within the ECL calculation, including forecasts of future macroeconomic conditions, necessitate judgement thereby increasing the potential for volatility in future
periods.
The Group’s impairment models incorporate four macroeconomic forecasts (central, upside, downside and stress), each comprising a number of economic
variables considered to be credit risk drivers. As already explained, economic scenarios and weightings have been updated to reflect the changing economic
conditions to which the Group is exposed.
Impairment on loans and advances - residential mortgages (core and second charge)
The following table indicates the main economic variables included within the IFRS 9 macroeconomic scenarios at 31 March 2022 and the associated
weightings, along with the sensitivity to the total residential and commercial ECL provision arising from the application of 100% weightings to each scenario. The
macroeconomic scenarios and associated weightings at 31 March 2021 are also provided for comparative purposes.
110 111
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
1. Accounting policies
(continued)
Macroeconomic scenarios as at 31 March 2022:
Current scenario (%)
Increase/
(decrease) in
provision with
100% scenario
weighting (£m)
Increase/
(decrease) in
provision with
10% increase
in scenario
weighting* (£m)
Scenario
weighting 2022/23 2023/24 5 year average
Central
scenario
60%
Bank Rate 1.3 2.0 1.6
(9.5) -
HPI 1.5 1.5 2.1
Unemployment 4.1 4.3 4.3
GDP 4.0 1.6 2.0
Upside
scenario
5%
Bank Rate 2.0 2.5 2.6
(12.4) (0.3)
HPI 6.3 4.1 4.5
Unemployment 3.9 3.6 3.1
GDP 5.7 2.9 3.0
Downside
scenario
25%
Bank Rate 3.0 4.0 3.2
14.0 2.4
HPI (10.8) (8.5) (3.4)
Unemployment 5.9 5.5 5.2
GDP (2.0) 1.2 0.5
Stress
scenario
10%
Bank Rate - (0.1) (0.1)
30.9 4.1
HPI (20.0) (10.0) (5.6)
Unemployment 12.0 10.0 8.8
GDP (10.0) - -
*(increase in 10% weighting with a corresponding reduction in the central scenarios).
Macroeconomic scenarios as at 31 March 2021:
Current scenario (%)
Increase/
(decrease) in
provision with
100% scenario
weighting (£m)
Increase/
(decrease) in
provision with
10% increase
in scenario
weighting* (£m)
Scenario
weighting 2021/22 2022/23 5 year average
Central
scenario
50%
Bank Rate 0.1 0.1 0.2
(15.2) -
HPI 1.9 (0.2) 2.0
Unemployment 6.3 5.7 5.2
GDP 4.4 6.6 3.3
Upside
scenario
10%
Bank Rate 0.1 0.3 0.5
(18.7) (0.3)
HPI 4.0 5.0 3.9
Unemployment 5.6 3.4 3.7
GDP 6.2 7.4 4.5
Downside
scenario
25%
Bank Rate 0.1 (0.1) -
11.5 2.7
HPI (9.1) (5.1) (2.3)
Unemployment 8.3 7.8 6.9
GDP 0.7 2.1 1.4
Stress
scenario
15%
Bank Rate - (0.1) (0.1)
45.1 5.9
HPI (20.0) (10.0) (5.6)
Unemployment 10.0 12.0 9.2
GDP (15.0) (5.0) (2.0)
*(increase in 10% weighting with a corresponding reduction in the central scenarios).
Key assumptions for the residential portfolios are the weightings of the macroeconomic forecasts, which each incorporate a different outlook for the economic
variables shown in the table above, the forecast of future house price inflation and the relative threshold used to identify a significant increase in credit risk. The
sensitivity of the residential provision calculations to the key assumptions in the current and prior year is as follows:
Assumption Change to current assumption
Increase/(Decrease) in
impairment provision
2022
£m
Increase/(Decrease) in
impairment provision
2021
£m
HPI growth Increase of 5.0%
(0.2)
(0.5)HPI growth Decrease of 5.0%
0.3
0.7Quantitative threshold for identifying
a significant increase in credit risk
Relative decrease of 7%
0.8
2.9Impairment on loans and advances - commercial mortgages
Consistent with residential mortgages, the IFRS 9 ECL calculation for the commercial portfolio incorporates central, upside, downside and stress economic
scenarios with weightings of 60%, 5%, 25% and 10% respectively.
112 113
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
2.
Interest receivable and similar income
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
On financial assets not at fair value through profit or loss:
Loans fully secured on residential property
91.2
88.669.3
69.6Other loans
Connected undertakings
-
-23.0
23.9Loans fully secured on land
6.1
9.01.4
1.4Investment securities
1.6
1.44.8
4.6Other liquid assets
1.1
0.41.1
0.4On financial assets at fair value through profit or loss:
Loans fully secured on residential property
0.7
0.80.7
0.8Net expense on derivative financial instruments
(13.4)
(16.0)
(10.9)(13.3)
Total interest receivable and similar income
87.3
84.2
89.487.4
Interest receivable includes:
Income from fixed income securities
0.1
-
0.1-
During the year ended 31 March 2022, the total interest receivable and similar income calculated using the effective interest method was: Group £98.4m (2020/21:
£98.0m) and Society £98.0m (2020/21: £98.5m) for financial assets held at amortised cost, and Group £1.6m (2020/21: £1.4m) and Society £1.6m (2020/21: £1.4m)
for financial assets held at fair value through other comprehensive income. Accrued interest on qualifying derivative financial instruments are recognised in interest
receivable/payable depending on whether they hedge assets/liabilities respectively.
Included within interest receivable and similar income is interest accrued on impaired residential mortgage assets: Group £1.2m (2020/21: £1.3m) and Society £0.5m
(2020/21: £0.6m) and interest accrued on impaired commercial mortgage assets: Group £4.2m (2020/21: £4.6m) and Society £nil (2020/21: £nil). For the purposes of
this disclosure, impaired mortgage assets are those which have been categorised as stage 3 under IFRS 9.
3. I
nterest expense and similar charges
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
On financial liabilities not at fair value through profit or loss:
Shares held by individuals
18.8
19.618.8
19.6Deposits from banks and other deposits
2.6
2.32.8
1.8Debt securities in issue
1.3
1.9-
-Subordinated liabilities
2.5
2.52.5
2.5Deemed loans
-
0.14.1
5.7Lease liabilities
0.1
0.10.1
0.1On financial liabilities at fair value through profit or loss:
Net income on derivative financial instruments
(0.1)
-
(0.1)-
Total interest expense and similar charges
25.2
26.5
28.229.7
1. Accounting policies
(continued)
In addition to the scenario weightings and account-specific factors that impact cash flows, the key model assumption for commercial provisioning is considered
to be the exit yield requirement, which is used to estimate the cash flows arising from realisation of the property values on sale. While interest rates also have a
significant impact on the ECL, via the discount factor applied in the model, compensating economic hedge arrangements would substantially offset the provision
movement in profit or loss terms with an opposing fair value movement. Compared with the central economic forecast, the exit yield requirement for each loan
increases by 0.9% and 2.0% in the downside and stress scenarios respectively and reduced by 0.2% in the upside scenario. This compares to an average exit
yield of 8%.
The tables below illustrates the sensitivity of the commercial ECL calculation to the central scenario weighting and exit yield requirement.
Assumption Change to current assumption
Increase/(Decrease) in
impairment provision
2022
£m
Increase/(Decrease) in
impairment provision
2021
£m
Exit yield requirement Increase of 0.5% across all scenarios
2.7
4.1Fair value of equity release mortgages
Under IFRS 9, the mature and closed book of equity release mortgages is held at FVTPL with fair values determined using a discounted cash flow model which
incorporates a number of judgemental assumptions to determine the amount and timing of future cash flows arising on mortgage redemption. Certain model
inputs, such as redemption rates, are informed by historic experience, with observed closure curves extrapolated to give an expected maturity profile for the
remaining book. Other model assumptions, such as house price indices, are based on the Group’s view of future economic conditions. The discount factor used
to calculate the present value of the future cash flows has been determined with due regard to credit, market and liquidity risk.
Key sensitivities are in relation to HPI, discount rate and time to redemption as shown in the table below.
Assumption Change to current assumption
Increase in fair value loss
2022
£m
Increase in fair value loss
2021
£m
HPI growth Increase of 5.0%
(0.4)
(0.4)HPI growth Decrease of 5.0%
0.4
0.5Discount rate Increase of 0.25%
0.1
0.1Time to redemption Increase of 1 year
0.2
0.3
Effective interest rate
The calculation of an effective interest rate requires the Group to make assumptions around the expected lives of mortgages. Management regularly reviews
these assumptions and compares with actual results.
If the average lives of the mortgages were to increase by 5%, representing 1.2 months, the carrying value of mortgages would increase by £3.8m (2020/21: £4.9m)
with a corresponding increase in interest income.
Investment properties
Independent specialist valuers have undertaken a valuation review of the portfolio of residential investment properties on an open market value for existing use
basis, calculated on the net income allowing for reversionary potential. In making the judgment, consideration has been given to assumptions that are mainly
based on market conditions existing at the Statement of Financial Position date. These estimates are regularly compared to actual market data and actual
transactions entered into by the Group. The calculation of the fair value of investment properties incorporates house price assumptions which are regularly
reviewed by management.
If house prices were to change by 5%, the carrying value of the investment properties would change by £7.4m (2020/21: £7.2m) with a corresponding change to
income.
Pensions
The Group operates a defined benefit pension scheme. The year end valuation of the scheme assets and liabilities relies on estimates of future interest, inflation
and mortality rates informed by external advice from the scheme actuaries. The main assumptions used in the valuation, together with sensitivity analysis of the
impact of movements in key variables, are outlined in note 31 to the Accounts.
ECL calculation – investments in subsidiary undertakings
Investments in subsidiary undertakings comprise (minimal) share capital and intercompany loans. Intercompany loans are financial assets of the Society which
are measured at amortised cost and therefore subject to the impairment requirements of IFRS 9.
For lending subsidiaries, a SICR is deemed to occur when the net assets of the subsidiary are lower than the amount owed to the Society, calling into question
the recoverability of the amount owed to the Society. Where an impairment is recorded, the intercompany loan is categorised as stage 2; all other intercompany
loans are recorded as Stage 1. The ultimate recovery of these amounts is linked to the recoverability of the underlying loans and advances, for which the ECL
methodology, including related judgments and estimation techniques, has been provided above. The impairment provision requirement is reviewed periodically.
114 115
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
Wages and salaries include £0.1m (2020/21: £0.1m) redundancy costs paid as part of the restructuring and rationalisation undertaken during the year.
Other assurance services provided by the external auditor comprise £5,000 (2020/21: £5,000) in respect of audit-related assurance services and £25,000 (2020/21:
£nil) in respect of other assurance services, in each case excluding VAT.
6. Administrative expenses
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Staff costs
Wages and salaries
21.2
21.619.9
21.1Social security costs
2.1
2.12.1
2.1Other pension costs
1.8
1.91.7
1.8Other administrative expenses
20.4
13.5
20.211.4
45.5
39.1
43.936.4
Other administrative expenses include:
Remuneration of auditor (excluding VAT element)
Audit of these financial statements
0.3
0.50.3
0.5Audit of the subsidiary financial statements
0.2
0.1
--
4. Other operating income
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Other operating income includes:
Rent receivable on investment property
7.3
7.0-
-Operating expenses on investment property
(3.6)
(3.2)-
-Pension fund net interest (note 31)
-
(0.1)-
(0.1)Total other operating income
3.7
3.7
-
(0.1)
5. Fair value gains on financial instruments
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Fair value hedges
Derivatives designated as fair value hedges
66.5
15.766.5
15.7Adjustments to hedged items in fair value hedge relationships
(63.6)
(13.6)(63.6)
(13.6)Fair value gains on hedge accounting
2.9
2.12.9
2.1Other derivatives
7.5
1.56.3
-Financial instruments mandatorily at fair value through profit or loss
0.2
(0.2)
0.2
(0.3)Total fair value gains on financial instruments
10.6
3.4
9.4
1.8
7. Employee numbers
Group and
Society
2022
Group and
Society
2021
The average number of employees employed throughout the year was:
Full time
429
480Part time
197
195
626
675
Building Society
Central administration (Society and subsidiaries)
458
482Branches
168
193
626
675
8. Directors’ emoluments
Total Directors' emoluments including expenses amounted to £1.879m (2020/21: £1.612m). Full details are given in the Directors' Remuneration Report on pages 72 to 83.
All employees were employed within the United Kingdom.
9. Taxation
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
UK corporation tax at 19% (2020/21: 19%)
1.1
0.8 2.2
2.2Corporation tax - adjustment in respect of prior years
-
0.2
2.1 0.8
Total current tax
1.1
1.0
4.3 3.0
Deferred tax
Current year
3.0
(1.5) 1.7
(2.7)Adjustment in respect of prior periods
(2.1)
0.1 (2.0)
0.1Effect of changes in tax rates
(3.2)
-
(3.6)-
Tax on profit/(loss) on ordinary activities
(1.2)
(0.4)
0.4 0.4
UK corporation tax has been calculated at the applicable prevailing rate.
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Profit/(loss) before tax
23.2
4.7
12.9 (12.7)
Profit/(loss) before tax multiplied by the UK standard rate of tax of 19%
(2020/21: 19%)
4.4
0.9
2.5 (2.4)
Effects of:
Income not taxable and expenses not deductible for tax purposes
0.2
0.2 2.1
5.8 Changes to tax rate
(3.2)
- (3.6)
- Adjustment in respect of prior years
(2.1)
0.3 -
0.9 Transfer pricing adjustments
-
- (0.6)
(0.4)Deconsolidation adjustments
(0.2)
(0.3) -
- Write down/(utilisation and recognition) of deferred tax assets
(0.4)
(1.4) -
(3.5)Revaluation
0.1
(0.1)
- -
Tax (credit)/charge
(1.2)
(0.4)
0.4 0.4
The tax charge is reconciled to the profit/(loss) before tax in the Income Statement as follows:
116 117
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
11. Investment securities
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Listed transferable investment securities:
Fair value through other comprehensive income
286.4
275.6286.4
275.6Amortised cost
-
-453.7
508.9Fair value through profit or loss
0.5
0.9
0.50.9
Total investment securities
286.9
276.5
740.6785.4
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
At beginning of year
276.5
285.3
785.4
831.5
Investment securities with maturities > 3 months at date of acquisition:
Additions
101.9
41.5101.9
41.5Disposals (sale and redemption)
(90.5)
(54.0)(145.7)
(91.3)(Losses)/gains from changes in fair value
(1.0)
3.7
(1.0)3.7
At end of year
286.9
276.5
740.6785.4
The Directors consider that the primary purpose for holding investment securities is prudential. The investment securities are held as liquid assets with the intention of
use on a continuing basis in the Group's activities.
The movement in investment securities is summarised as follows:
10.
Cash and balances with the Bank of England
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Cash in hand
1.8
1.91.8
1.9Cash ratio deposit with the Bank of England
15.1
11.815.1
11.8Other deposits with the Bank of England
635.1
302.8
635.1302.8
652.0
316.5
652.0316.5
Cash ratio deposits are mandatory deposits with the Bank of England which are not available for use in the Group's day-to-day operations. Cash in hand and the
mandatory deposit with the Bank of England are non-interest bearing.
12.
Derivative financial instruments and hedge accounting
(a) Use of derivative financial instruments for interest rate risk management purposes
The Group is exposed to the risk that movements in interest rates change the value of, or income arising from, its assets and liabilities. This type of market risk is known
as interest rate risk.
The Group has an integrated approach to interest rate risk management, taking advantage of natural hedges which exist within the Group Statement of Financial
Position and using derivatives where no such natural hedges exist. Derivatives are financial instruments whose value is derived from one or more underlying price,
rate or index (such as interest rates, exchange rates or stock market indices) but have a smaller or no initial net investment relative to financial assets/liabilities offering
the same risk/return, as cash flows are generally settled at a future date.
The derivatives currently held by the Group comprise interest rate swaps with highly rated counterparties. Counterparty credit risk is mitigated by the posting of
collateral and the use of central clearing counterparties. In accordance with the Building Societies Act 1986, derivatives are solely used for risk mitigation and never
for trading purposes. From an accounting perspective, where the IAS 39 criteria are met, the derivatives are designated as hedging instruments in fair value hedge
relationships and hedge accounting is adopted. Otherwise, the derivatives are held as economic hedges and valued at fair value through profit or loss. The accounting
policies for derivatives and hedge accounting are described in note 1 to the accounts.
The following table describes the significant activities undertaken by the Group, the associated risks, the type of derivatives typically used in managing such risks and
related hedge relationships.
Activity Risk Derivative type
Hedge
relationship
Hedge
accounting
Fixed rate mortgage lending Sensitivity to changes in interest rates Pay fixed receive floating interest rate swaps Fair value hedge
Yes
Fixed rate investment securities Sensitivity to changes in interest rates Pay fixed receive floating interest rate swaps Fair value hedge
Yes
Fixed rate savings products Sensitivity to changes in interest rates Receive fixed pay floating interest rate swaps Fair value hedge
Yes
Variable rate debt securities
in issue
Sensitivity to fluctuations in interest
rates between quarterly reset dates
Pay floating receive floating interest rate swaps Economic hedge No
Commercial mortgage loss
provisions
Sensitivity to changes in interest rates Pay fixed receive floating interest rate swaps Economic hedge No
These arrangements have been established solely for the mitigation of interest rate risk. Other risks, such as credit risk, are separately managed but not hedged.
The interest rate risk component of the hedge relationship is ascertained with reference to the benchmark rate of interest being hedged.
Group
Carrying value in the
Statement of Financial Position
Notional amount
2022
£m
Assets
2022
£m
Liabilities
2022
£m
Interest rate swaps
Designated as fair value hedges
2,099.7 48.9 (8.3)
Economic hedges
656.7 3.5 (3.2)
Total derivatives held for hedging purposes
2,756.4 52.4 (11.5)
Group
Carrying value in the
Statement of Financial Position
Notional amount
2021
£m
Assets
2021
£m
Liabilities
2021
£m
Interest rate swaps
Designated as fair value hedges 1,995.3 4.3 (31.1)
Economic hedges
1,214.6 2.2 (9.4)
Total derivatives held for hedging purposes
3,209.9 6.5 (40.5)
The following tables show the notional and carrying amounts of derivative financial instruments at the year-end date.
(b) Derivative financial instruments in the Statement of Financial Position
118 119
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
Society
Carrying value in the
Statement of Financial Position
Notional amount
2021
£m
Assets
2021
£m
Liabilities
2021
£m
Interest rate swaps
Designated as fair value hedges 1,995.3 4.3 (31.1)
Economic hedges
967.2 2.2 (8.0)
Total derivatives held for hedging purposes
2,962.5 6.5 (39.1)
Society
Carrying value in the
Statement of Financial Position
Notional amount
2022
£m
Assets
2022
£m
Liabilities
2022
£m
Interest rate swaps
Designated as fair value hedges
2,099.7 48.9 (8.3)
Economic hedges
456.5 3.3 (3.1)
Total derivatives held for hedging purposes
2,556.2 52.2 (11.4)
(c) Hedge accounting
(i) Fair value hedges
Hedges of the fair value of recognised assets or liabilities are termed ‘fair value hedges’. Under hedge accounting rules, changes in the fair value of derivatives
(hedging instruments) are offset against changes in the fair value of hedged assets or liabilities (hedged items) in the Income Statement. The hedging ratio is the ratio
of the notional value of the derivatives to the principal of the assets or liabilities being hedged.
(ii) Hedge effectiveness
For a fair value hedge of interest rate risk, hedge effectiveness is determined by comparing changes in the fair value of the derivative with changes in the fair value of
the hedged asset or liability attributable to changes in interest rates.
The primary sources of ineffectiveness for the Society’s fair value hedge relationships are:
• Differences in the timing of cash flows between the interest rate swaps and the hedged mortgages or savings products.
• Differences between actual and expected prepayment profiles of the hedged items.
• Differences between the contractual maturity dates of the derivatives and the hedged items.
