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.
Annual Report and Accounts
Year ended 31 March 2023
Contents
Overview
2
Chair’s Statement
2
Chief Executive Officer’s Review
4
Business Review
8
Strategic Report
8
Risk Management
34
Board of Directors
48
Governance
54
Directors’ Report
54
Directors’ Report on Corporate Governance
60
Audit Committee Report
66
Directors’ Remuneration Report
70
Independent Auditors’ Report
82
Financial Statements
90
Income Statements
91
Statements of Comprehensive Income
92
Statements of Financial Position
93
Statements of Changes in Members’ Interest and Equity
94
Statements of Cash Flows
96
Notes to the Accounts
98
Country-by-Country Reporting
166
Annual Business Statement
169
Glossary
172
1
Average market rates sourced from Bank of England Bankstats table A6.1 March 2023
2
Interest saving in first year by borrower with less than 75% Loan to Value
3
Average market revert rate sourced from Moneyfacts March 2023
4
Net Promoter Score and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.
Key highlights of the 2022/23
financial year include:
Borrowers
Borrowers
saved £1,400
saved £1,400
A borrower at the West Brom would save
circa
£1,400
2
a year for each £100,000
borrowed compared with an average
market SVR of
7.12%
3
.
Common Equity Tier 1 (CET 1)
18.7
18.7
%
%
Strong capital position maintained with
an increased Common Equity Tier 1 (CET 1)
capital ratio of
18.7%
(2021/22: 17.0%) and a
Leverage Ratio of
7.9%
(2021/22: 7.3%).
New mortgage
New mortgage
lending £691m
lending £691m
(2021/22: £756m)
With 67% of loans for house purchase
supporting first-time buyers onto the
property ladder (2021/22: 54%).
£33.2
£33.2
m
m
member mutual benefit
(2021/22: £9.0m)
Savers were rewarded with rates almost
double the market average
1
.
Market first
Market first
approach to SVR
approach to SVR
Standard Variable Rate aligned for existing
members to that of new mortgage customers,
with a reduced rate for lower LTVs.
Five star service
Five star service
Awarded the highest accolade in the
Financial Adviser Service Awards for the
fifth consecutive year.
Profit before tax
£31.8
£31.8
m
m
(2021/22: £23.2m)
On an underlying basis £21.2m (2021/22:
£26.6m) after removing one off recoveries/
charges and hedge ineffectiveness.
95
95
%
%
customer satisfaction
(2021/22: 96%)
Paired with an above average Net Promoter
Score
®4
of
+74
(2021/22: +81).
Supporting
Supporting
refugees
refugees
Supporting refugees from the Ukrainian
conflict by providing homes to
house
families impacted by the crisis
.
Living Hours
Living Hours
employer
employer
Became the first building society in the
UK and the first employer in the West
Midlands to receive the accreditation.
2
3
Annual Report and Accounts
Year ended 31 March 2023
Overview
Chair’s Statement
We’ve remained guided by our
Purpose to help our customers
achieve their hopes and
ambitions of home ownership
and save for a secure future.
- John Maltby, Chair
Over the last year we have continued to see
significant challenges in the external environment,
with the war in Ukraine continuing, cost of living
pressures rising and inflation at the highest we
have seen in almost four decades. Despite this,
we’ve remained guided by our Purpose to help
our customers achieve their hopes and ambitions
of home ownership and save for a secure future.
This remains as important today as it was almost
175 years ago when the Society first built its
foundations.
A Purpose-led strategy
As a Board, we are steadfast in delivering on our Purpose-led
strategy. We are proud to be reporting such positive results this
year and have committed to using our strong financial position
to invest in our technology, people and processes to ensure we
continue to meet the changing needs of our current and future
customers.
Over the course of the year, we identified a number of opportunities
to reinvigorate the principle of mutuality and deliver tangible value
for our customers. We continue to focus on those ’core to our
Purpose’ including first-time buyers, mortgage prisoners and those
excluded from mainstream lending due to a recent challenge in
their lives. These achievements are celebrated in our inaugural
Impact Report, to be published later this summer, a stand-alone
document setting out the positive impact that the West Brom has
on its members and the communities we serve.
Board and Executive Committee
changes
Over the last year we have made some changes to our Board and
Executive Committee.
After five years as Group Finance & Operations Director, Ashraf
Piranie stepped down from the Board in December 2022. I’d like
to thank Ashraf for his valued contributions and wish him well in
his future career.
Alex Pawley joined the Board as Chief Financial Officer having
joined the Society in 2016 and serving on our Executive Committee
as Divisional Director of Treasury and Finance for the last three
years.
Our changes to the Executive Committee were completed shortly
after the financial year end. In April Martin Boyle joined the Society
and the Board as Chief Operating Officer. Martin brings a wealth
of transformation and operations experience following senior
leadership positions at Metro Bank, Nationwide, Visa Europe and
Accenture.
We also welcomed Alex Windle, Chief Customer Officer, to the
Society and our Executive Committee. Alex has many years of
experience in strategy, marketing and commercial functions
from senior level roles at BP, LG Electronics, Vodafone and, most
recently, The Cumberland Building Society.
Looking ahead
As we look ahead, we see further economic and social challenges
and we understand the impact this could have on our customers,
colleagues and communities. We will continue to help wherever
possible to ease any burdens through our unwavering focus on
our Purpose and living the values of mutuality to the benefit of our
customers. We are committed to have an increasingly positive
impact on the lives and prospects of our customers, our colleagues
and the communities where we live and work.
On behalf of myself and the Board, I’d like to thank all our members
for their ongoing support and loyalty and also our colleagues for
their hard work and contribution this year. This support, together
with our ongoing investment and the further strengthening of our
leadership capability, positions us well for the challenges and
opportunities ahead.
John Maltby
Chair
31 May 2023
4
5
Annual Report and Accounts
Year ended 31 March 2023
Overview
Chief Executive Officer’s Review
Over the last year, we’ve remained
focused on ensuring our members
enjoy real benefits of belonging to
the West Brom.
- Jonathan Westhoff,
Chief Executive Officer
It’s great to report a strong performance as we
continue to work through significant challenges
in our external environment. Whilst our financial
performance
demonstrates
our
underlying
strength and resilience, and helps us to drive
forward on our Purpose-led agenda, perhaps
most satisfaction comes from what we have
delivered for our members, demonstrating the
tangible benefits of being with a mutual that is
true to its Purpose.
This value reflects our focus on not only ensuring
we deliver great value through our products,
but that we also innovate and take the lead on
changing market practices that have historically
either withheld value or put financial burdens on
those least able to afford it. Collectively, these
initiatives make a real impact.
Our Purpose-led activities
Over the last year, we’ve remained focused on ensuring our
members enjoy the benefits of belonging to the West Brom,
introducing a series of innovations, indeed sector firsts, that have
delivered significant value.
During the period, we took action to support our borrowing
members by becoming the first lender in the market to align our
approach for existing members on our Standard Variable Rate
(SVR) to that of new mortgage members. This new approach
means that all owner occupier mortgage members reverting to
SVR at the end of their product term will have their rate determined
by their Loan to Value (LTV), with a lower rate for those with more
equity in their property. Around 90% of owner occupier mortgage
members on our SVR saw savings on their interest rates, with the
majority seeing a reduction of 0.75%. This has provided real relief
for our members at a time when mortgage costs are increasing.
A borrower on SVR at the West Brom would save circa £1,400
2
a year for each £100,000 borrowed compared with an average
market SVR of 7.12%
3
.
Market first
Market first
approach to SVR
approach to SVR
Standard Variable Rate aligned for
existing members to that of new
mortgage customers, with a reduced
rate for lower LTVs.
Borrowers
Borrowers
saved £1,400
saved £1,400
2
2
Reduced the impact of rising rates for
mortgage members on our SVR.
Working with our partners we have also innovated by having
standard charging structures amended to return value. The new
commission structure combined with a profit share arrangement
that is distributed back to our policy holders means that members
taking their home and contents insurance through the West Brom
benefitted, on average, with a circa 8% reduction in their insurance
premiums.
For our savers, who this year have helped 3,413 members buy their
first home, we have continued to provide ‘best buy’ fixed savings
rates and responded to the increase in interest rates led by the
Bank of England Bank Rate, with improved variable saving rates
so that they were almost double the average rates paid by the
market
1
. This means we saw the savings member mutual benefit
increase from £9.0m to £33.2m this financial year. We have
also gone above and beyond our statutory duties by individually
notifying members of any material rate increases to their savings
rates to ensure that their product remains appropriate. For those
members that wish to benefit from investing with the advantage
of independent financial advice, through our partnership with
Wren Sterling, we have again negotiated a changed commission
structure, which results in a reduction of circa 25% to their ongoing
service (annual) charge. On the average investment this is a benefit
of £180 per year per investor.
£33.2
£33.2
m
m
member mutual benefit
(2021/22: £9.0m)
Savers were rewarded with rates almost
double the market average
1
.
And finally, to support those borrowers who find themselves in
financial difficulty and are not able to meet their payments we no
longer charge any additional fees, more commonly referred to as
‘arrears fees’, to cover internal costs.
Providing a range of channels for our members is important to us
and we have invested heavily in technology throughout the year.
In December, we launched a new savings portal for our branch
and direct members, giving them more immediate access to their
accounts. This is not about moving everything online, but instead
giving our members a choice of channels to suit their individual
needs, and forms part of a wider technology transformation
programme.
1
Average market rates sourced from Bank of England Bankstats table A6.1 March 2023
2
Interest saving in first year by borrower with less than 75% Loan to Value
3
Average market revert rate sourced from Moneyfacts March 2023
6
7
Annual Report and Accounts
Year ended 31 March 2023
Overview
We’ve also been working towards the new Consumer Duty
regulation that comes into force in July 2023. As a mutual, we’ve
always had a focus on delivering good member outcomes but
we believe this is a step in the right direction in terms of holding
all firms to a minimum standard, leading to improved practices
across the sector. For us Consumer Duty is another opportunity to
listen to our members, learn from others and evolve in line with
member expectations so that we can continue to serve them and
our communities.
Building on our financial strength
Our strong financial performance this year demonstrates the
underlying strength and resilience of the Society and helps us
to drive forward on our Purpose-led agenda, supporting those
underserved and/or overcharged by the market.
We have delivered a strong performance this year, with statutory
profit before tax ending the year at £31.8m (2021/22: £23.2m),
supported by strong net interest income, fair value gains on
financial instruments and recovery of previously written off costs. On
an underlying basis, after excluding hedge ineffectiveness and the
one-off cost recovery, underlying profit reduced to £21.2m (2021/22:
£26.6m). Charges for expected credit losses have increased in the
current year, focused on the remaining legacy Commercial Real
Estate exposures which are more susceptible to uncertainty in
the macroeconomic environment. This performance is discussed
further in the Strategic Review section of these Accounts.
£31.8
£31.8
m
m
Profit before tax
(2021/22: £23.2m).
Our profitability and management of risk contributes to our overall
financial resilience and strengthens the Society’s capital position.
Our Common Equity Tier 1 (CET 1) capital ratio, a key measure of
capital, ended the year at 18.7% (2021/22: 17.0%).
18.7
18.7
%
%
Common Equity Tier 1 capital ratio
(2021/22: 17.0%).
Supporting our colleagues and
communities
The drive and determination of our colleagues to serve our
members is second to none and they’ve made the West Brom the
thriving, Purpose-led organisation it is today.
We know that the economic pressures are likely to impact our
colleagues as well as our members therefore we’ve continued to
support them throughout the year. Across the winter months, over
70% of our colleagues benefitted from one-off support payments
totalling £1,200. This sits alongside our Financial Hardship Support
Fund, which exists to offer colleagues help in the event of a
sudden, unexpected financial burden.
We were also proud to be recognised as a Living Hours employer
this year – the first building society in the country and the first
employer in the West Midlands to achieve this standard. The Living
Hours standard requires employers to pay a real Living Wage and
provide colleagues with the security and stability of hours they
require to meet their everyday needs. This builds on our existing
real Living Wage accreditation and recognises the work we do to
ensure all colleagues are paid a wage they can live on.
Living Hours
Living Hours
employer
employer
Became the first building society in the
UK and the first employer in the West
Midlands to receive the accreditation.
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 that we benefit from the best
talent. Our equity, diversity and inclusion (ED&I) work continues
and is essential to bringing richness of thought, resulting in a more
successful business. Through Connect, our colleague network,
we’ve forged partnerships with a number of organisations to
support our work in this area, including Penn Hall School in
Wolverhampton and Queen Alexandra College in Birmingham.
We remain committed to investing in the communities in which
we operate and have showed our support in a variety of ways.
We have raised over £10,000 for our charity partner, Barnardo’s,
this year and have backed various appeals by the Disasters
Emergency Committee through our branch network. In addition,
we continue to provide grant funding to local worthy causes
through the Mercian Community Trust.
Last year, we also provided 11 properties from our rental portfolio
and accommodation above our branches for the Homes for
Ukraine scheme. To date, we have housed 23 refugees and are
geared up to provide employment support where needed.
Supporting
Supporting
refugees
refugees
Supporting refugees from the Ukrainian
conflict by providing homes to
house
families impacted by the crisis
.
Outlook
Living costs look set to remain elevated for some time to come,
maintaining the pressure on households and businesses alike.
We will continue to use our financial strength responsibly to
support our members, colleagues and communities through these
challenging times, helping people to stay in their homes and save
for the future where possible.
Recent years have built a significant momentum, not measured
by our size or profitability, but by the true value we deliver to our
members, and I look forward to working with my new and existing
colleagues to deliver even more Purpose-led innovations as we
approach 175 years of mutuality at the West Brom.
Jonathan Westhoff
Chief Executive Officer
31 May 2023
We’ve raised over £10,000
for our charity partner,
Barnardo’s, this year.
8
9
Annual Report and Accounts
Year ended 31 March 2023
Business Review
An overview of our strategy and
our financial and non-financial
performance in 2022/23.
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.
Our focus on home ownership means our lending is concentrated
on first-time buyers with 67% (2021/22: 54%) of loans for house
purchase going to those buying their first home and our lending
strategy is, and will increasingly be, concentrated on assisting
existing and potential homeowners who are excluded or
overcharged by other lenders.
Our savings strategy has focused on providing a strong return for
existing savers and offering market leading rates for term deposits
where savers commit to save with the Society for a longer period
of time, (up to 5 years) allowing us to use these funds to promote
home ownership.
Our commitment to modern mutual values means we strive to
do the right thing by our customers in support of their financial
wellbeing – be this through:
•
breaking the accepted model of a single reversion rate for all
borrowers through the introduction of our differentiated SVR;
• not charging those in payment difficulties (arrears) for our
internal costs of helping them; or
• reducing the cost of insurance and financial advice provided
through partners by cutting the commission that the Society
takes and passing this back to customers.
As a modern mutual our commitment to do the right thing
extends beyond our members but to our wider communities as
demonstrated by, for example:
•
our partnership with Barnardo’s, seeking to establish four ‘Gap
Homes’ for young vulnerable people leaving the care system in
the Black Country area, which is now dependent only on local
authority support;
• providing 11 properties from our rental portfolio and
accommodation above our branches for the Homes for Ukraine
scheme; or
• raising funds for our charity partner, Barnardo’s as well as
backing appeals by the Disasters Emergency Committee and
raising funds for donations to foodbanks.
Our first “Impact Report” will be published later this summer,
detailing those initiatives where we have demonstrated this
commitment to modern mutuality – taking real action which
has put pounds back in our members’ pockets, supporting our
communities and focusing on our impact on the environment.
The Society continues to invest in order to deliver on our Purpose
and over the next 12 months we will be reviewing the IT system and
architecture priorities for the Society to ensure that we continue to
meet the emerging needs of future and current members across
both mortgage and savings offerings.
This review follows the decision not to progress with the
development of a new savings platform at this time and the
successful recovery of £5.6m of costs which had previously been
written off. However, during the year the Society has adopted an
alternative strategic approach with the launch of a first stage online
savings portal, to which services will be incrementally added to
deliver the prime objective of the initial savings platform project,
without the requirement for any material changes to our existing
savings platform.
As well as our core saving and lending activities, the Society holds,
via its property investment subsidiary West Bromwich Homes
Limited (WBHL), a portfolio of residential properties. These generate
rental income and provide quality homes for those in the rented
sector at an affordable rent. The average rent is currently up to 10%
lower than the market rent charged for new tenants over time
6
.
The target is to charge around 5% below market rent.
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 to achieve the most favourable economic
outcome on behalf of members.
6
Internal analysis of market rent information from Lettings Agents and the Society’s rent charged as at December 2022
10
11
Annual Report and Accounts
Year ended 31 March 2023
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 focused 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 this Purpose.
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.
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 6,007 new borrowers, including 3,413 first-time
home owners, and 7,046 new savers to the Society.
•
Extended £691m in new residential lending, with 67% of loans
for home purchases to support first-time buyers onto the
property ladder (2021/22: 54%).
• Rewarded savers with rates that were, by the end of the
year, almost double the average rates paid by the market
1
,
equivalent to a member mutual benefit of £33.2m, more than
three times higher than the prior year benefit of £9.0m.
•
In a market first, we aligned our approach for existing customers
on our SVR to that of new mortgage customers, with a lower
rate for borrowers with a greater proportion of equity in their
homes. Around 90% of owner occupier mortgage customers
experienced savings on their interest rates, with the majority
seeing a reduction of 0.75% at the time of introduction.
•
This means an SVR borrower at the West Brom would save circa
£1,400
2
a year for each £100,000 borrowed compared with an
average market SVR of 7.12%
3
.
• Increased rates paid to savings members, including loyalty
fixed savings rates for existing customers; resulting in an
increase in fixed rate savings balances of 29%.
• A NPS
®4
of +74 (2021/22: +81) with customer satisfaction
maintained at 95% (2021/22: 96%). The movement in the NPS
was anticipated following the move towards email surveys
compared to previously used Interactive Voice Response
(IVR) surveys. One result of this was higher response levels
particularly against certain customer touch points where NPS
scores are typically lower.
•
Awarded, for the fifth year in a row, a top five star rating in the
Financial Adviser Service Awards for the exceptional service we
provide to our valued intermediary partners.
• Shortlisted in four categories of the Moneyfacts 2022 awards
including Best Building Society Mortgage Provider, Best First-
Time Buyer Mortgage Provider, Best Variable Rate Mortgage
Provider and Best Building Society Savings Provider. These
nominations recognise the work we do to ensure our products
meet the needs of both new and existing customers.
•
Held a further three meetings of our Member Council providing
valued input to Board decision making with discussion topics
including Environmental, Social and Governance (ESG) matters,
Executive Director Remuneration and Risk Management.
Safe & Responsible
•
Significantly increased our financial strength with a CET 1 capital
ratio of 18.7% (2021/22: 17.0%) providing even greater resilience
to potential stresses in the future.
• Delivered improved statutory profit before tax of £31.8m
(2021/22: £23.2m). On an underlying basis, profit reduced
to £21.2m (2021/22: £26.6m) largely as a result of higher
commercial provision charges.
• Provided £24.1m (2021/22: £8.1m) in respect of Expected
Credit Losses (ECL) across our residential and commercial
lending portfolios which includes a charge of £3.0m against
the residential portfolio (2021/22: release of £4.4m) and a
commercial impairment charge of £21.1m (2021/22: £12.5m).
After adjusting for the offsetting movements in derivatives
held to hedge the impact of changes in interest rates the net
charges were £18.0m and £5.6m for the current and prior year
respectively.
Our Strategic Framework
Our Strategic Framework helps support and guide the delivery of our Purpose to members.
1
Average market rates sourced from Bank of England Bankstats table A6.1 March 2023
2
Interest saving in first year by borrower with less than 75% Loan to Value
3
Average market revert rate sourced from Moneyfacts March 2023
4
Net Promoter Score and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.
12
13
Annual Report and Accounts
Year ended 31 March 2023
Business Review
• Reduced the residual commercial exposure by 33% during
2022/23 with a net exposure of less than one fifth of the peak
in 2008/2009.
•
Maintained arrears rates at levels well below industry averages
with core residential arrears of 0.52% (UK Finance: 0.71%)
5
at
31 March 2023. The increase in arrears percentage reflects
increasing arrears volumes as expected in the current economic
climate combined with a reducing book, particularly the buy to
let portfolio.
•
Raised close to £10,000 to be used to support food banks across
the Black Country which includes regular salary deduction
contributions from our Executive Committee members. 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
•
Our management expense ratio decreased to 0.78% (2021/22:
0.89%). This included the benefit of the net recovery of £5.6m
of costs in relation to the digital savings platform written off
in the previous year. Excluding this impact, the management
expenses ratio was 0.87% (2021/22: 0.84%).
•
We are committed to cost optimisation where our cost structures
remain aligned with our strategy. This allows us to target
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.
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 can 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
• New partnership developed with Management Training
Specialists (MTD Training) to deliver solutions for our leadership
development needs, which include the following:
•
Launched a ‘new manager’ development journey in January
2023, which reflects ‘leadership in the new world’;
•
Developing a Society wide leadership programme to redefine
expectations for existing managers including customer
thinking, resilience and supporting them to manage hybrid
teams; and
•
Support with more localised development needs to achieve
a proactive approach to development at the Society.
•
Made clear our commitment on Equity, Diversity and Inclusion
(EDI), including the following highlights:
•
Maintained 40% female Board representation, continuing
to exceed the target of 30% which we made as part of our
commitment to the Women in Finance Charter. We are also
making good progress with female representation at senior
management levels including senior specialist roles, which
by the end of March 2023 was at 38%, against our revised
target of 40% to be achieved by the end of 2024;
•
The Society’s Disability Confident Leader status continued
to recognise our ongoing commitment to raise awareness,
promote a culture of disability confidence, record and report
on disability, mental health and wellbeing. We actively
worked with local schools and colleges to provide students
with disabilities valuable ‘on the job’ experience with the
opportunity to work with West Brom colleagues and gain a
better understanding of the workplace;
•
Published our sixth annual Gender Pay Gap report and
second annual Ethnicity Pay Gap report, being one of the few
companies both in financial services and the wider industry
to voluntarily do so; and
•
Our EDI group, ‘Connect’, continued to play a key role
in raising awareness and strengthening the environment
where embracing different cultures and colleagues from
all backgrounds and diversities are encouraged and
celebrated.
• Provided our colleagues on salaries under £35,000 with
additional monthly payments of £300 across the challenging
winter months (October – January), totalling £1,200. A Hardship
Fund has also been established; the aim of this was to support
colleagues where finances might be ‘stretched’ through an
unexpected one-off financial shock.
•
The Society was recognised as the first building society in the
country and the first employer in the West Midlands to achieve
the new Living Hours Employer standard set by the Living Wage
foundation, which builds on the Society’s existing real Living
Wage accreditation, to provide colleagues with the security and
stability of hours they require to meet their everyday needs.
• Held three meetings of our Employee Council which provides
valued input to Board decision making, including on topics such
as ESG matters, risk management and remuneration.
•
Supported 17 colleagues who are undertaking Apprenticeships
ranging from Level 3 (A Level) to Level 7 (Master’s Degree)
qualifications in disciplines such as Learning and Development,
Business Administration, Business Analysis, Internal Audit,
Cyber Security, DevOps Engineering, Digital Technology
Solutions, Network Engineering and Senior Leadership.
•
Continued to build on the success of 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’.
4
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)
95%
Measure
Following a branch visit or call to our Customer Service 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.
2023 analysis
Customer satisfaction remains high reflecting our customer centric approach.
94%
96%
96%
96%
95%
2019
2020
2021
2022
2023
Gross residential lending
(Customer)
£691m
Measure
Delivering the Society's core Purpose of home ownership, this is the value of
residential lending advanced this year.
2023 analysis
Gross residential lending, at £691m, saw a decrease of 9% compared to the
prior year 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.
£691m
£569m
£784m
£756m
£691m
2019
2020
2021
2022
2023
Net Promoter Score
®
(NPS
®
)
4
– customer satisfaction
(Customer)
+74
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. During
2022 we moved towards using email surveys compared to previously used
Interactive Voice Response surveys.
2023 analysis
NPS remains well above average at +74 (2021/22: +81). The movement
in NPS was anticipated as we moved towards using a new methodology
during the year. One result of this was higher response levels particularly
against certain customer touch points where NPS scores are typically lower.
