12th Apr 2016 10:01
12 April 2016
Aldermore Group PLC (the "Company")
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2015 AND NOTICE OF AGM
The Company announces that, in accordance with Listing Rule 9.6.1, the documents listed below have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do.
- Annual Report and Accounts 2015
- Notice of 2016 Annual General Meeting
- Annual General Meeting 2016 Form of Proxy
- Shareholder communications letter
The mailing to shareholders of the documents mentioned above has commenced and the Annual Report and Accounts 2015 and the Notice of 2016 Annual General Meeting will shortly be available to view on the Company's website at www.investors.aldermore.co.uk.
The Company's 2016 Annual General Meeting will be held at 10.30am on Tuesday 17 May 2016 at the offices of Linklaters LLP, 1 Silk Street, London EC2Y 8HQ.
This announcement should be read in conjunction with the Company's full year results announcement issued on 10 March 2016. Together these constitute the material required by DTR 6.3 to be communicated to the media in full unedited text through a Regulatory Information Service. This material is not a substitute for reading the Company's Annual Report and Accounts 2015. Page references in the text below refer to page numbers in the Annual Report and Accounts 2015.
For further information:
Rachel Spencer
Company Secretary
+44 (0)20 3553 4202
Claire Cordell
Director of Investor Relations
+44 (0)20 3553 4274
Principal risks
Principal risks | Mitigation | Key risk measures | Commentary |
Strategic and business risk The risks that can affect our ability to achieve our corporate and strategic objectives. | · Remain focused on a sustainable business model which is aligned to the Group's strategy | GRAPHUnderlying returnon equity1
2014: 15.1% 2015: 20.6%
| RoE has improved as we continue to increase lending while improving the net interest margin, driving cost/income ratio lower and delivering a low and consistent cost of risk. |
Credit risk The risk of financial loss arising from a borrower failing to meet their financial obligations to the Group. | · Focus on business sectors where we have specific expertise · Limit concentration of exposures by size, geography and sector · Obtain appropriate level of security cover along with affordability testing · Detailed lending policies embedded in all business areas · Portfolio performance against risk appetite regularly reviewed · Stress testing See page 110 for further information | GRAPHCost of risk
2014: 23bps 2015:19bps
| Improved cost of risk reflects continued focus on underwriting and credit risk management as well as the relatively benign external credit environment. |
Liquidity risk The risk that we are not able to meet our financial obligations as they fall due, or can do so only at excessive cost. | · Maintain a liquidity buffer, which is based on requirements under stressed conditions · Monitor liquidity buffer on a daily basis to ensure there are sufficient liquid assets at all times See page 123 for further information | GRAPHLiquidity coverage ratio
2014: 270% 2015: 235%
| Liquidity coverage ratio is well in excess of current and expected future regulatory requirements. |
Market risk The financial impact from movements in market prices on the value of assets and liabilities. | · We do not seek to take or expose the Group to market risk and we do not carry out proprietary trading See page 125 for further information | ICON tick
| No material risk. |
1 Excludes IPO-related expenses at £4.1 million pre-tax and £3.4 million post tax in 2015 (2014: £6.0 million and £4.6 million respectively).