(iii) Portfolio hedges
The Society designates fair value hedge relationships in which derivative financial instruments hedge a portfolio of fixed rate mortgages or savings products, reducing
the Income Statement volatility that would otherwise arise from the derivatives being measured at fair value through profit or loss and the related hedged items at
amortised cost.
The Society’s hedging approach is dynamic, as the mortgage portfolios are constantly changing due to new advances, contractual repayments and early redemptions.
To manage the interest rate risk inherent within fixed rate mortgage lending, the Society frequently enters into and closes interest rate swap arrangements. It assesses
hedging ratios and hedge effectiveness on a monthly basis.
(iv) Derivatives not in a designated hedge relationship
In cases where the Group holds derivatives for hedging purposes, but the prescriptive IAS 39 criteria for application of hedge accounting are not met, the derivatives
are held at fair value through profit or loss. Changes in the fair value of these derivatives are included within ‘Fair value gains/(losses) on financial instruments’ on the
Income Statement.
At 31 March 2022
Group and Society
Less than 3 months 3 to 12 months 1 to 5 years Over 5 years
Fair value hedge of fixed rate residential loans
Interest rate swap notional (£m) 93.1 459.6 1,439.8 20.0
Average fixed rate 2.78% 0.98% 0.62% 1.81%
Fair value hedge of fixed rate investment securities
Interest rate swap notional (£m) - - - -
Average fixed rate - - - -
Fair value hedge of fixed rate savings products
Interest rate swap notional (£m) - - - -
Average fixed rate - - - -
Group
Fair value hedge of fixed rate commercial loans
Interest rate swap notional (£m) - 30.6 21.5 34.9
Average fixed rate - 10.07% 8.73% 10.03%
Society
Fair value hedge of intercompany loans*
Interest rate swap notional (£m) - 30.6 21.5 34.9
Average fixed rate
- 10.07% 8.73% 10.03%
The following tables analyse the notional value and average fixed rate of interest rate swaps in designated hedge relationships by contractual maturity date.
At 31 March 2021
Group and Society
Less than 3 months 3 to 12 months 1 to 5 years Over 5 years
Fair value hedge of fixed rate residential loans
Interest rate swap notional (£m) 38.0 502.6 1,318.9 38.9
Average fixed rate 1.60% 0.61% 0.57% 0.57%
Fair value hedge of fixed rate investment securities
Interest rate swap notional (£m) - - - -
Average fixed rate - - - -
Fair value hedge of fixed rate savings products
Interest rate swap notional (£m) - - - -
Average fixed rate - - - -
Group
Fair value hedge of fixed rate commercial loans
Interest rate swap notional (£m) - 0.7 42.6 53.6
Average fixed rate - 5.12% 4.26% 5.06%
Society
Fair value hedge of intercompany loans*
Interest rate swap notional (£m) - 0.7 42.6 53.6
Average fixed rate
- 5.12% 4.26% 5.06%
*The Society holds interest rate swaps to mitigate interest rate risk on commercial mortgages originated by its subsidiary West Bromwich Commercial Limited (WBCL).
At Group level the derivatives and commercial mortgages are in designated IAS 39 hedge relationships. In the Society's individual financial statements, the interest rate
swaps are held in a hedge relationship against intercompany loans with equivalent terms to the third party commercial mortgages.
12.
Derivative financial instruments and hedge accounting
(continued)
120 121
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
12. Derivative financial instruments and hedge accounting
(continued)
The impact of hedge accounting on the Group and Society Income Statement and Statement of Financial Position (SOFP) is indicated in the tables which follow.
Hedging instruments at 31 March 2022
Interest rate swaps
Group and Society
Notional
amount
£m
Carrying value
in the SOFP
SOFP line
Change in fair
value used for
recognising
ineffectiveness
£m
Ineffectivess
charge/(credit)
in the Income
Statement
£m Income Statement line
Assets
£m
Liabilities
£m
Fair value hedge of fixed rate
residential loans
2,012.5 48.9 (0.2)
Derivative financial
instruments
56.7 (1.7)
Fair value gains on
financial instruments
Fair value hedge of fixed rate
investment securities
- - -
Derivative financial
instruments
- -
Fair value gains on
financial instruments
Fair value hedge of fixed rate
savings products
- - -
Derivative financial
instruments
- -
Fair value gains on
financial instruments
Group
Fair value hedge of fixed rate
commercial loans
87.0 0.1 (8.1)
Derivative financial
instruments
9.8 (1.2)
Fair value gains on
financial instruments
Society
Fair value hedge of
intercompany loans*
87.0 0.1 (8.1)
Derivative financial
instruments
9.8 (1.2)
Fair value gains on
financial instruments
Hedging instruments at 31 March 2021
Interest rate swaps
Group and Society
Notional
amount
£m
Carrying value
in the SOFP
SOFP line
Change in fair
value used for
recognising
ineffectiveness
£m
Ineffectivess
charge in
the Income
Statement
£m Income Statement line
Assets
£m
Liabilities
£m
Fair value hedge of fixed rate
residential loans
1,898.4 4.3 (13.3)
Derivative financial
instruments
8.5 0.9
Fair value gains/(losses)
on financial instruments
Group
Fair value hedge of fixed rate
commercial loans
96.9 - (17.8)
Derivative financial
instruments
7.2 (3.0)
Fair value gains/(losses)
on financial instruments
Society
Fair value hedge of
intercompany loans*
96.9 - (17.8)
Derivative financial
instruments
7.2 (3.0)
Fair value gains/(losses)
on financial instruments
Hedged items at 31 March 2022
Hedged assets and liabilities
Group and Society
Carrying value
in the SOFP
£m
Accumulated fair
value adjustments
£m SOFP line
Change in fair value
used for recognising
ineffectiveness
£m
Fixed rate residential loans 1,973.4 (59.9)
Loans and advances
to customers
(55.0)
Fixed rate investment securities - - Investment securities -
Fixed rate savings products - - Shares -
Group
Fixed rate commercial loans 105.0 13.2
Loans and advances
to customers
(8.6)
Society
Intercompany loans* 105.0 13.2
Loans and advances
to customers
(8.6)
Hedged items at 31 March 2021
Hedged assets and liabilities
Group and Society
Carrying value
in the SOFP
£m
Accumulated fair
value adjustments
£m SOFP line
Change in fair value
used for recognising
ineffectiveness
£m
Fixed rate residential loans 1,699.6 3.7
Loans and advances
to customers
(9.4)
Group
Fixed rate commercial loans 118.6 21.8
Loans and advances
to customers
(4.2)
Society
Intercompany loans* 118.6 21.8
Loans and advances
to customers
(4.2)
*The Society holds interest rate swaps to mitigate interest rate risk on commercial mortgages originated by its subsidiary West Bromwich Commercial Limited (WBCL).
At Group level the derivatives and commercial mortgages are in designated IAS 39 hedge relationships. In the Society's individual financial statements, the interest rate
swaps are held in a hedge relationship against intercompany loans with equivalent terms to the third party commercial mortgages.
(d) IBOR reform
During the course of the year, and ahead of the transition away from LIBOR, the Society actively transitioned the majority of its LIBOR exposures including derivatives,
commercial and residential LIBOR mortgages and Treasury Assets to alternative rates. At the year end, the Group had actively transitioned all LIBOR position apart from
a small number of legacy Sandwell 1 and 2 commercial mortgage-backed securities which have subsequently moved to Synthetic LIBOR. These amount to circa £34m.
13.
Loans and advances to customers
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Amortised cost
Loans fully secured on residential property
4,592.1
4,556.23,449.1
3,361.5Loans fully secured on land
320.3
361.6
16.216.3
4,912.4
4,917.8
3,465.33,377.8
At fair value through profit or loss
Loans fully secured on residential property
11.5
12.511.5
12.5Loans fully secured on land
-
-
--
4,923.9
4,930.3
3,476.83,390.3
Fair value adjustment for hedged risk
(38.0)
25.7(45.8)
5.5Less: impairment provisions
(107.6)
(103.7)
(1.5)(2.5)
4,778.3
4,852.3
3,429.53,393.3
Included within loans and advances to customers are £348.5m (2020/21: £398.3m) of commercial lending balances of which £10.0m (2020/21: £18.6m) have been sold
by the Group to bankruptcy remote structured entities. A further £637.2m (2020/21: £744.3m) of residential mortgage balances, included within loans and advances,
have also been sold by the Group to structured entities. The structured entities have been funded by issuing mortgage backed securities (MBSs), a proportion of which are
held by the Society, at a carrying value of £487.4m (2020/21: £543.0m). Note 15 includes a list of the structured entities that are consolidated into the results of the Group.
122 123
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
Group Society
Group
Loans fully secured on
residential property
£m
Loans fully secured
on land
£m
Total
£m
Loans fully secured on
residential property
£m
At 1 April 2021 11.8 91.9
103.7 2.5
Amounts written off 0.3 (4.7)
(4.4) 0.4
Charge for the year comprising:
Provision for loan impairment (3.6) 12.8
9.2 (0.8)
Change in carrying value of deemed loan - (0.2)
(0.2) -
Adjustments to provisions resulting from recoveries
(0.8) (0.1)
(0.9) (0.6)
(Credit)/charge for the year (4.4) 12.5
8.1 (1.4)
Non-recourse finance on securitised advances - 0.2
0.2 -
At 31 March 2022
7.7 99.9
107.6 1.5
Group Society
Group
Loans fully secured on
residential property
£m
Loans fully secured
on land
£m
Total
£m
Loans fully secured on
residential property
£m
At 1 April 2020 7.0 81.8 88.8 2.4
Amounts written off - (2.6) (2.6) -
Charge for the year comprising:
Provision for loan impairment 5.3 12.9 18.2 0.3
Change in carrying value of deemed loan - 1.3 1.3 -
Adjustments to provisions resulting from recoveries
(0.5) (0.2) (0.7) (0.2)
Charge for the year 4.8 14.0 18.8 0.1
Non-recourse finance on securitised advances - (1.3) (1.3) -
At 31 March 2021
11.8 91.9 103.7 2.5
14
. A
llowance for losses on loans and advancesDuring the year there were impairment charges of £0.2m (2020/21: £1.3m gains) against mortgages transferred to structured entities, Sandwell Commercial Finance
No.1 Plc: £0.1m gain (2020/21: £0.2m gain) and Sandwell Commercial Finance No. 2 Plc: £0.3m charge (2020/21: £1.1m gain). The gains or losses from these
impairments are borne by the external loan note holders as they exceed the first loss exposure held by the Group. Impairment provisions at the end of the year include
£2.7m (2020/21: £4.3m) against loans in structured entity, Sandwell Commercial Finance No. 2 Plc. The carrying value of the deemed loan has been adjusted by an
equivalent amount. Non-recourse finance refers to the Notes issued by the securitised entites which represent obligations solely of the issuer. Non payment of these
notes does not create any obligation for the Society or its affiliates.
15
. I
nvestmentsShares in subsidiary undertakings Loans to subsidiary undertakings Total
Society
2022
£m
2021
£m
2022
£m
2021
£m
2022
£m
2021
£m
Cost
At beginning of year
0.6
0.61,270.8
1,295.61,271.4
1,296.2Decrease for the year
-
-
(44.5)(24.8)
(44.5)(24.8)
At end of year
0.6
0.6
1,226.31,270.8
1,226.91,271.4
Provisions
At beginning of year
0.5
0.5189.1
159.4189.6
159.9Charge for the year
-
-
10.029.7
10.029.7
At end of year
0.5
0.5
199.1189.1
199.6189.6
Net book value at end of year
0.1
0.1
1,027.2
1,081.7
1,027.3
1,081.8
The Society's approach to the assessment of impairment against investments in subsidiary undertakings is discussed within the accounting policies for ECL loans. The
value of the Society’s investment in West Bromwich Commercial Limited has been assessed by comparison of the amount owed to the Society against the net assets of
the subsidiary. Following continued contraction of the commercial mortgage book and the additional losses recognised within West Bromwich Commercial Limited, it has
been necessary to write down the value of the investment by £12.8m (2020/21: £14.8m) in the Society's Income Statement, with £nil (2020/21: £nil) recognised in equity.
An assessment has also been performed in respect of the value of the Society's investment in West Bromwich Mortgage Company Limited for which a credit of £2.8m has
been recognised against the investment (2020/21: £14.9m charge).
Name Major activities
Class of
shares held
Interest
of Society
West Bromwich Mortgage Company Limited
Residential mortgage lending Ordinary £1 shares 100%
West Bromwich Commercial Limited
Commercial mortgage lending Ordinary £1 shares 100%
CL Mortgages Limited
(1)
Residential mortgage lending Ordinary £1 shares 100%
West Bromwich Homes Limited
Investment in property for rental Ordinary £1 shares 100%
Insignia Finance Limited
Holding company Ordinary £500 shares 100%
White Label Lending Limited
(2)
Second charge lending Ordinary £1 shares 100%
(1) The entire share capital of CL Mortgages Limited is held by West Bromwich Mortgage Company Limited.
(2) The entire share capital of White Label Lending Limited is held by Insignia Finance Limited.
The registered office of the subsidiary undertakings listed above is the Group's registered office as detailed in note 37.
The Society holds directly (unless otherwise stated) the following interests in key subsidiary undertakings, all of which are registered in England:
The registered office of Hawthorn Asset Co Limited is Third Floor, 1 King's Arms Yard, London, EC2R 7AF.
The registered office of Hawthorn Finance Limited is 26 New Street, St. Helier, Jersey, JE2 3RA.
The registered office of Kenrick No. 3 Plc, Kenrick No. 3 Holdings Limited, Kenrick No.4 Plc and Kenrick No.4 Holdings Limited is 11th Floor 200 Aldersgate Street, London,
EC1A 4HD.
Kenrick No.4 Plc and Kenrick No.4 Holdings Limited did not trade during the year and were both dormant.
The Society has no shareholdings in any of the companies listed above. Unless stated otherwise above, all are incorporated in the United Kingdom and operate in
Great Britain.
Securitisation entities
The results of the following securitisation entities are consolidated into the results of the Group under the rules and guidance of IFRS 10:
Name Country of incorporation Principal activity
Hawthorn Asset Co Limited
United Kingdom Securitisation entity
Hawthorn Finance Limited
Jersey Securitisation entity
Kenrick No. 3 Holdings Limited
United Kingdom Holding company
Kenrick No. 3 Plc
United Kingdom Securitisation entity
Kenrick No.4 Holdings Limited
United Kingdom Holding company
Kenrick No.4 Plc
United Kingdom Securitisation entity - non trading
124 125
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
16
. I
ntangible assetsGroup
Goodwill
2022
£m
Purchased
software
2022
£m
Development
costs
2022
£m
Total
2022
£m
Goodwill
2021
£m
Purchased
software
2021
£m
Development
costs
2021
£m
Total
2021
£m
Cost
At beginning of year 17.3 24.9 42.7
0.5 18.7 28.2 47.4
0.5 Additions 1.4 3.3 4.7
- 0.6 3.6 4.2
- Write off of previously capitalised costs
- - (5.6) (5.6)
- - - -
At end of year
0.5 19.3 26.2 46.0
0.5 18.7 28.2 47.4
Aggregate amortisation
At beginning of year 12.5 13.4 26.4
0.5 14.1 16.5 31.1
0.5 Charge for the year 1.6 3.1 4.7
- 1.3 3.4 4.7
- At end of year
0.5 15.4 19.9 35.8
0.5 14.1 16.5 31.1
Net book value at end of year
- 3.9 6.3 10.2
- 4.6 11.7 16.3
Net book value at beginning of year 4.8 11.5 16.3
- 4.6 11.7 16.3
- Society
Goodwill
2022
£m
Computer
software
2022
£m
Development
costs
2022
£m
Total
2022
£m
Goodwill
2021
£m
Computer
software
2021
£m
Development
costs
2021
£m
Total
2021
£m
Cost
At beginning of year 17.3 24.9 42.2
- 18.7 28.2 46.9
- Additions 1.4 3.3 4.7
- 0.6 3.6 4.2
- Write off of previously capitalised costs - - -
- - (5.6) (5.6)
- At end of year
- 19.3 26.2 45.5
- 18.7 28.2 46.9
Aggregate amortisation
At beginning of year 12.5 13.4 25.9
- 14.1 16.5 30.6
- Charge for the year 1.6 3.1 4.7
- 1.3 3.4 4.7
- At end of year
- 15.4 19.9 35.3
- 14.1 16.5 30.6
Net book value at end of year
- 3.9 6.3 10.2
- 4.6 11.7 16.3
Net book value at beginning of year 4.8 11.5 16.3
- 4.6 11.7 16.3
- Independent specialist valuers have undertaken a valuation review of the residential investment properties held by West Bromwich Homes Limited. The complete
portfolio has been passed through an automated valuation model (AVM). A separate firm of independent valuers have valued a 10% sample of the portfolio using drive
by methods. The valuations have been used, in combination with the AVM output, to arrive at a portfolio valuation of £149.3m at 31 March 2022. A provision of £0.3m
(2020/21: £0.2m) for lease enfranchisement, a provision of £0.1m (2020/21: £0.1m) for cladding costs and a provision of £1.6m for property improvements to get all
the portfolio to an Energy Performance Certificate rating of C and delayed repair costs as a result of the pandemic (2020/21: £nil) has been deducted from the portfolio
valuation to arrive at the final valuation of £147.3m.
This fair value measurement is categorised as a Level 3 fair value measurement, based on an assessment of the inputs to the valuation methodology. It is categorised
as a Level 3 fair value measurement as described in Note 1f (2021: Level 3).
If the investment properties were carried at cost, the carrying amount would be £82.6m (2020/21: £84.2m).
The Group leases investment properties to non-commercial individuals for a contract period of up to 36 months. The future minimum lease receipts under non-
cancellable operating leases that end within 12 months are £2.4m (2020/21: £2.2m), and an additional £2.4m up to 36 months (2020/21: £2.1m). The Group has not
recognised any contingent rent in the period (2020/21: £nil).
18
. P
roperty, plant and equipmentLand and buildings
Group
Freehold
branches
£m
Head office
£m
Leasehold
improvements
£m
Equipment,
fixtures, fittings
and vehicles
£m
Right-of-use
assets
£m
Total
£m
Cost or valuation
At 1 April 2021 4.9 21.2 1.2 20.0 2.7
50.0
Additions - - - 0.4 -
0.4
Lease modifications and remeasurements - - - - 0.2
0.2
Disposals - - (0.6) (0.3) -
(0.9)
At 31 March 2022 4.9 21.2 0.6 20.1 2.9
49.7
Accumulated depreciation
At 1 April 2021 0.4 4.7 0.9 18.3 0.8
25.1
Charge for the year 0.1 0.8 0.1 1.3 0.4
2.7
Disposals - - (0.6) (0.3) -
(0.9)
At 31 March 2022 0.5 5.5 0.4 19.3 1.2
26.9
Net book value
At 31 March 2022 4.4 15.7 0.2 0.8 1.7
22.8
Land and buildings
Group
Freehold
branches
£m
Head office
£m
Leasehold
improvements
£m
Equipment,
fixtures, fittings
and vehicles
£m
Right-of-use
assets
£m
Total
£m
Cost or valuation
At 1 April 2020 4.9 21.2 1.2 19.5 3.1 49.9
Additions - - - 0.5 - 0.5
Lease modifications and remeasurements - - - - (0.4) (0.4)
At 31 March 2021 4.9 21.2 1.2 20.0 2.7 50.0
Accumulated depreciation
At 1 April 2020 0.3 3.7 0.7 16.6 0.4 21.7
Charge for the year 0.1 1.0 0.2 1.7 0.4 3.4
At 31 March 2021 0.4 4.7 0.9 18.3 0.8 25.1
Net book value
At 31 March 2021 4.5 16.5 0.3 1.7 1.9 24.9
In order to better serve our current and future members, a new online savings platform has been under development. As a result of delays to the build and
implementation of this platform, and in line with the requirements of
IAS 38: Intangible Assets
, we have written off £5.6m of previously capitalised costs.17
. I
nvestment propertiesGroup
2022
£m
Group
2021
£m
Valuation
At beginning of year
143.0
138.9Additions
0.5
0.2Disposals
(2.0)
(0.1)Revaluation gains
5.8
4.0
At end of year
147.3
143.0
The Group applies the fair value model to its investment property portfolio.