+72
+73
+76
+81
+74
2019
2020
2021
2022
2023
5
UK Finance is a trade association for the UK banking and financial services sector
14
15
Annual Report and Accounts
Year ended 31 March 2023
Business Review
1
Average market rates sourced from Bank of England Bankstats table A6.1
Common Equity Tier 1 (CET 1) ratio
(Safe & Responsible)
18.7%
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.
2023 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.
2019
2020
2021
2022
2023
Current Total Capital
Requirement (TCR)
CET 1 ratio
15.9%
9.3%
15.9%
9.3%
16.4%
17.0%
9.3%
9.3%
18.7%
9.4%
Net owner occupied lending
(Customer)
(£117m)
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 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.
2023 analysis
Since re-entering the owner occupied residential lending market in 2012, the
lending balances in this area have grown by 133%. The fall in net lending
reflects higher levels of capital repayments seen across the market, as
borrowers looked to reduce debt in the rising interest rate environment, and
a lower level of gross lending reflecting a weaker purchase market.
£146m
£52m
£256m
£116m
(£117m)
2019
2020
2021
2022
2023
Savings member mutual benefit
(Customer)
£33.2m
Measure
The Society's average savings rate above the rest of the market is paid in
mutual benefit to our savings members.
2023 analysis
We paid our savers almost double (2021/22: more than three times) the
market average
1
, enabling the Society to deliver £33.2m in mutual benefit to
our members.
£11.4m
£13.0m
£5.3m
£9.0m
£33.2m
2019
2020
2021
2022
2023
Key performance indicators
(continued)
Underlying profit before tax
(Safe & Responsible)
£21.2m
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 write off/ recovery of costs in relation to the project to implement a
digital savings platform. A reconciliation of statutory to underlying profit is
presented on page 18.
2023 analysis
Whilst underlying profitability has remained high in comparison to recent
history, this did fall from the previous year, as a result of higher provisioning
costs in the legacy commercial lending portfolio which increased from £5.6m
to £18.0m in 2022/23.
£10.5m
£1.6m
£2.4m
£26.6m
£21.2m
2019
2020
2021
2022
2023
Net interest margin
(Safe & Responsible)
1.42%
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 mortgages
and the interest paid to savers.
2023 analysis
Net interest margin improved significantly in the year. This was largely driven
by rising interest rates and the timing benefit we experience from hedging
our fixed rate mortgages. This means we receive the benefits of Bank Rate
increases faster than we are able to pass on increases to savers.
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.
1.03%
1.06%
1.02%
1.05%
1.42%
2019
2020
2021
2022
2023
16
17
Annual Report and Accounts
Year ended 31 March 2023
Business Review
On Balance Sheet CRE Exposures
(Safe & Responsible)
£228m
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.
2023 analysis
Non-core commercial mortgage balances have continued to reduce
annually, down 33% in the year to £234m at 31 March 2023.
Of the remaining exposure, £6m is securitised thereby transferring the
residual risk out of the Group.
£412m
£394m
£379m
£339m
£228m
2019
2020
2021
2022
2023
Core residential arrears
(Safe & Responsible)
0.52%
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.
2023 analysis
Core residential arrears increased from the prior year and stood at 0.52%
at 31 March, which compares favourably against the published UK Finance
average
5
of 0.71%.
The ongoing cost of living challenges are contributing to this position with
an increase being observed across both the owner occupied and buy to let
portfolios. Although the ratio has increased, the number of arrears cases has
remained relatively low.
0.31%
0.34%
0.43%
0.31%
0.52%
2019
2020
2021
2022
2023
Cost efficiency
(Efficient)
0.78%
Measure
The management expense ratio is a measure of cost efficiency, reflecting
costs (including depreciation and amortisation) as a percentage of mean
total assets.
2023 analysis
The management expense ratio reduced to 0.78% (2021/22: 0.89%). This
includes the impact of the net recovery of £5.6m of costs previously written
off. Excluding this, management expenses was 0.87%, due to inflationary
pressures.
2019
2020
2021
2022
2023
Manex ratio
Manex ratio (exd.
recovery/write off cost)
0.87%
0.83%
0.84%
0.89%
0.83%
0.87%
0.78%
Female representation
(Colleagues)
38%, 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.
2023 analysis
The 30% target for female representation continues to be exceeded at both
Board and senior management levels. Strong progress has been made
towards achievement of the revised target for our senior management
population.
2019
2020
2021
2022
2023
Senior management
Board
33%
29%
38%
35%
38%
33%
40%
34%
40%
38%
Ethnic representation
(Colleagues)
10%, 16%, 35%
Measure
The Society is a signatory of the Race at Work Charter and during 2022
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.
2023 analysis
With the Society’s heartland being located in one of the most ethnically
diverse regions in the UK, having 35% of the Society’s colleagues from ethnic
minority backgrounds in our customer teams helps us reflect the richly
diverse communities we serve. Although previously in a strong position,
representation at Board and Senior Management levels has fallen slightly
behind, and whilst these groups are of relatively small populations, this is an
area of focus where we are looking to improve.
2022
2023
Ethnic Minorities - Board
Ethnic Minorities - Senior Management
Ethnic Minorities - Other colleagues
33%
18%
20%
35%
16%
10%
32%
13%
20%
31%
13%
19%
2021
2020
Key performance indicators
(continued)
5
UK Finance is a trade association for the UK banking and financial services sector
18
19
Annual Report and Accounts
Year ended 31 March 2023
Business Review
Financial review
Financial performance
Summary income statement
Year to 31 March
Income statement overview
Group
2023
£m
Group
2022
£m
Net interest income
83.2
62.1
Fees, commissions and other income
5.8
5.6
Fair value gains on financial instruments*
6.6
10.6
Total income
95.6
78.3
Management expenses
(45.7)
(52.9)
Operating profit
49.9
25.4
Gains on investment properties
6.0
5.8
Impairment on loans and advances
(24.1)
(8.1)
Provisions for liabilities
-
0.1
Profit before tax
31.8
23.2
Taxation
(5.6)
1.2
Profit for the financial year
26.2
24.4
*Fair value losses include fair value losses on derivatives used to hedge commercial
loans of £3.1m (2021/22: £6.9m), included within the amounts presented in note 5
to the accounts.
A strong performance in the year saw statutory profit before tax
increase to levels not seen since before the credit crunch, ending
the year at £31.8m (2021/22: £23.2m). The Group’s operating
profit, which shows profit before impairments, almost doubled
to £49.9m supported by strong net interest income, fair value
gains on financial instruments and the recovery of previously
written off costs. On an underlying basis, after excluding hedge
ineffectiveness and the one-off cost recovery, profit reduced to
£21.2m (2021/22: £26.6m)
Charges for Expected Credit Losses (ECL) have increased in the
current year, focused on the remaining legacy Commercial Real
Estate exposures which are more susceptible to uncertainty in the
macroeconomic environment. For residential lending, updated
macroeconomics anticipate house price falls and expected
increases in arrears as a result of the ongoing cost of living
crisis, giving rise to an increase in modelled provisions. The
legacy commercial portfolio continues to contract due to natural
redemption activity and ongoing proactive management of exit
strategies for accounts in default.
Despite the current uncertainty in the housing market, strong
growth in the first half of the financial year has contributed to a gain
on our investment property portfolio of £6.0m (2021/22: £5.8m).
Included within the valuation gains are overlay adjustments to
reflect uncertainty in respect of the housing market.
A year on year comparison of underlying profit before tax is
presented below:
Year to 31 March
Reconciliation of statutory to underlying
profit before tax
2023
£m
2022
£m
Statutory profit before tax
31.8
23.2
Hedge ineffectiveness
(5.0)
(2.2)
(Recovery)/ write off of previously
capitalised costs
(5.6)
5.6
Underlying profit before tax
21.2
26.6
Net interest income
Net interest income increased in the year to £83.2m (2021/22:
£62.1m), with an improved net interest margin of 1.42% (2021/22:
1.05%). Higher interest income predominantly reflects net receipts
on interest rate swaps which are put in place to protect the
Society in the event of rising interest rates, and Bank Rate tracker
mortgages. The vast majority of borrowers, however, are protected
by being on fixed rate deals.
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 2023, we
significantly increased the amount paid to our savings members
in comparison to the market average (0.79% above the market
average
1
, 31 March 2022: 0.21%). This represents a considerable
£33.2m provided in mutual benefit to savers, more than three
times the amount in the previous year (2021/22: £9.0m).
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), predominantly
interest rate swaps which are taken out to protect net interest
income from volatility in market interest rates. The gains in the year
reflect the effectiveness of this strategy as we saw the largest year
on year increase in Bank Rate since 1989.
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 £6.6m fair value gains (2021/22: £10.6m gains) in the year:
• £3.1m gains (2021/22: £6.9m 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, ECL will increase owing to greater discounting of
future cashflows;
•
£3.4m gains (2021/22: £3.5m 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; and
• £0.5m loss (2021/22: £0.2m gains) arises on the closed
equity release portfolio reflecting the impact of house price
movements on the portfolio.
Management expenses
Management expenses have reduced significantly from £52.9m
to £45.7m in the current year reflecting the benefit from the net
recovery of £5.6m of previously written off costs in relation to the
development of a new savings platform (2021/22: write off of
£5.6m). Excluding the impact of the costs and related recovery,
management expenses were £51.3m (2021/22: £47.3m) reflecting
the ongoing impact of high inflation.
Gains on investment properties
The Society provides residential housing for rent through its
subsidiary company, West Bromwich Homes Limited. 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 continued in the first half of the year,
flattening towards the end of the year. This saw the market value
of the properties held rise by £6.0m compared with £5.8m in the
previous year. Included in this gain is an overlay adjustment to
reflect uncertainty in the housing market.
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
2023
£m
2022
£m
Residential loans
3.0
(4.4)
Commercial
21.1
12.5
Total impairment
24.1
8.1
Fair value movement on derivatives held
to hedge impaired commercial loans
(3.1)
(6.9)
Total impairment and related charges
21.0
1.2
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 charge for the year was £3.0m
(2021/22: £4.4m credit). We have not yet materially seen the
impacts of higher borrowing or living costs on mortgage holders (in
part as the majority continue to be protected by fixed rates) which
would see an increase in modelled provisions. However, we have
used a number of overlays to cover heightened affordability risk as
well as the potential impact of combustible materials in flats and
the potential overstatement of house price inflation in recent years.
These overlays are the reason for the higher residential provision
charge in the current year. Further detail is provided in note 1 to
the accounts.
Group arrears at 0.52% (31 March 2022: 0.31%) have increased
reflecting the current economic climate. This continues to compare
favourably against the UK Finance average of 0.71%
5
(2022:
0.77%).
Commercial impairment
Commercial impairment charges increased in the year to
£21.1m from £12.5m in 2021/22. After adjusting for the offsetting
movements in derivatives held to hedge the impact of changes
in interest rates the net charges were £18.0m and £5.6m for the
current and prior year respectively.
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 commercial provision
balances of £79.2m (2021/22: £99.9m), which represents 33.8% of
the current loan book (2021/22: 28.7%).
The majority of the Group’s commercial portfolio comprises loans
to the retail sector. Provision coverage against loans to the retail
sector has increased to circa 40.4% from circa 39.6% prior to
the onset of the pandemic. Note 33(c)(iii) to the accounts further
analyses the commercial portfolio by industry type.
All commercial lending was originated at least 15 years ago and
we continue to manage the exit from this sector with a reduction in
gross exposures of 33% in the year (2021/22: 12%).
Taxation
There is a corporation tax charge of £5.6m for the year (2021/22:
£1.2m 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 effective tax rate is 17.6% compared to a UK rate of 19%. In
the prior year an increase deferred tax asset was recognised
with respect to carried forward losses and timing differences after
future increases in tax rates were announced.
Further analysis of the tax charge is given in note 9 to the accounts.
1
Average market rates sourced from Bank of England Bankstats table A6.1 March 2023
5
UK Finance is a trade association for the UK banking and financial services sector
20
21
Annual Report and Accounts
Year ended 31 March 2023
Business Review
Financial position
Summary statement of financial position
At 31 March
Group
2023
£m
Group
2022
£m
Assets
Residential loans and advances
4,215.2
4,529.7
Commercial loans and advances
155.1
248.6
Liquid assets
986.6
1,012.1
Derivative financial instruments
100.5
52.4
Fixed and other assets
231.9
224.5
Total assets
5,689.3
6,067.3
Liabilities
Shares
4,306.3
4,183.6
Wholesale funding
883.1
1,395.4
Derivative financial instruments
6.7
11.5
Other liabilities
62.8
59.5
Total liabilities
5,258.9
5,650.0
Equity
General reserves
292.3
279.1
Other equity instruments
134.8
134.8
Other reserves
3.3
3.4
Total equity
430.4
417.3
Total liabilities and equity
5,689.3
6,067.3
Residential loans and advances
Analysis by lending type at 31 March 2023
66%
34%
67%
33%
70%
30%
72%
28%
73%
27%
2019
2020
2021
2022
2023
70
80
%
0
10
20
30
40
50
60
Prime owner occupied
Buy to let
Total residential loans and advances decreased in the year. The
fall in net lending reflects higher level of capital repayments, seen
across the market as borrowers looked to reduce debt in the rising
Bank Rate environment, and a lower level of gross lending reflecting
a weaker purchase market resulting in advances of £691m
(2021/22: £756m). 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.
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 27% compared to 28%
in the prior year.
At the heart of our Purpose, the Society supported a further 3,413
first-time buyers, which represented 57% (2021/22: 40%) of all new
borrowers in the year.
At 31 March 2023
Group arrears
Total balances
£m
3 months+
%
Owner occupied
3,157.4
0.53
Buy to let
1,141.2
0.70
Total residential
4,298.6
0.73
At 31 March 2022
Group arrears
Total balances
£m
3 months+
%
Owner occupied
3,276.6
0.36
Buy to let
1,300.5
0.25
Total residential
4,577.1
0.47
The Society continues to support borrowers who are faced with
ongoing cost of living challenges including the rising Bank Rate
environment. Encouraging borrowers to engage early is a key
focus for the Society enabling a tailored approach to help reduce
the impacts. 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
2023
£m
2022
£m
Non-core commercial balances
excluding securitisation
227.9
338.5
Securitised commercial balances
6.4
10.0
Impairment provisions
(79.2)
(99.9)
155.1
248.6
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 33% this year 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 14%
(2021/22: 21%) 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 2023
Liquidity portfolio
£m
%
Cash and balances with the Bank of England
598.2
60.6
Supranationals
49.9
5.1
Covered bonds
152.6
15.5
Mortgage backed securities
37.9
3.8
Subsidiary/other liquidity
148.0
15.0
Total liquidity
986.6
100.0
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
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
reflecting the uncertainty in the economic outlook.
The Society’s Liquidity Coverage Ratio (LCR), which measures its
ability to meet cash outflows in the event of a stressed scenario,
was 224% at 31 March 2023 (2021/22: 304%), comfortably above
the regulatory minimum of 100%.
22
23
Annual Report and Accounts
Year ended 31 March 2023
Business Review
Funding
Other retail
TFS
Branch accounts
Securitisation
Other wholesale
2019
2020
2021
2022
2023
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
0.96
0.71
0.17
3.34
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 is retail
savings. Retail savings balances increased by 3% in the year
to £4.31bn (2021/22: £4.18bn). Within this total, branch based
accounts increased by 6% to £3.3bn.
During the year, the Society successfully launched a range of
competitive savings products across all of our retail channels,
attracting over £435m of new funds. This included £285m of
funding through our branches, where almost 80% of new funds
were received into our range of fixed rate products. Other balances
were split evenly across web and direct channels.
Retail savings balances make up 77.6%, (2021/22: 74.9%) 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 reduced to £0.88bn (2021/22:
£1.40bn) following the maturity of the Kenrick 3 securitisation and
our decision to repay £350m of TFSME funding ahead of its maturity
in 2024 and 2025. This reduced the ratio of wholesale funding as
a proportion of total shares and borrowing to 17.1% (2021/22:
25.1%). Our reduced use of wholesale funding also meant that our
encumbrance ratio fell significantly to 17.1% (2022: 27.2%).
Wholesale funding ratio
21.4%
24.4%
20.0%
25.1%
17.1%
2019
2020
2021
2022
2023
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
2023, 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 2023 increased to 18.7%
(2021/22: 17.0%), comfortably in excess of the Society’s Total Capital
Requirement (TCR) which, at the end of the year equated to 9.4% 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, excluding central bank claims, also remains strong
at 7.9% (2021/22: 7.3%).
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 2023 would have been
18.3% (2021/22: 16.2%) and the Leverage Ratio would have been
7.7% (2021/22: 6.9%).
During the year the Society paid £4.8m as distributions on the
Society’s Core Capital Deferred Shares. In May 2023 the Board
declared a final distribution for the period to 31 March 2023 of
£2.25 per CCDS, 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
2023
£m
Full implementation
3
2023
£m
Transitional
2022
£m
Full implementation
3
2022
£m
Members' interests and equity
430.5
430.5
417.3
417.3
Permanent interest bearing shares (PIBS) deduction
(7.8)
(7.8)
(7.8)
(7.8)
Other adjustments¹
(29.4)
(37.7)
(19.1)
(41.0)
Common Equity Tier 1 (CET 1) capital
393.3
385.0
390.4
368.5
Additional Tier 1 capital
-
-
-
-
Total Tier 1 capital
393.3
385.0
390.4
368.5
Tier 2 capital²
21.8
21.8
21.8
21.8
Total regulatory capital resources
415.1
406.8
412.2
390.3
Risk weighted assets (RWA)
2,108.5
2,100.2
2,299.7
2,277.8
Leverage ratio exposure including claims on central banks
5,584.7
5,576.4
6,015.2
5,993.3
Leverage ratio exposure excluding claims on central banks
5,000.5
4,992.2
5,378.2
5,356.3
Capital ratios
%
%
%
%
Common Equity Tier 1 ratio
(as a percentage of RWA)
18.7
18.3
17.0
16.2
Common Equity Tier 1 before IFRS 9 transitional arrangements
(as a percentage of RWA)
18.3
18.3
16.2
16.2
Tier 1 ratio
(as a percentage of RWA)
18.7
18.3
17.0
16.2
Total capital ratio
(as a percentage of RWA)
19.7
19.4
17.9
17.1
Leverage ratio including claims on central banks
7.0
6.9
6.5
6.1
Leverage ratio excluding claims on central banks
7.9
7.7
7.3
6.9
Capital
1
Other adjustments mainly comprise IFRS 9 transitional arrangements and deductions for intangible assets and deferred tax assets.
2
Tier 2 capital comprises subordinated liabilities excluding accrued interest.
3
The 'Full implementation' basis includes the unwind of IFRS 9 transitional relief.
24
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Annual Report and Accounts
Year ended 31 March 2023
Business Review
In March 2023, the Society approved an interest payment in respect
of the Permanent Interest Bearing Shares (the ’PIBS’) of 0.74%,
which was paid on 5 April 2023. Whilst noting that any interest
payments on the PIBS are at the sole discretion of the Board, in
line with the distribution policy interest payments will be limited to
the lower of (i) the equivalent annual yield that would have been
paid to holders of Profit Participating Deferred Shares (the ‘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 3.0827%).
Whilst PPDS instruments no longer exist (having been exchanged
during the Liability Management Exercise (LME) in April 2018), the
Society has monitored a notional PPDS reserve. For the year ended
31 March 2023, the Society generated a reported profit after tax
of £26.2m, including the impact of £2.5m Tier 2 interest payable.
The net profit disregarding Tier 2 interest (after tax) would therefore
have been £28.2m, and the notional PPDS reserve account had
a balance of £6.6m at 31 March 2023 that could have been
distributed to PPDS holders. The equivalent annual yield that
would have been paid to PPDS holders would therefore have
been 3.86%, with PIBS interest payments therefore limited by the
Specified Rate above.
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 34 to 47
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,
adding to our capital reserves and further increasing our resilience
to the potential challenges that lie ahead.
The outlook for the UK economy going forward remains unclear;
the joint challenge of rising cost of living and increased borrowing
costs mean there is significant uncertainty over the demand
for mortgage borrowing over the next 12 months. As a lender
with a focus on our Purpose of advancing homeownership, our
mortgage lending is concentrated on first-time borrowers, which
we expect to be more impacted by this uncertainty.
Further Bank Rate increases are still anticipated and will likely not
begin to reverse until inflation returns to more sustainable levels.
We may yet see the impacts of rising inflation leading to recession
with the potential for rising business failures leading to increases in
unemployment. Coupled with ongoing cost of living pressures this
may lead to a rise in arears. As always, we stand ready to support
our members through these difficult and uncertain times, providing
financial resilience to our saving members and tailored support to
borrowers who require it.
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.
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.
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 60, 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.
26
27
Annual Report and Accounts
Year ended 31 March 2023
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 Officer
or Non-Executive Directors where appropriate.
Topics discussed have ranged from ESG matters,
Executive Director Remuneration and risk
management.
•
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.
Our Colleagues
- 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 Officer or Non-Executive Directors
where appropriate. A Non-Executive Director also
joins meetings of the Council to strengthen the
link between the Council and the Board. Topics
discussed have ranged from our employee
survey, ESG matters, risk management and
remuneration.
•
Regular colleague surveys which provides
colleagues to have their say on key operational
matters at the Society.
•
The ongoing activity of our diversity and
inclusion employee group, Connect. Further
details of the activity of our Connect group can
be found on page 31 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 Officer 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 29-33 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 Barnardo’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
29-33 of this report.
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.
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.
•
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 29-33 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.
28
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Annual Report and Accounts
Year ended 31 March 2023
Business Review
Sustaining our
ociety
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
Good Business Charter
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:
1
1
Here at the West Brom, we have a very clear Purpose - 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.
Every day we work hard to deliver the best service and products for
our new and existing members, and we put them at the heart of
everything we do. Our Member Commitments and Society Values
are the foundation on which all our business practices are built,
as we make every effort to make a positive difference to all our
members and wider society.
"As a mutual, we are owned by our members. This operating
model means we can deliver true benefits to them and live our
Purpose in the work we do every day. I believe that we put our
members’ interest centre stage, and our Member Commitments
and Values play a central role in guiding what we do and how
we work together to achieve this.” -
Jonathan Westhoff Chief
Executive Officer
Our Member
Commitments
We gather feedback on how we are delivering against our
Member Commitments by:
• Listening to your ideas to make our products and services
right for our members – review customer feedback and make
changes where appropriate;
•
Promoting our products and services in a clear and balanced
way, showing the risk as well as the benefits – use measures
such as Net Promotor Score and Net Ease Score;
• Product rates fairly reflecting the benefit of being a mutual,
run for the benefit of members – comparing the average rate
we pay our members to the average rate paid in the savings
market. We also measure customer retention on savings
products such as fixed rate bonds;
• Delivering what we promise and if we get it wrong, take
responsibility and explain to you why and how we can put
it right – we look at the number of upheld complaints (the
complaints we have resolved) and the number of complaints
that are referred to the Financial Ombudsman Service FOS;
Customer research and engagement
Customer feedback is extremely important to us and helps us to
make continuous improvements to the products and services we
provide. Like our new ways of working, customer engagement has
also taken on a hybrid approach with a mix of regular virtual and
in-person activities.
In the last 12 months, we continued to engage with our Member
Council with meetings in June 2022, November 2022 and March
2023. The flexibility of hybrid working has benefitted the Council
as more members were able to attend to discuss topics, including
Executive Director Remuneration, our approach to Environmental,
Social and Governance (ESG) matters and colleague engagement.
Through customer mailings, information in branches, updates on
our website, events and a twice-yearly newsletter called Connect,
we keep members informed about our products and services and
how we may be able to help. We recognise that engagement is
about far more than just ‘telling’, and reach out to members for
suggestions about the things we could be doing better to improve
our products and services.
One way we gather feedback is through our voice of the
customer programme, which allows us to track in the moment
feedback. Following a visit to one of our branches, a phone
call with our Customer Service team or an appointment with
a Personal Mortgage Consultant, our customers are invited
to rate the service they’ve received and leave feedback about
their experience. We frequently test customer understanding
on important communications, use customer research to help
develop new propositions and ask for feedback through our
customer panel, made up of over 2,000 members. We also hold
regular feedback events throughout the year, including our Annual
General Meeting and Members’ ViewPoint sessions, both of which
provide opportunities to meet with and ask questions to our Board
and senior management team.