Principal risks | Mitigation | Key risk measures | Commentary |
Interest rate risk The risk of financial loss through un-hedged or mismatched asset and liability positions sensitive to changes in interest rates. | · Match interest rate structure of assets with liabilities or deposits creating a natural hedge · Alternatively, we will enter into swap agreements to convert fixed interest rate liabilities into variable rate liabilities, which are then matched with variable interest rate assets See page 125 for further information | GRAPH Hedged fixed rate assets v liabilities
2014: 99.5% 2015: 100%
| Percentage un-hedged remains well within our tolerance of 5%. |
Capital risk The risk that we have insufficient capital to cover regulatory requirements or growth plans. | · Regulate the volume of loan origination · Monthly forecasting of 12 - 18 month capital outlook · Stress testing and sensitivity analysis See page 126 for further information | GRAPH Fully loadedCRD IV CET1 ratio
2014: 10.4% 2015: 11.8% | Increase in CET1 ratio driven by 2015 retained earnings of £78m plus £75m of gross primary equity raised at IPO partially offset by growth in risk weighted assets as lending has increased. |
Operational risk The risk of financial loss and/or reputational damage resulting from inadequate or failed internal processes, people and systems or from external events including financial crime. | · Embed and ensure all staff understand and follow the Operational Risk Management Framework · Oversight and challenge from Group Risk · Monitoring of the operational risk profile · Strengthened cyber security See page 129 for further information | ICON tick
| We agree a tolerated level of losses arising from operational risk events. During 2015, we have operated within risk appetite. |
Conduct risk The risk of causing unfair outcomes and detriment to our customers, regulatory censure and/or undermining market integrity as a result of our behaviour, decision-making, activities or processes. | · Conduct Risk Framework · Product GovernanceFramework · Conduct Risk built into Risk & Control Self-Assessment process · Monitor first line conduct risk metrics covering the product life cycle · Oversight and challenge from Group Risk See page 130 for further information | ICON tick | We utilise a composite metric which takes into account a number of factors including customer complaints and customer detriment suffered as a result of product design, product sales and post-sale processes. This includes actual detriment or emerging issues which may lead to detriment. During the year, we remained within our overall risk appetite. |
Current strategic risks
The Group's current strategic risks are detailed as follows. These may have a potential future impact on the strategic plans for the business and its future financial performance.
Compliance and competition regulation
The banking sector is currently subject to a large volume of actual and potential regulatory change arising from European regulation and from the PRA and FCA. We actively manage a number of regulatory review and change activities.
Buy-to-Let
There have been a number of actual and proposed regulatory and legislative changes related to the buy-to-let sector.
Firstly, the Summer Budget introduced plans to restrict relief on mortgage interest for individual landlords to the basic rate of income tax from April 2017. This was followed by the introduction, from April 2016, of an additional 3 per cent stamp duty tax on buy-to-let properties over £40,000. It should be noted, that around half of all buy-to-let mortgages across the market relate to remortgage rather than purchase transactions and attract no stamp duty. We represent a small part of the overall market and, as such, believe that this lending segment remains attractive from a growth and return perspective.
In addition to the powers of recommendation already granted, the UK Government is currently consulting on whether to grant the Financial Policy Committee (FPC) powers of direction to the PRA/FCA in relation to restrictions to the buy-to-let market. We consider our current underwriting criteria to be prudent. We stress all loans at origination to ensure that the mortgage is still affordable in a rising interest rate environment.
Additionally, in December 2015, the Basel Committee issued a consultation paper on risk weights which, if implemented as currently drafted, would, probably from 2019, increase the standardised capital risk weight for a buy-to-let mortgage on a residential property.
Although we believe the PRA will continue to press for the right, which it currently exercises, to determine the appropriate standardised risk weight for UK buy-to-let, given it is a mature and efficient market, we intend to pursue an IRB approach.
Interest rates
We are cognisant of the very low interest rate environment at present, with inflation and unemployment remaining low, despite global economic uncertainty and financial market turmoil. Predictions for an interest rate rise are highly uncertain but are currently indicating a rise sometime in 2018. However, the risk of an interest rate rise and the associated potential impact on our customers' ability to repay is recognised and is mitigated through a range of measures, including stress testing and the use of affordability criteria which measure the ability of customers to service loan payments at higher interest rates.
Political risks
There are ongoing political risks, including the UK's membership of the EU. The impact of leaving the EU is uncertain but could affect exports and the position of London as a major financial centre. There could also be changes in taxation or regulation which may prove to be disadvantageous to our customers. We are solely a UK-focused business and seek to mitigate these by working closely with banking regulators and Government authorities.