126 127
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
Land and buildings
Society
Freehold
branches
£m
Head office
£m
Leasehold
improvements
£m
Equipment,
fixtures, fittings
and vehicles
£m
Right-of-use
assets
£m
Total
£m
Cost or valuation
At 1 April 2021 4.9 21.2 1.2 19.8 2.7
49.8
Additions - - - 0.4 -
0.4
Lease modifications and remeasurements - - - - 0.2
0.2
Disposals - - (0.6) (0.3) -
(0.9)
At 31 March 2022 4.9 21.2 0.6 19.9 2.9
49.5
Accumulated depreciation
At 1 April 2021 0.4 4.9 0.9 17.9 0.8
24.9
Charge for the year 0.1 0.8 0.1 1.3 0.4
2.7
Disposals - - (0.6) (0.3) -
(0.9)
At 31 March 2022 0.5 5.7 0.4 18.9 1.2
26.7
Net book value
At 31 March 2022 4.4 15.5 0.2 1.0 1.7
22.8
The average remaining term of right-of-use assets at 31 March 2022 was 4.6 years (2020/21: 4.3 years).
The net book value of land and buildings occupied for the Society's own activities at 31 March is £20.1m (2020/21: £21.1m).
The Group's freehold branches were last revalued at 31 March 2017 by Colliers International, a firm of independent chartered surveyors. The valuations were
undertaken in accordance with the Valuation Standards issued by the Royal Institution of Chartered Surveyors in the United Kingdom. These valuations were
incorporated into the financial statements and the resulting revaluation adjustments taken to the revaluation reserve. This fair value measurement is categorised
as a Level 3 fair value measurement in the current year as described in Note 1f (2021: Level 3).
If land and buildings were carried at historical cost, the carrying amount would be £16.5m (2020/21: £17.5m).
As part of the ongoing funding agreement for the West Bromwich Building Society Staff Retirement Scheme (the SRS), the Trustees of the SRS have been granted a
charge over the Society’s Head Office. The charge may be exercised only in the event of the Society defaulting on its pension obligations and in such circumstances
assigns the rights of ownership of the building to the SRS.
Land and buildings
Society
Freehold
branches
£m
Head office
£m
Leasehold
improvements
£m
Equipment,
fixtures, fittings
and vehicles
£m
Right-of-use
assets
£m
Total
£m
Cost or valuation
At 1 April 2020 4.9 21.2 1.2 19.3 3.1 49.7
Additions - - - 0.5 - 0.5
Lease modifications and remeasurements - - - - (0.4) (0.4)
At 31 March 2021 4.9 21.2 1.2 19.8 2.7 49.8
Accumulated depreciation
At 1 April 2020 0.3 3.9 0.7 16.2 0.4 21.5
Charge for the year 0.1 1.0 0.2 1.7 0.4 3.4
At 31 March 2021 0.4 4.9 0.9 17.9 0.8 24.9
Net book value
At 31 March 2021 4.5 16.3 0.3 1.9 1.9 24.9
19.
Deferred tax
Deferred tax is calculated on all temporary differences under the liability method using an effective tax rate of either 19% or 25% (depending on when the deferred
tax balance is estimated to reverse (2020/21: 19%). The movement on the deferred tax account is as follows:
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
At beginning of year
13.7
13.7 12.3
11.3Current year Income Statement credit
0.2
1.5 2.0
2.5Amount recognised directly in other comprehensive income
(3.6)
(1.4) (3.6)
(1.4)Adjustments in respect of prior years
2.1
(0.1)
2.0 (0.1)
At end of year
12.4
13.7
12.7 12.3
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Deferred tax assets
Accelerated tax depreciation
9.0
5.38.9
5.3Carried forward tax losses
12.1
10.48.3
7.9Other temporary differences
6.0
5.6
1.21.2
27.1
21.3
18.414.4
Deferred tax liabilities
Property valuations
(9.9)
(6.2)(0.9)
(0.7)Other temporary differences
(1.1)
(1.2)(1.1)
(1.2)Pensions and other post retirement benefits
(3.7)
(0.2)
(3.7)(0.2)
(14.7)
(7.6)
(5.7)(2.1)
Deferred tax assets and liabilities are attributable to the following items:
The deferred tax credit in the Income Statement comprises the following temporary differences:
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Accelerated tax depreciation
3.6
(0.9)
3.6(0.9)
Other provisions
0.2
(0.7)(0.1)
(0.1)Carried forward tax losses
1.7
3.60.4
3.5Property valuations
(3.3)
(0.6)
--
2.2
1.4
3.92.5
Deferred tax assets are recognised only to the extent that realisation of the related tax benefit against future taxable profits is probable over the foreseeable future. The
deferred tax asset balances attributable to carried forward losses are expected to be substantially recovered against future taxable profits (as projected in the latest
Strategic Plan) within five years. The assumptions surrounding future expected credit losses and increases in the Bank Rate of interest represent the most subjective
areas of judgement in management’s projections of future taxable profits. The deferred tax assets have not been discounted. Unused tax losses, which have not been
recognised within deferred tax assets at 31 March 2022, amounted to Group: £27.8m (2020/21: £40.7m) and Society: £nil (2020/21: £nil). These losses, which are
trading losses, will be available to offset against future taxable profits, subject to certain loss restriction rules set by HMRC.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to do so.
The Budget on 3 March 2021 announced an increase to the UK’s main corporation tax rate to 25%, which is due to be effective from 1 April 2023. This change was
substantively enacted at the balance sheet date and hence the Group’s deferred tax balances have been measured dependant on the expected utilisation of the
deferred tax assets/liabilities.
18
. P
roperty, plant and equipment (continued)
128 129
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
20
. Trade
and other receivables
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Prepayments and accrued income
1.9
2.21.9
2.2Other
0.3
0.4
0.20.4
2.2
2.6
2.12.6
21
. S
haresGroup and Society
2022
£m
2021
£m
Held by individuals
4,182.5
4,233.0Other shares
1.1
1.1
4,183.6
4,234.1
23
. D
ebt securities in issueGroup
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Non-recourse finance on securitised advances
171.2
217.9
--
171.2
217.9
--
The non-recourse finance comprises mortgage backed floating rate notes (the Notes) secured over portfolios of mortgage loans secured by first charges over
residential and commercial properties in the United Kingdom (see note 13). Prior to redemption of the Notes on the final interest payment dates, the Notes will be
subject to mandatory and/or optional redemption, in certain circumstances, on each interest payment date.
For the purposes of the Statements of Cash Flows, debt securities in issue are classified as liabilities arising from financing activities. The following table analyses
movements in debt securities in issue.
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
At beginning of year
217.9
266.3-
1.0Financing cash flows
Repayments of debt securities in issue
(47.4)
(49.2)-
(1.0)Non-cash flows:
Amortisation
0.5
0.5-
-Other movements
0.2
0.3
--
At end of year
171.2
217.9
--
25. Provisions for liabilities
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
At beginning of year
0.6
0.60.5
0.5Utilised in the year
-
(0.1)-
(0.1)(Release)/charge for the year
(0.1)
0.1
(0.1)0.1
At end of year
0.5
0.6
0.40.5
24.
Trade and other payables
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Accruals
8.6
6.67.8
6.0Lease liabilities
1.9
2.01.9
2.0Other creditors
3.5
3.8
3.33.5
14.0
12.4
13.011.5
Group and Society
2022
£m
2021
£m
At beginning of year
2.0
2.8Modifications/remeasurements of existing lease liabilities
0.2
(0.4)Interest charged
0.1
0.1Lease payments
(0.4)
(0.5)
At end of year
1.9
2.0
The maturity analysis of lease liabilities is included in note 36.
The movement in lease liabilities in the year is analysed in the table below:
Provisions for liabilities
Provisions for liabilities represent the Group’s best estimate of customer redress payable. The calculation is based on a series of assumptions, including the number of
affected accounts, appropriate level of remediation and resulting administrative costs.
22.
Amounts due to other customers
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Deemed loans
7.1
13.9154.7
202.5Other customers
107.5
77.0
107.677.1
114.6
90.9
262.3279.6
130 131
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
26
. Subscribed
capitalNumber of shares Carrying value
Group and Society
2022
2021
2022£m
2021
£m
Permanent interest bearing shares
At beginning of year
7,847
8,8917.8
8.9Purchase and cancellation of PIBS
-
(1,044)-
(1.1)At end of year
7,847
7,847
7.8
7.8
The 6.15% permanent interest bearing shares (PIBS) comprise 7,847 PIBS of £1,000 each issued at a price of 99.828% of their principal amount, with the issue
premium amortised.
The PIBS are repayable at the option of the Society in whole on the 5 April 2021 or any scheduled interest payment thereafter, subject to PRA approval.
In a winding up or dissolution of the Society the claims of the holders of permanent interest bearing shares (PIBS) would rank behind all other creditors of the
Society, with the exception of the claims of holders of core capital deferred shares (CCDS). The holders of PIBS are not entitled to any share in any final surplus upon
winding up or dissolution of the Society.
Future interest payments are at the discretion of the Society, up to a maximum 6.15% prior to 5 April 2021 and, thereafter, a rate of interest reset periodically and
equal to the applicable 5-year gilt rate plus a margin of 2.8%. As announced on 30 September 2021, the Board resolved not to make an interest payment on the
scheduled interest payment date of 5 October 2021. In March 2022, the Board approved an interest payment in respect of the PIBS of 0.5%, which was paid on 5
April 2022.
Whilst noting that any interest payments on the PIBS are at the sole discretion of the Society, the Society announced during its capital restructuring in 2018 that any
future payments on PIBS will be made only if and to the extent that they would have been permitted had the Liability Management Exercise (LME) not taken place,
and in the context of determining the equivalent annual yield that would have been paid to holders of the Society's Profit Participating Deferred Shares (PPDS) had
they remained in issue on their original terms. Under the terms and conditions of the PPDS (which are available for viewing on the Society's website), the Society's
ability to pay PPDS distributions was constrained by reference to a percentage of profits generated in the relevant financial year, and to the extent of any positive
balance on a special PPDS reserve account (to which a percentage of profits or losses of the Society was allocated each year).
Interest payments on the PIBS will therefore be limited to the lower of (i) the equivalent annual yield that would have been paid to holders of PPDS (had they
remained in issue on their original terms); and (ii) the annual rate set out in the Special Conditions of Issue of the PIBS (the “Specified Rate”), being 6.15% prior to 5
April 2021 and thereafter, a rate of interest reset periodically and equal to the applicable 5-year gilt rate plus a margin of 2.8% (currently 3.08%).
Whilst PPDS instruments no longer exist (having been exchanged during the LME), the Society continues to monitor a notional PPDS reserve. At 31 March 2018 (the
last accounting date before the completion of the LME) the deficit on the PPDS reserve stood at £9.1m. At 31 March 2021, the Society disclosed a deficit balance on
this notional reserve of £3.9m, which was extinguished during the year following the increase in reported net statutory profit. For the year ended 31 March 2022,
the Society generated a reported profit after tax of £24.4m, including the impact of £2.5m Tier 2 interest payable. The net profit disregarding Tier 2 interest (after
tax) would therefore have been £26.4m. Accordingly, during the year the notional PPDS reserve account deficit was extinguished, with a positive balance of £2.7m
at 31 March 2022 that could have been distributed to PPDS holders. The equivalent annual yield that would have been paid to PPDS holders would therefore have
been 1.48%.
29. Financial assets and liabilities at fair value through profit or loss (FVTPL)
Financial assets mandatorily measured at FVTPL
The Society's closed portfolio of equity release mortgages is held at FVTPL under IFRS 9. The movements on the portfolio during the year are analysed in the table below.
Group and Society
2022
£m
2021
£m
At beginning of year
12.5
13.3Interest added
0.7
0.8Redemptions
(1.9)
(1.4)Changes in fair value
0.2
(0.2)At end of year
11.5
12.5
Group and Society
2022
£m
2021
£m
At beginning of year
22.8
22.8Financing cash flows
Interest paid on subordinated liabilities
(2.5)
(2.5)Non-cash flows:
Accrued interest (settled during the year)
1.3
1.3Accrued interest (carried forward)
1.2
1.2Movement in unamortised issue costs
0.1
-
At end of year
22.9
22.8
28. Subordinated liabilities
Group and Society
2022
£m
2021
£m
Subordinated notes due 2038 – 11.0%
22.9
22.8
The Society's subordinated notes rank behind all other creditors of the Society, with the exception of holders of CCDS and PIBS.
For the purposes of the Statements of Cash Flows, subordinated liabilities are classified as liabilities arising from financing activities. The following table analyses
movements in subordinated liabilities.
CCDS are perpetual instruments and a form of Common Equity Tier 1 (CET 1) capital.
CCDS are the most junior-ranking capital instrument of the Society, ranking behind the claims of all depositors, payables and investing members.
Each holder of CCDS has one vote, regardless of the number of CCDS held.
The CCDS holders are entitled to receive a distribution at the discretion of the Society. The total distribution paid on each CCDS in respect of any given financial year of the
Society is subject to a cap provided for in the Rules of the Society and adjusted annually for inflation. The Directors declared a final distribution in May 2021 of £0.75 per
CCDS in respect of the period to 31 March 2021, which was paid in August 2021. The Directors declared an interim distribution of £1.50 per CCDS in respect of the period
to 30 September 2021 which was paid in February 2022. These distributions have been recognised in the Statement of Changes in Members' Interests and Equity. In
May 2022 the Directors declared they expect to pay a final distribution for the period to 31 March 2022 of £1.50 per CCDS which would be paid in August 2022, in line
with current distribution policy published on 24 November 2021. The final distribution is not reflected in these financial statements as distributions to the CCDS holders
are recognised with reference to the date they are declared.
In the event of a winding up or dissolution of the Society, the share of surplus assets (if any) a CCDS holder would be eligible to receive is determined by the calculation
of a core capital contribution proportion, limited to a maximum of the average principal amount, currently £100 per CCDS.
27. Core capital deferred shares
Group and Society
Number of
shares
CCDS nominal
amount
£m
Share
premium
£m
Total
£m
At 31 March 2021
1,288,813 1.3 125.7
127.0
At 31 March 2022
1,288,813 1.3 125.7
127.0
132 133
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
30.
Tax effects relating to each component of other comprehensive income
Group
Before tax
amount
2022
£m
Taxation
2022
£m
Net of tax
amount
2022
£m
Fair value through other comprehensive income investments (1.0) 0.2
(0.8)
Retirement benefit obligations 9.6 (2.7)
6.9
Revaluation reserve
- (0.2)
(0.2)
Other comprehensive income
8.6 (2.7)
5.9
Group
Before tax
amount
2021
£m
Taxation
2021
£m
Net of tax
amount
2021
£m
Fair value through other comprehensive income investments 3.7 (0.7) 3.0
Retirement benefit obligations
(0.3) 0.1 (0.2)
Other comprehensive income
3.4 (0.6) 2.8
Society
Before tax
amount
2022
£m
Taxation
2022
£m
Net of tax
amount
2022
£m
Fair value through other comprehensive income investments (1.0) 0.2
(0.8)
Retirement benefit obligations 9.6 (2.7)
6.9
Revaluation reserve
- (0.2)
(0.2)
Other comprehensive income
8.6 (2.7)
5.9
Society
Before tax
amount
2021
£m
Taxation
2021
£m
Net of tax
amount
2021
£m
Fair value through other comprehensive income investments 3.7 (0.7) 3.0
Retirement benefit obligations
(0.3) 0.1 (0.2)
Other comprehensive income
3.4 (0.6) 2.8
31.
Retirement benefit obligations
Group and Society
2022
£m
2021
£m
2020
£m
2019
£m
2018
£m
Net defined benefit pension scheme (asset)/obligation
(14.9)
(1.1) 2.7 4.9 5.1
Defined benefit plans
The Society operates the West Bromwich Building Society Staff Retirement Scheme (SRS), a funded pension scheme providing benefits for some of its employees
based on final pensionable emoluments. The assets of the Scheme are held in a separate Trustee administered fund. In addition, the Society has an unregistered
arrangement in place in respect of one former Director. The financial effect of this arrangement is included in this note.
The results of a formal actuarial valuation at 31 March 2019 carried out by the appointed actuary to the Scheme have been rolled forward to the accounting date
by an independent qualified actuary and updated in accordance with IAS 19, ‘Employee Benefits’. Pension obligations are valued differently for accounting and
funding purposes. In accordance with IAS 19, best estimate assumptions are used to determine the retirement benefit obligation shown in the Statement of
Financial Position whereas the funding valuations use more prudent assumptions and also include allowance for future administration costs, which are not
included in the IAS 19 valuation.
The Society closed the Scheme to the future accrual of benefits with effect from 1 August 2009, at which date all previously active members became entitled to
deferred pensions in the Scheme.
As part of the ongoing funding agreement for the SRS, the Trustee of the SRS has been granted a charge over the Society’s Head Office, which may be exercised
only in the event of the Society defaulting on its pension obligations and in such circumstances assigns the rights of ownership of the building to the SRS. In addition
to this, the estimated amount of total employer deficit contributions expected to be paid to the Scheme during 2022/23, based on the required amounts under the
schedule of contributions, is £4.5m.
The Scheme is subject to the funding legislation outlined in the Pensions Act 2004 and the Pensions Act 2021, which received royal assent in February 2021. This,
together with associated regulations and documents issued by the Pensions Regulator, sets out the framework for funding defined benefit occupational pension
schemes in the UK.
IAS 19 allows an employer to recognise a surplus as an asset to the extent that it is able to recover a surplus either through reduced contributions in the future or
through refunds from the Scheme, even if the refunds may only be available at some distant time in the future, such as after the last benefit has been paid. The
Society believes that under the Scheme Rules a surplus would be recoverable by the Society.
The weighted average duration of the expected benefit payments from the Scheme is around 17 years.
The sensitivity of the defined benefit obligation to changes in the significant actuarial assumptions is shown in the table below (on a gross basis, prior to the application
of hedging arrangements which are described in the 'Scheme assets' section of this note):
Group and Society
2022
(Decrease)/
Increase
£m
2021
(Decrease)/
Increase
£m
Discount rate
Effect on defined benefit obligation of a 1% increase
(16.4)
(19.0)Inflation
Effect on defined benefit obligation of a 1% increase
12.0
16.0 Life expectancy
Effect on defined benefit obligation of a 1 year increase
3.9
4.3
Group and Society
2022
2021 2020 2019 2018
Pension increases in payment (RPI capped at 5%) 2.5% 3.0% 3.0%
3.4%
3.1%Pension increases in payment (CPI capped at 2.5%) 1.5% 1.8% 1.7%
2.1%
1.9%Discount rate 2.3% 2.4% 2.8%
2.8%
2.1%Life expectancy of male aged 65 at year end date 21.8 22.4 22.9
21.6
21.8Life expectancy of female aged 65 at year end date 23.7 23.4 23.8
23.8
23.9Life expectancy of male aged 65 at year end date plus
20 years
22.9
23.1 23.1 23.7 24.3
Life expectancy of female aged 65 at year end date plus
20 years
25.2
25.3 25.2 24.9 25.3
The key assumptions used by the actuary in the updated calculation were:
134 135
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
The amounts recognised in the Income Statement are as follows:
Group and Society
2022
£m
2021
£m
2020
£m
Interest cost 2.7
2.5
2.5Interest receivable on plan assets (2.6)
(2.6)
(2.4)Running costs
0.4
0.4 0.4
Total pension fund cost
0.3
0.5 0.5
Past service cost and running costs, other than those associated with management of scheme assets, are shown in administrative expenses whilst interest cost and
interest receivable on plan assets are disclosed as other operating income.