We remain committed to working closely with our members,
colleagues and communities, and their feedback ensures we
are able to further develop and adapt to continually deliver our
Purpose.
Customer feedback is extremely
important to us and helps us to make
continuous improvements to the
products and services we provide.
30
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Annual Report and Accounts
Year ended 31 March 2023
Business Review
• Committing to acting responsibly and in a sustainable way
to support our future members and wider society – measures
in place to reduce carbon emissions year on year, reduce
water usage year on year and zero to landfill (reduction year
on year); and
• Playing an active role in our local communities, working
with local community groups, schools and charities – we
measure the number of paid volunteering days our colleagues
undertake, the number of children we have presented our
education programme to and the amount of funds raised and
distributed for good causes.
2
2
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 colleagues, 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 colleagues
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 in 2021
announced revised targets for senior management population to
make even greater progress by the end of 2024. In our third year
as a signatory to the Race at Work charter, we have continued
with our commitments to improve outcomes of colleagues from
ethnic minorities. Continuing with our success in 2021 achieving
the Disability Leader Status, we have actively worked with local
schools and colleges to provide students with disabilities valuable
‘on the job’ experience with the opportunity to work with West Brom
colleagues and gain a better understanding of the workplace.
We published our sixth 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 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. We
continued to work closely with local colleges, providing career
advice and work experience for students to gain a better insight
into what it is like working at the Society.
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, female Board representation continued to be
at 40%, exceeding our target of 30%. We are also making good
progress with female representation at senior management,
including senior specialist roles, which by the end of March 2023
was at 38%, against our revised target of 40% to be achieved by
the end of 2024. In total, out of 650 colleagues at the year-end
(including Non-Executive Directors), women make up 412 (63%).
Details of colleague composition at the end of the year is outlined
below, compared to 2022:
At 31 March
2023
Female
2023
Male
2022
Female
2022
Male
Directors
Number
4
6
4
6
Percentage
40%
60%
40%
60%
Senior managers
Number
29
47
27
53
Percentage
38%
62%
34%
66%
Other colleagues
Number
379
185
369
168
Percentage
67%
33%
69%
31%
Senior managers include divisional directors and colleagues
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. We have recently partnered up
with Reed Women in Technology Mentoring Programme to support
our colleagues with confidence to take control of their own careers
in an industry that is typically male orientated via mentoring and
career coaching.
This is our second year of publishing the Ethnicity Pay Gap report,
after being one of the first companies in our industry to do so, and
we have seen good progress across a number of indicators. We
have also 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 2022) is as
follows:
At 31 March
2023
Ethnic
minority
2023
White
2022
Ethnic
minority
2022
White
Directors
Number
1
9
2
8
Percentage
10%
90%
20%
80%
Senior managers
Number
12
64
14
66
Percentage
16%
84%
18%
82%
Other colleagues
Number
197
364
176
360
Percentage
35%
65%
33%
67%
Having 35% 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 Disability Confident Leader status continued to recognise 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 work, we recognise there is still work to be done
in particular around neurodiversity to ensure colleagues from all
walks of life feel supported.
The Society’s colleague-led equity, inclusion and diversity focus
group – Connect, launched in 2018, continues to raise awareness
and strengthen the environment where embracing different
cultures and colleagues from all backgrounds and diversities
are encouraged and celebrated. The group is sponsored by
the Society’s CEO and Chief People Officer which allows two–
way communication between colleagues and the Executive.
This provides our colleagues with the reassurance that they are
supported, valued and listened to.
3
3
We have a suite of clear, fair and transparent policies designed
to support and encourage employee well-being including a
sickness policy which clearly outlines both employee and employer
responsibilities. In addition, we have a number of colleagues
who are trained as Mental Health First Aiders. We also have
an Employee Assistance Programme (EAP) in place with Health
Assured, available to everyone with 24/7 free and confidential
support, along with a wide range of information and guidance on
health, lifestyle and well-being matters including four week health
plans and mini health checks.
4
4
We are an accredited Living Wage Employer with the Living Wage
Foundation committed to paying at least the voluntary living wage
for all employees and any contractors working permanently on our
sites (Head Office and in our branches).
5
5
There are two key ways our people’s voices are heard:
•
Employee Council. The Employee Council offers an opportunity
for feedback – something we always value at the West Brom –
but has a much wider remit than that, giving people a genuine
say and influence on the Society’s strategic decision-making,
right up to Board level; and
•
The Society’s Union is Community. All colleagues are able to join
the Union which is in place to help people at work, at home,
and when life gets complicated.
6
6
We’re proud to be one of the first 50 employers to be accredited
as a Living Hours Employer (including the first building society and
the first business in the West Midlands) providing security of hours
alongside providing the real Living Wage as a minimum.
32
33
Annual Report and Accounts
Year ended 31 March 2023
Business Review
7
7
The Society is continuing its journey to net zero, identifying and
maximising opportunities to reduce its environmental impact.
Over the last 12 months focus on energy has continued with the
trial of a replacement branch heating and cooling system which is
anticipated to reduce energy consumption by 19,000 kwh over 12
months. The system also helps us to improve the air quality for the
benefit of both colleagues and customers.
Refurbishment of properties is key in reducing property energy
wastage and our expectation is to achieve an energy performance
rating of at least C by the end of the next financial year through
our refurbishment programme across our West Bromwich Homes
Limited rental portfolio (our latest flat refurbishment achieved a
rating of B). This reduction is largely through improved insulation
and moving to double glazed windows.
Transport and journey reduction represents a challenge. As part
of our transport initiative and to encourage the use of electric
vehicles (EVs) additional EV charger points have been installed for
use by colleagues, which has proved very successful. By charging
vehicles through renewable energy a reduction is achieved to the
carbon impact of commuting. Our plan is to continue installing
additional chargers as demand grows.
Our suppliers play an important part in our journey and are being
encouraged to work with the Society in achieving our environmental
goals. A successful example is where our cleaning service supplier
has moved to only using eco-friendly cleaning solutions.
The Society set itself a goal of nil to landfill which has been achieved
through identifying waste streams and putting in place reduction
initiatives and removing non-recyclable items such as single use
plastic. Again, this involved working with suppliers and their supply
chain to ensure all items are sustainable and recyclable (e.g. all
our redundant computer equipment is collected and recycled by
a specialist company).
The Society has committed to the use of only FSC (Forestry
Stewardship Council) paper in its marketing materials. This along
with the use of recyclable paper and shredding of paper for
recycling reduces the impact of paper usage on our woodlands.
This section of the report summarises the energy usage, associated
emissions, energy efficiency actions and energy performance for
the Society, under the Streamlined Energy & Carbon Reporting
(SECR), as implemented by the Companies (Directors’ Report)
and Limited Liability Partnerships (Energy and Carbon Report)
Regulations 2018.
2022-2023
2021-2022
Energy Use
2021-2022
kWh p.a.
tCO
2
(tonnes) p.a.
kWh p.a.
tCO
2
(tonnes) p.a.
Buildings
electricity
2,087,274
403.6
2,229,617
473.4
Buildings
natural gas
984,462
179.7
1,221,067
223.7
Transport
170,868
40.2
126,202
29.4
Totals
3,242,604
623.5
3,576,886
726.5
This represents an overall reduction of 14.18% in the 12 month
period.
The plans for the future are to continue to aim for carbon net zero
through more challenging initiatives:
•
Solar Power – A review is underway to identify the feasibility of
using solar power at the Head Office. It is anticipated that solar
power could become the main source of energy for the office
heating and cooling systems.
• LED Lighting – This continues to offer an effective energy
reduction solution but requires high capital spend to realise
the benefits. We are currently working with a supply partner on
developing an effective solution.
8
8
We are committed to the standards set out in the Ethical Trading
Initiative Base Code and we encourage our suppliers to do the
same.
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.
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.
9
9
We have signed the government's Prompt Payment Code and
commit to paying all suppliers within 30 days. Unless there is
specific agreement, the Society will endeavour to pay suppliers
with ‘immediate’ payment terms within 2 weeks of receipt of the
invoice.
We are pleased to confirm that for the financial year ending 31
March 2023 all suppliers have been paid within 30 days of receipt
of invoice.
10
10
Our Tax Strategy Statement is reviewed and approved each year,
with the current statement approved at the Audit Committee on 1
March 2023, and published on our website.
Community funding
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 as well as
local fundraising across our branch network.
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 (details of which can be
found in our Impact Report to be published later this summer).
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 colleagues 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 colleagues
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.
Colleagues at the Society are entitled to two volunteering days
every year and for the financial year ending 31 March 2023 637
hours were recorded as volunteering days.
The strength of partnerships
The Society’s affinity partnerships have proved a way for members
to show their commitment to organisations 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 £962,261 has been generated
for the hospital since 2006.
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 remains committed to joining the Dormant Assets
Scheme, operated by Reclaim Fund Ltd (RFL), to fund £600,000 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 a further 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.
On behalf of the Board
Alex Pawley
Chief Financial Officer
31 May 2023
34
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Annual Report and Accounts
Year ended 31 March 2023
Business Review
Risk Management
This section outlines the risks
that the Society is exposed to
and how they are managed.
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 reflects an understanding of actual and potential risks,
the quantification of the impact of such risks, 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 in line with its Purpose and
values. The Board has agreed a set of Risk Appetite statements
covering the principal risk categories which the Society is exposed
to: business, credit, capital, liquidity, market, margin compression,
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 principal 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 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
Chief Internal Auditor 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
in their area including:
• Identifying;
• Assessing; and
•
Reporting risk exposures, taking into account the Society’s risk appetite, policies and procedures.
•
Independent oversight and risk governance through monitoring and reporting responsibilities
to Operational Oversight Committees and the Risk Committee.
•
Provide guidance, support and education on Risk Management matters, working
collaboratively with business management to ensure effective risk management practices are
being delivered.
•
Internal Audit provide the Board (via the Audit Committee) with independent assurance over
the adequacy and effectiveness of control mechanisms in place to mitigate the Society’s
exposure to all risks within its Risk Categories.
Executive
Board
Chief Executive Officer
Risk Oversight
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Annual Report and Accounts
Year ended 31 March 2023
Business Review
Business conditions and the economic
environment
The UK economy slowed in the second half of the financial year
on the back of high inflation and rising cost of living pressures,
with the Ukraine/Russia conflict exacerbating supply chain issues
initially caused by the COVID-19 disruption. Global central banks
have responded to higher inflation by shifting from quantative
easing to quantative tightening and sharply raising interest rates,
with the Bank of England increasing Bank Rate to 4.25% in March
2023, its highest level since 2008, with any further increases
expected to reach a peak later in 2023.
House price rises have slowed throughout 2022 and are largely
predicted to reduce further throughout 2023 with some estimates
of a 10% correction in prices throughout 2023. The Society has
shown appropriate prudence in its modelled macroeconomic
scenarios to take account of this risk.
Households are facing unprecedented pressure as a result of
rapid increases in the cost of living. Although mortgage arrears
rates have continued to remain low the Society has enhanced its
forbearance practices, with a focus on pre-emptive tailor-made
support for borrowers. These changes align to the tone being set
by our regulators.
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.
The war in Ukraine, the ongoing transition following the UK leaving
the EU means there is much uncertainty which has the potential
to further impact on consumer and business confidence, with the
number of company insolvencies in 2022 being the highest since
2009. The external factors that impact the Society include:
•
Interest rates (Bank Rate, SONIA and other market rates);
• Inflation;
• Unemployment; and
•
The residential housing and commercial property markets.
decisions
reached
KEY
•
Cost Of Living – reviewed the approach to supporting customers with mortgage payment difficulties during a period of
increasing day-to-day living costs, energy costs and interest costs and encouraged greater pre-delinquency recognition
and assistance;
•
Operational Resilience – reviewed quarterly the performance of Important Business Services and Impact Tolerances;
•
Credit Risk – approved retaining a prudent approach to setting residential lending policy given the macroeconomic
uncertainty, whilst remaining supportive of home ownership members;
•
Retail Conduct Risk – approved the revised approach to monitoring the delivery of good customer outcomes ahead of
the Consumer Duty in July 2023; and
•
Margin Compression Risk – continued to monitor and approved proposals to manage exposure to the unprecedented
rises in Bank Rate environment and the ongoing volatility in interest rate outlook.
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 six occasions.
Governance structure
During the year, risk governance was provided through ten 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 Chief Financial Officer (CFO) 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 Senior Manager Credit Risk and is responsible for overseeing
the exposure to credit risks generated as a result of the Society’s
residential lending activity.
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.
Conduct Risk & Customer Review Group (CRCRG)
– This Group
is chaired by the Society’s Chief Executive Officer (CEO) and is
responsible for overseeing the management of retail conduct risk
and includes responsibility for monitoring customer outcomes
arising from the Society’s retail activities.
Operational Risk & Resilience Group (ORRG)
– This Group is
chaired by the Chief Operating Officer (COO) and oversees the
management of all operational, information and operational
resiliency risks.
CRCRG and ORRG were formed in January 2023 as part of a
restructure replacing the Operational, Conduct and Information
Risk Group (OCIRG) and Operational Resilience Group (ORG).
Capital Review Group (CRG)
- This Group is chaired by the CFO
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:
Retail conduct risk
The risk that inappropriate behaviours by the Society result in
adverse outcomes for retail customers.
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.
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.
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.
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.
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.
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.
For each risk category the Board has agreed an appetite statement
and associated 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.
38
39
Annual Report and Accounts
Year ended 31 March 2023
Business Review
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 Risk, Compliance and Financial Crime, and the
ALM (Asset and Liability Management) Oversight and Model Risk
Oversight – 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 36.
Credit risk
The Society’s Board establishes the credit risk appetite and
supporting lending policy. 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
the Credit Risk Management Framework and associated limits and
providing regular reports to the Risk Committee.
Economic uncertainty and market movements including significantly
higher interest rates, have manifested into cost of living challenges
for many in the UK. In response, the Society has continuously
reviewed its credit risk policies and procedures that reflect these
affordability challenges. This approach supports both responsible
lending decisions and the support provided to individual borrowers
in vulnerable financial situations.
The Society’s approach to collections and recoveries has continued
to evolve reflecting experiences of working with borrowers through
the pandemic and the observed increases in the cost of living.
Focus has been drawn to providing pre-emptive support for
borrowers. The Society’s approach is reflective of any ongoing
government and regulatory guidance and has specifically 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 borrowers’ potential affordability issues or those already in
financial difficulty in light of the cost of living challenges.
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.
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 RC and 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, the Treasury
team 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.
In line with regulatory requirements and best practice, the impact
on net interest income (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.
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 the Treasury team
and reported to ALCo.
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 funds mortgages on residential property substantially
from shorter term deposits provided by its saving members. The
contractual maturity of the mortgages is up to 35 years although
loans are typically repaid early due to borrowers moving home 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,
predominantly through its Branch network.
This difference in the nature of borrowers’ and savers’ relationships
cause 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 cash 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 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). The Treasury
team maintains liquid resources at the greater of the Liquidity
Coverage Ratio 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 RC has delegated authority for the governance of liquidity
risk management to the ALCo which meets at least monthly;
• Operational management of liquidity risk is further delegated
to the Liquidity Management Committee (LMC) which typically
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;
•
The Treasury team is responsible for day-to-day management
and maintenance of adequate liquid resources under delegated
authority from ALCo; and
• The RC monitors independently the overall liquidity adequacy
process, including the activities of ALCo, LMC and the Treasury
team. 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. 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-eligible assets. Treasury operates a strict control
framework and exposures are monitored on an intra-daily basis.
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 periodicaly 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 23.
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 Risk team, which has regular dialogue with function
managers and collates management information for review by
executive management, the Operational Risk and Resilience
Group, and the Risk Committee.
The Operational 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 operational risk scenario analysis undertaken that
feeds into the ICAAP.
During the year there has been continued focus on our Operational
Resilience and there has been 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,
associated Impact Tolerances and completed resource mapping.
The main focus now is the continued testing against severe but
plausible disruption scenarios to identify any vulnerabilities to the
Society remaining operationally resilient. These steps support us
in our delivery against the regulatory requirements as we have
entered the transition period to March 2025, defined by the FCA
and PRA “as the ability of firms to prevent, adapt, respond, recover
and learn from Operational Disruptions”.
The COVID-19 pandemic resulted in a number of changes to
working practices, which have endured post pandemic creating a
’new normal’. Hybrid working is now ingrained in how we operate
as a business. Whilst this has positively impacted our operational
risk profile in areas such as resilience, it has also resulted in a
challenging market for recruitment and retention of resources.
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.
40
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Annual Report and Accounts
Year ended 31 March 2023
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 implementation of the new Consumer
Duty in July 2023 builds further on the requirement to ensure good
customer outcomes and in order to ensure the Society meets these
enhanced regulatory requirements, a number of enhancements
have been implemented to policies and procedures to ensure
customer outcomes remain at the forefront of all the Society’s retail
activities.
The establishment of a dedicated Conduct Risk oversight group
(CRCRG) and the appointment of a Chief Customer Officer, as
detailed on page 3 further emphasises the importance the
Society places on ensuring good customer outcomes with the
management of conduct risk 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 Society is acutely aware of the increased level of threat to
Cyber Security and as such is focused on enhancing its capability
in this area.
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
Climate change has been consistently highlighted as one of the
top risks facing global economics by the World Economic Forum
(WEF). Although climate change is not a principal risk for the
Society and is an element of business risk, the Society recognises
that climate change threatens financial stability and exacerbates
existing risks including those potentially faced by our customers. In
addition, climate change implications may affect the ability of the
Society’s members to transition to a low-carbon economy. 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 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 continues to work to
quantify its potential exposure to both of these climate change risks
to reflect emerging thinking and access to improving data sources.
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 SS3/19 – Enhancing
banks’ and insurers’ approaches to managing the financial risks
from climate change. The Society’s disclosures are aligned with
the Taskforce on Climate-Related Financial Disclosure (TCFD)
recommendations with regards to 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 Credit Risk team.
The AC has oversight of external disclosures relating to the Society’s
management of the financial risks arising from climate change.
Strategy
To address the challenge faced by climate change, the Society
has set a number of targets including becoming carbon neutral
for direct operations by 2025 and becoming carbon positive by
2050. Monitoring our progress towards these targets enables our
climate strategy to evolve, ensuring the Society remains resilient to
climate-related risks whilst meeting these environmental targets.
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
Increasing frequency of environmental perils
could affect the delivery of 3rd party good and
services.
Low
Medium
Long
Increase supply chain costs due to climate
related inflationary pressures.
Low
Medium
Medium
Credit Risk
Flood/subsidence risk materialising which
impacts property values and subsequent losses
to the Society.
Low
Medium
Long
Higher energy efficiency standards for 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
Savings balances eroded to fund, for example
property retro-fits or replace income due to a
climate related macroeconomic impact.
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 liability and conduct risks from green
propositions and assumed advice.
Low
High
Long
Regulatory & Legal
Inadequate or inaccurate climate risk
disclosures on past or anticipated events.
Medium
High
Long
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).
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Business Review
The Society has recognised the potential to offer products that align with the UK’s target to reach net zero by 2050 at the latest. The Society
has recognised that housing contributes a significant proportion of greenhouse gas emissions, therefore making homes more energy
efficient is a critical step towards achieving this target. To support this the Society offers a Green Additional Borrowing product to fund
energy efficiency improvements to homes.
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.
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.
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 for each
scenario are adjusted upwards and with it the average likelihood
of flooding.
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 implemented 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.
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.”
Climate change is not considered a Board Principal Risk due to
the modest losses resulting from future flood and subsidence risk
described above and is a sub-risk under Business Risk, whilst
still retaining full Board oversight. In support of this appetite, MI
and metrics are presented to RC so that the Society’s exposure
to physical and transition risk can be tracked and as climate risk
evolves, the relevant action can be taken to control.
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Business Review
Metrics and Targets
The Society’s exposure to climate risks have been assessed
through a series of metrics, and measured against defined targets.
Physical risks to mortgaged properties have been quantified by
ECLs based on flood and subsidence risk modelling. The EPC
ratings of mortgaged properties have been assessed to indicate
where transition risk can be mitigated.
Physical Risk metric (Flooding and Subsidence)
Physical risk analysis was completed for the residential mortgage
book as of 31 March 2023. 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 the High, Medium, and
Low emission scenarios. Data for flood risk is obtained via 4most
Analytics Consulting, who convert the climate scenarios into flood
risk impacts for our mortgaged properties. The flood risk analysis
includes surface, river and coastal flooding.
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, compared to a
base ECL that assumes no such hazards. This determines for each
account the increase in ECL attributable to climate stress.
The Society’s physical climate risk modelling yielded the following
output with respect to future flood and subsidence risk ECL:
2023
L
M
H
Additional flood risk
related expected loss £m
0.12
0.15
0.19
2027
L
M
H
Additional flood risk
related expected loss £m
0.22
0.30
0.38
2050
L
M
H
Additional flood risk
related expected loss £m
0.28
0.41
0.56
2080
L
M
H
Additional flood risk
related expected loss £m
0.33
0.53
0.73
Flood risk ECLs are modest, even under the High emissions
scenario, compared to the Society’s residential provisions.
Distribution of Risk - England & Wales
31,824
24,714
1,652
6,195
724
2,037
194
1,448
None
Low
Medium
High
35,000
0
5,000
10,000
15,000
20,000
25,000
30,000
River
Surface
Number of Properties
Flood Risk
The Society will continue to monitor the outputs of the climate
model and will consider mitigating actions if future losses increase
to material levels.
Transition Risk metric (EPC)
The Society currently has an average EPC rating of D across the
residential mortgage book with the following describing the EPC
rating distribution:
Current EPC Rating
EPC Rating
Total
Owner Occupied
Buy to Let
A
0.2%
0.3%
0.0%
B
12.3%
15.8%
5.3%
C
24.6%
22.2%
29.4%
D
44.9%
42.8%
49.2%
E
15.1%
15.5%
14.2%
F
2.3%
2.7%
1.5%
G
0.5%
0.6%
0.3%
Average
D (64)
D (64)
D (64)
Potential EPC rating
EPC Rating
Total
Owner Occupied
Buy to Let
A
9.1%
12.7%
2.0%
B
48.4%
51.4%
42.4%
C
30.5%
28.5%
34.6%
D
10.2%
5.9%
18.7%
E
1.5%
1.2%
2.2%
F
0.2%
0.2%
0.2%
G
0.0%
0%
0.0%
Average
B (81)
B (81)
B (80)
EPC ratings have been gathered from the publicly available EPC
Register and matched to the Society’s mortgage book. In addition,
an exercise to model the likely EPC rating of properties without
one has been undertaken. The Society currently has a match
rate of 80%, which supported by modelled data increases the
understanding to 84% of the portfolio.
This data has enabled the Society to visualise the potential
EPC ratings of the residential mortgage book if energy efficient
measures are introduced to increase the EPC rating of the existing
housing stock:
A
B
C
D
E
F
G
60%
0%
10%
20%
30%
40%
50%
Current
Potential
Current vs Potential EPC rating
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.
Operational Emissions
To reduce the carbon emissions of our operations, the Society now
uses green energy with all energy across Head Office and the
branch network generated by renewable sources (electricity and
gas). In addition, the Society’s owned vehicle fleet comprises of all
electric vehicles.
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:
tCO
2
(tonnes) p.a.
2019-20
2020-21
2021-22
2022-23
Scope 1
Buildings natural gas
136.3
241.9
223.7
179.7
Transport (owned)
92.7
24.3
29.4
40.2
Scope 2
Buildings electricity
593.5
552.3
473.4
403.6
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.
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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,
heightened geopolitical risks and ongoing
cost of living crisis leading to:
•
Higher inflation resulting in Bank Rate
increasing towards 5%;
•
Declining consumer confidence resulting
in reduced activity in the housing market
and adverse impact from both lower
lending and a potential fall in house
prices;
•
Elevated 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 rising central Bank Rates to
respond to higher inflation due to global supply chain issues 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 put 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 insolvencies
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 across a range
of forbearance options 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/BTL tenant failures).
The Society has a well-resourced and highly experienced team
dealing with commercial property and BTL 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.