Economic risks
The UK economic outlook remains relatively benign, with growth expected to continue, a stable property market and very gradually rising interest rates. Although there are some sub-sectors which have some risks (oil and gas and steel sectors), we have only limited exposure to these areas.
The international economic and political environment also contains risks. These include structural and deflationary concerns in the EU, worsening geopolitical risks in Russia and the Middle East, and a continued slowing of the economy in China, putting pressure on global financial and commodity markets. To date, the UK economy has remained robust in the face of these global headwinds and as a UK- focused business we have not felt any adverse consequences. The medium-term impact is unclear and there remains a possibility that material international events could adversely affect the UK and act as a drag on the UK economy and sectors in which we lend. We aim to manage these risks by maintaining a well-diversified product base, and remaining focused on the UK.
Cyber-crime
Financial cyber-crime has become a major issue in our increasingly interconnected world and exposes our business to both financial and reputational damage. During 2015, we continued to strengthen our defences against cyber-crime. Notwithstanding this, we plan to make further security improvements during 2016 and to ensure that the measures in place are in line with best practice standards. Additionally, we have plans in place to identify and respond to a cyber risk event on a timely basis, ensuring that there is a practical approach to actions and escalation to help minimise any potential impact.
Impact of accounting standards
New reporting requirements under IFRS 9 introduce forward looking credit models which will lead to changes in the timing of impairment recognition. We continue to assess the impact of IFRS 9 and have implemented a project plan to ensure compliance with this new standard well ahead of its proposed implementation date of 1 January 2018.
Competition
The competitive landscape contains risks from new entrants, increased competition from incumbent lenders and disruptive products/software solutions potentially affecting both lending and deposit taking activities. The effect of this could result in lower volume, higher customer attrition and/or lower net interest margins. The risk of competition has been recognised in our future planning process but is constantly monitored.
Risk management, internal control and viability reporting
Assessment of principal risks
As described further in the Risk Report, the Board is responsible for determining the nature and extent of the principal risks it is willing to take in order to achieve its strategic objectives. The Board is also ultimately responsible for maintaining sound risk management and internal control systems. In line with the Code requirements, the Directors have performed a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.
The principal risks are further described on pages 40 to 41 and the current strategic risks are described on page 42.
Statement of Directors' responsibilities in respect of the Annual Report and Accounts and the financial statements
The Directors are responsible for preparing the Annual Report and Accounts and the Group and parent company financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether they have been prepared in accordance with IFRSs as adopted by the EU; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic report, Directors' Report, Remuneration Report and Corporate governance statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
· the Strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy.
Phillip Monks
Chief Executive Officer
9 March 2016
Notes to the consolidated financial statements
40. Related parties
a) Controlling parties
The Group was previously controlled by AnaCap Financial Partners, II L.P. (52.3 per cent. of voting rights) and AnaCap Financial Partners, L.P. (47.7 per cent. of voting rights) who were the sole voting shareholders of Aldermore Group PLC.
On 13 March 2015, the Company was admitted to the LSE, offering 117,934,783 ordinary shares, of which 78,872,283 shares were sold by the Selling shareholders. Upon admission, AnaCap Financial Partners L.P., AnaCap Financial Partners II L.P., AnaCap Derby Co-Investment (No.1.) L.P. and AnaCap Derby Co-Investment (No.2.) (collectively "the Principal Shareholders") and the Company entered into the "Relationship agreement". Details of the Relationship agreement were provided within the Prospectus issued prior to the admission to the LSE.
On 15 September 2015 the Principal Shareholders sold 40,885,613 Ordinary £0.10 shares on the open market.
At 31 December 2015, AnaCap Financial Partners L.P., AnaCap Financial Partners II L.P., AnaCap Derby Co-Investment (No.1.) L.P. and AnaCap Derby Co-Investment (No.2.) L.P held 11.26 per cent, 11.01 per cent, 9.54 per cent and 8.33 per cent of the Company's ordinary share capital respectively. Although Anacap is no longer a controlling party for the Group it continues to have significant influence and is therefore considered to be a related party.