Change in benefit obligations
Group and Society
2022
£m
2021
£m
2020
£m
Benefit obligations at beginning of year 113.9
120.7
108.9Interest cost 2.7
2.5
2.4Actuarial losses/(gains) (4.0)
(8.9)
13.5Benefits paid (3.7)
(3.9)
(4.1)Benefit obligations at end of year 108.9
110.4
120.7Group and Society
2022
£m
2021
£m
2020
£m
2019
£m
2018
£m
Present value of funded obligations 108.2 113.1 108.5
109.7
119.9Present value of unfunded obligations
0.7
0.8 0.7 0.8 0.7
110.4
120.7 108.9 113.9 109.2
Fair value of scheme assets
(125.3)
(121.8) (106.2) (109.0) (104.1)
Net (asset)/liability in the Statement of Financial Position
(14.9)
(1.1) 2.7 4.9 5.1
The amounts recognised in the Statement of Financial Position are as follows:
Group and Society
2022
£m
2021
£m
2020
£m
Diversified growth fund 60.2
43.3
50.6Global equities -
16.2
14.5Corporate bonds -
-
5.9Liability driven investment 26.2
31.0
32.0Short duration credit -
17.0
-Insurance asset 17.7
16.5
18.7Cash and other assets
1.3
0.1 2.1
125.3
121.8 106.2
Scheme assets
The value of the invested assets at 31 March 2022 was £125.3m, analysed as follows:
As part of its asset and liability matching investment strategy, designed to mitigate inflation and interest rate risk exposure, the SRS has invested in liability driven
investment funds. In addition, an insurance policy has been purchased to provide income which provides a specific match against the liabilities arising from a
large proportion of the SRS’s current pensioners. The SRS is targeted to be 90%-100% hedged on movements in interest rates and inflation rates based on the
Technical Provisions funding target.
With a view to reducing the investment risk within the Scheme’s asset portfolio, a large proportion of the investments are held in Diversified Growth Funds (DGFs).
Although DGFs do themselves include equity investments this is part of a more diversified strategy which is expected to reduce overall investment volatility whilst
still maintaining relatively strong returns.
Stakeholder scheme
The total cost for the year of the stakeholder plan to the Group and Society was £1.2m (2020/21: £1.3m).
For the period through to 31 July 2009 staff could contribute between 2% and 9% with the Society contributing on a sliding scale between 2% and 7%. From 1 August
2009 to 31 March 2018 staff were able to contribute between 2% and 10% with the Society providing matched funding. From 1 April 2018 staff within the stakeholder
scheme were required to contribute between 3% and 10%, with the Society providing matched funding plus 0.6%. From 1 April 2019 staff within the stakeholder
scheme are required to contribute between 4% and 10%, with the Society providing matched funding plus 0.6%.
History of experience gains and losses
Group and Society
2022
2021 2020 2019 2018
Experience gains/(losses) on scheme assets:
Amount (£m) (4.7) 2.6 (4.1)
0.7
13.2Percentage of scheme assets (4%) 2% (4%)
1%
12%Experience (gains)/losses on scheme liabilities:
Amount (£m) 0.3 - 0.7
2.0
(0.6)Percentage of scheme liabilities
2%
(1%) 0% 0% 1%
Change in scheme assets
Group and Society
2022
£m
2021
£m
2020
£m
Fair value of scheme assets at beginning of year 109.0
121.8
106.2 Interest receivable on plan assets 2.6
2.6
2.4 Actuarial gains/(losses) (4.7)
0.7
13.2 Contribution by employer 3.4
4.5
4.5 Running costs (0.4)
(0.4)
(0.4)Benefits paid
(3.9)
(4.1) (3.7)
Fair value of scheme assets at end of year
125.3
121.8 106.2
The amount recognised outside profit and loss in the Statement of Comprehensive Income for 2021/22 is an actuarial gain of £9.6m (2020/21: loss £0.3m). The
cumulative amount recognised outside profit and loss at 31 March 2022 is an actuarial loss of £49.1m.
31.
Retirement benefit obligations
(continued)
Group and Society
2022
£m
2021
£m
Actuarial losses/(gains) arising from:
Financial assumptions
(9.9)
14.5Demographic assumptions
(1.0)
(0.4)Experience adjustments
2.0
(0.6)Return on plan assets (excluding interest)
(0.7)
(13.2)Total amount recognised in Other Comprehensive Income
(9.6)
0.3The amounts recognised in the Statement of Comprehensive Income are as follows:
136 137
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity of another entity.
The Group is a retailer of financial instruments, mainly in the form of mortgages and savings. The Group uses wholesale financial instruments to invest liquid asset
balances and raise wholesale funding, and to manage the risks arising from its operations. As a result of these activities, the Group is exposed to a variety of risks, the
most significant of which are credit risk, liquidity risk and market risk (principally interest rate risk). These risks are described in notes 33 to 35.
The use of derivative financial instruments for risk management purposes is described in note 12.
Classification of financial assets and financial liabilities
The following tables show the classification of the Group's and Society's financial assets and liabilities:
At 31 March 2022
Group
Amortised cost
£m
Fair value
through other
comprehensive
income
£m
Fair value through
profit or loss
£m
Total
£m
Assets
Cash and balances with the Bank of England 652.0 - -
652.0
Loans and advances to credit institutions 73.2 - -
73.2
Investment securities - 286.4 0.5
286.9
Derivative financial instruments - - 52.4
52.4
Loans and advances to customers
4,766.8 - 11.5
4,778.3
Total financial assets
5,492.0 286.4 64.4
5,842.8
Non-financial assets
224.5
Total assets
6,067.3
Amortised cost
£m
Fair value through
profit or loss
£m
Total
£m
Liabilities
Shares 4,183.6 -
4,183.6
Amounts due to credit institutions 1,116.7 -
1,116.7
Amounts due to other customers 114.6 -
114.6
Derivative financial instruments - 11.5
11.5
Debt securities in issue 171.2 -
171.2
Subordinated liabilities
22.9 -
22.9
Total financial liabilities
5,609.0 11.5
5,620.5
Non-financial liabilities
29.5
Total liabilities
5,650.0
32
. F
inancial instrumentsAt 31 March 2021
Group
Amortised cost
£m
Fair value
through other
comprehensive
income
£m
Fair value through
profit or loss
£m
Total
£m
Assets
Cash and balances with the Bank of England 316.5 - - 316.5
Loans and advances to credit institutions 107.3 - - 107.3
Investment securities - 275.6 0.9 276.5
Derivative financial instruments - - 6.5 6.5
Loans and advances to customers
4,839.8 - 12.5 4,852.3
Total financial assets
5,263.6 275.6 19.9 5,559.1
Non-financial assets
209.4
Total assets
5,768.5
Amortised cost
£m
Fair value through
profit or loss
£m
Total
£m
Liabilities
Shares 4,234.1 - 4,234.1
Amounts due to credit institutions 751.8 - 751.8
Amounts due to other customers 90.9 - 90.9
Derivative financial instruments - 40.5 40.5
Debt securities in issue 217.9 - 217.9
Subordinated liabilities
22.8 - 22.8
Total financial liabilities
5,317.5 40.5 5,358.0
Non-financial liabilities
20.6
Total liabilities
5,378.6
138 139
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
At 31 March 2022
Society
Amortised cost
£m
Fair value
through other
comprehensive
income
£m
Fair value through
profit or loss
£m
Total
£m
Assets
Cash and balances with the Bank of England 652.0 - -
652.0
Loans and advances to credit institutions 27.1 - -
27.1
Investment securities 453.7 286.4 0.5
740.6
Derivative financial instruments - - 52.2
52.2
Loans and advances to customers 3,418.0 - 11.5
3,429.5
Investments
1,027.3 - -
1,027.3
Total financial assets
5,578.1 286.4 64.2
5,928.7
Non-financial assets
68.4
Total assets
5,997.1
Amortised cost
£m
Fair value through
profit or loss
£m
Total
£m
Liabilities
Shares 4,183.6 -
4,183.6
Amounts due to credit institutions 1,116.2 -
1,116.2
Amounts due to other customers 262.3 -
262.3
Derivative financial instruments - 11.4
11.4
Subordinated liabilities
22.9 -
22.9
Total financial liabilities
5,585.0 11.4
5,596.4
Non-financial liabilities
19.4
Total liabilities
5,615.8
At 31 March 2021
Society
Amortised cost
£m
Fair value
through other
comprehensive
income
£m
Fair value through
profit or loss
£m
Total
£m
Assets
Cash and balances with the Bank of England 316.5 - - 316.5
Loans and advances to credit institutions 64.6 - - 64.6
Investment securities 508.9 275.6 0.9 785.4
Derivative financial instruments - - 6.5 6.5
Loans and advances to customers 3,380.8 - 12.5 3,393.3
Investments
1,081.8 - - 1,081.8
Total financial assets
5,352.6 275.6 19.9 5,648.1
Non-financial assets
59.5
Total assets
5,707.6
Amortised cost
£m
Fair value through
profit or loss
£m
Total
£m
Liabilities
Shares 4,234.1 - 4,234.1
Amounts due to credit institutions 752.1 - 752.1
Amounts due to other customers 279.6 - 279.6
Derivative financial instruments - 39.1 39.1
Subordinated liabilities
22.8 - 22.8
Total financial liabilities
5,288.6 39.1 5,327.7
Non-financial liabilities
14.1
Total liabilities
5,341.8
32
. F
inancial instruments (continued)
140 141
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
Fair values of financial assets and financial liabilities
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. The Group determines fair values by the following three tier valuation hierarchy:
Level 1:
Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
Valuation techniques where all inputs are taken from observable market data, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3:
Valuation techniques where significant inputs are not based on observable market data.
Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist and
other valuation models. Assumptions and market observable inputs used in valuation techniques include risk-free and benchmark interest rates, equity index prices
and expected price volatilities. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at
the reporting date that would have been determined by market participants acting at arm’s length. Observable prices are those that have been seen either from
counterparties or from market pricing sources including Bloomberg. The use of these depends upon the liquidity of the relevant market.
The carrying value of cash and balances with the Bank of England are assumed to approximate their fair value.
Financial assets and financial liabilities held at amortised cost
The tables below show the fair values of the Group's and Society's financial assets and liabilities held at amortised cost in the Statements of Financial Position, analysed
according to the fair value hierarchy described above.
At 31 March 2022
Group
Carrying
value
£m
Fair value
Level 1
£m
Fair value
Level 2
£m
Fair value
Level 3
£m
Fair value
Total
£m
Financial assets
Loans and advances to credit institutions 73.2 -
73.2
-73.2
Loans and advances to customers
4,766.8
- - 4,907.2
4,907.2
4,840.0 - 73.2 4,907.2
4,980.4
Financial liabilities
Shares - 4,145.5
4,183.6
-4,145.5
Amounts due to credit institutions 1,116.7 -
1,116.7
-1,116.7
Amounts due to other customers 107.5 7.2
114.6
-114.7
Debt securities in issue 0.2 -
171.2
171.4171.6
Subordinated liabilities
22.9
- 22.9 -
22.9
5,609.0 171.4 1,247.3 4,152.7
5,571.4
At 31 March 2021
Group
Carrying
value
£m
Fair value
Level 1
£m
Fair value
Level 2
£m
Fair value
Level 3
£m
Fair value
Total
£m
Financial assets
Loans and advances to credit institutions 107.3 - 107.3 - 107.3
Loans and advances to customers
4,839.8 - - 4,854.3 4,854.3
4,947.1 - 107.3 4,854.3 4,961.6
Financial liabilities
Shares 4,234.1 - - 4,231.5 4,231.5
Amounts due to credit institutions 751.8 - 751.8 - 751.8
Amounts due to other customers 90.9 - 77.0 13.8 90.8
Debt securities in issue 217.9 218.1 0.2 - 218.3
Subordinated liabilities
22.8 - 22.8 - 22.8
5,317.5 218.1 851.8 4,245.3 5,315.2
At 31 March 2022
Society
Carrying
value
£m
Fair value
Level 1
£m
Fair value
Level 2
£m
Fair value
Level 3
£m
Fair value
Total
£m
Financial assets
Loans and advances to credit institutions 27.1 -
27.1
-27.1
Investment securities 453.7 -
453.7
-453.7
Loans and advances to customers - 3,613.3
3,418.0
-3,613.3
Investments
1,027.3
- - 1,027.3
1,027.3
4,926.1 - 480.8 4,640.6
5,121.4
Financial liabilities
Shares - 4,145.5
4,183.6
-4,145.5
Amounts due to credit institutions 1,116.2 -
1,116.2
-1,116.2
Amounts due to other customers 107.6 157.9
262.3
-265.5
Subordinated liabilities
22.9
- 22.9 -
22.9
5,585.0 - 1,246.7 4,303.4
5,550.1
At 31 March 2021
Society
Carrying
value
£m
Fair value
Level 1
£m
Fair value
Level 2
£m
Fair value
Level 3
£m
Fair value
Total
£m
Financial assets
Loans and advances to credit institutions 64.6 - 64.6 - 64.6
Investment securities 508.9 - 508.9 - 508.9
Loans and advances to customers 3,380.8 - - 3,446.6 3,446.6
Investments
1,081.8 - - 1,081.8 1,081.8
5,036.1 - 573.5 4,528.4 5,101.9
Financial liabilities
Shares 4,234.1 - - 4,231.5 4,231.5
Amounts due to credit institutions 752.1 - 752.1 - 752.1
Amounts due to other customers 279.6 - 77.1 207.8 284.9
Subordinated liabilities
22.8 - 22.8 - 22.8
5,288.6 - 852.0 4,439.3 5,291.3
32
. F
inancial instruments (continued)
142 143
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
a) Loans and advances to customers
The fair value of loans and advances to customers has been determined taking into account factors such as impairment and interest rates. The fair values have been
calculated on a product basis and as such do not necessarily represent the value that could have been obtained for a portfolio if it were sold at 31 March 2022.
b) Shares and borrowings
The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand. The estimated fair
value of fixed interest-bearing deposits and other borrowings without quoted market price is based on discounted cash flows using interest rates for new deposits with
similar remaining maturity. The fair values have been calculated on a product basis and as such do not necessarily represent the value that could have been obtained
for a portfolio if it were sold at 31 March 2022.
c) Debt securities in issue
The aggregate fair values are calculated based on quoted market prices. For those notes where quoted market prices are not available, a discounted cash flow model
is used based on a current yield curve appropriate for the remaining term to maturity.
Financial assets and financial liabilities held at fair value
The tables below show the fair values of the Group's and Society's financial assets and liabilities held at fair value in the Statements of Financial Position, analysed
according to the fair value hierarchy described previously.
Group
Level 1
2022
£m
Level 2
2022
£m
Level 3
2022
£m
Total
2022
£m
Financial assets
Investment securities
At fair value through other comprehensive income 286.4 - -
286.4
At fair value through profit or loss 0.5 - -
0.5
Derivative financial instruments - 52.4 -
52.4
Loans and advances to customers
- - 11.5
11.5
286.9 52.4 11.5
350.8
Financial liabilities
Derivative financial instruments
- 11.5 -
11.5
- 11.5 -
11.5
Group
Level 1
2021
£m
Level 2
2021
£m
Level 3
2021
£m
Total
2021
£m
Financial assets
Investment securities
At fair value through other comprehensive income 275.6 - - 275.6
At fair value through profit or loss 0.9 - - 0.9
Derivative financial instruments - 6.5 - 6.5
Loans and advances to customers
- - 12.5 12.5
276.5 6.5 12.5 295.5
Financial liabilities
Derivative financial instruments
- 40.5 - 40.5
- 40.5 - 40.5
Society
Level 1
2022
£m
Level 2
2022
£m
Level 3
2022
£m
Total
2022
£m
Financial assets
Investment securities
At fair value through other comprehensive income 286.4 - -
286.4
At fair value through profit or loss 0.5 - -
0.5
Derivative financial instruments - 52.2 -
52.2
Loans and advances to customers
- - 11.5
11.5
286.9 52.2 11.5
350.6
Financial liabilities
Derivative financial instruments
- 11.4 -
11.4
- 11.4 -
11.4
Group and Society
2022
£m
2021
£m
Equity release portfolio
At 1 April
12.5
13.3Items recognised in the Income Statement
Interest receivable and similar income
0.7
0.8Fair value gains/(losses) on financial instruments
0.2
(0.2)Redemptions
(1.9)
(1.4)
At 31 March
11.5
12.5
Society
Level 1
2021
£m
Level 2
2021
£m
Level 3
2021
£m
Total
2021
£m
Financial assets
Investment securities
At fair value through other comprehensive income 275.6 - - 275.6
At fair value through profit or loss 0.9 - - 0.9
Derivative financial instruments - 6.5 - 6.5
Loans and advances to customers
- - 12.5 12.5
276.5 6.5 12.5 295.5
Financial liabilities
Derivative financial instruments
- 39.1 - 39.1
- 39.1 - 39.1
The Society's equity release mortgage portfolio is measured at fair value using a discounted cash flow model for which key inputs are not based on observable
market data. The calculation therefore meets the definition of a level 3 valuation technique. Details of the key model assumptions and the fair value impact of
changes in those assumptions are given in the accounting policies.
The table below analyses movements in the level 3 portfolio during the period.
There have been no transfers of financial assets or liabilities between levels of the valuation hierarchy in the period.
32
. F
inancial instruments (continued)
144 145
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
33. Credit risk
(a) Credit risk definition and management
Credit risk can be described as the risk of customers or counterparties being unable to meet their financial obligations to the Group as they become due.
The Group is exposed to this risk through its lending to:
• individuals (consumers - residential mortgages, including buy to let);
• businesses (non-consumers - previous commercial lending and elements of buy to let exposure); and
• wholesale counterparties (including other financial institutions). Specifically within the treasury portfolio, where credit risk arises from the investments held by
the Group in order to meet liquidity requirements and for general business purposes.
Changes in the credit quality and the recoverability of loans and amounts due from counterparties influence the Group's exposure to credit risk. Adverse changes
in the credit quality of counterparties, collateral values or deterioration in the wider economy, including rising unemployment, worsening household finances and
tightening in the UK property market, resulting in declining property values, could affect the recoverability and value of the Group's assets and influence its financial
performance. An economic downturn and future falls in property values (either residential or commercial) could affect the level of impairment losses recognised.
The controlled management of credit risk is critical to the Group's overall strategy. The Group has therefore embedded a comprehensive and robust credit risk
management framework with clear lines of accountability and oversight as part of its overall governance framework. The Group has effective policies and
procedures to identify, measure, monitor, manage and report credit risk within the Group's risk appetite.
The Risk Committee is responsible for the oversight of credit risk appetite that has been established by the Board and for approving lending policy and setting
limits on credit exposures, which are monitored and reviewed on a monthly basis. The minutes of this committee are presented to the Board. This committee is
supported by four Executive sub-committees: the Executive Risk Committee, the Residential Credit Committee, the Commercial Loan Risk Committee and the Model
Risk Committee. The role of each within the credit risk framework is outlined below:
• The Executive Risk Committee (ERC) is responsible for providing the Risk Committee with an enterprise wide view of the risk profile of the Society including
current and potential risks. The ERC is also accountable for driving the detailed implementation of the Society's Risk Management Framework. In the context of
credit risk, the ERC proposes to Risk Committee any recommendations for Board approval regarding the Residential Lending Statement and Credit Risk Appetite
Statement. The ERC approves material changes to the Lending and Security Policies, and reviews these policies annually. A summary of the minutes of this
committee are presented to the Risk Committee.
• The Residential Credit Committee is responsible for the monitoring of the Group’s residential credit exposures and approving changes to the credit scoring
systems that are utilised. In addition, the Committee reviews the type and quality of approved residential mortgage business and appraises actual arrears
and repossession levels against trends and industry averages. A summary of the minutes of this committee are presented to the ERC.
• The Commercial Loan Risk Committee reviews individual commercial loans at levels mandated by the Board. This may involve reviewing individual cases on a
quarterly, half yearly or annual basis.
• The Model Risk Committee supports the Society's development and maintenance of models, including those related to the management of credit risk. The
Committee oversees the initiation, development, approval, implementation, performance, monitoring and validation of the Society's models in the context of
compliance with both Regulation and the Society's own governance requirements. A summary of the minutes of this committee are presented to the ERC.
The Group adopts a responsible approach to lending ensuring that loans are, and are expected to remain, affordable and the Responsible Lending Policy is
approved annually by the Board.
The maximum credit risk exposure is the carrying value as shown in the tables on pages 140 to 143.
The Group's most significant exposures to credit risk are loans secured on UK residential properties and loans secured on UK land.