Following the failure of US mid-size banks,
rules for calculating liquidity (amount
required and/or amount held) are changed.
The Society continues to demonstrate the ability to attract new retail
deposits this year and the focus has been on fixed rate funding.
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
31 May 2023
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 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 and SONIA) 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 maintains an operational resilience framework to
prevent, adapt, respond to, recover, and learn from operational
disruptions. 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.
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. Cyber attacks
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 RC is kept updated as to the maturity of the
Society’s cyber defences and controls and a Chief Information
Security Officer has been recruited to develop these further.
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.
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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Business Review
Board of Directors
This section provides
information about your
Board of Directors.
Board composition
Gender split
Female
4
Male
7
Ethnic diversity
BAME
1
Non-BAME
10
Tenure of Board members
1
1
1
1
4
years
2
3
2
years
1
year
2
<1
year
5
years
7
years
14
years
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Business Review
John Maltby MBE
Chair of the Board
Appointed January 2021
John is an experienced Board member in Financial Services as well as with public, private, not-for-
profit and private-equity owned businesses. John 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 Society’s Board in 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.”
Board of Directors
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 and Chair of Saga Services Ltd and
with MS Amlin Underwriting Limited where she is Chair of the Risk Committee. Julie chairs the Society’s
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 seven 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.”
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
Society’s 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 more than 10 years’ experience as a Board
member in public and private companies spanning retail financial services, insurance, wealth
management, savings and lending. Anne is a Non-Executive Director at Mattioli Woods Plc where she
is Senior Independent Director and chairs the Audit Committee. Anne is a member of the Society’s
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.”
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.”
Martin Boyle
BSc, M.Phil (Cantab.)
Chief Operating Officer
Appointed April 2023
Martin joined the Board and the Society in April 2023 in the newly created role of Chief Operating
Officer. Martin is an experienced change and operations leader with extensive retail banking
expertise, most recently as Chief Transformation Officer at Metro Bank Plc, sat on the Group Executive
Committee. He has previously held senior roles at Nationwide and Portman building societies, Visa
Europe and Accenture.
Martin has significant expertise leading transformational programmes and portfolios, running scale
operations and is responsible for leading the modernisation and digitisation of the Society’s
infrastructure and operations, to better serve our Purpose-led member strategy. Martin is a member
of the Executive Committee and Executive Risk Committee.
“I believe the mutual sector is a vital part of our society. It has been helping people get the home of
their dreams and make the most of their income for over 170 years. Personally, I want to ensure the
Society is fit for the future and can serve our members in ways that best suit them. That is why I am
proud to be part of the Society team and the wider building society movement.”
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Annual Report and Accounts
Year ended 31 March 2023
Business Review
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 Society’s 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.”
Alex Pawley
BSc, FCA
Chief Financial Officer
Appointed January 2023
Alex joined the Board in January 2023 having been the Society’s Divisional Director for Treasury &
Finance since 2020. Alex joined the West Brom in 2016 from Deloitte where he qualified as a Chartered
Accountant and specialised in the financial services sector, working with a host of banks, building
societies and specialist lenders. Alex chairs the Society’s Assets & Liabilities Committee and is a
member of the Executive Committee and Executive Risk Committee.
“I believe strongly in the Society’s values as a truly mutual and Purpose-led organisation, and am
proud to see our teams put these into practice every day. In my role as Chief Financial Officer I lead
our Finance and Treasury teams and my priority is to safeguard the Society’s strong financial position
whilst ensuring we maximise the value and benefits for our members, both current and future.”
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 at RBS Plc, Corporate Banking Division and the Managing
Director responsible for Ulster Bank’s Corporate and SME business on the Island of Ireland. David is a
member of the Society’s Audit and Remuneration Committees and Chair of the 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 three years now I am also
impressed by the ethical approach it takes, led by a strong and professional team."
Jonathan Westhoff
BA (Hons) Financial Services, FCMA, CGMA, ACIB
Chief Executive Officer
Appointed May 2009
Formerly the Society’s Group Finance Director and Deputy Chief Executive, Jonathan was appointed as
Chief Executive Officer 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
Society’s Executive Committee, the Member and Employee Councils, and is a member of the Assets &
Liabilities Committee. Jonathan is also a past Chair of the Building Societies Association.
“Having spent nearly 23 years in the building society sector, the last 14 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.”
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 a Non-Executive Director at N Brown Group plc, where she
is the Chair of the Financial Services Board and a member of the Audit and Risk and Nominations
Committees. Victoria is a member of the Society’s Remuneration and Risk Committees.
“I have been with the West Brom for five 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.”
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Annual Report and Accounts
Year ended 31 March 2023
Governance
54
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 2023.
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 Officer’s Review on
pages 4 to 7 and the Strategic Report on pages 8 to 33.
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 33.
Profit and capital
Profit before tax (on continuing operations) was £31.8m (2021/22:
£23.2m). The capital position is set out in the Strategic Report on
pages 8 to 33 and the Annual Business Statement on page 169.
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 166.
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 34 to 47.
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 2023 there were 39 residential and 5 commercial
mortgage accounts (2021/22: 42 residential and 5 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 £69.5m
(2021/22: £79.8m), of which £67.3m (2021/22: £76.6m) related to
commercial mortgage accounts. The total amount outstanding
represented 1.47% (2021/22: 1.58%) of mortgage balances. The
amount of arrears was £12.4m (2021/22: £14.6m), 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*
(stepped down 31 December 2022)
Lynne Shamwana
Jonathan Westhoff*
David Thomas
John Maltby
(Chair)
Dave Dyer
Anne Gunther
Manjit Hayre*
Alex Pawley*
(appointed 1 January 2023)
* 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, held any beneficial
interest in shares or debentures of any associated body of the
Society.
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57
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 2023, the creditor days figure
was 26 days (2021/22: 28 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 Sustaining our Society section of the Strategic
Report. The Society also donated £1,645 (2021/22: £1,811) to its
long-term partner, Barnardo’s as a result of the number of votes
received at the AGM in 2022.
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.
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.
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Annual Report and Accounts
Year ended 31 March 2023
Governance
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.
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 47 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 Officer’s Review on pages 4 to 7 and the
Strategic Report on pages 8 to 33. 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
33 and the Risk Management Report on pages 33 to 47.
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 the impacts of high inflation and the
potential for recession 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 geo-
political, 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 2026.
Auditors
The auditors, PricewaterhouseCoopers LLP, have expressed their
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 auditors are
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
auditors are aware of that information.
By order of the Board
John Maltby
Chair
31 May 2023
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Annual Report and Accounts
Year ended 31 March 2023
Governance
Directors’ Report on
Corporate Governance
This section details how the
Society’s governance framework
operated during 2022/23.
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) and this Report has been
prepared in accordance with the Principles of the Code. Whilst the
Society is not required to comply with the Code, as it applies to
publicly listed companies only, 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 this is the case.
For the financial year ending 31 March 2023 the Society met with
all the main Principles of the Code with one exception and that
was the decision not to conduct a Board Effectiveness Review
within this financial year. An explanation of this decision is
provided on page 63.
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 9 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:
•
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;
•
Members’ ViewPoint events held around the branch network;
•
Assessing enquiries from the Society’s contact centre and website;
•
Analysing the quantity and nature of customer complaints;
•
Customer research on specific topics; and
•
Customer satisfaction surveys.
Every member of staff has direct access to the Chief Executive Officer 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 Audit Committee received a report summarising incidents of whistleblowing. The report was fully
investigated but did not indicate any possible improprieties of financial reporting or other issues covered by
the Public Interest Disclosure Act 1998.
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Annual Report and Accounts
Year ended 31 March 2023
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 NEDs, 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.
NEDs 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 Officer, agree the Chief
Executive Officer’s objectives and carry out regular appraisals. The Chair is responsible for leading the
appointment process for the Chief Executive Officer;
•
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 Officer 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 NEDs and has the right skills and experience to
oversee the Society’s business activities.
The positions of Chair and Chief Executive Officer are held by different people.
The letter of appointment for 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.
Work of the Nominations Committee
The Nominations Committee, chaired by the Society’s Chair, supports the Board by fulfilling the following
overall aims:
•
Ensure the Board is of the appropriate size and has the appropriate skills and experience to enable it to
fulfil its regulatory and corporate governance responsibilities; and
•
Provide oversight of elements of the Society’s People Strategy that relate specifically to the Board and all
other roles under the Senior Managers Regime (SMR).
In fulfilling its central duties and responsibilities during 2022/23, the Committee has had a specific focus on:
•
Endorsing design and implementation of a new leadership target operating model;
•
Attraction, selection and appointment of a new Chief Operating Officer, Chief Customer Officer and Chief
Financial Officer (see details of Executive Director appointments below);
•
Ensuring the Board maintains the requisite skills and competencies to govern the Society; and
•
Overseeing the broader organisational people strategy.
Meetings of the Nominations Committee
The Nominations Committee met on 7 occasions in the last financial year. In addition to the above specific
areas of focus, the Committee also covered its standing duties and responsibilities as follows:
•
Membership of Board committees;
•
Board performance evaluation arrangements;
•
NEDs reaching the end of their three year term of office;
•
NED development (see details below);
•
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 2018 Code’s Main Principles
What the Society does to meet the Principles
Composition, Succession and Evaluation
(continued)
Executive Director Appointments
The Nominations Committee regularly reviews Board succession plans and uses a Skills Matrix as one of the
tools to identify future role needs. During this financial year the Committee has followed a rigorous approach
to the identification of candidates able to drive the Society’s strategy at both Board and operational level, with
support provided from specialist recruitment firms. This process also took account of the departure of Ashraf
Piranie following his successful tenure as the Society’s Group Finance & Operations Director.
The action taken by the Nominations Committee has led to the appointment of two new Executive Directors
to the Board. Alex Pawley, formerly the Society’s Divisional Director of Treasury and Finance, began his
appointment as Chief Financial Officer (CFO) on 1 January 2023. Martin Boyle, previously Chief Transformation
Officer at Metro Bank, commenced his appointment as the Society’s Chief Operating Officer (COO) in April 2023.
Board Development
The Society has a range of induction activities and material for NED appointments which are 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.
The Society undertakes 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 2021/22 culminating in a report with recommendations to the Board. This was followed by a
programme of Board development facilitated by an external firm, New Street Consulting during the financial
year 2022/23. Consequently, the Board agreed to delay a further Board Effectiveness Review until mid-
2023/24 financial year where the review will also evaluate the effect of the Board Development Programme to
date and input to any further stages of that Development Programme.
As a principle, the Society requires that NED 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 requires 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.
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 (see Risk Management report for more detail). The minutes of the meetings of these
Committees are available to the full Board with the relevant Committee Chair highlighting any key matters
at the following Board meeting;
•
Regular reports and presentations to the Board by the Executive Directors and other senior management;
and
•
Monthly Board report on key business information and performance.
In addition, the NEDs meet formally and informally without Executive Directors present.
The Society’s Internal Audit function, with a reporting line to the Chair of Audit Committee, provides
independent assurance regarding the adequacy and effectiveness of internal controls across all Group
activities.
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 terms of reference of the
Committees are available from the Group Secretary on request. The Board is satisfied that at least one
member of each Committee has recent and relevant financial experience. The Audit and Risk Committees
receive detailed management information and reports to ensure they have a firm grasp of the Society’s
business and external operating environment. The Chairs of the Audit and Risk Committees receive
additional fees in recognition of their additional responsibilities.
The Society has a policy on the engagement of the external auditors to supply non-audit services, which
is operated across the Group and in tandem with the external auditors’ own internal policy on providing
non-audit services. There have been four meetings of the Audit Committee during the financial year 2022/23.
Executive Directors and other members of senior management (by invitation only) attended the meetings.
Those employees who regularly attend include the Chief Executive Officer, Chief Financial Officer, Group
Secretary, Chief Risk Officer, and Chief Internal Auditor.
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Governance
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
31 May 2023
Attendance records –
Board and Board Committee meetings
Board
Nominations
Audit
Risk
Remuneration
John Maltby
9 (9)
7 (7)
7 (7)
Julie Hopes
9 (9)
7 (7)
4 (4)
7 (7)
Victoria Mitchell
9 (9)
6 (6)
7 (7)
Ashraf Piranie (left the Society 31/12/22)
7 (7)
Lynne Shamwana
9 (9)
7 (7)
4 (4)
6 (6)
Jonathan Westhoff
9 (9)
David Thomas
9 (9)
4 (4)
6 (6)
6 (7)
Manjit Hayre
9 (9)
Dave Dyer
8 (9)
4 (4)
5 (6)
Anne Gunther
9 (9)
6 (6)
7 (7)
Alex Pawley (joined 01/01/2023)
2 (2)
The 2018 Code’s Main Principles
What the Society does to meet the Principles
Audit, Risk and Internal Control
(continued)
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;
•
Assessed the adequacy and effectiveness of the Society’s internal controls and risk management
systems;
•
Monitored and reviewed the effectiveness of the Group’s Internal Audit function;
•
Reviewed the external auditors’ 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 Chief Internal Auditor and the external auditors.
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 70 to 81 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 (including a one-off payment made to a number of
colleagues to provide support during the cost of living crisis);
•
Made recommendations to the Board in respect of the annual salary review
•
Reviewed the employee benefits package;
•
Reviewed the terms of appointment and benefits of Code Staff; and
•
Sought input on executive remuneration proposals from both the Employee and Member Councils.
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Audit Committee Report
This report sets out the work
carried out by the Audit
Committee throughout 2022/23.
The Chair, Chief Executive Officer, Chief Financial Officer, Chief Risk
Officer, Group Secretary, the external auditors and Chief Internal
Auditor 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 64. In addition, the Committee met privately
with the external auditors and the Chief Internal Auditor, during
the year.
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 the 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 Chief Internal
Auditor, 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 external auditors and if
the external 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,
PricewaterhouseCoopers LLP (PwC), 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
•
Reviewed and approved significant financial reporting judgements and accounting policies/issues;
•
Validated the integrity of the Group’s financial statements and associated reports (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
results of external quality inspections,
remuneration and terms of engagement
David Thomas
Dave Dyer
Julie Hopes
Lynne Shamwana (Chair)
Membership and attendees
The Audit Committee is appointed by the Board and, at 31 March 2023, comprised four Non-Executive Directors:
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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 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 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
2022/23 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 suitability of Post Model
Adjustments (PMAs) together with the judgements included
within the calculation of those 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.
• 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 2023.
• 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 34 to 47. 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 2022/23 financial year
provided reasonable 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 Prudential Risk. The Chief Internal Auditor 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. This review covers an
assessment of compliance with internal auditing standards, in
addition to 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).
The last review in 2021/22, concluded the Internal Audit function
‘generally conforms’ to the Standards, which is the highest rating.
c) External auditor
PwC are in their third 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, 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 in 2021/22. 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
31 May 2023
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Governance
Directors’ Remuneration Report
This section explains our
approach to rewarding
Directors and colleagues.
Annual Statement by the Chair of the
Remuneration Committee
As Chair of the Remuneration Committee (the Committee), I am
pleased to present the Directors’ Remuneration Report. This report
includes a summary of the Committee’s activities over the year, our
Remuneration Policy and details of pay and benefits for our
Executive Directors and fees paid to Non-Executive Directors.
Following years that were impacted by the COVID-19 pandemic
where there was a focus on supporting our colleagues and
members’ wellbeing, the labour market that emerged during
2021/2022 was much more competitive, creating a challenge for
all businesses to attract and retain talented people resource. This
has accelerated in 2022/23, with the additional factors of the cost
of living crisis and the further development of hybrid working all
impacting how we manage and support our colleague base.
The immediacy and widespread impact of the cost of living crisis
was felt by colleagues and members alike. Across the winter
months, over 70% of our colleagues benefitted from one-off
support payments totalling £1,200. This sits alongside our Financial
Hardship Support Fund, which exists to offer colleagues help in the
event of a sudden, unexpected financial burden.
The Society has responded to the challenges of the labour market,
taking action to attract and retain colleagues in line with our
mutual culture. Ensuring that we continue to be a progressive
employer that provides an engaging and rewarding working
environment, as per our Environmental, Social and Governance
strategy, means that we have a colleague base that delivers the
best outcomes for our members and achieves our Purpose. The
results of our annual colleague survey demonstrate how strong we
are in these aims; 91% of colleagues participated and the results
showed a 92% positive engagement score, with colleagues citing
flexibility, purpose and development as important to them; themes
we will continue to work hard on getting right.
The Chief Executive Officer’s report outlines the strong performance
of the Society during 2022/23, particular highlights have been
statutory profit before tax of £31.8m, demonstrating our unwavering
and sector-leading approach to delivering on the core of mutuality
which equates to a member mutual benefit in financial terms
alone of £33.2m.
Our members and our colleagues are our Society. All our actions
and the endeavours of our colleagues are guided to serve our
members in the best possible way. As such, the Committee
considers that engaging and gaining the views of these two
groups is essential to ensuring the Committee and Board can be
supported to make the right decisions. Our Member and Employee
Councils were the first to be established in the sector and have
been in place for some years now. I regularly attend the Council
meetings, and at the March meetings of each group, Executive
Director Remuneration was discussed. Both Councils were
supportive of Executive salaries keeping pace with the market in
order that we can retain our strong team.
Ultimately, we demonstrate the importance of our members’ views
on remuneration by making their votes on both the Remuneration
Report and Remuneration Policy binding, not just advisory, as is the
case for most other firms. You vote on the Report at each AGM and
then the Policy is voted on every three years or whenever changes
are required. Under the three year rule the Policy is presented to
the membership for such a vote. There is one change to the Policy
to draw your attention to; car and fuel allowances relating to non-
electric cars have been removed from benefits packages in line
with the Society’s commitment to the environment under its ESG
strategy.
Turning to a review of the 2022/23 financial year, the Board
continued to voluntarily adopt the relevant requirements of the UK
Corporate Governance Code (the Code). The ratio of the Chief
Executive Officer’s pay to the wider colleague population has again
been published (four times). A remuneration 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 and during the year became the first building society
and the first employer in the West Midlands to be accredited as a
Living Hours employer.
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 have in place 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 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 2023 and how the Policy will operate for the year ending
31 March 2024.
72
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Annual Report and Accounts
Year ended 31 March 2023
Governance
Salary and fees for 2022/23 and proposals for 2023/24
At the Society all roles are externally benchmarked for salary on an
annual basis. As a result, salary changes 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. Both the wage movements
created by the buoyant labour market along with rising inflation
are factored into the benchmarking that is performed using
external data. On this basis, salary increases for eligible employees
ranged between 1% and 20%.
Consistent with this approach, a recent independent benchmarking
exercise of Executive Directors’ remuneration was undertaken by
our Remuneration Advisor, FIT Consultants. As reported in the
Chair’s Statement, Ashraf Piranie (the former Group Finance &
Operations Director) left the organisation during the year. A new
Chief Financial Officer has been appointed (January 2023) and a
new Chief Operating Officer joined in April 2023, resulting in the
following suite of Executive Directors:
• Chief Executive Officer;
• Chief Financial Officer;
•
Chief Risk Officer; and
• Chief Operating Officer.
As has been reported in recent years, the overall remuneration of
the Chief Executive Officer had not kept pace with the market. Last
year, the salary increase awarded sought to address that trajectory
and benchmarking data indicates that this has been achieved.
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 Officer 4%;
•
Chief Financial Officer 4%; and
•
Chief Risk Officer 10%.
Ashraf Piranie (Group Finance & Operations Director) was not
considered for a pay increase as he left the Society on 31 December
2022.
Performance-related pay awards
The Executive Director performance-related pay award payable to
the Executive Directors generated the following awards:
•
Chief Executive Officer 42.25%;
•
Chief Financial Officer 39%; and
•
Chief Risk Officer 39.75%.
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). Further detail on the
Society objectives is provided within page 79 of this report.
Deferred performance-related payments in relation to 2019/20,
2020/21 and 2021/22 for the Chief Executive Officer, Chief Risk
Officer and former Group Finance & Operations Director have been
approved for payment since the end of the 2022/23 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
2023/24.
FIT Consultants completed a recent review of the Non-Executive
Director fees for the 2023/24 financial year against benchmarking
data. The standard fee for a Non-Executive Director role has
remained unchanged for the last twelve reporting periods; in order
to keep pace with the market and retain a strong Board, a 4%
increase will be applied to this fee, along with the Society Chair.
Fees for Chairs of Board Committees were increased last year and
will not receive any increase.
Gender and ethnicity pay
In August 2022, the Society published its updated report on gender
and ethnicity pay gaps. The Society was pleased to be amongst the
first financial services firms to voluntarily publish its ethnicity pay
gap. Addressing the drivers of the pay gaps remains a key focus for
the Society as reflected in their inclusion within our Key Performance
Indicators as shown in the Strategic Report. 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.
The Committee will continue to work diligently in the coming year
to ensure it supports members and colleagues.
Julie Hopes
Chair of Remuneration Committee
31 May 2023
74
75
Annual Report and Accounts
Year ended 31 March 2023
Governance
Remuneration Committee membership and responsibilities
Membership
The members of the Remuneration Committee during the financial year 2022/23 were:
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 Officer, Group Secretary and Chief
People Officer 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 seven 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 approach to pay,
reward and recognition, 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 2022/23 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 2023/24 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 Gap Regulations
and Ethnicity Pay Gap data.
The Committee receives annual confirmation jointly from the Chief
Risk Officer and the Chief Internal Auditor 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 2022. 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 2022/23 year the
Committee commissioned FIT Consultants to undertake a thorough
benchmark of remuneration for Executive Directors.
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, colleagues 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
Opportunity
Basic 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, and 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 7 years for Executive Directors, and 5 years
for deferred payments/ one year for non-deferred payments for
other Code Staff 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: customer, financial,
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 2023/24 remains at 50% of basic salary.
decisions
reached
KEY
• The Committee supported and oversaw support for the whole colleague base through the cost of living crisis via
implementation of a Hardship Fund and support payments of £1,200 for qualifying colleagues.
•
The Committee shaped suitable remuneration arrangements for movements in the Executive Director team.
• The Committee reached key decisions about the central aspects of Directors’ remuneration, with the input of key
stakeholder groups.
Julie Hopes (Chair)
John Maltby
Victoria Mitchell
David Thomas
Anne Gunther
76
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Annual Report and Accounts
Year ended 31 March 2023
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.
Component
Operation and performance metrics
Opportunity
Pension 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 2023/24: 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; private medical care for themselves and their family,
and life assurance (4X 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 PRP 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 Society’s Policy, as reflected in Executive Director contracts, is
for loss of office payments to be reduced by an amount equivalent
to basic salary from new employment entered into during the
period covered by loss of office payments.
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. The Society’s annual salary review scheme reviews
salary for each employee based on robust external benchmarking,
taking into account the market rate and level of responsibility for
each role. From April 2023, base salary increments applied to
eligible colleagues ranged between 1% and 20%.
Remuneration scenarios
The chart shows the breakdown of the component parts of the
remuneration package for Executive Directors for 2022/23 on the
following basis:
• Fixed remuneration – comprising 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
Chief Executive
Officer
Manjit Hayre
Chief Risk
Officer
Alex Pawley
Chief Financial
Officer
Ashraf Piranie
Group Finance &
Operations Director
(until 31/12/2022)
£669,000
£500,000
£725,000
£403,000
£277,000
£193,000
£255,000
£276,000
£371,000
£402,000
£498,000
£529,000
Key
Total maximum remuneration
Target remuneration
Fixed remuneration
Note:
Alex Pawley was appointed to the Board as Chief Financial Officer on 1 January
2023. The remuneration above reflects his total remuneration for the year,
including the period for which he was not an Executive Director.
Ashraf Piranie’s target and total maximum remuneration above reflects eligible
performance-related pay for the period until he left the Society on 31 December
2022.
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 75, 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).
The table below shows the Policy for Non-Executive Directors:
78
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Annual Report and Accounts
Year ended 31 March 2023
Governance
Section 2 – Annual Report on Remuneration
Notes:
1.
The Society’s Chair (John Maltby) and other Non-Executive Directors with Committee Chair responsibilities (Julie Hopes, Lynne Shamwana and David Thomas)
received a £5,000 increase in their fees from April 2022.
2.
In addition to the payment of fees, Non-Executive Directors receive expenses for travel and accommodation in relation to their attendance at meetings.