The Group had agreements in place with Syscap Limited ("Syscap") at the start of the year. Syscap were previously under the control of Anacap Financial Partners II L.P. and AnaCap Financial Partners, L.P. Syscap ceased to be a related party when Anacap sold their interest on 20 February 2015. During the year the following agreements were in place between the Group and Syscap:
· The Group provides £5 million of block discounting facilities to Syscap Limited, a provider of business finance solutions. The facilities are secured by underlying receivables of short-term loans, primarily to solicitors' practices which are funded at a discount to the face value of the loans. The facilities contain appropriate conditions relating to performance, non-performing deal substitution rights and default provisions in line with the Group's standard commercial policies. Pricing on the facilities is subject to normal commercial terms
· Until 20 February 2015 Syscap introduced business of £9.6 million (year ended 31 December 2014: £21.9 million) and received commission of £0.1 million (year ended 31 December 2014: £0.4 million) of which £nil was outstanding as at 20 February 2015 (31 December 2014: £nil)
In addition, Anacap charged the Group investment monitoring fees of £29,000 for the year ended 31 December 2015 (year ended 31 December 2014: £0.2 million). The balance outstanding at 31 December 2015 is £nil (31 December 2014: £0.1 million).
During 2015, the Group also incurred fees of £0.1 million in relation to the Shareholder-representative Directors (year ended 31 December 2014: £nil).
b) Key management personnel
Key Management Personnel ("KMP") comprise Directors of the Group and members of the Executive Committee. Details of the compensation paid (in accordance with IAS 24) to KMP are:
2015£'000 | 2014£'000 | |
Emoluments | 5,035.8 | 3,366.0 |
Payments in respect of personal pension plans | 45.9 | 24.0 |
Compensation for loss of office | - | 20.0 |
Contributions to money purchase scheme | 71.3 | 72.0 |
Loan forgiveness | 162.3 | - |
Share-based payments | 1,196.5 | 555.0 |
6,511.8 | 4,037.0 |
Compensation for loss of office for the year ended 31 December 2014 of £20,000 relates to two key persons.
The Group made payments of £45,900 in aggregate in respect of four key persons' personal pension plans during the year ended 31 December 2015 (31 December 2014: £24,000, two key persons).
Key persons' emoluments includes £0.8 million of deferred bonus (31 December 2014: £nil).
Share-Based Payments ("SBP")
As at 31 December 2014, certain KMP held a number of shares in the B, C and E classes. In preparation for the IPO, the rights to these shares were varied and the holdings re-designated.
A number of KMP were awarded shares in the Company under new share incentive plans created upon IPO. In total, KMP were granted awards over 5,938,906 shares. Further details of the share schemes, including performance conditions are provided in Note 36. In addition, a number of KMP participated in the Sharesave Plan, holding options over a total of 17,855 shares at 31 December 2015.
The aggregate value of transactions and outstanding balances related to KMP (as defined by IAS 24 "Related Party Disclosure") were as follows:
2015£'000 | 2014£'000 | |
Deposits | ||
At 1 January | 1,565.0 | 1,067.0 |
Net movement | 454.2 | 498.0 |
At 31 December | 2,019.2 | 1,565.0 |
The table above includes transactions and balances relating to KMP in post at the end of the year.
At 31 December 2015 there are two loans with KMP for the value of £0.1 million (31 December 2014: four loans, £0.2 million). From 1 January 2015 until admission to the LSE a number of KMP had loans with the Company. Upon admission the Company forgave loans totalling £0.2 million. A number of KMP continue to have loans and deposits in the ordinary course of business with the Group.
During 2014 and up to Admission, interest rates charged on loan balances outstanding from related parties were lower than the rates that would be charged in arm's length transactions. Interest was charged on these loans at an annual rate of 0.8 per cent above 1 month LIBOR.
All deposit arrangements have been operated by the Group on commercial terms and conditions.
Related Shares:
ALD.L