Concentration by loan type
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Prime owner occupied
3,234.4
3,118.63,149.9
3,020.4Buy to let
1,300.5
1,373.1284.3
326.2Other
42.2
49.6
0.70.8
Gross balances
4,577.1
4,541.3
3,434.93,347.4
Expected credit loss provisions
(7.7)
(11.8)(1.5)
(2.5)Fair value hedge adjustments
(51.2)
3.7
(46.1)3.6
4,518.2
4,533.2
3,387.33,348.5
(b) Residential assets held at amortised cost
(i) Credit quality
The Group assesses credit risk on owner occupied and buy to let residential mortgages using behavioural scorecard and other analysis to determine probabilities
of default across a number of rating grades. The IFRS 9 impairment models make use of this data, incorporating forecasts of future economic conditions and
account-specific factors to produce forward-looking probabilities of default by account and allocating loans to one of three stages (as explained in note 1).
The table below analyses gross exposures to residential assets by 12-month probability of default and IFRS 9 stage at the reporting date, with the exception of the
closed second charge lending portfolio for which probability of possession is used as a credit risk measure, rather than probability of default.
At 31 March 2022
Group Society
Probability of default range (%)
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
0.00 to < 0.25 3,174.4 205.7 - 168.7 -
3,380.1
2,684.02,852.7
0.25 to < 0.50 474.3 84.8 0.3 38.1 -
559.4
304.0342.1
0.50 to < 0.75 39.9 24.2 - 5.2 -
64.1
10.315.5
0.75 to < 1.00 65.7 14.1 - 7.0 -
79.8
6.513.5
1.00 to < 5.00 176.3 152.8 1.0 97.8 0.5
330.1
57.5155.8
5.00 to < 10.00 4.9 0.7 - 0.4 -
5.6
2.83.2
10.00 to < 100.00 64.6 25.6 0.5 15.6 0.2
90.7
11.126.9
100.00 (default) - - 59.7 - 24.9
59.7
-24.9
Second charge 5.0 1.5 1.1 0.1 -
7.6
0.20.3
4,005.1 509.4 62.6 332.9 25.6
4,577.1
3,076.43,434.9
At 31 March 2021
Group Society
Probability of default range (%)
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
0.00 to < 0.25 3,189.0 309.4 - 3,498.4 2,641.9 126.0 - 2,767.9
0.25 to < 0.50 377.0 46.9 - 423.9 313.3 21.2 - 334.5
0.50 to < 0.75 32.5 43.5 - 76.0 9.8 7.3 - 17.1
0.75 to < 1.00 3.1 1.0 - 4.1 3.0 0.9 - 3.9
1.00 to < 5.00 164.8 186.9 - 351.7 51.7 108.2 - 159.9
5.00 to < 10.00 5.3 1.3 - 6.6 1.9 0.5 - 2.4
10.00 to < 100.00 47.8 28.5 - 76.3 5.7 15.5 - 21.2
100.00 (default) 37.5 - 57.7 95.2 18.2 - 22.3 40.5
Second charge 6.1 1.7 1.3 9.1 - - - -
3,863.1 619.2 59.0 4,541.3 3,045.5 279.6 22.3 3,347.4
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Not past due
4,548.4
4,506.8 3,423.1
3,333.8 Past due 1 to 3 months
13.7
14.0 5.4
5.6 Past due 3 to 6 months
5.6
8.8 2.2
4.3 Past due 6 to 12 months
3.2
5.3 2.0
1.3 Past due over 12 months
3.1
3.7 0.8
1.5 Possessions
3.1
2.7
1.4 0.9
4,577.1
4,541.3
3,434.9 3,347.4
The table below provides further information on the Group's residential loans and advances to customers by payment due status at 31 March.
146 147
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
(ii) Expected credit losses
The table below illustrates the IFRS 9 staging distribution of residential loans and advances to customers held at amortised cost, loan commitments and related
expected credit loss provisions at the year end. Stage 2 loans have been further analysed to show those which are more than 30 days past due, the IFRS 9 backstop
for identifying a significant increase in credit risk (SICR), and those which meet other SICR criteria as detailed in note 1 to the accounts.
At 31 March 2022
Group Society
Gross exposure
£m
Expected credit
loss provision
£m
Provision
coverage
%
Gross exposure
£m
Expected credit
loss provision
£m
Provision
coverage
%
Residential loans at amortised cost
Stage 1
4,005.1 1.3 0.03% 3,076.4 0.2 0.01%
Stage 2
> 30 days past due
7.3 0.1 1.37% 3.0 - 0.00%
Other SICR indicators
502.1 1.7 0.34% 329.9 0.4 0.12%
Provision overlays
- 2.3 - - 0.2 -
Stage 3
62.6 2.3 3.67% 25.6 0.7 2.73%
4,577.1 7.7 0.17% 3,434.9 1.5 0.04%
Loan commitments
Stage 1
169.4 - 0.00% 154.9 - 0.00%
At 31 March 2021
Group Society
Gross exposure
£m
Expected credit
loss provision
£m
Provision
coverage
%
Gross exposure
£m
Expected credit
loss provision
£m
Provision
coverage
%
Residential loans at amortised cost
Stage 1 3,863.1 1.8 0.05% 3,045.5 0.4 0.01%
Stage 2
> 30 days past due 8.8 0.1 1.14% 3.3 - 0.00%
Other SICR indicators 610.4 5.6 0.92% 276.3 1.1 0.40%
Provision overlays
- 1.7 - - 0.3 -
Stage 3 59.0 2.6 4.41% 22.3 0.7 3.14%
4,541.3 11.8 0.26% 3,347.4 2.5 0.07%
Loan commitments
Stage 1 252.3 - 0.00% 221.4 - 0.00%
For the purposes of the disclosure above, gross exposures and expected credit loss provisions are rounded to the nearest £0.1m whereas the provision coverage
percentages are based on the underlying data prior to rounding.
The tables below analyse the movement in gross residential exposures and the related expected credit loss allowances for the year ended 31 March 2022:
Group Society
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Gross exposure
At 1 April 2021 3,863.1 619.2 59.0 279.6 22.3
4,541.3
3,045.53,347.4
Transfers due to increased
credit risk:
From stage 1 to stage 2 (204.6) 204.6 - 172.4 -
-
(172.4)-
From stage 1 to stage 3 (16.6) - 16.6 - 8.7
-
(8.7)-
From stage 2 to stage 3 - (7.5) 7.5 (3.3) 3.3
-
--
Transfers due to decreased
credit risk:
From stage 2 to stage 1 241.9 (241.9) - (76.5) -
-
76.5-
From stage 3 to stage 1 1.0 - (1.0) - (0.3)
-
0.3-
From stage 3 to stage 2 - 5.3 (5.3) 1.5 (1.5)
-
--
Mortgage advances 755.5 - - - -
755.5
682.6682.6
Net redemptions and
repayments
(630.0) (70.3) (13.6) (40.8) (6.7)
(713.9)
(547.4)(594.9)
Amounts written off - - (0.5) - (0.2)
(0.5)
-(0.2)
Other movements (5.2) - (0.1) - -
(5.3)
--
At 31 March 2022 4,005.1 509.4 62.6 332.9 25.6
4,577.1
3,076.43,434.9
Group Society
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Gross exposure
At 1 April 2020 3,888.0 393.5 56.5 4,338.0 2,852.7 224.9 22.0 3,099.6
Transfers due to increased
credit risk:
From stage 1 to stage 2 (346.2) 346.2 - - (134.4) 134.4 - -
From stage 1 to stage 3 (11.3) - 11.3 - (4.6) - 4.6 -
From stage 2 to stage 3 - (9.1) 9.1 - - (3.6) 3.6 -
Transfers due to decreased
credit risk:
From stage 2 to stage 1 81.6 (81.6) - - 53.1 (53.1) - -
From stage 3 to stage 1 1.1 - (1.1) - 0.6 - (0.6) -
From stage 3 to stage 2 - 7.8 (7.8) - - 3.5 (3.5) -
Mortgage advances 783.5 - - 783.5 740.9 - - 740.9
Net redemptions and
repayments
(532.8) (37.6) (8.4) (578.8) (461.9) (26.5) (3.6) (492.0)
Amounts written off - - (0.5) (0.5) - - (0.2) (0.2)
Other movements (0.8) - (0.1) (0.9) (0.9) - - (0.9)
At 31 March 2021 3,863.1 619.2 59.0 4,541.3 3,045.5 279.6 22.3 3,347.4
33.
Credit risk
(continued)
148 149
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
Group Society
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Expected credit loss provision
At 1 April 2021 1.8 7.4 2.6 1.4 0.7
11.8
0.42.5
Transfers due to increased
credit risk:
From stage 1 to stage 2 - 0.4 - 0.2 -
0.4
-0.2
From stage 1 to stage 3 (0.2) - 0.5 - 0.2
0.3
(0.1)0.1
From stage 2 to stage 3 - (0.1) 0.2 (0.1) 0.1
0.1
--
Transfers due to decreased
credit risk:
From stage 2 to stage 1 0.2 (2.5) - (0.3) -
(2.3)
-(0.3)
From stage 3 to stage 2 - - (0.1) - -
(0.1)
--
Remeasurement of expected
credit losses with no stage
transfer
(0.1) (1.5) (0.1) (0.4) 0.1
(1.7)
(0.1)(0.4)
Redemptions (0.4) (0.2) (0.3) (0.1) (0.1)
(0.9)
(0.1)(0.3)
Amounts written off - - (0.5) - (0.2)
(0.5)
-(0.2)
Other movements - - - - (0.1)
-
0.1-
Movement in provision overlays
- 0.6 - (0.1) -
0.6
-(0.1)
At 31 March 2022 1.3 4.1 2.3 0.6 0.7
7.7
0.21.5
Group Society
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Expected credit loss provision
At 1 April 2020 1.1 2.7 3.2 7.0 0.3 1.2 0.9 2.4
Transfers due to increased
credit risk:
From stage 1 to stage 2 (0.1) 3.2 - 3.1 - 0.6 - 0.6
From stage 1 to stage 3 (0.1) - 0.4 0.3 - - 0.1 0.1
From stage 2 to stage 3 - (0.1) 0.5 0.4 - (0.1) 0.1 -
Transfers due to decreased
credit risk:
From stage 2 to stage 1 0.1 (0.2) - (0.1) - (0.1) - (0.1)
From stage 3 to stage 1 - - (0.1) (0.1) - - - -
From stage 3 to stage 2 - - (0.3) (0.3) - - (0.1) (0.1)
Remeasurement of expected
credit losses with no stage
transfer
1.1 1.0 (0.3) 1.8 0.3 0.1 - 0.4
Redemptions (0.2) - (0.1) (0.3) - - - -
Amounts written off - - (0.5) (0.5) - - (0.2) (0.2)
Other movements (0.1) - (0.2) (0.3) (0.2) - (0.1) (0.3)
Movement in provision overlays
- 0.8 - 0.8 - (0.3) - (0.3)
At 31 March 2021 1.8 7.4 2.6 11.8 0.4 1.4 0.7 2.5
(iv) Collateral
The table below shows analysis of the indexed loan to value distribution of the residential loan portfolio at the year end date:
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
>95%
9.3
2.07.3
0.791% - 95%
39.8
6.539.4
5.786% - 90%
61.8
203.061.2
194.776% - 85%
461.2
657.3377.0
597.851% - 75%
2,349.8
2,261.11,794.3
1,545.0<51%
1,655.2
1,411.4
1,155.71,003.5
4,577.1
4,541.3
3,434.93,347.4
The Group's average indexed loan to value at the year end date is 46.9% (2020/21: 52.4%), calculated as a simple average across all residential loans.
The following table indicates collateral held against residential loans and advances to customers by IFRS 9 stage:
Fair value of collateral held
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Stage 1
8,914.9
8,143.56,834.8
6,357.7Stage 2
1,140.8
1,265.1727.1
585.8Stage 3
162.7
142.6
72.062.0
10,218.4
9,551.2
7,633.97,005.5
The collateral held consists of properties included within the above categories. The use of such collateral is in line with terms that are usual and customary to
standard lending activities.
(iii) Geographical analysis
The table below shows the geographic spread of the residential loan portfolio at the year end date:
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
East Anglia
113.2
119.381.3
84.2East Midlands
480.7
475.7383.3
374.6Greater London
490.7
492.0256.5
253.2Northern Ireland
3.2
3.60.3
0.4North
213.0
196.8169.6
150.0North West
608.2
576.4469.7
433.1Scotland
72.9
83.818.6
21.8South East
801.3
784.4582.2
567.0South West
364.3
384.5286.8
299.8Wales
229.7
226.1179.7
172.9West Midlands
701.3
722.4597.5
610.6Yorkshire
498.6
476.3
409.4379.8
4,577.1
4,541.3
3,434.93,347.4
33.
Credit risk
(continued)
150 151
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
(v) Forbearance
A range of forbearance strategies are employed in order to work with borrowers to control arrears and, wherever possible, avoid repossession. These are set out in
the relevant Group policies. The agreed strategy will reflect the customer’s individual circumstances, appropriately taking any vulnerabilities into consideration, and will
be used in line with industry guidance. Forbearance arrangements include extended payment terms, a reduction in interest or principal repayments, and approved
external debt management plans.
The payment deferral scheme, helping customers impacted as a result of the COVID-19 pandemic, ceased at the end of July 2021. The Society provided payment
deferrals to 5,439 accounts in total of which 97% have recommenced payments. Although, the Society has not seen the anticipated increase in borrowers suffering
financial distress, as Government support has unwound, for example the availability of furlough ending (September 2021), it continues to be vigilant. The Society is
mindful of increasing pressure on household budgets as the cost of living continues to rise above wage growth.
Group
Arrangements
2022
£m
Concessions
2022
£m
Capitalisation
2022
£m
Term extensions
2022
£m
Total
2022
£m
Not past due
9.6 0.1 1.5 0.8
12.0
Past due 1 to 3 months 1.7 - - -
1.7
Past due 3 to 6 months 1.3 - - -
1.3
Past due 6 to 12 months 1.0 0.1 0.1 -
1.2
Past due over 12 months
1.2 0.2 - -
1.4
14.8 0.4 1.6 0.8
17.6
The table below analyses residential mortgage balances with renegotiated terms at the year end date:
Group
Arrangements
2021
£m
Concessions
2021
£m
Capitalisation
2021
£m
Term extensions
2021
£m
Total
2021
£m
Not past due
10.1 0.2 0.8 0.5 11.6
Past due 1 to 3 months 2.1 0.1 0.1 - 2.3
Past due 3 to 6 months 1.9 0.5 0.1 - 2.5
Past due 6 to 12 months 0.7 0.1 - - 0.8
Past due over 12 months
1.5 0.1 - - 1.6
16.3 1.0 1.0 0.5 18.8
(c) Commercial assets
Commercial assets comprise a closed portfolio of non-core commercial loans which is analysed in the table below.
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Concentration by loan type
Loans secured on commercial property
320.3
361.616.2
16.3Loans secured on residential property
15.0
14.9
14.214.1
Gross balances
335.3
376.5
30.430.4
Fair value adjustments
13.2
21.8
0.41.9
Gross exposures
348.5
398.3
30.832.3
Impairment provisions
(99.9)
(91.9)
--
248.6
306.4
30.832.3
Of the Group fair value adjustments, £13.0m (2020/21: £20.9m) relate to loans secured on commercial property and £0.2m (2020/21 £0.9m) relate to loans secured
on residential property. Of the Society fair value adjustments, £0.2m (2020/21: £1.0m) relates to loans secured on commercial property and £0.2m (2020/21: £0.9m)
relates to loans secured on residential property.
The table below provides further information on the Group's commercial assets by payment due status at 31 March:
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Not past due
256.3
301.430.8
32.3Past due up to 3 months
-
0.3-
-Past due 3 to 6 months
2.1
3.1-
-Past due 6 to 12 months
13.5
4.8-
-Past due over 12 months
76.6
88.7
--
348.5
398.3
30.832.3
At 31 March 2022
Group
Society
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Strong 37.4 - -
37.4
30.8Good 10.5 - -
10.5
-Satisfactory - 10.5 -
10.5
-Weak - 39.8 -
39.8
-Default:
In LPA receivership - - 250.3
250.3
-47.9 50.3 250.3
348.5
30.8At 31 March 2021
Group
Society
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Strong 43.9 - - 43.9 32.3
Good 13.7 - - 13.7 -
Satisfactory - 10.1 - 10.1 -
Weak - 72.7 - 72.7 -
Default:
In LPA receivership - - 257.9 257.9 -
57.6 82.8 257.9 398.3 32.3
(i) Credit quality
The internal credit risk grading approach for the closed commercial loan book does not use scorecards or probability of default calculations. Instead loans are
individually assessed against a series of prescriptive and judgmental criteria, by subject matter experts following a clearly defined methodology, to arrive at a risk
grade. The distribution of the portfolio by grade and IFRS 9 stage at 31 March is set out in the table below.
33.
Credit risk
(continued)
152 153
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
(ii) Expected credit losses
The table below illustrates the IFRS 9 staging distribution of commercial loans and advances to customers and related expected credit loss provisions at the year
end. Stage 2 loans have been further analysed to show those which are more than 30 days past due, the IFRS 9 backstop for identifying a significant increase in
credit risk (SICR), and those which meet other SICR criteria as detailed in note 1 to the accounts.
At 31 March 2022
Group
Society
Gross exposure
£m
Expected credit
loss provision
£m
Provision
coverage
%
Gross exposure
£m
Expected credit
loss provision
£m
Provision
coverage
%
Commercial loans
Stage 1
47.9 - 0.00% 30.8 - 0.00%
Stage 2
> 30 days past due
- - - - - -
Other SICR indicators
50.3 8.8 17.50% - - -
Stage 3
250.3 91.1 36.40% - - -
Provision overlays
- - - - - -
348.5 99.9 28.67% 30.8 - 0.00%
At 31 March 2021
Group
Society
Gross exposure
£m
Expected credit
loss provision
£m
Provision
coverage
%
Gross exposure
£m
Expected credit
loss provision
£m
Provision
coverage
%
Commercial loans
Stage 1 57.6 - 0.00% 32.3 - 0.00%
Stage 2
> 30 days past due 2.1 0.1 4.76% - - -
Other SICR indicators 80.7 8.3 10.29% - - -
Stage 3 257.9 80.7 31.29% - - -
Provision overlays - 2.8 - - - -
398.3 91.9 23.07% 32.3 - 0.00%
For the purposes of the disclosure above, gross exposures and expected credit loss provisions are rounded to the nearest £0.1m whereas the provision coverage
percentages are based on the underlying data prior to rounding.
The tables below analyse the movement in gross commercial exposures and the related expected credit loss allowances at 31 March:
Group Society
Gross exposure
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
At 1 April 2021 57.6 82.8 257.9
398.3
32.3Transfers due to increased credit risk:
From stage 1 to stage 2 (1.3) 1.3 -
-
-From stage 1 to stage 3 (0.2) - 0.2
-
-From stage 2 to stage 3 - (17.9) 17.9
-
-Transfers due to decreased credit risk:
From stage 3 to stage 2 - 2.9 (2.9)
-
-Net redemptions, repayments and fair value adjustments for
hedged risk
(8.2) (18.8) (18.0)
(45.0)
(1.5)Amounts written off - - (4.8)
(4.8)
-At 31 March 2022 47.9 50.3 250.3
348.5
30.8Group Society
Gross exposure
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
At 1 April 2020 59.5 103.6 254.1 417.2 33.6
Transfers due to increased credit risk:
From stage 1 to stage 3 (0.2) - 0.2 - -
From stage 2 to stage 3 - (13.4) 13.4 - -
Transfers due to decreased credit risk:
From stage 2 to stage 1 1.6 (1.6) - - -
Net redemptions, repayments and fair value adjustments for
hedged risk
(3.3) (5.8) (7.0) (16.1) (1.2)
Amounts written off - - (2.8) (2.8) -
Other movements - - - - (0.1)
At 31 March 2021 57.6 82.8 257.9 398.3 32.3
33.