For 2022/23 a review of performance against objectives agreed at the start of the year has generated awards for Executive Directors of
42.25% for the Chief Executive Officer, 37.75% for the Group Finance & Operations Director, 39.75% for the Chief Risk Officer and 39% for
the Chief Financial Officer (against maximum performance-related pay of 50%) resulting in the amounts shown in the ‘Executive Director
remuneration – 2022/23’ table. These payments are based on performance against both Society and personal objectives.
For Jonathan Westhoff and Ashraf Piranie, 30% of their maximum award is/was based on Society objectives and 20% on personal objectives.
For Manjit Hayre, 40% of his maximum award is based on personal objectives and 10% on Society objectives. For Alex Pawley, 20% of his
maximum award is based on Society objectives and 30% on personal objectives, to acknowledge the majority (9 months) of the 2022/23
performance year where he was not in an Executive Director position. A review of performance against personal objectives agreed at the
start of the year has generated awards of 17.5% for the Chief Executive Officer, 13% for the Group Finance & Operations Director, 31.5% for
the Chief Risk Officer and 22.5% for the Chief Financial Officer. Awards agreed against Society objectives are detailed below.
Non-Executive Director fees
(audited)
Non-Executive Director
Date
appointed
2022/23
Fees
(1)
£000
2022/23
Benefits
(2)
£000
2021/22
Fees
£000
2021/22
Benefits
(2)
£000
John Maltby
(Society Chair since 01/03/21)
04/01/21
125
1
109
2
Julie Hopes
(Remuneration Committee Chair. Deputy Chair from 01/08/19)
01/04/16
75
2
70
-
Lynne Shamwana
(Audit Committee Chair since 23/07/20)
01/02/19
65
2
60
1
David Thomas
(Risk Committee Chair from 04/05/21)
01/08/20
65
1
59
1
Victoria Mitchell
01/04/18
50
1
50
-
David Dyer
01/09/21
50
1
29
1
Anne Gunther
01/11/21
50
1
21
1
Mark Preston
(Risk Committee Chair until 03/05/21)
18/05/11
-
-
18
-
Total
480
9
416
6
Society overall objectives for the year include:
Objectives
% of overall award potential
% of award achieved
Customer
•
Gross residential lending
•
Retention of lending
•
Customer satisfaction
•
Ease of doing business
20%
17.5%
Financial
•
Profitability
•
Net interest margin
•
Cost efficiency
15%
15%
Change
•
System enhancement and implementation for savings and mortgages
15%
10%
Risk
•
Operational resiliency
•
Support capability for lending
15%
10%
People
•
Strengthening leadership and management capability
•
Enhancing diversity and inclusivity
15%
10%
Overall assessment by the Board of Executive performance
20%
20%
Overall Society objectives
100%
82.5%
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 Officer)
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
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.
As covered in the Chair’s statement, Alex Pawley was appointed to the Board during the year as Chief Financial 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.
Executive Director Remuneration – 2022/23
(audited)
Executive Director
Basic salary
£000
Performance-
related pay
(1)
£000
Pension
£000
Other
benefits
£000
Total
£000
Jonathan Westhoff (Chief Executive Officer)
450
190
48
2
690
Ashraf Piranie
(Group Finance & Operations Director until 31/12/22)
253
95
27
124
2
499
Manjit Hayre
(Chief Risk Officer)
250
99
26
1
376
Alex Pawley
(Chief Financial Officer since 01/01/23)
166
65
18
9
258
Total
1,119
449
119
136
1,823
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.
Other benefits for Ashraf Piranie include £55,900 redundancy pay and an amount of £52,341 in lieu of pay and benefits due for the period from January 2023 to
March 2023 under the terms of his contract. A further amount in lieu of pay and benefits to cover the period from April 2023 to November 2023 (up to £260,000) is
due to be paid in the new financial year, however due to the application of mitigation arrangements, this amount is expected to reduce to circa £49,500.
80
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Annual Report and Accounts
Year ended 31 March 2023
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, 25th and 75th percentiles against the CEO single
figure. The ratios shown below are based on the Society’s employee base as at 31 March 2023.
Year
Method
25
th
percentile
Median
75
th
percentile
2022-23
Option A
29:1
22:1
16:1
2021-22
Option A
30:1
23:1
15:1
2020-21
Option A
31:1
23:1
16:1
2019-20
Option A
31:1
24:1
16:1
Remuneration element
25
th
percentile (£)
Median (£)
75
th
percentile (£)
Total pay and benefits
23,809
30,995
43,240
Salary
19,838
29,500
42,000
Statement on member voting at the 2022 AGM
At the 2022 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
10,937
92.11
937
255
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 2023/24
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 2023. 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. We continue to review and apply equitable pay practices across the Society, as demonstrated
by completion of the pension alignment programme which means that all employees (including Executive Directors) are eligible to the same
percentages.
The Society enters the next period confidently, as we are well equipped to meet the challenges posed by the external environment.
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
31 May 2023
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
2022/23
£000
2023/24
£000
2024/25
£000
2025/26
£000
2026/27
£000
Jonathan Westhoff
2019/20
20
-
-
-
-
2020/21
24
24
-
-
-
2021/22
17
17
17
17
-
2022/23
-
19
19
19
19
Total
61
60
36
36
19
Ashraf Piranie (until 31/12/2022)
2019/20
15
-
-
-
-
2020/21
18
18
-
-
-
2021/22
12
12
12
12
-
2022/23
-
10
10
10
10
Total
45
40
22
22
10
Manjit Hayre
2021/22
(1)
7
7
7
7
-
2022/23
-
10
10
10
10
Total
7
17
17
17
10
Alex Pawley
2022/23
(2)
-
6
6
6
6
Total
-
6
6
6
6
Notes:
1.
The breakdown shown for Manjit 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.
2.
The breakdown shown for Alex Pawley 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.
82
83
Annual Report and Accounts
Year ended 31 March 2023
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 2023 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 2023; 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 2022 to 31 March 2023.
Our audit approach
Overview
Materiality
•
£4.3m (2022: £4.0m) - Group annual accounts
•
Based on 1% of Group net assets
•
£3.7m (2022: £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 99.7% of the interest income
of the Group and 99.9% of the total assets of the Group.
Key audit matters
• Risk of inappropriate judgements and estimates relating to the significant management judgements involved in determining the
appropriateness of account specific scenarios and associated weightings given the historic facts and circumstances in each account
within the Commercial loan portfolio (Group).
•
Risk of inappropriate judgements and estimates relating to 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 inappropriate manual adjustments made in the hedging process(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 rate, 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
84
85
Annual Report and Accounts
Year ended 31 March 2023
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 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 modeled 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 modeling 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 modeling 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 modeled by management, agreeing key data points
back to supporting documents (eg. 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.
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 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
judgements regarding when a loan has experienced a ‘significant increase
in credit risk’ and to make assumptions regarding expected customer default
rates and repayment behavior.
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 modeling of default rates and house
price values and their impact on ECL;
•
The post model adjustments that are made to account for areas of credit
risk not captured within the base modeling solution.
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.
86
87
Annual Report and Accounts
Year ended 31 March 2023
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 schemes 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 twelve 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.
The impact of climate risk on our audit
As part of our audit we made enquiries of management to understand the extent of the potential impact of climate risk on the Society’s
financial statements, and we remained alert when performing our audit procedures for any indicators of the impact of climate risk.
Management considers the impact of climate risk does not give rise to a potential material financial statement impact as set out in the risk
management report and our procedures have not identified any material impact in the context of our audit over the financial statements.
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
£4.2m (2022: £4.0m).
£3.7m (2022: £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 £0.1m to £3.7m.
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 £3.2m for the Group financial statements and £2.8m 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 £211k (2022: £201k)
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.
88
89
Annual Report and Accounts
Year ended 31 March 2023
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 2023 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 20 September 2020 to audit the annual
accounts for the year ended 31 March 2021 and subsequent financial periods. The period of total uninterrupted engagement is 3 years,
covering the years ended 31 March 2021 to 31 March 2023.
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
Birmingham
31 May 2023
91
Annual Report and Accounts
Year ended 31 March 2023
Financial Statements
Financial statements
In this section you will find our
primary financial statements
and related notes.
Income Statements
for the year ended 31 March 2023
Notes
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Interest receivable and similar income
Calculated using the effective interest method
On instruments measured at fair value through profit or loss
(12.7 )
(10.2 )
Total interest receivable and similar income
2
Interest expense and similar charges
3
(91.0 )
(25.2 )
(91.5 )
(28.2 )
Net interest receivable
Fees and commissions receivable
Other operating income
4
Fair value gains on financial instruments
5
Total income
Administrative expenses
6
(39.9 )
(45.5 )
(38.2 )
(43.9 )
Depreciation and amortisation
16,18
(5.8 )
(7.4 )
(5.8 )
(7.4 )
Operating profit before revaluation gains, impairment and provisions
Gains on investment properties
17
Impairment on loans and advances
14
(24.1 )
(8.1 )
(1.1 )
Provisions for liabilities
25
Provisions against investments in subsidiary undertakings
15
(14.3 )
(10.0 )
Profit before tax
Taxation
9
(5.6 )
(7.1 )
(0.4 )
Profit for the financial year
The profit for the year derives wholly from continuing operations.
The notes on pages 98 to 165 form part of these accounts.
92
93
Annual Report and Accounts
Year ended 31 March 2023
Financial Statements
Statements of Comprehensive Income
for the year ended 31 March 2023
Notes
Group
2023
£m
Group
2022
£m
Profit for the financial year
Other comprehensive income/(expense)
Items that may subsequently be reclassified to profit or loss
Fair value through other comprehensive income investments
Valuation losses taken to equity
(0.3 )
(1.0 )
Taxation
30
Items that will not subsequently be reclassified to profit or loss
Gains on revaluation of land and buildings
Actuarial (losses)/gains on defined benefit obligations
31
(10.8 )
Taxation
30
(2.9 )
Other comprehensive (expense)/income for the financial year, net of tax
(8.2 )
Total comprehensive income for the financial year
Notes
Society
2023
£m
Society
2022
£m
Profit for the financial year
Other comprehensive income/(expense)
Items that may subsequently be reclassified to profit or loss
Fair value through other comprehensive income investments
Valuation losses taken to equity
(0.3 )
(1.0 )
Taxation
30
Items that will not subsequently be reclassified to profit or loss
Gains on revaluation of land and buildings
Actuarial (losses)/gains on defined benefit obligations
31
(10.8 )
Taxation
30
(2.9 )
Other comprehensive (expense)/income for the financial year, net of tax
(8.2 )
Total comprehensive income for the financial year
The notes on pages 98 to 165 form part of these accounts.
Statements of Financial Position
at 31 March 2023
Notes
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Assets
Cash and balances with the Bank of England
10
Loans and advances to credit institutions
Investment securities
11
Derivative financial instruments
12
Loans and advances to customers
13
Deferred tax assets
19
Trade and other receivables
20
Investments
15
Intangible assets
16
Investment properties
17
Property, plant and equipment
18
Retirement benefit asset
31
Total assets
Liabilities
Shares
21
Amounts due to credit institutions
Amounts due to other customers
22
Derivative financial instruments
12
Debt securities in issue
23
Current tax liabilities
Deferred tax liabilities
19
Trade and other payables
24
Provisions for liabilities
25
Subordinated liabilities
28
Total liabilities
Members' interests and equity
Core capital deferred shares
27
Subscribed capital
26
General reserves
Revaluation reserve
Fair value reserve
Total members' interests and equity
Total members' interests, equity and liabilities
The accounting policies and notes on pages 98 to 165 form part of these accounts.
Approved by the Board of Directors on 25 May 2023 and signed on its behalf by:
John Maltby
Jonathan Westhoff
Alex Pawley
Chair
Chief Executive Officer
Group Financial Officer
94
95
Annual Report and Accounts
Year ended 31 March 2023
Financial Statements
Statements of Changes in Members’ Interests and Equity
for the year ended 31 March 2023
Group
Core capital
deferred
shares
£m
Subscribed
capital
£m
General
reserves
£m
Revaluation
reserve
£m
Fair value
reserve
£m
Total
£m
At 1 April 2022
Profit for the financial year
-
-
-
-
Other comprehensive income for the year (net of tax)
Retirement benefit obligations
-
-
(8.5 )
-
-
(8.5 )
Gains on revaluation of land and buildings
Realisation of previous revaluation gains
-
-
(0.4 )
-
-
Fair value through other comprehensive
income investments
-
-
-
-
(0.3 )
(0.3 )
Total other comprehensive income
-
-
(8.1 )
(0.3 )
(8.2 )
Total comprehensive income for the year
-
-
(0.3 )
Distribution to the holders of core capital deferred shares
-
-
(4.8 )
-
-
(4.8 )
At 31 March 2023
-
for the year ended 31 March 2022
Group
Core capital
deferred
shares
£m
Subscribed
capital
£m
General
reserves
£m
Revaluation
reserve
£m
Fair value
reserve
£m
Total
£m
At 1 April 2021
Profit for the financial year
-
-
-
-
Other comprehensive income for the year (net of tax)
Retirement benefit obligations
-
-
-
-
Realisation of previous revaluation gains
-
-
-
(0.2 )
-
(0.2 )
Fair value through other comprehensive
income investments
-
-
-
-
(0.8 )
(0.8 )
Total other comprehensive income
-
-
(0.2 )
(0.8 )
Total comprehensive income for the year
-
-
(0.2 )
(0.8 )
Distribution to the holders of core capital deferred shares
-
-
(2.9 )
-
-
(2.9 )
At 31 March 2022
Statements of Changes in Members’ Interests and Equity
for the year ended 31 March 2023
Society
Core capital
deferred
shares
£m
Subscribed
capital
£m
General
reserves
£m
Revaluation
reserve
£m
Fair value
reserve
£m
Total
£m
At 1 April 2022
Profit for the financial year
-
-
-
-
Other comprehensive income for the year (net of tax)
Retirement benefit obligations
-
-
(8.5 )
-
-
(8.5 )
Gains on revaluation of land and buildings
Realisation of previous revaluation gains
-
-
(0.4 )
-
-
Fair value through other comprehensive
income investments
-
-
-
-
(0.3 )
(0.3 )
Total other comprehensive income
-
-
(8.1 )
(0.3 )
(8.2 )
Total comprehensive income for the year
-
-
(0.3 )
Distribution to the holders of core capital deferred shares
-
-
(4.8 )
-
-
(4.8 )
At 31 March 2023
-
The notes on pages 98 to 165 form part of these accounts.
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
Profit for the financial year
-
-
-
-
Other comprehensive income for the year (net of tax)
Retirement benefit obligations
-
-
-
-
Realisation of previous revaluation gains
-
-
-
(0.2 )
-
(0.2 )
Fair value through other comprehensive
income investments
-
-
-
-
(0.8 )
(0.8 )
Total other comprehensive income
-
-
(0.2 )
(0.8 )
Total comprehensive income for the year
-
-
(0.2 )
(0.8 )
Distribution to the holders of core capital deferred shares
-
-
(2.9 )
-
-
(2.9 )
At 31 March 2022
96
97
Annual Report and Accounts
Year ended 31 March 2023
Financial Statements
Statements of Cash Flows
for the year ended 31 March 2023
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Net cash inflow/(outflow) from operating activities (below)
(192.2 )
Cash flows from investing activities
Purchase of investment securities
(240.5 )
(101.9 )
(240.4 )
(101.9 )
Proceeds from disposal of investment securities
Proceeds from disposal of investment properties
-
-
Purchase of property, plant and equipment and intangible assets
(7.8 )
(5.1 )
(6.2 )
(4.6 )
New funding to subsidiaries
-
-
(18.8 )
(52.4 )
Repayment of funding from subsidiaries
-
-
Net cash (outflows)/inflows from investing activities
(34.8 )
(18.4 )
Cash flows from financing activities
Repayment of debt securities in issue
(172.0 )
(47.4 )
-
-
Interest paid on subordinated liabilities
(2.5 )
(2.5 )
(2.5 )
(2.5 )
Payment of lease liabilities
(0.3 )
(0.4 )
(0.4 )
(0.4 )
Distribution to the holders of core capital deferred shares
(4.8 )
(2.9 )
(4.8 )
(2.9 )
Net cash outflows from financing activities
(179.6 )
(53.2 )
(7.7 )
(5.8 )
Net (decrease)/increase in cash
(53.1 )
(39.3 )
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
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Cash in hand (including Bank of England Reserve account)
Loans and advances to credit institutions
The Group is required to maintain certain mandatory balances with the Bank of England which, at 31 March 2023, amounted to £14.0 m (2021/22: £15.1 m). The
movement in these balances is included within cash flows from operating activities.
The Group’s loans and advances to credit institutions includes £31.1 m (2021/22: £46.0 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 2023
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Cash flows from operating activities
Profit before tax
Adjustments for non-cash items included in profit before tax
Impairment on loans and advances
(1.4 )
Depreciation, amortisation and impairment
Disposal of property, plant and equipment
-
(0.1 )
-
-
Revaluations of investment properties
(6.0 )
(5.8 )
-
-
Changes in provisions for liabilities
-
(0.1 )
-
(0.1 )
Provisions against investments in subsidiary undertakings
-
-
Interest on subordinated liabilities
Fair value losses/(gains) on equity release portfolio
(0.2 )
(0.2 )
Interest paid on lease liabilities
-
-
Changes in fair value
Changes in operating assets and liabilities
Loans and advances to customers
(85.7 )
Loans and advances to credit institutions
(3.3 )
(3.3 )
Derivative financial instruments
(52.9 )
(74.9 )
(53.1 )
(73.4 )
Shares
(50.5 )
(50.5 )
Deposits and other borrowings
(341.2 )
(495.6 )
Trade and other receivables
(8.5 )
(8.7 )
Trade and other payables
Retirement benefit obligations
(6.8 )
(4.2 )
(6.8 )
(4.2 )
Tax received
(0.2 )
(0.2 )
Net cash inflow/(outflow) from operating activities
(192.2 )
The notes on pages 98 to 165 form part of these accounts.
98
99
Annual Report and Accounts
Year ended 31 March 2023
Financial Statements
The principal accounting policies applied consistently in the preparation of these consolidated Annual Accounts are set out below.
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 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 in the UK 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 at least 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
There have been no changes to accounting standards in the period that have an impact on the Group’s accounting policies. The International Accounting
Standards Board (IASB) have issued a number of amendments and improvements to accounting standards with an effective date of 1 January 2023 and beyond.
The Group financial statements consolidate the financial statements of the Society and its subsidiary undertakings.
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.
Securitisation transactions
The Group has entered into securitisation transactions in which it sells 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 Group continues to recognise 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. 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.
Interest in unconsolidated structured entities - Group
As outlined further below, management has judged that the securitisation Sandwell Commercial Finance no. 1 plc and Sandwell Commercial Finance no. 2 plc
no longer meet 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 2023
31 March 2022
Notes
Maximum
Maximum
Deemed
held in
exposure to loss
Deemed
Notes held
exposure to loss
loan
Mortgages
structured
in unconsolidated
loan
Mortgages
in structured
in unconsolidated
balances
transferred
entities
structured entities
balances
transferred
entities
structured entities
Group
6.3
6.4
0.5
0
7.1
10.0
0.6
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.
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. During the year, changes were made to the judgements applied for EIR calculations. As a result,
from inception, mortgage products are treated as having distinct periods (initial and follow-on) and income in the follow-on period is recognised as it is received.
Notes to the Accounts
for the year ended 31 March 2023
1. Accounting policies
(continued)
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
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
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
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
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 cost of
living challenges, interest rates and house price movements.
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 £1.6m (2020/22: £1.8m).
•
PD overlays of £1.7m (2021/22: £0.3m) have been recorded as PDs are considered to be understated in the historic data under certain macroeconomic
scenarios. PDs have been further uplifted on accounts deemed to be most at risk from cost of living challenges due to stretched affordability.
•
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 (2021/22: £0.2m).
Notes to the Accounts
for the year ended 31 March 2023
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 2022 and 31 March 2023 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
publicly 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 2022 and 31 March 2023 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 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.
Notes to the Accounts
for the year ended 31 March 2023
1. Accounting policies
(continued)
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
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
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.
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
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.
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
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
Notes to the Accounts
for the year ended 31 March 2023
1. Accounting policies
(continued)
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
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
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.
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.
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
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
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 “Impairment of financial assets” 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. In the case of Sandwell Commercial Finance no. 1 plc and Sandwell
Commercial Finance no. 2 plc, management judge 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 are no
longer consolidated within the Group. 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 2023 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 2022 are also provided for comparative purposes.
Notes to the Accounts
for the year ended 31 March 2023
1. Accounting policies
(continued)
Macroeconomic scenarios as at 31 March 2023:
Current scenario (%)
Increase/
(decrease) in
provision with
100% scenario
weighting (£m)
Increase/
(decrease) in
provision with
10% increase
in scenario
weighting* (£m)
Scenario
weighting
2023/24
2024/25
5 year average
Central
scenario
60%
Bank Rate
4.3
3.8
3.7
(6.3)
-
HPI
(5.9)
(4.5)
(0.3)
Unemployment
4.3
4.7
4.7
GDP
(0.6)
0.0
(0.1)
Upside
scenario
5%
Bank Rate
4.5
3.5
3.4
(9.7)
(0.3)
HPI
0.2
1.0
3.5
Unemployment
3.7
3.8
3.8
GDP
0.9
0.0
0.2
Downside
scenario
25%
Bank Rate
6.0
5.5
5.2
9.2
1.5
HPI
(6.5)
(9.1)
(3.6)
Unemployment
5.8
6.9
6.5
GDP
(4.3)
(0.0)
(0.9)
Stress
scenario
10%
Bank Rate
5.3
0.1
1.1
19.9
2.6
HPI
(10.4)
(15.2)
(4.5)
Unemployment
9.8
10.7
9.1
GDP
(7.5)
(0.0)
(1.5)
*(increase in 10% weighting with a corresponding reduction in the central scenarios).
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).
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
2023
£m
Increase/(Decrease) in
impairment provision
2022
£m
HPI growth
Increase of 5.0%
(0.2)
(0.2)
HPI growth
Decrease of 5.0%
0.3
0.3
Quantitative threshold for identifying
a significant increase in credit risk
Relative decrease of 7%
0.9
0.8
Impairment 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.
Notes to the Accounts
for the year ended 31 March 2023
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.
Increase/(Decrease) in
Increase/(Decrease) in
impairment provision
impairment provision
2023
2022
Assumption
Change to current assumption
£m
£m
Exit yield requirement
Increase of 0.5% across all scenarios
1.9
2.7
Fair 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.
(Decrease)/Increase
(Decrease)/Increase
in fair value loss
in fair value loss
2023
2022
Assumption
Change to current assumption
£m
£m
HPI growth
Increase of 5.0%
(0.3)
(0.4)
HPI growth
Decrease of 5.0%
0.3
0.4
Discount rate
Increase of 0.25%
0.1
0.1
Time to redemption
Increase of 1 year
0.1
0.2
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 £7.6m (2021/22: £7.4m) with a corresponding change to
Gains on investment properties.
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
On financial assets not at fair value through profit or loss:
Loans fully secured on residential property
Other loans
Connected undertakings
Loans fully secured on land
Investment securities
Other liquid assets
On financial assets at fair value through profit or loss:
Loans fully secured on residential property
Net Income/(expense) on derivative financial instruments
Group
2023
£m
116.7
-
5.1
8.8
15.3
0.8
27.5
Group
2022
£m
91.2
-
6.1
1.6
1.1
0.7
(13.4)
Society
2023
£m
79.3
17.3
0.5
19.6
14.2
0.8
26.0
Society
2022
£m
69.3
23.0
1.4
4.8
1.1
0.7
(10.9)
Total interest receivable and similar income
174.2
87.3
157.7
89.4
Interest receivable includes:
Income from fixed income securities
2.1
0.1
2.1
0.1
During the year ended 31 March 2023, the total interest receivable and similar income calculated using the effective interest method was: Group £137.1m (2021/22:
£98.4m) and Society £122.1m (2021/22: £98.0m) for financial assets held at amortised cost, and Group £8.8m (2021/22: £1.6m) and Society £8.8m (2021/22: £1.6m)
for financial assets held at fair value through other comprehensive income. Accrued interest on qualifying derivative financial instruments is 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 £1.0m (2021/22: £1.2m) and Society £0.9m
(2021/22: £0.5m) and interest accrued on impaired commercial mortgage assets: Group £4.3m (2021/22: £4.2m) and Society £nil (2021/22: £nil). For the purposes of
Group
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
On financial liabilities not at fair value through profit or loss:
Shares held by individuals
64.0
18.8
64.0
18.8
Deposits from banks and other deposits
22.6
2.6
22.7
2.8
Debt securities in issue
1.8
1.3
-
-
Subordinated liabilities
2.5
2.5
2.5
2.5
Deemed loans
(0.2)
-
2.0
4.1
Lease liabilities
-
0.1
-
0.1
On financial liabilities at fair value through profit or loss:
Net income on derivative financial instruments
0.3
(0.1)
0.3
(0.1)
Total interest expense/(income) and similar charges
91.0
25.2
91.5
Notes to the Accounts
for the year ended 31 March 2023
Group
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
Other operating income includes:
Rent receivable on investment property
7.3
7.3
-
-
Operating expenses on investment property
(3.3)
(3.6)
-
-
Pension fund net interest (note 31)
0.4
-
0.4
-
Total other operating income
4.4
3.7
0.4
Group
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
Fair value hedges
Derivatives designated as fair value hedges
40.9
66.5
40.9
66.5
Adjustments to hedged items in fair value hedge relationships
(40.1)
(63.6)
(40.1)
(63.6)
Fair value gains on hedge accounting
0.8
2.9
0.8
2.9
Other derivatives
6.4
7.5
7.0
6.3
Financial instruments mandatorily at fair value through profit or loss
(0.6)
0.2
(0.6)
0.2
Total fair value gains on financial instruments
6.6
10.6
7.2
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Staff costs
Wages and salaries
23.4
21.2
22.8
19.9
Social security costs
2.2
2.1
2.2
2.1
Other pension costs
1.9
1.8
1.8
1.7
Other administrative expenses
12.4
20.4
11.4
20.2
39.9
45.5
38.2
43.9
Other administrative expenses include:
Remuneration of auditors (excluding VAT element)
Audit of these financial statements
0.3
0.3
0.3
0.3
Audit of the subsidiary financial statements
0.1
0.2
-
-
Wages and salaries include £0.1m (2021/22: £0.1m) redundancy costs paid as part of the restructuring and rationalisation undertaken during the year.
Other assurance services provided by the external auditors comprise £5,000 (2021/22: £5,000) in respect of audit-related assurance services and £nil (2021/22:
Group and
Society
2023
Group and
Society
2022
The average number of employees employed throughout the year was:
Full time
435
429
Part time
198
197
633
626
Building Society
Central administration (Society and subsidiaries)
460
458
Branches
173
168
633
626
8. Directors’ emoluments
Total Directors' emoluments including expenses amounted to £2,312m (2021/22: £1.879m). Full details are given in the Directors' Remuneration Report on pages 70 to 81.
Group
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
UK corporation tax at 19% (2021/22: 19%)
1.9
1.1
4.4
2.2
Corporation tax - adjustment in respect of prior years
-
-
1.5
2.1
Total current tax
1.9
1.1
5.9
4.3
Deferred tax
Current year
4.8
3.0
2.7
1.7
Adjustment in respect of prior periods
(1.4)
(2.1)
(1.4)
(2.0)
Effect of changes in tax rates
0.3
(3.2)
(0.1)
(3.6)
Tax on profit on ordinary activities
5.6
(1.2)
7.1
0.4
UK corporation tax has been calculated at the applicable prevailing rate.
The tax charge is reconciled to the profit before tax in the Income Statement as follows:
Group
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
Profit before tax
31.8
23.2
15.7
12.9
Profit before tax multiplied by the UK standard rate of tax of 19% (2021/22: 19%)
6.0
4.4
3.0
2.5
Effects of:
Income not taxable and expenses not deductible for tax purposes
0.1
0.2
2.8
2.1
Changes to tax rate
0.3
(3.2)
(0.1)
(3.6)
Adjustment in respect of prior years
(1.4)
(2.1)
0.1
-
Transfer pricing adjustments
-
-
1.3
(0.6)
Deconsolidation adjustments
0.1
(0.2)
-
-
Write down/(utilisation and recognition) of deferred tax assets
0.1
(0.4)
-
-
Revaluation
0.4
0.1
-
-
Tax charge/(credit)
5.6
(1.2)
7.1
Notes to the Accounts
for the year ended 31 March 2023
Group
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
Cash in hand
1.4
1.8
1.4
1.8
Cash ratio deposit with the Bank of England
14.0
15.1
14.0
15.1
Other deposits with the Bank of England
582.8
635.1
582.8
635.1
598.2
652.0
598.2
652.0
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
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Listed transferable investment securities:
Fair value through other comprehensive income
315.2
286.4
315.2
286.4
Amortised cost
-
-
370.6
453.7
Fair value through profit or loss
0.4
0.5
0.4
0.5
Total investment securities
315.6
286.9
686.2
740.6
The movement in investment securities is summarised as follows:
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
At beginning of year
286.9
276.5
740.6
785.4
Investment securities with maturities > 3 months at date of acquisition:
Additions
240.5
101.9
240.5
101.9
Disposals (sale and redemption)
(211.4)
(90.5)
(294.5)
(145.7)
(Losses) from changes in fair value
(0.4)
(1.0)
(0.4)
(1.0)
At end of year
315.6
286.9
686.2
740.6
The Directors consider that the primary purpose for holding investment securities is as liquid assets with the intention of use on a continuing basis in the Group's
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
Fixed rate mortgage lending
Risk
Sensitivity to changes in interest rates
Derivative type
Pay fixed receive floating interest rate swaps
Hedge
relationship
Fair value hedge
Hedge
accounting
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
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.
(b) Derivative financial instruments in the Statement of Financial Position
The following tables show the notional and carrying amounts of derivative financial instruments at the year-end date.
Carrying value in the
Statement of Financial Position
Group
Notional amount
2023
£m
Assets
Liabilities
2023
2023
£m
£m
Interest rate swaps
Designated as fair value hedges
1,970.2
94.1
(5.5)
Economic hedges
284.4
6.4
(1.2)
Total derivatives held for hedging purposes
2,254.6
100.5
(6.7)
Carrying value in the
Statement of Financial Position
Group
Notional amount
2022
£m
Assets
Liabilities
2022
2022
£m
£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)
Notes to the Accounts
for the year ended 31 March 2023
12. Derivative financial instruments and hedge accounting
(continued)
Society
Interest rate swaps
Notional amount
2023
£m
Carrying value in the
Statement of Financial Position
Assets
Liabilities
2023
2023
£m
£m
Designated as fair value hedges
Economic hedges
1,970.2
284.4
94.0
(5.5)
6.5
(1.1)
Total derivatives held for hedging purposes
2,254.6
100.5
(6.6)
Society
Interest rate swaps
Notional amount
2022
£m
Carrying value in the
Statement of Financial Position
Assets
Liabilities
2022
2022
£m
£m
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 start dates and 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.
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 2023
Group and Society
Fair value hedge of fixed rate residential loans
Interest rate swap notional (£m)
Average fixed rate
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)
Average fixed rate
Society
Fair value hedge of intercompany loans*
Interest rate swap notional (£m)
Average fixed rate
Less than 3 months
129.6
0.88%
-
-
-
-
-
-
-
-
3 to 12 months
478.3
0.53%
-
-
-
-
-
-
-
-
1 to 5 years
1,279.3
1.41%
-
-
-
-
43.2
4.71%
43.2
4.71%
Over 5 years
39.7
2.47%
-
-
-
-
-
-
-
-
At 31 March 2022
Group and Society
Fair value hedge of fixed rate residential loans
Interest rate swap notional (£m)
Average fixed rate
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)
Average fixed rate
Society
Fair value hedge of intercompany loans*
Interest rate swap notional (£m)
Average fixed rate
Less than 3 months
93.1
2.78%
-
-
-
-
-
-
-
-
3 to 12 months
459.6
0.98%
-
-
-
-
30.6
10.07%
30.6
10.07%
1 to 5 years
1,439.8
0.62%
-
-
-
-
21.5
8.73%
21.5
8.73%
Over 5 years
20.0
1.81%
-
-
-
-
34.9
10.03%
34.9
10.03%
*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.
Notes to the Accounts
for the year ended 31 March 2023
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 2023
Carrying value
in the SOFP
Change in fair
value used for
Ineffectivess
charge/(credit)
Interest rate swaps
Notional
amount
Assets
Liabilities
recognising
ineffectiveness
in the Income
Statement
Group and Society
£m
£m
£m
SOFP line
£m
£m
Income Statement line
Fair value hedge of fixed rate
residential loans
1,926.9
94.0
(4.0)
Derivative financial
instruments
34.4
(4.0)
Fair value gains on
financial instruments
Fair value hedge of fixed rate
-
-
-
Derivative financial
-
-
Fair value gains on
investment securities
instruments
financial instruments
Fair value hedge of fixed rate
-
-
-
Derivative financial
-
-
Fair value gains on
savings products
instruments
financial instruments
Group
Fair value hedge of fixed rate
commercial loans
43.2
0.2
(1.5)
Derivative financial
instruments
6.5
3.2
Fair value gains on
financial instruments
Society
Fair value hedge of
intercompany loans*
43.2
0.2
(1.5)
Derivative financial
instruments
6.5
3.2
Fair value gains on
financial instruments
Hedging instruments at 31 March 2022
Carrying value
in the SOFP
Change in fair
value used for
Ineffectivess
charge/(credit)
Interest rate swaps
Notional
amount
Assets
Liabilities
recognising
ineffectiveness
in the Income
Statement
Group and Society
£m
£m
£m
SOFP line
£m
£m
Income Statement line
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
-
-
-
Derivative financial
-
-
Fair value gains on
investment securities
instruments
financial instruments
Fair value hedge of fixed rate
-
-
-
Derivative financial
-
-
Fair value gains on
savings products
instruments
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
Hedged items at 31 March 2023
Change in fair value
Hedged assets and liabilities
Group and Society
Carrying value
in the SOFP
£m
Accumulated fair
value adjustments
£m
SOFP line
used for recognising
ineffectiveness
£m
Fixed rate residential loans
1,830.1
(81.6)
Loans and advances
to customers
(30.4)
Fixed rate investment securities
-
-
Investment securities
-
Fixed rate savings products
-
-
Shares
-
Group
Fixed rate commercial loans
44.5
3.5
Loans and advances
to customers
(9.7)
Society
Intercompany loans*
44.5
3.5
Loans and advances
to customers
(9.7)
Hedged items at 31 March 2022
Change in fair value
Hedged assets and liabilities
Group and Society
Carrying value
in the SOFP
£m
Accumulated fair
value adjustments
£m
SOFP line
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)
*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.
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Amortised cost
Loans fully secured on residential property
4,299.1
4,592.1
3,289.9
3,449.1
Loans fully secured on land
230.0
320.3
-
16.2
4,529.1
4,912.4
3,289.9
3,465.3
At fair value through profit or loss
Loans fully secured on residential property
8.6
11.5
8.6
11.5
Loans fully secured on land
-
-
-
-
4,537.8
4,923.9
3,298.5
3,476.8
Fair value adjustment for hedged risk
(78.1)
(38.0)
(72.0)
(45.8)
Less: impairment provisions
(89.4)
(107.6)
(2.2)
(1.5)
4,370.3
4,778.3
3,224.3
3,429.5
Included within loans and advances to customers are £233.5m (2021/22: £348.5m) of commercial lending balances of which £6.4m (2021/22: £10.0m) have been sold
by the Group to bankruptcy remote structured entities. A further £359.0m (2021/22: £637.2m) 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 £371.2m (2021/22: £487.4m). Note 15 includes a list of the structured entities that are consolidated into the results of the Group.
Notes to the Accounts
for the year ended 31 March 2023
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 2022
7.7
99.9
107.6
1.5
Amounts written off
(0.5)
(41.3)
(41.8)
(0.3)
Charge for the year comprising:
Provision for loan impairment
3.8
20.6
24.4
1.3
Change in carrying value of deemed loan
-
0.5
0.5
-
Adjustments to provisions resulting from recoveries
(0.8)
-
(0.8)
(0.2)
Charge for the year
3.0
21.1
24.1
1.1
Non-recourse finance on securitised advances
-
(0.6)
(0.6)
-
At 31 March 2023
10.2
79.1
89.3
2.3
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
During the year there were impairment gains of £0.5m (2021/22: £0.2m charge) against mortgages transferred to structured entities, Sandwell Commercial Finance
No.1 Plc: £0.2m gain (2021/22: £0.1m gain) and Sandwell Commercial Finance No. 2 Plc: £0.3m gain (2021/22: £0.3m charge). 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 nil (2021/22: £2.7m) 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
Society
Cost
Shares in subsidiary undertakings
2023
2022
£m
£m
Loans to subsidiary undertakings
2023
2022
£m
£m
Total
2023
£m
2022
£m
At beginning of year
0.6
0.6
1,226.3
1,270.8
1,226.9
1,271.4
Decrease for the year
-
-
(116.7)
(44.5)
(116.7)
(44.5)
At end of year
0.6
0.6
1,109.6
1,226.3
1,110.2
1,226.9
Provisions
At beginning of year
0.5
0.5
199.1
189.1
199.6
189.6
Charge for the year
-
-
14.3
10.0
14.3
10.0
At end of year
0.5
0.5
213.4
199.1
213.9
199.6
Net book value at end of year
0.1
0.1
896.2
1,027.2
896.3
1,027.3
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 £12.6m (2021/22: £12.8m). 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 charge of £1.7m has been recognised against the investment (2021/22: £2.8m credit).
The Society holds directly (unless otherwise stated) the following interests in key subsidiary undertakings, all of which are registered in England:
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%
(1)
CL Mortgages Limited
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%
(2)
White Label Lending Limited
Second charge lending
Ordinary £1 shares
100%
(1)
The assets and liabilities held by CL Mortgages were transferred into WBMC on 30 March 2023. CL Mortgages ceased to trade on that date.
(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.
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
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.
The registered office of Kenrick No. 3 Plc is 40a Station Road, Upminster, Essex, RM14 2TR.
Kenrick No.3 plc was dissolved on 9 February 2023.
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
Notes to the Accounts
for the year ended 31 March 2023
16. Intangible assets
Group
Goodwill
2023
£m
Purchased
software
2023
£m
Development
costs
2023
£m
Total
2023
£m
Goodwill
2022
£m
Purchased
software
2022
£m
Development
costs
2022
£m
Total
2022
£m
Cost
At beginning of year
0.5
19.3
26.2
46.0
0.5
18.7
28.2
47.4
Additions
-
-
5.5
5.5
-
0.6
3.6
4.2
Write off of previously capitalised costs
-
-
(3.1)
(3.1)
-
-
(5.6)
(5.6)
At end of year
0.5
19.3
28.6
48.4
0.5
19.3
26.2
46.0
Aggregate amortisation
At beginning of year
0.5
15.4
19.9
35.8
0.5
14.1
16.5
31.1
Charge for the year
-
0.6
3.3
3.9
-
1.3
3.4
4.7
Disposals
-
-
(1.2)
(1.2)
-
-
-
-
At end of year
0.5
16.0
22.0
38.5
0.5
15.4
19.9
35.8
Net book value at end of year
-
3.3
6.6
9.9
-
3.9
6.3
10.2
Net book value at beginning of year
-
3.9
6.3
10.2
-
4.6
11.7
16.3
The Group applies the fair value model to its investment property portfolio.
Management have engaged independent specialist valuers to undertake a valuation review of the residential investment properties held by West Bromwich Homes
Limited. with adjustments made by management as necessary.
This fair value measurement is categorised as a Level 3 fair value measurement, based on an assessment of the inputs to the valuation methodology, as described
in Note 1f (2022: Level 3).
If the investment properties were carried at cost, the carrying amount would be £81.4m (2021/22: £82.6m).
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 £2.5m (2021/22: £2.4m), and an additional £2.7m up to 36 months (2021/22: £2.4m). The Group has not
recognised any contingent rent in the period (2021/22: £nil).
18. Property, plant and equipment
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 2022
4.9
21.2
0.6
20.1
2.9
49.7
Additions
-
-
-
0.8
-
0.8
Revaluation
0.1
-
-
-
-
0.1
Lease modifications and remeasurements
-
-
-
-
0.3
0.3
At 31 March 2023
5.0
21.2
0.6
20.9
3.2
50.9
Accumulated depreciation
At 1 April 2022
0.5
5.5
0.4
19.3
1.2
26.9
Charge for the year
0.1
1.0
-
0.5
0.3
1.9
Revaluation
(0.6)
-
-
-
-
(0.6)
At 31 March 2023
-
6.5
0.4
19.8
1.5
28.2
Net book value
At 31 March 2023
5.0
14.7
0.2
1.1
1.7
22.7
Society
Goodwill
2023
£m
Computer
software
2023
£m
Development
costs
2023
£m
Total
2023
£m
Goodwill
2022
£m
Computer
software
2022
£m
Development
costs
2022
£m
Total
2022
£m
Cost
At beginning of year
-
19.3
26.2
45.5
-
18.7
28.2
46.9
Additions
-
-
5.5
5.5
-
0.6
3.6
4.2
Write off of previously capitalised costs
-
-
(3.1)
(3.1)
-
-
(5.6)
(5.6)
At end of year
-
19.3
28.6
47.9
-
19.3
26.2
45.5
Aggregate amortisation
At beginning of year
-
15.4
19.9
35.3
-
14.1
16.5
30.6
Charge for the year
-
0.6
3.3
3.9
-
1.3
3.4
4.7
Disposals
-
-
(1.2)
(1.2)
-
-
-
-
At end of year
-
16.0
22.0
38.0
-
15.4
19.9
35.3
Net book value at end of year
-
3.3
6.6
9.9
-
3.9
6.3
10.2
Net book value at beginning of year
-
3.9
6.3
10.2
-
4.6
11.7
16.3
Write off of previously capitalised costs (£3.1m) predominantly relates to the development of a new online savings platform (2021/22: £5.6m). The decision was taken
not to progress this development further during the year.
17. Investment properties
Group
2023
£m
Group
2022
£m
Valuation
At beginning of year
147.3
143.0
Additions
1.5
0.5
Disposals
(2.1)
(2.0)
Revaluation gains
6.0
5.8
At end of year
152.7
147.3
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 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
Notes to the Accounts
for the year ended 31 March 2023
18. Property, plant and equipment
(continued)
Society
Cost or valuation
Freehold
branches
£m
Land and buildings
Leasehold
Head Office
improvements
£m
£m
Equipment,
fixtures, fittings
and vehicles
£m
Right-of-use
assets
£m
Total
£m
At 1 April 2022
4.9
21.2
0.6
19.9
2.9
49.5
Additions
-
-
-
0.7
-
0.7
Revaluation
0.1
-
-
-
-
0.1
Lease modifications and remeasurements
-
-
-
0.3
0.3
At 31 March 2023
5.0
21.2
0.6
20.6
3.2
50.6
Accumulated depreciation
At 1 April 2022
0.5
5.7
0.4
18.9
1.2
26.7
Charge for the year
0.1
0.9
-
0.5
0.3
1.8
Revaluation
(0.6)
-
-
-
-
(0.6)
At 31 March 2023
-
6.6
0.4
19.4
1.5
27.9
Net book value
At 31 March 2023
5.0
14.6
0.2
1.2
1.7
22.7
Society
Cost or valuation
Freehold
branches
£m
Land and buildings
Leasehold
Head Office
improvements
£m
£m
Equipment,
fixtures, fittings
and vehicles
£m
Right-of-use
assets
£m
Total
£m
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 2023 was 5.0 years (2021/22: 4.6 years).
The net book value of land and buildings occupied for the Society's own activities at 31 March is £19.8m (2021/22: £20.1m).
The Group's freehold branches were revalued at 31 March 2023 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 (2022: Level 3).
If land and buildings were carried at historical cost less depreciation, the carrying amount would be £17.3m (2021/22: £16.5m).
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.
Deferred tax is calculated on all temporary differences under the liability method using an effective tax rate of 25% (2021/22: 19% or 25% (depending on when the
deferred tax balance was estimated to reverse)). The movement on the deferred tax account is as follows:
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
At beginning of year
12.4
13.7
12.7
12.3
Current year Income Statement (charge)/credit
(5.1)
0.2
(2.6)
2.0
Amount recognised directly in other comprehensive income
0.9
(3.6)
0.9
(3.6)
Adjustments in respect of prior years
1.4
2.1
1.4
2.0
At end of year
9.6
12.4
12.4
12.7
Deferred tax assets and liabilities are attributable to the following items:
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Deferred tax assets
Accelerated tax depreciation
8.2
9.0
8.0
8.9
Carried forward tax losses
11.6
12.1
8.0
8.3
Other temporary differences
5.2
6.0
1.0
1.2
25.0
27.1
17.0
18.4
Deferred tax liabilities
Property valuations
(11.8)
(9.9)
(1.0)
(0.9)
Other temporary differences
(0.9)
(1.1)
(0.9)
(1.1)
Pensions and other post retirement benefits
(2.7)
(3.7)
(2.7)
(3.7)
(15.4)
(14.7)
(4.6)
(5.7)
The deferred tax (charge)/credit in the Income Statement comprises the following temporary differences:
Accelerated tax depreciation
Group
2023
£m
(0.8)
Group
2022
£m
3.6
Society
2023
£m
(0.8)
Society
2022
£m
3.6
Other provisions
(0.7)
0.2
-
(0.1)
Carried forward tax losses
(0.4)
1.7
(0.4)
0.4
Property valuations
(1.8)
(3.3)
-
-
(3.7)
2.2
(1.2)
3.9
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 2023, amounted to Group: £23.0m (2021/22: £27.8m) and Society: £nil (2021/22: £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 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
Year ended 31 March 2023
Notes to the Accounts
for the year ended 31 March 2023
Group
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
Prepayments and accrued income
10.3
1.9
10.3
1.9
Other
0.4
0.3
0.4
0.2
10.7
2.2
10.7
2023
2022
Group and Society
£m
£m
Held by individuals
4,305.2
4,182.5
Other shares
1.1
1.1
4,306.3
22. Amounts due to other customers
Group
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
Deemed loans
6.3
7.1
-
154.7
Other customers
56.8
107.5
56.8
107.6
63.1
114.6
56.8
262.3
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Non-recourse finance on securitised advances
-
171.2
-
-
-
171.2
-
-
The non-recourse finance comprised 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).
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
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
At beginning of year
171.2
217.9
-
-
Financing cash flows
Repayments of debt securities in issue
(172.0)
(47.4)
-
-
Non-cash flows:
Amortisation
0.7
0.5
-
-
Other movements
0.1
0.2
-
-
At end of year
-
171.2
-
Group
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
Accruals
11.0
8.6
10.4
7.8
Lease liabilities
1.9
1.9
1.9
1.9
Other creditors
4.2
3.5
3.7
3.3
17.1
14.0
16.0
13.0
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:
2023
2022
Group and Society
£m
£m
At beginning of year
1.9
2.0
Modifications/remeasurements of existing lease liabilities
0.3
0.2
Interest charged
0.1
0.1
Lease payments
(0.4)
(0.4)
At end of year
1.9
Group
Group
Society
Society
2023
2022
2023
2022
£m
£m
£m
£m
At beginning of year
0.5
0.6
0.4
0.5
Utilised in the year
-
-
-
-
(Release) for the year
-
(0.1)
-
(0.1)
At end of year
0.5
0.5
0.4
0.4
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
Notes to the Accounts
for the year ended 31 March 2023
Number of shares
Carrying value
2023
2022
2023
2022
Group and Society
£m
£m
Permanent interest bearing shares
At beginning of year
7,847
7,847
7.8
7.8
At end of year
7,847
7,847
7.8
7.8
The Society’s 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.
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 3.0827%).