Credit risk
(continued)
154 155
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Healthcare
55.5
60.6-
-Leisure
47.0
54.3-
-Industrial and warehouse
8.2
10.12.8
2.7Office
4.3
25.14.3
4.5Retail
218.4
232.59.3
10.2Residential
15.1
15.7
14.414.9
348.5
398.3
30.832.3
(iii) Industry analysis of commercial loans
The analysis of commercial loans by industry type is as follows:
Group Society
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Expected credit loss allowance
At 1 April 2021 - 8.4 83.5
91.9
-Transfers due to increased credit risk:
From stage 2 to stage 3 - (2.7) 1.5
(1.2)
-Remeasurement of expected credit losses with no stage
transfer
- 3.6 13.7
17.3
-Redemptions - (0.5) -
(0.5)
-Amounts written off - - (4.8)
(4.8)
-Movement in provision overlays - - (2.8)
(2.8)
-At 31 March 2022 - 8.8 91.1
99.9
-Group Society
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Expected credit loss allowance
At 1 April 2020 - 9.3 72.5 81.8 -
Transfers due to increased credit risk:
From stage 1 to stage 2 - - - - -
From stage 2 to stage 3 - (1.4) 1.8 0.4 -
Remeasurement of expected credit losses with no stage
transfer
- 0.5 9.2 9.7 -
Amounts written off - - (2.8) (2.8) -
Movement in provision overlays - - 2.8 2.8 -
At 31 March 2021 - 8.4 83.5 91.9 -
33.
Credit risk
(continued)
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
East Anglia
17.3
20.04.3
4.5East Midlands
24.1
26.61.0
0.9Greater London
32.5
35.217.2
18.0North
32.9
36.2-
-North West
131.4
135.03.6
3.6Scotland
0.7
0.70.4
0.4South East
37.7
55.80.8
0.9South West
7.0
8.50.1
0.1Wales
4.0
4.00.6
0.6West Midlands
30.1
36.9-
-Yorkshire
30.8
39.4
2.83.3
348.5
398.3
30.832.3
(iv) Geographical analysis
The table below shows the geographic spread of the commercial loan portfolio at the year end date:
156 157
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
Group
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
Concentration by credit grading
AAA
271.4
341.6271.4
298.9AA+ to AA-
652.3
302.9652.3
302.9A+ to A-
87.9
54.941.7
54.9Other
0.5
0.9
487.4542.9
1,012.1
700.3
1,452.81,199.6
Concentration by sector
Financial institutions
88.2
107.342.0
64.6Asset backed securities
189.5
189.4676.4
731.4Supranational institutions
82.4
87.182.4
87.1Sovereign
652.0
316.5
652.0316.5
1,012.1
700.3
1,452.81,199.6
Concentration by region
UK
912.3
596.51,353.0
1,095.8Europe (excluding UK)
-
0.6-
0.6North America
17.4
16.117.4
16.1Supranational
82.4
87.1
82.487.1
1,012.1
700.3
1,452.81,199.6
(d) Loans and advances to credit institutions and investment securities
The Group holds treasury investments in order to meet liquidity requirements and for general business purposes. The credit risk arising from these investments is
monitored, managed and controlled closely by the Group.
At 31 March 2022, the Group and Society's loans and advances to credit institutions and investment securities held at amortised cost or FVOCI were all categorised
as stage 1 and the associated ECLs were negligible. At the reporting date, 100% (2020/21: 100%) of the Group's treasury assets were invested in or deposited with
counterparties rated single A or better or classified as a Global Systemically Important Counterparty (GSIC).
The tables below show the relative concentrations of the Group's treasury investment portfolio, all of which are denominated in sterling:
33.
Credit risk
(continued)
Group
Arrangements
2022
£m
Capitalisation
2022
£m
Term extensions
2022
£m
Total
2022
£m
Not past due
13.3 10.4 -
23.7
Past due 6 to 12 months 4.4 - -
4.4
Past due over 12 months
3.6 - -
3.6
21.3 10.4 -
31.7
Group
Arrangements
2021
£m
Capitalisation
2021
£m
Term extensions
2021
£m
Total
2021
£m
Not past due
14.7 10.9 1.1 26.7
Past due 6 to 12 months 4.8 - - 4.8
Past due over 12 months
3.8 - - 3.8
23.3 10.9 1.1 35.3
The analysis below sets out the commercial mortgage gross exposures with evidence of forbearance and renegotiated terms at the year end date.
(vi) Forbearance
Certain forbearance activities are applied on a small number of commercial mortgages. Loans that have been restructured (generally via a term extension) and would
otherwise have been past due are classified as renegotiated. The carrying amount of loans that have been classified as renegotiated retain this classification until
maturity or derecognition. Interest is recorded on renegotiated loans on the basis of new contractual terms following renegotiation.
(v) Collateral
The Group's average indexed loan to value at the year end date is 114.8% (2020/21: 111.9%), calculated as a simple average across all commercial loans.
The following table indicates collateral held against commercial loans and advances to customers by IFRS 9 stage at 31 March:
Society
Indexed
2022
£m
Unindexed
2022
£m
Indexed
2021
£m
Unindexed
2021
£m
Value of collateral held
Stage 1
126.8 123.1
123.9 125.1
The collateral held consists of properties, land or other guarantees or cash included within the above categories. The use of such collateral is in line with terms that are
usual and customary to standard lending activities.
Group
Indexed
2022
£m
Unindexed
2022
£m
Indexed
2021
£m
Unindexed
2021
£m
Value of collateral held
Stage 1 187.0
174.5 164.7
189.7Stage 2 64.4
38.9 42.3
56.2Stage 3
129.1 162.2
134.7 163.5
342.5 369.2
380.6 414.9
(e) Intercompany loans
An ECL provision of £199.1m (2020/21: £189.1m) is held against intercompany loans of £908.5m (2020/21: £958.6m) to West Bromwich Commercial Limited and West
Bromwich Mortgage Company where there is currently a shortfall in net assets; these loans are classified as Stage 2. The balance of £118.7m (2020/21: £123.1m) of
intercompany investments and loans is classified as stage 1 with no provision against it (2021: £nil).
158 159
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
At
31 March 2022
£m
Average
2022
£m
High
2022
£m
Low
2022
£m
Market value (8.7) (0.2)
(1.4)
(5.1)Net interest income
(6.1)
(5.8) (8.2) (1.6)
34.
Market risk
Market risk is the potential adverse change in Group income, or the value of Group net worth, arising from movements in interest rates, exchange rates, equity prices
or other market prices. The Board recognises that the effective management of market risk is essential to the maintenance of stable earnings and the preservation of
member value.
The Group’s exposure to market risk is governed by the Board approved Treasury and Financial Risk Management Policy, which sets out the nature of risks that may
be taken and defines aggregate risk limits. Within this Policy, the Board has delegated responsibility for the management and control of market risk to the Assets &
Liabilities Committee (ALCo). ALCo reviews the Treasury & Financial Risk Management Policy, recommending changes to the Board as appropriate. At each meeting,
ALCo reviews reports which show the Group’s current and forecast exposure to market risks together with the results of extensive stress testing. The key market risk is
interest rate risk, which arises as a result of differences in the timing of interest rate re-pricing of assets and liabilities. To mitigate this, natural balance sheet hedging
and derivative financial instruments are used.
The Society's Assets and Liabilities Management function is responsible for operational management of the Group’s exposure to market risk. It achieves this by taking
advantage of natural hedges arising within the Group’s businesses and, for the purpose of reducing risk, transacting appropriate hedging instruments where no
natural hedges exist.
The Group's use of derivative financial instruments to manage interest rate risk is explained in note 12 to the accounts.
Interest rate risk
The Group’s exposure to interest rate risk is reported against target operating ranges set by ALCo, which themselves fall within Board Policy limits. The effect upon the
Group's current and forecast net market value of assets and liabilities is determined for parallel yield curve shifts in the range +2% to -2%, subject to a defined floor, and
for a variety of stressed non-parallel yield curve shifts, including unfloored negative rates. The impact upon net interest income is also assessed for rate movements
using parallel shifts in the range +2% to -2%, subject to a specified assumed floor for Bank Rate, and non-parallel stress rates, including convergent and divergent
Bank Rate and LIBOR paths.
Analysis is also presented to show the mismatches between assets and liabilities whose rates move in line with different variable rate benchmarks such as Bank Rate,
SONIA, LIBOR and rates administered by the Group. Such mismatches generate additional interest rate risks (basis risk) to those assessed by parallel and non-parallel
shift analysis. The Board has defined risk appetites for basis mismatches.
To ensure that the overall reported interest rate risk position does not mask excessive offsetting concentrations in different periods, reprice gap concentration limits are
in place to limit the maximum mismatch between assets and liabilities repricing in future time periods. In conducting this analysis, general reserves, CCDS and PIBS are
allocated over a range of time buckets against treasury and other assets in accordance with targets set by ALCo. The resulting ‘reverse cumulative gap report’ allows
the income and market value sensitivity of a one basis point movement in interest rates upon the whole balance sheet to be calculated.
The levels of Group pre-tax interest rate risk exposures to applicable parallel shifts, subject to the aforementioned floors, through the reporting period were as follows:
The Group’s gap and basis mismatch positions are reported quarterly to the Prudential Regulation Authority (PRA). The Society also employs Economic Value of
Equity measures in line with PRA requirements. The Society’s internal limits framework ensures that Interest Rate Risk in the Banking Book is controlled at much lower
exposures than would trigger a notification to the PRA. Further detail on the Society's management of interest rate risk is provided in the Risk Management report on
page 40.
35.
Liquidity risk
The contractual maturity of the mortgages is typically up to 30 years although loans are often repaid early due to borrowers moving house or remortgaging. In
contrast, the majority of members' savings are available on demand or at short notice. It is this inherent mismatch between the maturity profile of mortgage lending
and the easy accessibility of savings that creates liquidity risk.
The Group’s exposure to liquidity risk is governed by the Liquidity and Funding Policy sections of the Board approved Treasury and Financial Risk Management Policy.
The Liquidity and Funding limits are designed to ensure that adequate liquid assets are held to cover statutory, regulatory and operational cash requirements in both
business-as-usual and stressed environments.
The Group’s liquidity risk is managed as follows:
• The Board has delegated authority for the management of liquidity risk to the Assets & Liabilities Committee (ALCo) within risk tolerances set out in the Treasury
and Financial Risk Management Policy. ALCo meets monthly;
• Operational management of liquidity risk is further delegated to the Liquidity Management Committee (LMC). LMC meets regularly (typically weekly) to agree,
based upon detailed customer behavioural analysis, the amount of funding required to maintain the adequacy of Group liquidity over horizons of up to three
months. LMC plans cash requirements at a higher level over an extended rolling 12 month plan period;
• LMC also considers a series of daily, weekly and monthly stress tests which are designed to ensure that the Group maintains sufficient liquidity to meet its cash
flow needs under any of a number of adverse scenarios. These scenarios simulate both Group specific, general market and combined events including severe
savings outflows and the unavailability of wholesale funding; and
• Under the Prudential Regulation Authority’s liquidity regime, the Group holds sufficient high quality liquid assets, such as government securities, supranational
bonds, covered bonds and cash deposited with the Bank of England, to ensure that it can meet its liabilities over a 30 day period under stressed conditions.
This is known as its Liquidity Coverage Ratio (LCR). The Group holds high quality liquidity above that required by the LCR in accordance with its own day-to-day
assessment of liquidity adequacy. This includes stress testing over a number of horizons, including survival days’ assessment out to 90 days.
The Overall Liquidity Adequacy Rule (OLAR) states that a regulated firm must at all times maintain liquidity resources which are adequate, both as to amount and
quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due. There are three measures that the Group considers key to meeting
the OLAR:
• Liquidity ratios - the amount of liquidity necessary to meet its LCR and to maintain overall liquidity adequacy as determined by the society’s Individual Liquidity
Adequacy Assessment Process (ILAAP) is assessed daily;
• Liquidity stress tests - adequacy of Group liquidity under a number of different stress scenarios is modelled and maintained within the Board's liquidity risk
tolerance; and
• Refinancing gaps - the level of wholesale and combined retail/wholesale funding permitted to mature over given time periods is subject to Board approved limits.
Further details of liquidity management are contained within the Risk Management Report on pages 36 to 49.
Capital Risk
The Group manages regulatory capital which substantially consists of Members Interests and Equity, as set out in the Capital Risk section of the Risk Management
report on page 41. The Group has met the external regulatory capital requirements during the year.
160 161
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
At 31 March 2021
Group
Repayable
on demand
£m
Less than
3 months
£m
3 to 12
months
£m
1 to 5
years
£m
Over
5 years
£m
No specific
maturity
£m
Total
£m
Financial assets
Cash and balances with the Bank of England 304.7 - - - - 11.8 316.5
Loans and advances to credit institutions 52.3 55.0 - - - - 107.3
Investment securities - 4.0 63.8 139.5 69.2 - 276.5
Derivative financial instruments - 1.4 0.6 4.1 0.4 - 6.5
Loans and advances to customers
- 258.1 53.6 301.0 4,336.0 (96.4) 4,852.3
Total financial assets
357.0 318.5 118.0 444.6 4,405.6 (84.6) 5,559.1
Financial liabilities
Shares 3,263.8 296.5 320.9 352.9 - - 4,234.1
Amounts due to credit institutions - 54.7 197.1 500.0 - - 751.8
Amounts due to other customers 11.4 39.8 34.6 5.1 - - 90.9
Derivative financial instruments - 1.5 3.5 17.4 18.1 - 40.5
Debt securities in issue - - - 217.9 - - 217.9
Subordinated liabilities
- - - - 22.8 - 22.8
Total financial liabilities
3,275.2 392.5 556.1 1,093.3 40.9 - 5,358.0
At 31 March 2022
Society
Repayable
on demand
£m
Less than
3 months
£m
3 to 12
months
£m
1 to 5
years
£m
Over
5 years
£m
No specific
maturity
£m
Total
£m
Financial assets
Cash and balances with the Bank of England 637.0 - - - - 15.0
652.0
Loans and advances to credit institutions 5.3 21.8 - - - -
27.1
Investment securities - - 130.1 97.6 512.9 -
740.6
Derivative financial instruments - - 1.7 49.6 0.9 -
52.2
Loans and advances to customers - 11.4 38.1 128.2 3,297.1 (45.3)
3,429.5
Investments: loans in subsidiary undertakings
- - - - - 1,027.2
1,027.2
Total financial assets
642.3 33.2 169.9 275.4 3,810.9 996.9
5,928.6
Financial liabilities
Shares 3,012.4 326.7 409.6 420.0 14.9 -
4,183.6
Amounts due to credit institutions - 55.4 - 1,060.8 - -
1,116.2
Amounts due to other customers 3.5 55.5 48.6 1.0 153.7 -
262.3
Derivative financial instruments - - 0.8 2.7 7.9 -
11.4
Subordinated liabilities
- - - - 22.9 -
22.9
Total financial liabilities
3,015.9 437.6 459.0 1,484.5 199.4 -
5,596.4
35.
Liquidity risk
(continued)
At 31 March 2021
Society
Repayable
on demand
£m
Less than
3 months
£m
3 to 12
months
£m
1 to 5
years
£m
Over
5 years
£m
No specific
maturity
£m
Total
£m
Financial assets
Cash and balances with the Bank of England 304.7 - - - - 11.8 316.5
Loans and advances to credit institutions 9.6 55.0 - - - - 64.6
Investment securities - 4.0 63.8 139.5 578.1 - 785.4
Derivative financial instruments - 1.4 0.6 4.1 0.4 - 6.5
Loans and advances to customers - 41.1 15.8 103.0 3,223.7 9.7 3,393.3
Investments: loans in subsidiary undertakings
- - - - - 1,081.7 1,081.7
Total financial assets
314.3 101.5 80.2 246.6 3,802.2 1,103.2 5,648.0
Financial liabilities
Shares 3,263.8 296.5 320.9 352.9 - - 4,234.1
Amounts due to credit institutions - 54.8 197.1 500.2 - - 752.1
Amounts due to other customers 3.4 39.9 33.8 1.0 201.5 - 279.6
Derivative financial instruments - 0.2 3.5 17.3 18.1 - 39.1
Subordinated liabilities
- - - - 22.8 - 22.8
Total financial liabilities
3,267.2 391.4 555.3 871.4 242.4 - 5,327.7
At 31 March 2022
Group
Repayable
on demand
£m
Less than
3 months
£m
3 to 12
months
£m
1 to 5
years
£m
Over
5 years
£m
No specific
maturity
£m
Total
£m
Financial assets
Cash and balances with the Bank of England 637.0 - - - - 15.0
652.0
Loans and advances to credit institutions 51.4 21.8 - - - -
73.2
Investment securities - - 97.0 130.7 59.2 -
286.9
Derivative financial instruments - - 1.9 49.6 0.9 -
52.4
Loans and advances to customers
- 239.0 74.6 318.7 4,302.8 (156.8)
4,778.3
Total financial assets
688.4 260.8 173.5 499.0 4,362.9 (141.8)
5,842.8
Financial liabilities
Shares 3,012.4 326.7 409.6 420.0 14.9 -
4,183.6
Amounts due to credit institutions - 55.4 0.1 1,061.2 - -
1,116.7
Amounts due to other customers 5.7 55.5 49.2 4.2 - -
114.6
Derivative financial instruments - - 0.8 2.6 8.1 -
11.5
Debt securities in issue - - - 171.2 - -
171.2
Subordinated liabilities
- - - - 22.9 -
22.9
Total financial liabilities
3,018.1 437.6 459.7 1,659.2 45.9 -
5,620.5
The table below analyses the Group’s assets and liabilities across maturity periods that reflect the residual maturity from the year end date to the contractual maturity
date. The Group's liquidity management processes consider the actual repayment profiles of financial assets and liabilities which are likely to be significantly different
to that shown in the analysis. Gross loan committments are expected to mature within 3 months.
162 163
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
Group
2022
£m
2022
%
2021
£m
2021
%
Cash in hand and balances with the Bank of England 45.2
652.0 64.4
316.5Cash with banks and building societies 15.4
73.2 7.3
107.3Fixed rate bonds 1.1
42.8 4.2
7.8Floating rate notes 11.3
54.6 5.4
79.4Covered bonds 17.1
130.3 12.9
120.1Residential mortgage backed securities
59.2 5.8
69.2 9.9
Total
1,012.1 100.0
700.3 100.0
At 31 March 2021
Group
Less than 3 months
£m
3 to 12 months
£m
1 to 5 years
£m
Over 5 years
£m
Total
£m
Liabilities
Shares 3,567.2 341.6 336.7 - 4,245.5
Amounts due to credit institutions and other
customers
92.3 237.6 502.0 - 831.9
Derivative financial instruments 4.9 11.9 27.2 5.7 49.7
Debt securities in issue 0.2 0.8 219.2 - 220.2
Subordinated liabilities
- 2.5 9.9 52.3 64.7
3,664.6 594.4 1,095.0 58.0 5,412.0
At 31 March 2022
Group
Less than 3 months
£m
3 to 12 months
£m
1 to 5 years
£m
Over 5 years
£m
Total
£m
Liabilities
Shares 3,357.7 439.0 400.3 -
4,197.0
Amounts due to credit institutions and other
customers
115.7 48.6 1,083.5 -
1,247.8
Derivative financial instruments 0.7 - 7.9 0.9
9.5
Debt securities in issue 0.6 173.3 - -
173.9
Subordinated liabilities
- 2.5 9.9 49.8
62.2
3,474.7 663.4 1,501.6 50.7
5,690.4
The following table is an analysis of the gross contractual cash flows payable under financial liabilities:
The significant development of liquidity stress testing and forecast models has continued throughout 2022 due to economic and market conditions. A wide range of
scenarios is considered including mild and severe stresses, credit downgrades and a total closure of the wholesale market. An analysis of the liquidity portfolio is set
out in the table below:
At 31 March 2022
Society
Less than 3 months
£m
3 to 12 months
£m
1 to 5 years
£m
Over 5 years
£m
Total
£m
Liabilities
Shares 3,357.7 439.0 400.3 -
4,197.0
Amounts due to credit institutions and other
customers
115.7 48.6 1,083.5 -
1,247.8
Derivative financial instruments 0.7 - 7.9 0.9
9.5
Subordinated liabilities
- 2.5 9.9 49.8
62.2
3,474.1 490.1 1,501.6 50.7
5,516.5
For each material class of financial liability a maturity analysis is provided on pages 160 to 161.
At 31 March 2021
Society
Less than 3 months
£m
3 to 12 months
£m
1 to 5 years
£m
Over 5 years
£m
Total
£m
Liabilities
Shares 3,567.2 341.6 336.7 - 4,245.5
Amounts due to credit institutions and other
customers
92.3 237.6 502.0 - 831.9
Derivative financial instruments 4.9 11.9 27.2 5.7 49.7
Subordinated liabilities
- 2.5 9.9 52.3 64.7
3,664.4 593.6 875.8 58.0 5,191.8
35.
Liquidity risk
(continued)
36
. F
inancial commitmentsGroup
2022
£m
Group
2021
£m
Society
2022
£m
Society
2021
£m
a) Leasing commitments
Less than three months
0.1
0.10.1
0.1Greater than three months and less than one year
0.3
0.30.3
0.3Between one and five years
1.3
1.21.3
1.2After five years
0.3
0.5
0.30.5
2.0
2.1
2.02.1
The maturity analysis of lease liabilities is analysed in the table shown below:
b) Loan commitments
Undrawn loan facilities
169.4
252.3
154.9221.4
c) Capital commitments
Capital expenditure contracted but not yet provided for in the accounts
-
0.4
-0.4
The Society earns rental income on subletting parts of seven (2020/21: eight) of its freehold branches to residential and commercial tenants. The income received from
this is negligible and is regarded as rental income.
164 165
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
37. Related party transactions
i) Subsidiary, parent and ultimate controlling party
The Group is controlled by West Bromwich Building Society
15. The Group's registered office and principal place of business is 2 Providence Place, West Bromwich , B70 8AF.
ii) Key management personnel
The Board considers key management personnel to comprise Executive and Non-Executive Directors. Details of Directors’ emoluments are disclosed in note 8 and the
Directors' Remuneration report.
iii) Transactions with key management personnel and their close family members
The table below shows outstanding balances and transactions with key management personnel, which comprises Group Directors, and their close family members:
Group and Society
No. of key
management
personnel
2022
Amount in respect of key
management personnel
and their close family
members
2022
£000
No. of key
management
personnel
2021
Amount in respect of key
management personnel
and their close family
members
2021
£000
Savings balances at 31 March 37
10 62
6Interest payable on savings balances
10 0
6 1
Mortgage loans and savings are available to key management personnel and members of their close family at normal commercial terms. At 31 March 2022 , there was
1 mortgage loan outstanding to Directors and their connected persons of £0.2m (31 March 2021: 1 outstanding of £0.2m).
A register is maintained by the Society containing details of loans, transactions and arrangements made between the Society or its subsidiary undertakings and Directors
of the Society or persons connected with Directors of the Society. The register will be available for inspection by members at the Annual General Meeting and during
normal office hours at the Society's Principal Office (2 Providence Place, West Bromwich) during the period 15 days prior to the meeting.
iv) Contributions to pension schemes
During the year the Group paid contributions of £4.5m (2020/21: £4.5m) to defined benefit pension schemes, which are classified as related parties.
As part of the ongoing funding agreement for the West Bromwich Building Society Staff Retirement Scheme (the SRS), the Trustees of the SRS have been granted a charge
over the Society’s Head Office, which may be exercised only in the event of the Society defaulting on its pension obligations and in such circumstances assigns the rights
of ownership of the building to the SRS.
v) Transactions with subsidiary companies
Interest paid
to Society
2022
£m
Interest paid
to Society
2021
£m
Insignia Finance Limited
0.1
0.2West Bromwich Commercial Limited
10.4
9.5West Bromwich Homes Limited
2.8
2.9West Bromwich Mortgage Company Limited
9.7
11.3
23.0
23.9
At the year end the following balances were outstanding with subsidiary companies:
Loans owed by
subsidiaries
2022
£m
Loans owed by
subsidiaries
2021
£m
Insignia Finance Limited
3.3
5.6West Bromwich Commercial Limited
378.8
366.9West Bromwich Homes Limited
115.4
117.5West Bromwich Mortgage Company Limited
529.7
591.7
1,027.2
1,081.7
Transactions and balances between Group companies are on normal commercial terms and conditions.
The loans owed by West Bromwich Commercial Limited are net of impairment provisions of £187.0m (2020/21: £174.1m) and the loans owed by West Bromwich
Mortgage Company Limited are net of impairment provisions of £12.1m (2020/21: £14.9m).
38.
Business segments
Operating segments are reported in accordance with the internal reporting provided to the Group Board (the chief operating decision maker), which is responsible for
allocating resources to the reportable segments and assessing their performance.
The Group has three main business segments:
• Retail - incorporating residential lending, savings, investments and protection;
• Commercial real estate - primarily representing loans for commercial property investment; and
• Property - a portfolio of residential properties for rent.
Central Group operations have been included in Retail and comprise risk management, finance, treasury services, human resources and computer services, none of
which constitute a separately reportable segment.
From 2018/19 onwards, the Group commenced responsible buy to let lending to limited companies which is reported within the Retail segment. The segment previously
termed 'Commercial' is now reported as 'Commercial real estate'. There were no other changes to reportable segments during current or prior year.
Transactions between the business segments are carried out at arm’s length. The revenue from external parties reported to the Group Board is measured in a manner
consistent with that in the consolidated Income Statement.
Funds are ordinarily allocated between segments, resulting in funding cost transfers disclosed in inter-segment net interest income. Interest charged for these funds is
based on the Group’s cost of capital. Central administrative costs are also allocated between segments and are disclosed in inter-segment administrative expenses.
There are no other material items of income or expense between the business segments.
The Group does not consider its operations to be cyclical or seasonal in nature.
Income Statements for the year ended 31 March 2022
Retail
£m
Commercial
real estate
£m
Property
£m
Consolidation
adjustments
£m
Total Group
£m
Interest receivable and similar income
Calculated using the effective interest method 106.9 7.2 - (14.1)
100.0
On instruments measured at fair value through profit or loss
(12.7) - - -
(12.7)
Total interest receivable and similar income
94.2 7.2 - (14.1)
87.3
Interest expense and similar charges
(25.6) (10.9) (2.8) 14.1
(25.2)
Net interest receivable/(expense)
68.6 (3.7) (2.8) -
62.1
Fees and commissions receivable 1.9 - - -
1.9
Other operating income - - 3.7 -
3.7
Fair value gains on financial instruments
3.9 6.7 - -
10.6
Total income
74.4 3.0 0.9 -
78.3
Administrative expenses (44.5) (0.9) (0.1) -
(45.5)
Depreciation and amortisation
(7.4) - - -
(7.4)
Operating profit before revaluation gains, impairment
and provisions
22.5 2.1 0.8 -
25.4
Gains on investment properties - - 5.8 -
5.8
Impairment on loans and advances 4.4 (12.5) - -
(8.1)
Provisions for liabilities
0.1 - - -
0.1
Profit/(Loss) before tax
27.0 (10.4) 6.6 -
23.2
Statements of Financial Position at 31 March 2022
Retail
£m
Commercial
real estate
£m
Property
£m
Consolidation
adjustments
£m
Total Group
£m
Total assets
6,125.4 257.3 150.6 (466.0)
6,067.3
Total liabilities 5,775.3 406.3 124.8 (656.4)
5,650.0
Capital expenditure 4.6 - - -
4.6
166 167
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Notes to the Accounts
for the year ended 31 March 2022
Income Statements for the year ended 31 March 2021
Retail
£m
Commercial
real estate
£m
Property
£m
Consolidation
adjustments
£m
Total Group
£m
Interest receivable and similar income
Calculated using the effective interest method 104.6 8.0 - (13.2) 99.4
On instruments measured at fair value through profit or loss
(15.2) - - - (15.2)
Total interest receivable and similar income
89.4 8.0 - (13.2) 84.2
Interest expense and similar charges
(26.7) (10.1) (3.0) 13.3 (26.5)
Net interest receivable/(expense)
62.7 (2.1) (3.0) 0.1 57.7
Fees and commissions receivable 2.0 - - - 2.0
Other operating income - - 3.7 - 3.7
Fair value gains on financial instruments
2.5 0.9 - - 3.4
Total income
67.2 (1.2) 0.7 0.1 66.8
Administrative expenses (38.1) (0.9) (0.1) - (39.1)
Depreciation and amortisation
(8.1) - - - (8.1)
Operating profit/(loss) before revaluation gains, impairment
and provisions
21.0 (2.1) 0.6 0.1 19.6
Gains on investment properties - - 4.0 - 4.0
Impairment on loans and advances (4.8) (14.0) - - (18.8)
Provisions for liabilities
(0.1) - - - (0.1)
Profit/(Loss) before tax
16.1 (16.1) 4.6 0.1 4.7
Statements of Financial Position at 31 March 2021
Retail
£m
Commercial
real estate
£m
Property
£m
Consolidation
adjustments
£m
Total Group
£m
Total assets
5,771.7 315.9 145.4 (464.5) 5,768.5
Total liabilities 5,434.3 439.0 123.4 (618.1) 5,378.6
Capital expenditure 5.2 - - - 5.2
39.
Asset encumbrance
Certain financial assets have been utilised as collateral to support the wholesale funding initiatives of the Group. As the Group has retained substantially all of the risks and
rewards of ownership, the assets remain on the Statement of Financial Position but are encumbered and cannot be utilised for other purposes.
As described in note 13, the Group has established a number of securitisation structures funded by the issue of mortgage backed securities (MBSs). Retained MBSs and
designated mortgage loan pools may be pledged as collateral for participation in Bank of England funding schemes.
For liquidity management purposes, the Society also enters into sale and repurchase agreements whereby it sells investment securities to third parties with a commitment
to repurchase them at a future date. The proceeds of the sale and repurchase agreements are included within amounts due to credit institutions.
An analysis of Group assets pledged at 31 March is set out below.
Encumbered
2022
£m
Unencumbered
2022
£m
Encumbered
2021
£m
Unencumbered
2021
£m
Cash and balances at the Bank of England 304.7
15.1 636.9
11.8 Loans and advances to credit institutions 36.6
38.9 34.3
70.7 Investment securities 276.5
- 286.9
- Derivative financial instruments 6.5
- 52.4
- Loans and advances to customers 3,649.3
1,598.4 3,179.9
1,203.0 Other assets
- 224.5
- 209.4
1,652.4 4,414.9
1,285.5 4,483.0
Included in the above, at 31 March 2022, Group loans and advances to credit institutions included £21.8m (2020/21: £55.0m) of collateral pledged against derivative
financial instruments.
38.
Business segments
(continued)
168 169
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Country-by-Country Reporting
for the year ended 31 March 2022
2022
2021
Average number of Group employees, all of which employed in the UK
626
675
Arising in the UK:
£m
£m
Group total income
78.3
66.8Group profit before tax
23.2
4.7 Group corporation tax receipts
(0.2)
- Public subsidies received by the Group
-
-
Capital Requirements (Country-by-Country) reporting
The Capital Requirements (Country-by-Country Reporting) Regulations 2013 aim to give increased transparency regarding the activities of institutions.
West Bromwich Building Society (the Society) is the 7th largest building society in the United Kingdom (UK). As a mutual organisation, the Society is owned and run for
the benefit of its members with the safety of members’ funds being paramount. In providing a safe haven for members’ funds, the Society can fulfil its primary purpose
of enabling home ownership through the provision of mortgages.
These consolidated financial statements of the West Bromwich Building Society Group (the Group) include the audited results of the Society, its subsidiary undertakings
and a number of securitisation entities. The consolidated entities, their principal activities and countries of incorporation are detailed in note 15. All of the consolidated
entities are incorporated in the UK, with the exception of Hawthorn Finance Limited which is incorporated in Jersey.
Basis of preparation
• The number of employees has been calculated as the average number of full and part-time employees, on a monthly basis, as disclosed in note 7.
• Turnover represents Group total income as disclosed in the Group Income Statement. Total income comprises net interest, fees and commissions receivable and
other operating income, together with fair value gains/losses and net realised profits/losses on financial instruments.
• Pre-tax profit or loss represents the Group profit or loss before tax, as reported in the Group Income Statement.
• Corporation tax receipts/payments represent the amount of tax received/paid during the year, as disclosed in the Group Cash Flow Statement.
• Public subsidies received represent direct support by the government and exclude any central bank operations that are designed for financial stability purposes
or operations that aim to facilitate the functioning of the monetary policy transmission mechanism.
Hawthorn Finance Limited did not transact with entities outside the Group and had no employees (2020/21: nil).
Country-by-Country Reporting
Report on the audit of the country-by-country information
Opinion
In our opinion, West Bromwich Building Society’s country-by-country information for the year ended 31 March 2022 has been properly
prepared, in all material respects, in accordance with the requirements of the Capital Requirements (Country-by-Country Reporting)
Regulations 2013.
We have audited the country-by-country information for the year ended 31 March 2022 in the Country-by-Country Reporting.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”), including ISA (UK) 800 and ISA (UK) 805,
and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the country-
by-country information section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Independence
We remained independent of the Society in accordance with the ethical requirements that are relevant to our audit of the country-by-
country information in the UK, which includes the FRC’s Ethical Standard, as applicable to public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
Emphasis of matter - Basis of preparation
In forming our opinion on the country-by-country information, which is not modified, we draw attention to the basis of preparation note
of the country-by-country information which describes the basis of preparation. The country-by-country information is prepared for the
directors for the purpose of complying with the requirements of the Capital Requirements (Country-by-Country Reporting) Regulations 2013.
The country-by-country information has therefore been prepared in accordance with a special purpose framework and, as a result, the
country-by-country information may not be suitable for another purpose.
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the Society’s ability to continue to adopt the going concern basis of accounting included:
• Review and challenge of key assumptions used by the directors in their determination of the going concern of the Group and Society;
• Review of key regulatory returns in relation to liquidity and capital and consideration of the stress testing performed;
• Consideration as to whether our audit work had identified events or conditions which may give rise to uncertainty as to the Group’s
future ability to trade; and
• Review of legal and regulatory correspondence to ensure that any compliance issues which may impact the going concern of the Group
had not been identified.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually
or collectively, may cast significant doubt on the Society’s ability to continue as a going concern for a period of at least twelve months from
the date on which the country-by-country information is authorised for issue.
In auditing the country-by-country information, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the country-by-country information is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the Society’s ability to
continue as a going concern.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this
report.
Responsibilities for the country-by-country information and the audit
Responsibilities of the directors for the country-by-country information
The directors are responsible for the preparation of the country-by-country information in accordance with the requirements of the Capital
Requirements (Country-by-Country Reporting) Regulations 2013 as explained in the basis of preparation statement to the country-by-
country information, and for determining that the basis of preparation and accounting policies are acceptable in the circumstances. The
directors are also responsible for such internal control as they determine is necessary to enable the preparation of country-by-country
information that is free from material misstatement, whether due to fraud or error.
In preparing the country-by-country information, the directors are responsible for assessing the Society’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors
either intend to liquidate the Society or to cease operations, or have no realistic alternative but to do so.
Independent auditors’ report to the directors of
West Bromwich Building Society
171
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
170
Country-by-Country Reporting
for the year ended 31 March 2022
1. Statutory percentages
2022
%
Statutory
limit
%
Lending limit
7.5
25.0
Funding limit
22.8
50.0The above percentages have been calculated in accordance with the provisions of the Building Societies Act 1986.
The lending limit measures the proportion of business assets not in the form of loans secured on residential property. Business assets are the total assets of the
Group plus allowance for losses on loans and advances less liquid assets, investment properties, intangible assets and property, plant and equipment as shown in
the Group Statement of Financial Position.
The funding limit measures the proportion of shares and borrowings not in the form of shares held by individuals.
Securitised assets and related liabilities are excluded from the lending limit and funding limit calculations in line with the Building Societies Act 1986 as updated by
the Modification of the Lending Limit and Funding Limit Calculations Order 2004.
The statutory limits are as laid down under the Building Societies Act 1986 as amended by the Building Societies Act 1997 and ensure that the principal purpose of a
building society is that of making loans which are secured on residential property and are funded substantially by its members.
Annual Business Statement
2. Other percentages
2022
%
2021
%
As a percentage of shares and borrowings:
Gross capital
7.88
7.79Free capital
4.65
4.32Liquid assets
18.12
13.23
As a percentage of mean total assets:
Profit for the financial year
0.41
0.09 Management expenses
0.89
0.83
The above percentages have been prepared from the Group's accounts and in particular:
• 'Shares and borrowings' represent the total of shares, amounts owed to credit institutions, amounts owed to other customers and debt securities in issue, in each
case including accrued interest.
• 'Gross capital' represents the aggregate of general reserves, revaluation reserve, fair value reserve, core capital deferred shares, subscribed capital and
subordinated liabilities.
• 'Free capital' represents the aggregate of gross capital and collective impairment provisions for losses on loans and advances less intangible assets, investment
properties and property, plant and equipment.
• 'Mean total assets' represent the amount produced by halving the aggregate of total assets at the beginning and end of the financial year.
• 'Liquid assets' represent the total of cash and balances with the Bank of England, loans and advances to credit institutions and investment securities.
• 'Management expenses' represent the aggregate of administrative expenses, depreciation and amortisation.
Auditors’ responsibilities for the audit of the country-by-country information
It is our responsibility to report on whether the country-by-country information has been properly prepared in accordance with the relevant
requirements of the Capital Requirements (Country-by-Country Reporting) Regulations 2013.
Our objectives are to obtain reasonable assurance about whether the country-by-country information as a whole is free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of this country-by-country information.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including fraud, is detailed below.
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud:
Based on our understanding of the Society/industry, we identified that the principal risks of non-compliance with laws and regulations
related to breaches of banking regulations including, but not limited to, the Financial Conduct Authority’s regulations, the Prudential
Regulation Authority’s regulations and UK tax legislation, and we considered the extent to which non-compliance might have a material
effect on the country-by-country information. We also considered those laws and regulations that have a direct impact on the country-by-
country information such as applicable tax legislation and the Capital Requirements (Country-by-Country Reporting) Regulations 2013. We
evaluated management’s incentives and opportunities for fraudulent manipulation of the country-by-country information (including the risk
of override of controls), and determined that the principal risks were related to posting inappropriate journal entries to reduce expenditure
and increase income and inappropriate management bias in accounting estimate. Audit procedures performed included:
• Review of the financial statement disclosures to underlying supporting documentation;
• Review of correspondence with and reports to the regulators;
• Testing significant accounting estimates (see key audit matters below);
• Testing of the assumptions used within the effective interest rate method for recognising interest income for their appropriateness;
• Testing of journal entries which contained unusual account combinations back to corroborating evidence;
• Discussions with management and those charged with governance in relation to known or suspected instances of non-compliance
with laws and regulation and fraud; and
• Specific audit procedures over non-interest revenue streams significant to the Group accounts.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance
with laws and regulations that are not closely related to events and transactions reflected in the country-by-country information. Also, the
risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may
involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
A further description of our responsibilities for the audit of the country-by-country information is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinion, has been prepared for and only for the Society’s directors in accordance with the Capital Requirements
(Country-by-Country Reporting) Regulations 2013 and for no other purpose. We do not, in giving this opinion, accept or assume
responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come, save where
expressly agreed by our prior consent in writing.
The engagement partner responsible for this audit is Daniel Brydon.
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Birmingham
25 May 2022
172 173
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Annual Business Statement
for the year ended 31 March 2022
All Directors are members of the Society. None of the Directors have at any time in the year, or at the year end, any beneficial interest in shares or debentures of any
associated body of the Society.