Whilst PPDS instruments no longer exist (having been exchanged during the LME), the Society continues to monitor a notional PPDS reserve. For the year ended
31 March 2023, the Society generated a reported profit after tax of £26.2m, including the impact of £2.5m Tier 2 interest payable. The net profit disregarding Tier
2 interest (after tax) would therefore have been £28.2m, and the notional PPDS reserve had a positive balance of £6.6m at 31 March 2023 that could have been
distributed to PPDS holders. The equivalent annual yield that would have been paid to PPDS holders would therefore have been 3.86%, with PIBS interest payments
Group and Society
Number of
shares
CCDS nominal
amount
£m
Share
premium
£m
Total
£m
At 31 March 2022
1,288,813
1.3
125.7
127.0
At 31 March 2023
1,288,813
1.3
125.7
127.0
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 an interim distribution of £2.25 per
CCDS in respect of the period to 30 September 2022 which was paid in February 2023. This distribution has been recognised in the Statement of Changes in Members'
Interests and Equity. In May 2023 the Directors declared a final distribution for the period to 31 March 2023 of £2.25 per CCDS, 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
2023
2022
Group and Society
£m
£m
Subordinated notes due 2038 – 11.0%
22.9
22.9
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.
2023
2022
Group and Society
£m
£m
At beginning of year
22.9
22.8
Financing cash flows
Interest paid on subordinated liabilities
(2.5)
(2.5)
Non-cash flows:
Accrued interest (settled during the year)
1.3
1.3
Accrued interest (carried forward)
1.2
1.2
Movement in unamortised issue costs
-
0.1
At end of year
22.9
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.
2023
2022
Group and Society
£m
£m
At beginning of year
11.5
12.5
Interest added
0.8
0.7
Redemptions
(3.2)
(1.9)
Changes in fair value
(0.5)
0.2
At end of year
8.6
Notes to the Accounts
for the year ended 31 March 2023
30. Tax effects relating to each component of other comprehensive income
Group
Before tax
amount
2023
£m
Taxation
2023
£m
Net of tax
amount
2023
£m
Fair value through other comprehensive income investments
(0.3)
0.1
(0.3)
Retirement benefit obligations
(10.8)
2.3
(8.5)
Revaluation reserve
0.7
(0.1)
0.6
Other comprehensive income
(10.4)
2.3
(8.2)
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
Society
Before tax
amount
2023
£m
Taxation
2023
£m
Net of tax
amount
2023
£m
Fair value through other comprehensive income investments
(0.3)
0.1
(0.3)
Retirement benefit obligations
(10.8)
2.3
(8.5)
Revaluation reserve
0.7
(0.1)
0.6
Other comprehensive income
(10.4)
2.3
(8.2)
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
2023
2022
2021
2020
2019
Group and Society
£m
£m
£m
£m
£m
Net defined benefit pension scheme (asset)/obligation
(10.9)
(14.9)
(1.1)
2.7
4.9
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 2022 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.
An additional liability of £3.6m has been recorded to cover the potential cost of equalising payments to early retirees (under certain conditions) owing to potential
discrepancies in Trust documentation. The assumptions used to calculate the impact on liabilities are the same as those used to calculate the IAS19 liabilities at 31
March 2023. All or part of this liability may be recovered through an ongoing resolution exercise.
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. The March
2022 valuation, and future contributions, are yet to be formally agreed. At this stage, the estimated amount of total employer deficit contributions expected to be
paid to the Scheme during 2023/24, based on the current schedule of contributions, is £2.2m.
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 approximately 14 years.
The key assumptions used by the actuary in the updated calculation were:
Group and Society
2023
2022
2021
2020
2019
Pension increases in payment (RPI capped at 5%)
3.1%
3.4%
3.1%
2.5%
3.0%
Pension increases in payment (CPI capped at 2.5%)
1.9%
2.1%
1.9%
1.5%
1.8%
Discount rate
4.8%
2.8%
2.1%
2.3%
2.4%
Life expectancy of male aged 65 at year end date
21.5
21.6
21.8
21.8
22.4
Life expectancy of female aged 65 at year end date
23.7
23.8
23.9
23.7
23.4
22.8
22.9
23.1
23.1
23.7
Life expectancy of male aged 65 at year end date plus
20 years
Life expectancy of female aged 65 at year end date plus
20 years
25.2
25.2
25.3
25.2
24.9
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):
2023
2022
(Decrease)/
(Decrease)/
Increase
Increase
Group and Society
£m
£m
Discount rate
Effect on defined benefit obligation of a 1% increase
(9.9)
(16.4)
Inflation
Effect on defined benefit obligation of a 1% increase
7.2
12.0
Life expectancy
Effect on defined benefit obligation of a 1 year increase
3.2
3.9
Notes to the Accounts
for the year ended 31 March 2023
31. Retirement benefit obligations
(continued)
The amounts recognised in the Statement of Financial Position are as follows:
Group and Society
2023
£m
2022
£m
2021
£m
2020
£m
2019
£m
Present value of funded obligations
83.9
109.7
119.9
108.2
113.1
Present value of unfunded obligations
0.5
0.7
0.8
0.7
0.8
84.4
110.4
120.7
108.9
113.9
Fair value of scheme assets
(95.3)
(125.3)
(121.8)
(106.2)
(109.0)
Net (asset) in the Statement of Financial Position
(10.9)
(14.9)
(1.1)
2.7
4.9
The amounts recognised in the Income Statement are as follows:
Group and Society
2023
£m
2022
£m
2021
£m
Interest cost
3.0
2.5
2.5
Interest receivable on plan assets
(3.5)
(2.6)
(2.4)
Running costs
0.5
0.4
0.4
Total pension fund cost
-
0.3
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.
The amounts recognised in the Statement of Comprehensive Income are as follows:
Group and Society
2023
£m
2022
£m
Actuarial losses arising from:
Financial assumptions
(32.5)
(9.9)
Demographic assumptions
(0.3)
(1.0)
Experience adjustments
7.6
2.0
Loss/(gain) on plan assets (excluding interest)
36.0
(0.7)
Total amount recognised in Other Comprehensive Income
10.8
(9.6)
Change in benefit obligations
Group and Society
2023
£m
2022
£m
2021
£m
Benefit obligations at beginning of year
110.4
120.7
108.9
Interest cost
3.0
2.5
2.4
Actuarial (losses)/gains
(25.2)
(8.9)
13.5
Benefits paid
(3.8)
(3.9)
(4.1)
Benefit obligations at end of year
84.4
110.4
120.7
Change in scheme assets
Group and Society
2023
£m
2022
£m
2021
£m
Fair value of scheme assets at beginning of year
125.3
121.8
106.2
Interest receivable on plan assets
3.5
2.6
2.4
Actuarial (losses)/gains
(36.0)
0.7
13.2
Contribution by employer
6.8
4.5
4.5
Running costs
(0.5)
(0.4)
(0.4)
Benefits paid
(3.8)
(3.9)
(4.1)
Fair value of scheme assets at end of year
95.3
125.3
121.8
The amount recognised outside profit and loss in the Statement of Comprehensive Income for 2022/23 is an actuarial loss of £10.8m (2021/22: gain £9.6m). The
cumulative amount recognised outside profit and loss at 31 March 2023 is an actuarial loss of £59.9m.
History of experience gains and losses
Group and Society
2023
2022
2021
2020
2019
Experience gains/(losses) on scheme assets:
Amount (£m)
(36.0)
0.7
13.2
(4.7)
2.6
Percentage of scheme assets
29%
1%
12%
(4%)
2%
Experience (gains)/losses on scheme liabilities:
Amount (£m)
7.6
2.0
(0.6)
0.3
-
Percentage of scheme liabilities
7%
2%
(1%)
0%
0%
Scheme assets
The value of the invested assets at 31 March 2023 was £95.3m, analysed as follows:
Group and Society
2023
£m
2022
£m
2021
£m
Diversified growth fund
1.8
43.3
50.6
Global equities
-
16.2
14.5
Corporate bonds
14.2
-
5.9
Liability driven investment
25.0
31.0
32.0
Short duration credit
14.4
17.0
-
Insurance asset
12.9
16.5
18.7
Cash and other assets
27.0
1.3
0.1
95.3
125.3
121.8
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. The profile of invested assets has changed reflecting a lower risk profile.
The Trustee is currently reviewing the investment strategy to consider whether the SRS should target the same level of hedging on a more prudent funding target.
Stakeholder scheme
The total cost for the year of the stakeholder plan to the Group and Society was £1.3m (2021/22: £1.2m).
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
Notes to the Accounts
for the year ended 31 March 2023
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 34 to 36.
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 2023
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
598.2
-
-
598.2
Loans and advances to credit institutions
72.8
-
-
72.8
Investment securities
-
315.2
0.4
315.6
Derivative financial instruments
-
-
100.5
100.5
Loans and advances to customers
4,361.7
-
8.6
4,370.3
Total financial assets
5,032.7
315.2
109.5
5,457.4
Non-financial assets
231.9
Total assets
5,689.3
Amortised cost
£m
Fair value through
profit or loss
£m
Total
£m
Liabilities
Shares
4,306.3
-
4,306.3
Amounts due to credit institutions
826.2
-
826.2
Amounts due to other customers
63.1
-
63.1
Derivative financial instruments
-
6.7
6.7
Debt securities in issue
-
-
-
Subordinated liabilities
22.9
-
22.9
Total financial liabilities
5,218.5
6.7
5,225.2
Non-financial liabilities
33.6
Total liabilities
5,258.8
At 31 March 2022
Group
Assets
Amortised cost
£m
Fair value
through other
comprehensive
income
£m
Fair value through
profit or loss
£m
Total
£m
Cash and balances with the Bank of England
Loans and advances to credit institutions
652.0
73.2
-
-
-
-
652.0
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
Non-financial assets
5,492.0
286.4
64.4
5,842.8
224.5
Total assets
6,067.3
Liabilities
Amortised cost
£m
Fair value through
profit or loss
£m
Total
£m
Shares
Amounts due to credit institutions
Amounts due to other customers
4,183.6
1,116.7
114.6
-
-
-
4,183.6
1,116.7
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
Non-financial liabilities
5,609.0
11.5
5,620.5
29.5
Total liabilities
5,650.0
Notes to the Accounts
for the year ended 31 March 2023
At 31 March 2023
Society
Assets
Amortised cost
£m
Fair value
through other
comprehensive
income
£m
Fair value through
profit or loss
£m
Total
£m
Cash and balances with the Bank of England
Loans and advances to credit institutions
598.2
40.5
-
-
-
-
598.2
40.5
Investment securities
370.6
315.2
0.4
686.2
Derivative financial instruments
-
-
100.5
100.5
Loans and advances to customers
Investments
3,215.7
896.3
-
-
8.6
-
3,224.3
896.3
Total financial assets
Non-financial assets
5,121.3
315.2
109.5
5,546.0
71.2
Total assets
5,617.2
Liabilities
Amortised cost
£m
Fair value through
profit or loss
£m
Total
£m
Shares
Amounts due to credit institutions
4,306.3
826.6
-
-
4,306.3
826.6
Amounts due to other customers
56.3
-
56.3
Derivative financial instruments
-
6.6
6.6
Subordinated liabilities
22.9
-
22.9
Total financial liabilities
Non-financial liabilities
5,212.1
6.6
5,218.7
21.6
Total liabilities
5,240.3
At 31 March 2022
Society
Assets
Amortised cost
£m
Fair value
through other
comprehensive
income
£m
Fair value through
profit or loss
£m
Total
£m
Cash and balances with the Bank of England
Loans and advances to credit institutions
652.0
27.1
-
-
-
-
652.0
27.1
Investment securities
453.7
286.4
0.5
740.6
Derivative financial instruments
-
-
52.2
52.2
Loans and advances to customers
Investments
3,418.0
1,027.3
-
-
11.5
-
3,429.5
1,027.3
Total financial assets
Non-financial assets
5,578.1
286.4
64.2
5,928.7
68.4
Total assets
5,997.1
Liabilities
Amortised cost
£m
Fair value through
profit or loss
£m
Total
£m
Shares
4,183.6
-
4,183.6
Amounts due to credit institutions
Amounts due to other customers
1,116.2
262.3
-
-
1,116.2
262.3
Derivative financial instruments
-
11.4
11.4
Subordinated liabilities
22.9
-
22.9
Total financial liabilities
Non-financial liabilities
5,585.0
11.4
5,596.4
19.4
Total liabilities
5,615.8
Notes to the Accounts
for the year ended 31 March 2023
At 31 March 2023
32. Financial instruments
(continued)
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.
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
72.8
-
72.8
-
72.8
Loans and advances to customers
4,361.7
-
-
4,465.2
4,465.2
4,434.5
-
72.8
4,465.2
4,538.0
Financial liabilities
Shares
4,306.3
-
-
4,308.9
4,308.9
Amounts due to credit institutions
826.2
-
826.2
-
826.2
Amounts due to other customers
63.1
-
56.8
6.0
62.8
Debt securities in issue
-
-
-
-
-
Subordinated liabilities
22.9
-
22.9
-
22.9
5,218.5
-
905.9
4,314.9
5,220.8
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
4,183.6
-
-
4,145.5
4,145.5
Amounts due to credit institutions
1,116.7
-
1,116.7
-
1,116.7
Amounts due to other customers
114.6
-
107.5
7.2
114.7
Debt securities in issue
171.2
171.4
0.2
-
171.6
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 2023
Society
Financial assets
Carrying
value
£m
Fair value
Level 1
£m
Fair value
Level 2
£m
Fair value
Level 3
£m
Fair value
Total
£m
Loans and advances to credit institutions
40.5
-
40.5
-
40.5
Investment securities
370.6
-
370.6
-
370.6
Loans and advances to customers
Investments
3,215.7
896.3
-
-
-
-
3,535.8
896.3
3,535.8
896.3
4,523.1
-
411.1
4,432.1
4,843.2
Financial liabilities
Shares
4,306.3
-
-
4,308.9
4,308.9
Amounts due to credit institutions
826.6
-
826.6
-
826.6
Amounts due to other customers
Subordinated liabilities
56.3
22.9
-
-
56.3
22.9
(0.1)
-
56.2
22.9
5,212.1
-
905.8
4,308.8
5,214.6
At 31 March 2022
Society
Financial assets
Carrying
value
£m
Fair value
Level 1
£m
Fair value
Level 2
£m
Fair value
Level 3
£m
Fair value
Total
£m
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
3,418.0
-
-
3,613.3
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
4,183.6
-
-
4,145.5
4,145.5
Amounts due to credit institutions
1,116.2
-
1,116.2
-
1,116.2
Amounts due to other customers
262.3
-
107.6
157.9
265.5
Subordinated liabilities
22.9
-
22.9
-
22.9
5,585.0
-
1,246.7
4,303.4
5,550.1
Notes to the Accounts
for the year ended 31 March 2023
32. Financial instruments
(continued)
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 2023.
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 2023.
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
2023
£m
Level 2
2023
£m
Level 3
2023
£m
Total
2023
£m
Financial assets
Investment securities
At fair value through other comprehensive income
315.2
-
-
315.2
At fair value through profit or loss
0.4
-
-
0.4
Derivative financial instruments
-
100.5
-
100.5
Loans and advances to customers
-
-
8.6
8.6
315.6
100.5
8.6
424.7
Financial liabilities
Derivative financial instruments
-
6.7
-
6.7
-
6.7
-
6.7
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
Society
Financial assets
Level 1
2023
£m
Level 2
2023
£m
Level 3
2023
£m
Total
2023
£m
Investment securities
At fair value through other comprehensive income
At fair value through profit or loss
Derivative financial instruments
315.2
0.4
-
-
-
100.5
-
-
-
315.2
0.4
100.5
Loans and advances to customers
-
-
8.6
8.6
315.6
100.5
8.6
424.7
Financial liabilities
Derivative financial instruments
-
6.6
-
6.6
-
6.6
-
6.6
Society
Financial assets
Level 1
2022
£m
Level 2
2022
£m
Level 3
2022
£m
Total
2022
£m
Investment securities
At fair value through other comprehensive income
At fair value through profit or loss
Derivative financial instruments
286.4
0.5
-
-
-
52.2
-
-
-
286.4
0.5
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
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.
Group and Society
Equity release portfolio
At 1 April
Items recognised in the Income Statement
Interest receivable and similar income
Fair value (losses)/gains on financial instruments
Redemptions
2023
£m
11.5
0.8
(0.5)
(3.2)
2022
£m
12.5
0.7
0.2
(1.9)
At 31 March
8.6
11.5
Notes to the Accounts
for the year ended 31 March 2023
(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 138 to 141.
(b) Residential assets held at amortised cost
Group
Group
Society
Society
2023
2022
2023
2022
Concentration by loan type
£m
£m
£m
£m
Prime owner occupied
3,122.1
3,234.4
3,052.6
3,149.9
Buy to let
1,141.3
1,300.5
236.9
284.3
Other
35.2
42.2
0.5
0.7
Gross balances
4,298.6
4,577.1
3,290.0
3,434.9
Expected credit loss provisions
(10.2)
(7.7)
(2.3)
(1.5)
Fair value hedge adjustments
(81.6)
(51.2)
(72.0)
(46.1)
4,206.8
4,518.2
3,215.7
3,387.3
(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 2023
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
2,997.9
108.6
-
3,106.5
2,576.6
101.5
-
2,678.1
0.25 to < 0.50
476.4
64.7
-
541.1
312.3
37.2
-
349.5
0.50 to < 0.75
41.4
10.1
-
51.5
11.5
2.0
-
13.5
0.75 to < 1.00
85.6
13.3
-
98.9
5.9
5.9
-
11.8
1.00 to < 5.00
228.3
130.9
-
359.2
69.6
103.0
-
172.6
5.00 to < 10.00
5.8
2.6
-
8.4
2.9
2.3
-
5.2
10.00 to < 100.00
31.7
31.3
-
63.0
11.5
21.7
-
33.2
100.00 (default)
-
-
63.8
63.8
-
-
25.9
25.9
Second charge
3.7
1.4
1.0
6.1
0.1
0.1
-
0.2
3,870.8
362.9
64.8
4,298.5
2,990.4
273.7
25.9
3,290.0
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
-
3,380.1
2,684.0
168.7
-
2,852.7
0.25 to < 0.50
474.3
84.8
0.3
559.4
304.0
38.1
-
342.1
0.50 to < 0.75
39.9
24.2
-
64.1
10.3
5.2
-
15.5
0.75 to < 1.00
65.7
14.1
-
79.8
6.5
7.0
-
13.5
1.00 to < 5.00
176.3
152.8
1.0
330.1
57.5
97.8
0.5
155.8
5.00 to < 10.00
4.9
0.7
-
5.6
2.8
0.4
-
3.2
10.00 to < 100.00
64.6
25.6
0.5
90.7
11.1
15.6
0.2
26.9
100.00 (default)
-
-
59.7
59.7
-
-
24.9
24.9
Second charge
5.0
1.5
1.1
7.6
0.2
0.1
-
0.3
4,005.1
509.4
62.6
4,577.1
3,076.4
332.9
25.6
3,434.9
The table below provides further information on the Group's residential loans and advances to customers by payment due status at 31 March.
Group
2023
Group
2022
Society
2023
Society
2022
£m
£m
£m
£m
Not past due
4,248.3
4,548.4
3,266.7
3,423.1
Past due 1 to 3 months
23.9
13.7
11.6
5.4
Past due 3 to 6 months
14.2
5.6
6.2
2.2
Past due 6 to 12 months
7.0
3.2
4.1
2.0
Past due over 12 months
2.2
3.1
1.1
0.8
Possessions
3.0
3.1
0.3
1.4
4,298.6
4,577.1
3,290.0
3,434.9
Notes to the Accounts
for the year ended 31 March 2023
33. Credit risk
(continued)
(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 2023
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
3,870.8
0.9
0.02%
2,990.4
0.2
0.01%
Provision overlays
-
0.2
-
-
-
-
Stage 2
> 30 days past due
8.6
0.1
1.16%
4.9
-
0.00%
Other SICR indicators
354.4
1.2
0.34%
268.8
0.6
0.22%
Provision overlays
-
5.4
-
-
1.0
-
Stage 3
64.7
2.4
3.72%
25.9
0.5
1.93%
4,298.5
10.2
0.24%
3,290.0
2.3
0.07%
Loan commitments
Stage 1
243.1
-
0.00%
218.0
-
0.00%
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%
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 2023:
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 2022
4,005.1
509.4
62.6
4,577.1
3,076.4
332.9
25.6
3,434.9
Transfers due to increased
credit risk:
From stage 1 to stage 2
(154.9)
154.9
-
-
(120.1)
120.1
-
-
From stage 1 to stage 3
(15.1)
-
15.1
-
(4.4)
-
4.4
-
From stage 2 to stage 3
-
(15.8)
15.8
-
-
(8.1)
8.1
-
Transfers due to decreased
credit risk:
From stage 2 to stage 1
203.5
(203.5)
-
-
114.1
(114.1)
-
-
From stage 3 to stage 1
2.9
-
(2.9)
-
0.9
-
(0.9)
-
From stage 3 to stage 2
-
5.8
(5.8)
-
-
3.2
(3.2)
-
Mortgage advances
690.7
-
-
690.7
640.1
-
-
640.1
Net redemptions and
repayments
(868.9)
(82.2)
(19.4)
(970.5)
(712.7)
(60.2)
(8.0)
(780.9)
Amounts written off
(0.1)
-
(0.4)
(0.5)
-
-
(0.1)
(0.1)
Other movements
7.6
(5.7)
(0.2)
1.7
(3.9)
(0.1)
-
(4.0)
At 31 March 2023
3,870.8
362.9
64.8
4,298.5
2,990.4
273.7
25.9
3,290.0
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
4,541.3
3,045.5
279.6
22.3
3,347.4
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
682.6
-
-
682.6
Net redemptions and
repayments
(630.0)
(70.3)
(13.6)
(713.9)
(547.4)
(40.8)
(6.7)
(594.9)
Amounts written off
-
-
(0.5)
(0.5)
-
-
(0.2)
(0.2)
Other movements
(5.2)
-
(0.1)
(5.3)
-
-
-
-
At 31 March 2022
4,005.1
509.4
62.6
4,577.1
3,076.4
332.9
25.6
3,434.9
Notes to the Accounts
for the year ended 31 March 2023
33. Credit risk
(continued)
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 2022
1.3
4.1
2.3
7.7
0.2
0.6
0.7
1.5
Transfers due to increased
credit risk:
From stage 1 to stage 2
-
0.6
-
0.6
-
0.3
-
0.3
From stage 1 to stage 3
(0.2)
-
0.6
0.4
-
-
0.1
0.1
From stage 2 to stage 3
-
(0.2)
0.3
0.1
-
(0.1)
0.1
-
Transfers due to decreased
credit risk:
From stage 2 to stage 1
0.2
(0.7)
-
(0.5)
-
(0.1)
-
(0.1)
From stage 3 to stage 2
-
-
(0.1)
(0.1)
-
-
-
-
Remeasurement of expected
credit losses with no stage
transfer
0.3
(0.1)
-
0.2
0.2
-
(0.1)
0.1
Redemptions
(0.5)
(0.1)
(0.4)
(1.0)
(0.1)
-
(0.1)
(0.2)
Amounts written off
(0.1)
-
(0.4)
(0.5)
-
-
(0.1)
(0.1)
Other movements
(0.1)
-
0.1
-
(0.1)
0.1
(0.1)
(0.1)
Movement in provision overlays
0.2
3.1
-
3.3
-
0.8
-
0.8
At 31 March 2023
1.1
6.7
2.4
10.2
0.2
1.6
0.5
2.3
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
11.8
0.4
1.4
0.7
2.5
Transfers due to increased
credit risk:
From stage 1 to stage 2
-
0.4
-
0.4
-
0.2
-
0.2
From stage 1 to stage 3
(0.2)
-
0.5
0.3
(0.1)
-
0.2
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)
-
(2.3)
-
(0.3)
-
(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)
(1.7)
(0.1)
(0.4)
0.1
(0.4)
Redemptions
(0.4)
(0.2)
(0.3)
(0.9)
(0.1)
(0.1)
(0.1)
(0.3)
Amounts written off
-
-
(0.5)
(0.5)
-
-
(0.2)
(0.2)
Other movements
-
-
-
-
0.1
-
(0.1)
-
Movement in provision overlays
-
0.6
-
0.6
-
(0.1)
-
(0.1)
At 31 March 2022
1.3
4.1
2.3
7.7
0.2
0.6
0.7
1.5
(iii) Geographical analysis
The table below shows the geographic spread of the residential loan portfolio at the year end date:
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
East Anglia
104.0
113.2
78.2
81.3
East Midlands
449.9
480.7
361.6
383.3
Greater London
447.1
490.7
235.0
256.5
Northern Ireland
2.9
3.2
0.1
0.3
North
210.3
213.0
171.3
169.6
North West
600.1
608.2
478.4
469.7
Scotland
58.3
72.9
14.7
18.6
South East
759.0
801.3
563.9
582.2
South West
330.1
364.3
264.9
286.8
Wales
215.9
229.7
172.3
179.7
West Midlands
635.7
701.3
542.7
597.5
Yorkshire
485.3
498.6
406.9
409.4
4,298.6
4,577.1
3,290.0
3,434.9
The table below shows analysis of the indexed loan to value distribution of the residential loan portfolio at the year end date:
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
>95%
37.5
9.3
37.1
7.3
91% - 95%
119.7
39.8
119.3
39.4
86% - 90%
123.1
61.8
122.9
61.2
76% - 85%
335.1
461.2
250.6
377.0
51% - 75%
2,008.1
2,349.8
1,581.6
1,794.3
<51%
1,675.1
1,655.2
1,178.5
1,155.7
4,298.6
4,577.1
3,290.0
3,434.9
The Group's average indexed loan to value at the year end date is 48.4% (2021/22: 46.9%), 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
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Stage 1
8,936.7
8,914.9
6,878.0
6,834.8
Stage 2
830.7
1,140.8
600.9
727.1
Stage 3
174.8
162.7
75.7
72.0
9,942.2
10,218.4
7,554.6
7,633.9
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
Notes to the Accounts
for the year ended 31 March 2023
33. Credit risk
(continued)
(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 table below analyses residential mortgage balances with renegotiated terms at the year end date:
Group
Arrangements
2023
£m
Concessions
2023
£m
Capitalisation
2023
£m
Term extensions
2023
£m
Total
2023
£m
Not past due
9.2
0.1
1.3
0.8
11.4
Past due 1 to 3 months
2.0
0.1
0.1
-
2.2
Past due 3 to 6 months
2.0
-
-
-
2.0
Past due 6 to 12 months
1.1
-
-
-
1.1
Past due over 12 months
0.9
-
-
-
0.9
15.2
0.2
1.4
0.8
17.6
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
(c) Commercial assets
Commercial assets comprise a closed portfolio of non-core commercial loans which is analysed in the table below.
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Concentration by loan type
Loans secured on commercial property
229.9
320.3
-
16.2
Loans secured on residential property
0.7
15.0
-
14.2
Gross balances
230.6
335.3
-
30.4
Fair value adjustments
3.5
13.2
-
0.4
Gross exposures
234.1
348.5
-
30.8
Impairment provisions
(79.1)
(99.9)
-
-
155.0
248.6
-
30.8
Of the Group fair value adjustments, £3.5m (2021/22: £13.0m) relate to loans secured on commercial property and nil (2021/22 £0.2m) relate to loans secured on
residential property. Of the Society fair value adjustments, nil (2021/22: £0.2m) relates to loans secured on commercial property and nil (2021/22: £0.2m) relates to
loans secured on residential property. Loans secured on commercial property sitting within the Society balance sheet fully redeemed during the year. The remaining
portfolio is held within West Bromwich Commercial Limited.
(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.
At 31 March 2023
Group
Society
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Strong
3.9
-
-
3.9
-
Good
14.2
-
-
14.2
-
Satisfactory
-
4.0
-
4.0
-
Weak
-
8.9
-
8.9
-
Default:
In Law of Property Act Receivership
-
-
203.1
203.1
-
18.1
12.9
203.1
234.1
-
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
30.8
Good
10.5
-
-
10.5
-
Satisfactory
-
10.5
-
10.5
-
Weak
-
39.8
-
39.8
-
Default:
In Law of Property Act Receivership
-
-
250.3
250.3
-
47.9
50.3
250.3
348.5
30.8
The table below provides further information on the Group's commercial assets by payment due status at 31 March:
Group
2023
Group
2022
Society
2023
Society
2022
£m
£m
£m
£m
Not past due
132.4
256.3
-
30.8
Past due up to 3 months
32.4
-
-
-
Past due 3 to 6 months
-
2.1
-
-
Past due 6 to 12 months
2.0
13.5
-
-
Past due over 12 months
67.3
76.6
-
-
234.1
348.5
-
30.8
Notes to the Accounts
for the year ended 31 March 2023
33. Credit risk
(continued)
(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 2023
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
18.1
-
0.00%
-
-
-
Stage 2
> 30 days past due
-
-
0.00%
-
-
-
Other SICR indicators
12.9
0.2
1.55%
-
-
-
Stage 3
203.1
77.4
38.10%
-
-
-
Provision overlays
-
1.6
-
-
-
-
234.1
79.2
33.83%
-
-
-
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%
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 2022
47.9
50.3
250.3
348.5
30.8
Transfers due to increased credit risk:
From stage 1 to stage 2
-
-
-
-
-
From stage 1 to stage 3
(1.5)
-
1.5
-
-
From stage 2 to stage 3
-
(26.4)
26.4
-
-
Transfers due to decreased credit risk:
From stage 2 to stage 1
4.4
(4.4)
-
-
-
From stage 3 to stage 2
-
0.1
(0.1)
-
-
Net redemptions, repayments and fair value adjustments for
hedged risk
(32.6)
(6.7)
(33.7)
(73.0)
(30.8)
Amounts written off
-
-
(41.3)
(41.3)
-
Other movements
(0.1)
-
-
(0.1)
-
At 31 March 2023
18.1
12.9
203.1
234.1
-
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
32.3
Transfers 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
30.8
Notes to the Accounts
for the year ended 31 March 2023
33. Credit risk
(continued)
Group
Society
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
Expected credit loss allowance
At 1 April 2022
-
8.8
91.1
99.9
-
Transfers due to increased credit risk:
From stage 2 to stage 3
-
(8.5)
9.4
0.9
-
Remeasurement of expected credit losses with no stage
transfer
-
(0.1)
18.3
18.2
-
Redemptions
-
-
(0.2)
(0.2)
-
Amounts written off
-
-
(41.3)
(41.3)
-
Other movements
-
-
0.1
0.1
-
Movement in provision overlays
-
-
1.6
1.6
-
At 31 March 2023
-
0.2
79.0
79.2
-
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
-
(iii) Industry analysis of commercial loans
The analysis of commercial loans by industry type is as follows:
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Healthcare
47.3
55.5
-
-
Leisure
40.9
47.0
-
-
Industrial and warehouse
3.9
8.2
-
2.8
Office
-
4.3
-
4.3
Retail
140.3
218.4
-
9.3
Residential
0.7
15.1
-
14.4
Other
1.0
-
-
-
234.1
348.5
-
30.8
(iv) Geographical analysis
The table below shows the geographic spread of the commercial loan portfolio at the year end date:
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
East Anglia
11.8
17.3
-
4.3
East Midlands
19.7
24.1
-
1.0
Greater London
14.7
32.5
-
17.2
North
21.3
32.9
-
-
North West
104.6
131.4
-
3.6
Scotland
0.3
0.7
-
0.4
South East
28.8
37.7
-
0.8
South West
6.5
7.0
-
0.1
Wales
-
4.0
-
0.6
West Midlands
6.4
30.1
-
-
Yorkshire
20.0
30.8
-
2.8
234.1
348.5
-
30.8
Notes to the Accounts
for the year ended 31 March 2023
33. Credit risk
(continued)
(v) Collateral
The Group's average indexed loan to value at the year end date is 119.3% (2021/22: 114.8%), 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:
Group
Value of collateral held
Indexed
2023
£m
Unindexed
2023
£m
Indexed
2022
£m
Unindexed
2022
£m
Stage 1
45.6
40.9
174.5
164.7
Stage 2
13.5
14.9
38.9
42.3
Stage 3
104.8
139.6
129.1
162.2
163.9
195.4
342.5
369.2
Society
Value of collateral held
Indexed
2023
£m
Unindexed
2023
£m
Indexed
2022
£m
Unindexed
2022
£m
Stage 1
-
-
126.8
123.1
(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.
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.
The analysis below sets out the commercial mortgage gross exposures with evidence of forbearance and renegotiated terms at the year end date.
Group
Arrangements
2023
£m
Capitalisation
2023
£m
Term extensions
2023
£m
Total
2023
£m
Not past due
11.7
10.3
23.0
45.0
Past due up to 3 months
-
-
8.4
8.4
Past due 6 to 12 months
-
-
-
-
Past due over 12 months
7.5
-
-
7.5
19.2
10.3
31.4
60.9
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
(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 2023, 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% (2021/22: 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:
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
Concentration by credit grading
AAA
239.8
271.4
239.8
271.4
AA+ to AA-
663.3
652.3
663.3
652.3
A+ to A-
83.0
87.9
50.6
41.7
Other
0.5
0.5
371.1
487.4
986.6
1,012.1
1,324.8
1,452.8
Concentration by sector
Financial institutions
148.1
88.2
115.8
42.0
Asset backed securities
190.4
189.5
561.1
676.4
Supranational institutions
49.9
82.4
49.9
82.4
Sovereign
598.2
652.0
598.2
652.0
986.6
1,012.1
1,325.0
1,452.8
Concentration by region
UK
871.6
912.3
1,209.9
1,353.0
Europe (excluding UK)
19.3
-
19.3
-
North America
35.7
17.4
35.7
17.4
Supranational
49.9
82.4
49.9
82.4
986.7
1,012.1
1,325.0
1,452.8
(e) Intercompany loans
An ECL provision of £213.4m (2021/22: £199.1m) is held against intercompany loans of £784.6m (2021/22: £908.5m) 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 £116.0m (2021/22: £118.7m) of
Notes to the Accounts
for the year ended 31 March 2023
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). 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 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 +2.5% to -2.5%, subject to a defined
floor, and for a variety of stressed non-parallel yield curve shifts. The impact upon net interest income is also assessed for rate movements using parallel shifts in the
range +2.5% to -2.5%.
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 shift analysis. The
Board has a define risk appetites for basis mismatch.
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:
At
Average
High
Low
31 March 2023
2023
2023
2023
£m
£m
£m
£m
Market value
(6.5)
(4.2)
(8.3)
(0.9)
Net interest income
(0.7)
(2.6)
(6.5)
(0.2)
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 under the established reporting triggers. Further detail on the Society's management of interest rate risk is
provided in the Risk Management report on page 38.
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
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,
taken together with its Individual Liquidity Adequacy Assessment Process (ILAAP).
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 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 34 to 47.
Notes to the Accounts
for the year ended 31 March 2023
35. Liquidity risk
(continued)
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.
At 31 March 2023
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
584.2
-
-
-
-
14.0
598.2
Loans and advances to credit institutions
35.9
36.9
-
-
-
-
72.8
Investment securities
-
25.5
147.8
104.4
37.9
-
315.6
Derivative financial instruments
-
1.4
13.4
82.7
3.0
-
100.5
Loans and advances to customers
-
181.3
19.6
447.3
3,892.2
(170.1)
4,370.3
Total financial assets
620.1
245.1
180.8
634.4
3,933.1
(156.1)
5,457.4
Financial liabilities
Shares
2,844.1
144.6
403.0
914.6
-
-
4,306.3
Amounts due to credit institutions
-
109.5
-
716.7
-
-
826.2
Amounts due to other customers
5.2
47.0
8.1
2.8
-
-
63.1
Derivative financial instruments
-
-
0.8
5.7
0.2
-
6.7
Debt securities in issue
-
-
-
-
-
-
-
Subordinated liabilities
-
-
-
-
22.9
-
22.9
Total financial liabilities
2,849.3
301.1
411.9
1,639.8
23.1
-
5,225.2
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
At 31 March 2023
Society
Financial assets
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
Cash and balances with the Bank of England
584.2
-
-
-
-
14.0
598.2
Loans and advances to credit institutions
3.6
36.9
-
-
-
-
40.5
Investment securities
-
25.5
147.9
104.4
408.4
-
686.2
Derivative financial instruments
-
1.4
13.4
82.7
3.0
-
100.5
Loans and advances to customers
-
7.6
7.8
119.4
3,162.7
(73.2)
3,224.3
Investments: loans in subsidiary undertakings
-
-
-
-
-
896.2
896.2
Total financial assets
587.8
71.4
169.1
306.5
3,574.1
837.0
5,545.9
Financial liabilities
Shares
2,844.1
144.6
403.0
914.6
-
-
4,306.3
Amounts due to credit institutions
-
109.5
-
717.0
-
-
826.5
Amounts due to other customers
5.2
46.3
5.3
(0.5)
-
-
56.3
Derivative financial instruments
-
-
0.8
5.7
0.1
-
6.6
Subordinated liabilities
-
-
-
-
22.9
-
22.9
Total financial liabilities
2,849.3
300.4
409.1
1,636.8
23.0
-
5,218.6
At 31 March 2022
Society
Financial assets
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
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
Notes to the Accounts
for the year ended 31 March 2023
35. Liquidity risk
(continued)
The significant development of liquidity stress testing and forecast models has continued throughout 2023 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:
Group
2023
£m
2023
%
2022
£m
2022
%
Cash in hand and balances with the Bank of England
598.2
60.7
652.0
64.4
Cash with banks and building societies
72.8
7.4
73.2
7.3
Certificates of deposit
75.3
7.6
15.0
1.5
Fixed rate bonds
-
-
42.8
4.2
Floating rate notes
49.8
5.0
39.6
3.9
Covered bonds
152.6
15.5
130.3
12.9
Residential mortgage backed securities
37.9
3.8
59.2
5.8
Total
986.6
100.0
1,012.1
100.0
The following table is an analysis of the gross contractual cash flows payable under financial liabilities:
At 31 March 2023
Group
Less than 3 months
£m
3 to 12 months
£m
1 to 5 years
£m
Over 5 years
£m
Total
£m
Liabilities
Shares
3,140.7
474.6
746.5
4.4
4,366.2
Amounts due to credit institutions and other
customers
167.9
28.1
749.6
-
945.6
Derivative financial instruments
0.5
1.1
3.4
-
5.0
Subordinated liabilities
1.2
1.2
9.9
48.5
60.8
3,310.3
505.0
1,509.4
52.9
5,377.6
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
At 31 March 2023
Society
Liabilities
Less than 3 months
£m
3 to 12 months
£m
1 to 5 years
£m
Over 5 years
£m
Total
£m
Shares
Amounts due to credit institutions and other
customers
Derivative financial instruments
3,140.7
167.9
0.5
474.6
28.1
1.1
746.5
749.6
3.4
4.4
-
-
4,366.2
945.6
5.0
Subordinated liabilities
1.2
1.2
9.9
48.5
60.8
3,310.3
505.0
1,509.4
52.9
5,377.6
At 31 March 2022
Society
Liabilities
Less than 3 months
£m
3 to 12 months
£m
1 to 5 years
£m
Over 5 years
£m
Total
£m
Shares
Amounts due to credit institutions and other
customers
Derivative financial instruments
3,357.7
115.7
0.7
439.0
48.6
-
400.3
1,083.5
7.9
-
-
0.9
4,197.0
1,247.8
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
The maturity analysis of lease liabilities is analysed in the table shown below:
Group
2023
£m
Group
2022
£m
Society
2023
£m
Society
2022
£m
a) Leasing commitments
Less than three months
0.1
0.1
0.1
0.1
Greater than three months and less than one year
0.3
0.3
0.3
0.3
Between one and five years
1.4
1.3
1.4
1.3
After five years
0.3
0.3
0.3
0.3
2.1
2.0
2.1
2.0
The Society earns rental income on subletting parts of three (2021/22: seven) of its freehold branches to residential and commercial tenants. The income received from
this is negligible and is regarded as rental income.
b) Loan commitments
Undrawn loan facilities
243.1
169.4
218.0
154.9
c) Capital commitments
Capital expenditure contracted but not yet provided for in the accounts
-
-
-
Notes to the Accounts
for the year ended 31 March 2023
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.
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
2023
Amount in respect of key
management personnel
and their close family
members
2023
£000
No. of key
management
personnel
2022
Amount in respect of key
management personnel
and their close family
members
2022
£000
Savings balances at 31 March
11
130
10
62
Interest payable on savings balances
11
1
10
0
Mortgage loans and savings are available to key management personnel and members of their close family at normal commercial terms. At 31 March 2023 , there was
1 mortgage loan outstanding to Directors and their connected persons of £0.2m (31 March 2022: 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
iv) Contributions to pension schemes
During the year the Group paid contributions of £6.8m (2021/22: £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
2023
£m
Interest paid
to Society
2022
£m
Insignia Finance Limited
0.1
0.1
West Bromwich Commercial Limited
5.5
10.4
West Bromwich Homes Limited
2.8
2.8
West Bromwich Mortgage Company Limited
8.9
9.7
17.3
23.0
At the year end the following balances were outstanding with subsidiary companies:
Loans owed by
subsidiaries
2023
£m
Loans owed by
subsidiaries
2022
£m
Insignia Finance Limited
1.8
3.3
West Bromwich Commercial Limited
350.2
378.8
West Bromwich Homes Limited
114.3
115.4
West Bromwich Mortgage Company Limited
430.2
529.7
896.5
1,027.2
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 £199.6m (2021/22: £187.0m) and the loans owed by West Bromwich
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 2023
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
145.5
8.2
-
(7.8)
145.9
On instruments measured at fair value through profit or loss
27.1
1.2
-
-
28.3
Total interest receivable and similar income
172.6
9.4
-
(7.8)
174.2
Interest expense and similar charges
(91.3)
(4.8)
(2.8)
7.9
(91.0)
Net interest receivable/(expense)
81.3
4.6
(2.8)
0.1
83.2
Fees and commissions receivable
1.3
0.1
-
-
1.4
Other operating income
0.4
-
4.0
-
4.4
Fair value gains on financial instruments
4.6
2.0
-
-
6.6
Total income
87.6
6.7
1.2
0.1
95.6
Administrative expenses
(38.7)
(1.1)
(0.2)
-
(39.9)
Depreciation and amortisation
(5.8)
-
-
-
(5.8)
Operating profit before revaluation gains, impairment and
provisions
43.2
5.6
1.0
0.1
49.9
Gains on investment properties
-
-
6.0
-
6.0
Impairment on loans and advances
(2.9)
(21.1)
-
-
(24.1)
Provisions for liabilities
-
-
-
-
-
Profit/(Loss) before tax
40.3
(15.5)
6.9
0.1
31.8
Statements of Financial Position at 31 March 2023
Retail
£m
Commercial
real estate
£m
Property
£m
Consolidation
adjustments
£m
Total Group
£m
Total assets
5,808.7
163.0
156.2
(438.6)
5,689.3
Total liabilities
5,419.5
371.9
125.4
(658.0)
5,258.8
Capital expenditure
6.3
-
-
-
6.3
Notes to the Accounts
for the year ended 31 March 2023
38. Business segments
(continued)
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
Gains on investment properties
22.5
-
2.1
-
0.8
5.8
-
-
25.4
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
-
-
-
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
Unencumbered
Encumbered
Unencumbered
2023
2023
2022
2022
£m
£m
£m
£m
Cash and balances at the Bank of England
14.0
584.2
15.1
636.9
Loans and advances to credit institutions
37.9
35.9
38.9
34.3
Investment securities
-
315.6
-
286.9
Derivative financial instruments
-
100.5
-
52.4
Loans and advances to customers
922.2
3,448.1
1,598.4
3,179.9
Other assets
-
231.0
-
224.5
974.0
4,715.3
1,652.4
4,414.9
Included in the above, at 31 March 2023, Group loans and advances to credit institutions included £36.9m (2021/22: £21.8m) of collateral pledged against derivative
166
167
Annual Report and Accounts
Year ended 31 March 2023
Financial Statements
Country-by-Country Reporting
for the year ended 31 March 2023
2023
2022
Average number of Group employees, all of which employed in the UK
633
626
Arising in the UK:
£m
£m
Group total income
95.6
78.3
Group profit before tax
31.8
23.2
Group corporation tax payments/(receipts)
0.2
(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 (2021/22: 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 2023 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 2023 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
169
Annual Report and Accounts
Year ended 31 March 2023
Financial Statements
168
Country-by-Country Reporting
for the year ended 31 March 2023
1. Statutory percentages
2023
%
Statutory
limit
%
Lending limit
6.8
25.0
Funding limit
17.1
50.0
The 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
2023
%
2022
%
As a percentage of shares and borrowings:
Gross capital
8.73
7.88
Free capital
5.16
4.65
Liquid assets
18.99
18.12
As a percentage of mean total assets:
Profit for the financial year
0.45
0.41
Management expenses
0.78
0.89
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;
•
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
31 May 2023
170
171
Annual Report and Accounts
Year ended 31 March 2023
Financial Statements
Annual Business Statement
for the year ended 31 March 2023
Name, qualification
and age
Role
Date of appointment
Other directorships and interests
Dave Dyer
BA Hons. (Cantab.), MBA,
FCMA
Age 66
Non-Executive Director
1 September 2021
DAD Associates Limited
Anne Gunther
BSc, MBA, ACIB, FSCIB
Age 68
Non-Executive Director
1 November 2021
Mattioli Woods Plc
Julie Hopes
MBA, ACIB
Age 55
Deputy Chair
1 April 2016
MS Amlin Underwriting Limited
Saga Personal Finance Limited
SAGA Services Limited
SAGA Plc
Kingston Gorse Estate (Sussex) Limited
John Maltby
Age 61
Chair
1 January 2021
Allica Bank Ltd
Max Nicholas Renewables Ltd
Nordea Bank
Victoria Mitchell
LLB (Hons)
Age 58
Non-Executive Director
1 April 2018
N Brown Group Plc
Lynne Shamwana
BA FCA
Age 60
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 61
Non-Executive Director
1 August 2020
Harrogate Homeless Project Limited
TD Bank Europe Limited
Manjit Hayre
Age 56
Chief Risk Officer
1 September 2021
Martin Boyle
Age 52
Chief Operating Officer
3 April 2023
West Bromwich Mortgage Company Limited
Insignia Finance Ltd
White Label Lending Limited
CL Mortgages Limited
Alex Pawley
Age 40
Chief Financial Officer
1 January 2023
West Bromwich Mortgage Company Limited
Insignia Finance Ltd
White Label Lending Limited
CL Mortgages Limited
Jonathan Westhoff
BA (Hons) Financial Services,
FCMA, CGMA, ACIB
Age 58
Chief Executive Officer
5 May 2009
West Bromwich Commercial Limited
West Bromwich Homes Limited
West Bromwich Mortgage Company Limited
Insignia Finance Ltd
White Label Lending Limited
West Bromwich Building Society Foundation
Information relating to Directors’ and Officers’ other directorships and interests at 31 March 2023
Senior management
Role
Group directorships
Andrea Hackett
Divisional Director, Operations
John McErlean
MIIA, FIIA
Chief Internal Auditor
Neil Noakes
Group Secretary
Insignia Finance Limited
WBBS (SRS) Limited
West Bromwich Homes Limited
White Label Lending Limited
Sophie Pazzaglia
BSc (Hons), FCCA, ACG
Chief People Officer
James Wright
BSc, ACIB, CIM Dip
Divisional Director, Sales & Marketing
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.
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 Officer on 25 May 2011, Alex Pawley entered into his service contract as Chief Financial Officer
on 1 January 2023 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 70 to 81.
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.
172
173
Annual Report and Accounts
Year ended 31 March 2023
Financial Statements
Glossary
for the year ended 31 March 2023
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.
Equity, Diversity and Inclusion (EDI)
– A framework which ensures
fair treatment and opportunity for all. It aims to eradicate prejudice
and discrimination on the basis of an individual or group of
individual's protected characteristics.
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.
Environmental, Social and Governance (ESG)
– a framework that
helps stakeholders understand how an organisation is managing
risks and opportunities related to environmental, social, and
governance criteria.
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.
Glossary
Greenhouse gas (GHG) emissions
– A greenhouse gas (GHG) is
a gas that absorbs and emits radiant energy at thermal infrared
wavelengths, and that contribute to the greenhouse effect and
global climate change.
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.
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).
174
Glossary
for the year ended 31 March 2023
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.
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.
Streamlined Energy & Carbon Reporting (SECR)
– A framework
which aims to bring the benefits of carbon and energy reporting to
more businesses
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.
1627-05/23-01
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.