Name, qualification
and age
Role Date of appointment Other directorships and interests
Dave Dyer
BA Hons. (Cantab.), MBA,
FCMA
Age 65
Non-Executive Director 1 September 2021 DAD Associates Limited
Anne Gunther
BSc, MBA, ACIB, FSCIB
Age 67
Non-Executive Director 1 November 2021 Water Plus Select Limited
Water Plus Limited
Water Plus Group Company
Mattioli Woods Plc
Julie Hopes
MBA, ACIB
Age 54
Deputy Chair 1 April 2016 MS Amlin Underwriting Limited
Saga Personal Finance Limited
SAGA Services Limited
SAGA Plc
John Maltby
Age 60
Chair 1 January 2021 Allica Bank Ltd
Max Nicholas Renewables Ltd
Nordea Bank
Victoria Mitchell
LLB (Hons)
Age 57
Non-Executive Director 1 April 2018 N Brown Group Plc
Lookers Plc
Lookers Motor Group Ltd
Lynne Shamwana
BA FCA
Age 59
Non-Executive Director 1 February 2019 Southbank Centre Enterprises Limited
Southbank Centre Limited
61 Queens Gardens (Freehold) Ltd
Overs Farm Residents Company Ltd
Antin Infrastructure Partners AS
David Thomas
MSc, ACIB, FIB (Ireland)
Age 60
Non-Executive Director 1 August 2020 Harrogate Homeless Project Limited
TD Bank Europe Limited
Manjit Hayre
Age 55
Chief Risk Officer 1 September 2021
Ashraf Piranie
FCCA, MBA
Age 58
Group Finance & Operations
Director
13 March 2017 Elite Star Investments Limited
Osborne House Property Management Limited
DPC (2011) Limited
West Bromwich Mortgage Company Limited
CL Mortgages Limited
Jonathan Westhoff
BA (Hons) Financial Services,
FCMA, CGMA, ACIB
Age 57
Chief Executive 5 May 2009 West Bromwich Commercial Limited
West Bromwich Homes Limited
West Bromwich Mortgage Company Limited
CL Mortgages Limited
Insignia Finance Ltd
White Label Lending Limited
Information relating to Directors’ and Officers’ other directorships and interests at 31 March 2022
Senior management Role Group directorships
Andrea Hackett
Divisional Director, Operations
Greg Johnson
ACIB
Divisional Director, IT Service and Solutions
Alex Pawley
BSc, FCA
Divisional Director, Treasury & Finance White Label Lending Limited
Insignia Finance Limited
West Bromwich Mortgage Company Limited
John McErlean
MIIA, FIIA
Divisional Director, Internal Audit
Neil Noakes
Group Secretary Insignia Finance Limited
WBBS (SRS) Limited
West Bromwich Homes Limited
White Label Lending Limited
Sophie Pazzaglia
BSc (Hons), FCCA, ACG
Divisional Director, Human Resources
James Wright
BSc, ACIB, CIM Dip
Divisional Director, Sales & Marketing
Service contracts
The Society’s policy in relation to the duration of contracts for the Executive Directors is that their contract would normally continue until termination by either party,
subject to the required notice or until retirement. The service contract is terminable with 12 months' notice if given by the Society or six months' notice if given by the
Director. Jonathan Westhoff entered into his contract as Chief Executive on 25 May 2011, Ashraf Piranie entered into his service contract as Group Finance & Operations
Director on 13 March 2017 and Manjit Hayre entered into his service contract as Chief Risk Officer on 1 September 2021, on this basis.
For further details of the Executive Directors' service contracts, see the Directors' Remuneration Report on pages 72 to 83.
Documents may be served on any of the above named Directors at the following address: Addleshaw Goddard, 3 Sovereign Square, Sovereign Street, Leeds, LS1 4ER.
174 175
Annual Report and Accounts
Year ended 31 March 2022
Financial Statements
Glossary
for the year ended 31 March 2022
Set out below are the definitions of the terms used within the
Annual Report and Accounts to assist the reader and to facilitate
comparison with other financial institutions:
Arrears
– Customers are said to be in arrears when they are behind
in fulfilling their obligations with the result that an outstanding loan
commitment is unpaid or overdue. The value of the arrears is the
value of the payments that have been missed.
Asset backed securities (ABS)
– Securities that represent an
interest in an underlying pool of referenced assets. Typically these
assets are pools of residential or commercial mortgages.
Basel lll framework
– The Basel Committee on Banking
Supervision’s strengthened global regulatory standards on bank
capital adequacy and liquidity, defining the methods by which
firms should calculate their regulatory capital requirements in
order to protect the financial system against unexpected losses.
Capital Requirements Directive (CRD) and Capital Requirements
Regulation (CRR)
– CRD IV, comprising the Capital Requirements
Regulation and the Capital Requirements Directive, was the
legislative package which implemented the Basel III agreement.
The legislation has been subsequently updated with the latest
package commonly referred to as CRD V/CRR II. The elements of
CRD V and CRR II, which did not come into force in the EU until after
the end of the Brexit transition period, have subsequently been
implemented in the UK via the PRA Rulebook.
Commercial lending
– Loans secured on commercial property
assets which can include office buildings, industrial property,
hotels, medical centres, shopping centres, farm land, buy to let
and housing association properties.
Commercial mortgage backed securities (CMBS)
– Securities
that represent interests in a pool of commercial mortgages.
Investors in these securities have the right to cash received from
future mortgage payments (interest and/or principal).
Common Equity Tier 1 (CET 1) capital
– CET 1 capital comprises
internally generated capital from general reserves and other
reserves less intangible assets, goodwill and other regulatory
adjustments.
Common Equity Tier 1 capital ratio
– Common Equity Tier 1 capital
as a percentage of risk weighted assets.
Contractual maturity
– The final payment date of a loan or other
financial instrument, at which point all the remaining outstanding
principal and interest is due to be paid.
Core Capital Deferred Shares (CCDS)
– A form of Common Equity
Tier 1 (CET 1) capital issued by building societies.
Credit risk
– The risk that a customer or counterparty is unable to
honour their obligations as they fall due.
Debt securities in issue
– Transferable certificates of indebtedness
of the Group to the bearer of the certificates. These are liabilities
of the Group and include certificates of deposit and non-recourse
finance.
Derivative financial instruments
– A derivative financial
instrument is a type of financial instrument (or an agreement
between two parties) whose value depends on the underlying
asset, index or reference rate it is linked to. The Group uses
derivative financial instruments to hedge its exposures to market
risks such as interest rate risk.
Effective interest method
– The method used to measure the
carrying value of a financial asset or a liability and to allocate
associated interest income or expense over the relevant period.
The calculation includes all fees and penalties paid or received
between parties to the contract that are considered integral.
Encumbered assets
– Assets held on the Statement of Financial
Position which have been used as security for funding or otherwise
pledged.
Expected credit loss (ECL)
– A term used in the calculation of
impairment provisions under accounting standard IFRS 9 ‘Financial
Instruments’. The ECL is the present value of all cash shortfalls over
the expected life of a financial instrument.
Exposure at default (EAD)
– An estimate of the outstanding
balance on a financial asset at the time of default.
Fair value
– Fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
Fair value through other comprehensive income (FVOCI)
assets
– Financial assets held at fair value in the Statement of
Financial Position with changes in fair value being recognised
through other comprehensive income.
Fair value through profit or loss (FVTPL) assets
– Financial assets
held at fair value in the Statement of Financial Position with changes
in fair value being recognised through the Income Statement.
Financial Conduct Authority (FCA)
– The conduct regulator
for financial services firms in the UK, with objectives to protect
consumers and financial markets and to promote competition.
Financial Services Compensation Scheme (FSCS)
– The UK’s
compensation fund of last resort for customers of authorised
financial services firms. The FSCS may pay compensation to
customers if a firm is unable, or likely to be unable, to pay claims
against it, usually because it has stopped trading or has been
declared in default. The FSCS is funded by the financial services
industry. Every deposit-taking firm authorised by the FCA and PRA
is obliged to pay an annual levy, which goes towards its running
costs and compensation payments.
Forbearance
– Support offered to borrowers experiencing
genuine financial hardship to enable them to remain in their
homes, where this action is not expected to increase the level of
debt in the long term.
Free capital
– Gross capital less intangible assets, investment
properties and property, plant and equipment. In 2017/18,
free capital was adjusted for collective mortgage impairment
provisions which are no longer applicable under IFRS 9.
Funding limit
– Measures the proportion of shares and borrowings
not in the form of shares held by individuals excluding non-
recourse finance. The calculation of the funding limit is explained
in the Annual Business Statement.
General Data Protection Regulation (GDPR)
– A legal framework
that sets guidelines for the collection and processing of personal
information from individuals who live in the EU.
Goodwill
– Goodwill arises on the acquisition of subsidiary
undertakings, joint ventures, associates or businesses and
represents the excess of the fair value of consideration over the fair
value of identifiable net assets and contingent liabilities acquired
at the date of acquisition.
Gross capital
– The aggregate of reserves, subscribed capital,
subordinated liabilities and core capital deferred shares.
House Price Index
– This is a measure of the housing price
change, in percentage terms, from a specific start date.
Interbank Offered Rate (IBOR)
– A benchmark interest rate at
which banks lend to and borrow from one another in interbank
markets.
Glossary
Impaired loans
– Under IFRS 9, impaired loans are those assessed
as stage 3 (default). In previous years, under IAS 39, impaired
loans were defined as loans where there was evidence to suggest
that the Group would not receive all of the contractual cash flows
or there was an expectation that the cash flows would be received
at a later date than when they were contractually due.
Individual Liquidity Adequacy Assessment (ILAA)
– The Group’s
internal assessment of the levels of liquidity that need to be held
by the Society to meet its regulatory liquidity requirements.
Individually/collectively assessed
– Prior to IFRS 9 adoption on 1
April 2018 the Group assessed, at each reporting date, whether or
not there was objective evidence that individual financial assets
were impaired. If no objective evidence of impairment existed
for an individually assessed financial asset, it was included in a
group of financial assets with similar credit risk characteristics
and collectively assessed for impairment. A collective provision
was made against a group of financial assets where there was
evidence that credit losses had been incurred, but not individually
identified, at the reporting date.
Interest rate risk
– Interest rate risk is the risk that the fair value of
future cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
Internal Capital Adequacy Assessment Process (ICAAP)
– The
Group’s own assessment, as part of regulatory requirements, of
the levels of capital that it needs to hold in respect of the risks it
faces under a business as usual scenario and a variety of stress
scenarios.
Internal Liquidity Adequacy Assessment Process (ILAAP)
– The
Group’s own assessment of the controls required to mitigate
liquidity risk, including the minimum volume and quality of liquidity
to be held in respect of the risks it faces under a variety of stress
scenarios.
International Swaps and Derivatives Association (ISDA) 2020
IBOR Fallbacks Protocol
– A protocol created to address the
expected cessation of LIBOR and other IBORs. It enable parties
to Protocol Covered Documents to amend the terms of each such
Protocol Covered Document.
Investment securities
– Assets representing certificates of
indebtedness of credit institutions, public bodies or other
undertakings.
Law of Property Act (LPA) Receiver
– A receiver appointed to
manage a property, held as security for a mortgage, where the
contractual terms of the mortgage have not been met.
Lending limit
– Measures the proportion of business assets not
in the form of loans fully secured on residential property. The
calculation of the lending limit is explained in the Annual Business
Statement.
Leverage ratio
– Tier 1 capital as a percentage of total exposures
which include on and off balance sheet assets after netting
derivatives.
Liquid assets
– Total of cash in hand and balances with the Bank of
England, loans and advances to credit institutions and investment
securities.
Liquidity coverage ratio (LCR)
– A measure which aims to ensure
that an entity maintains an adequate level of liquidity to meet its
needs for a 30 day period under severe stress conditions.
Liquidity risk
– The risk that the Group does not have sufficient
financial resources to meet its obligations as they fall due, or will
have to do so at an excessive cost. This risk arises from mismatches
in the timing of cash inflows and outflows.
Loan to value (LTV)
– A ratio which expresses the balance of a
mortgage as a percentage of the value of the property on which it
is secured. The Group calculates residential mortgage LTV on an
indexed basis. The value of the property is updated on a quarterly
basis to reflect changes in the House Price Index (HPI).
Loans past due/past due loans
– Loans on which payments are
overdue including those on which partial payments are being
made.
London Inter-Bank Offered Rate (LIBOR)
– A benchmark interest
rate, expected to cease in 2021, at which a selection of banks on
the London money market are prepared to lend to one another.
Loss given default (LGD)
– The difference between exposure at
default (EAD) and the net amount expected to be recovered on a
defaulted loan, expressed as a percentage of EAD.
Management expenses
– Management expenses represent
administrative expenses plus depreciation and amortisation.
The management expenses ratio is calculated as management
expenses expressed as a percentage of mean total assets.
Market risk
– The risk of changes in the value of, or income arising
from, assets and liabilities as a result of unexpected changes in
financial prices, primarily interest rates, property prices, bond
yields and inflation.
Mean total assets
– Represents the amount produced by halving
the aggregate of total assets at the beginning and end of the
financial year.
Medium term notes (MTN)
– Securities offered by a company to
investors, through a dealer, across a range of maturities.
Member
– A person who has a share investment or a mortgage
loan with the Society.
Mortgage backed securities (MBS)
– Securities that represent an
interest in an underlying pool of mortgage assets.
Net interest income
– The difference between interest received
on assets and interest paid on liabilities.
Net interest margin
– Net interest income as a percentage of
mean total assets.
Net Promoter Score (NPS)
– A measure, ranging from -100 to +100,
of the likelihood that a customer would recommend a product,
service or brand. Net Promoter Score and NPS are trademarks of
Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.
Net stable funding ratio (NSFR)
– A ratio calculated as the amount
of available stable funding against the amount of required stable
funding.
Non-recourse finance
– A secured loan (debt) that is secured by
a pledge of collateral but for which the borrower is not personally
liable. If the borrower defaults, the lender can seize the collateral,
but the lender’s recovery is limited to the collateral alone.
Operational risk
– The risk of loss arising from inadequate or
failed internal processes, people and systems or from external
events.
Other income
– The income received from selling non-mortgage
and savings products (e.g. home and contents insurance,
investment products, other insurances. It also includes rental
income from investment property).
Permanent interest bearing shares (PIBS)
– Unsecured, deferred
shares that rank behind the claims of all depositors, payables
and investing members of the West Brom with the exception of
the claims of holders of core capital deferred shares and (in prior
years) profit participating deferred shares.
176
Glossary
for the year ended 31 March 2022
Prime
– Prime mortgages are those granted to the most credit
worthy category of borrower.
Probability of default (PD)
– The estimated probability that a
borrower will default on their credit obligations.
Probability of Possession given default
– The estimated probability
that a borrower moves to possession from a default status.
Profit participating deferred shares (PPDS)
– A form of unsecured
Common Equity Tier 1 capital, fully cancelled following the Liability
Management Exercise completed in April 2018.
Prudential Regulation Authority (PRA)
- The prudential regulator
for UK banks, building societies and insurers, with a general
objective to promote the safety and soundness of the firms it
regulates.
Renegotiated loans
– Loans are classed as renegotiated with
the customer’s consent, when their terms have changed during
the year. Loans and advances are generally renegotiated either
as part of an ongoing customer relationship or in response to an
adverse change in the circumstances of the borrower.
Repo/Reverse repo
– Short to medium-term funding agreements
which allow a borrower to sell a financial asset, such as asset backed
securities (ABS) or government bonds as security for cash. As part of
the agreement the borrower agrees to repurchase the security at
some later date. For the party selling the security (and agreeing to
repurchase it in the future) it is a repo; for the party on the other end of
the transaction (buying the security and agreeing to sell in the future),
it is a reverse repurchase agreement or reverse repo.
Residential loans
– Mortgage lending secured against residential
property.
Residential mortgage backed securities (RMBS)
– A category of
asset backed securities (ABS) that represents interests in a group
of residential mortgages. Investors in these securities have the
right to cash received from future mortgage payments (interest
and/or principal).
Risk appetite
– The articulation of the level of risk that the Society is
willing to accept (or not accept) in order to safeguard the interests
of its members whilst achieving business objectives.
Risk weighted assets (RWA)
or risk-weighted exposure amount
(RWEA)
– The value of an on or off-balance sheet exposure
adjusted under Pillar 1 rules to reflect the degree of risk it presents.
Royal Institution of Chartered Surveyors (RICS)
– A professional
body promoting and enforcing international standards in the
valuation, management and development of land, real estate,
construction and infrastructure.
Securitisation
– A process by which a group of assets, usually
loans, are aggregated into a pool which is used to back the
issuance of new securities. An entity transfers these assets to a
structured entity which then issues securities backed by the assets.
The Group has established securitisation structures as part of its
funding activities.
Shares
– Money deposited by a person in a retail savings account
with the Society. Such funds are recorded as liabilities for the
Society.
Shares and borrowings
– The total of shares, amounts owed
to credit institutions, amounts owed to other customers and
debt securities in issue, including accrued interest and fair value
adjustments for hedged risk.
Significant increase of credit risk (SICR)
– A term used in IFRS
9 where quantitative and/or qualitative factors indicate that the
credit risk associated with a non-defaulted loan has increased
significantly since it was initially recognised in the Statement
of Financial Position. Where a SICR has occurred, the loan is
categorised as stage 2 requiring the recognition of lifetime
expected credit losses.
Solely payments of principal and interest (SPPI) test
– An
assessment of whether the contractual terms of a financial asset
give rise to cash flows which are solely payments of principal
and interest on the principal amount outstanding. It is used to
determine the appropriate measurement basis for the financial
asset under IFRS 9.
Stage 1
– The IFRS 9 category to which financial assets held at
amortised cost or FVOCI, which have not experienced a SICR since
initial recognition, are assigned. 12-month ECLs are recognised for
stage 1 assets and interest income is calculated by applying the
effective interest rate to the gross carrying amount.
Stage 2
– The IFRS 9 category to which financial assets held at
amortised cost or FVOCI, which have experienced a SICR since
initial recognition, are assigned. Lifetime ECLs are recognised for
stage 2 assets and interest income is calculated by applying the
effective interest rate to the gross carrying amount.
Stage 3
– The IFRS 9 category to which defaulted financial assets
held at amortised cost or FVOCI are assigned. Lifetime ECLs are
recognised for stage 3 assets and interest income is calculated
by applying the effective interest rate to the net (of impairment
provision) carrying amount.
Sterling Overnight Index Average (SONIA)
– A benchmark
interest rate administered by the Bank of England, SONIA is a
measure of the rate at which interest is paid on sterling short-term
wholesale funds in circumstances where credit, liquidity and other
risks are minimal.
Subordinated liabilities
– A form of unsecured Tier 2 capital. The
Society's subordinated notes rank behind all other creditors of the
Society, with the exception of holders of CCDS and PIBS.
Taskforce on Climate-Related Financial Disclosures (TCFD)
–
The Society’s Taskforce on Climate-Related Financial Disclosure
(TCFD) aligned disclosure in the areas of Governance, Strategy, Risk
Management, and Metrics & Targets.
Term Funding Scheme (TFS)
– A scheme launched by the
Bank of England, providing term funding to banks and building
societies with the aim of promoting UK lending growth. Term
Funding Scheme with additional incentives for SMEs (TFSME) is an
equivalent scheme launched in March 2020.
Tier 1 capital
– An element of regulatory capital and measure
of financial strength, comprising Common Equity Tier 1 and
Additional Tier 1 capital. Additional Tier 1 capital is not deemed to
be fully loss absorbing and can only be included in capital under
the transitional arrangements of CRD IV.
Tier 2 capital
– An element of regulatory capital comprising
subordinated liabilities, eligible collective impairment allowances
(in 2017/18) and certain regulatory deductions made for the
purposes of assessing capital adequacy.
Total Capital Requirement (TCR)
– The minimum amount of
capital the Society is required to hold, set by the PRA and informed
by the ICAAP.
Wholesale funding
– The total of amounts owed to credit institutions,
amounts owed to other customers and debt securities in issue.
Supporting the financial wellbeing
of our members by providing
a safe and good return on the
savings they entrust with us and
promoting home ownership
through responsible lending.
Annual Report and Accounts
Year ended 31 March 2022
1627-05/22-01
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available upon request. Please contact us on 0345 241 3784.
Head Office: 2 Providence Place, West Bromwich B70 8AF.
www.westbrom.co.uk
Registered Number: 651B
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The West Brom is authorised by the Prudential Regulation Authority
and regulated by the Financial Conduct Authority and Prudential
Regulation Authority. Register No. 104877. ‘the West Brom’ is a trading
name of West Bromwich Building Society.