4th Apr 2017 14:02
4 April 2017
Aldermore Group PLC (the "Company")
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2016 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.
- 2016 Annual Report and Accounts
- Notice of 2017 Annual General Meeting
- 2017 Annual General Meeting Form of Proxy
The mailing to shareholders of the documents mentioned above has commenced and the 2016 Annual Report and Accounts and the Notice of 2017 Annual General Meeting will shortly be available to view on the Company's website at www.investors.aldermore.co.uk.
The Company's 2017 Annual General Meeting will be held at 11.00am on Tuesday 16 May 2017 at the offices of Linklaters LLP, 1 Silk Street, London EC2Y 8HQ.
The information set out below should be read in conjunction with the Company's full year results announcement issued on 2 March 2017. 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 2016 Annual Report and Accounts. Page references in the text below refer to page numbers in the 2016 Annual Report and Accounts.
For further information:
Rachel Spencer
Company Secretary
+44 (0)20 3553 4202
Ryan Jones
Deputy Head of Investor Relations
+44 (0) 20 8185 3146
Risk management, internal control and viability reporting
Assessment of principal risks
As described further in the risk management section, 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 requirements of the UK Corporate Governance Code, published by the Financial Reporting Council in September 2014 (the "Code"), 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 page 33 and the current emerging risks are described on pages 34 and 35.
Principal risks
Principal risk | Mitigation |
| Commentary |
Credit Risk The risk that customers are unable to make their loan repayments. | · Focus lending where we have specific expertise · Limit concentration of lending by size, geography and sector · Obtain appropriate level of security cover and perform affordability testing at origination · Embed clear lending policies in each business area · Regularly review performance against risk appetite · Stress test the portfolio to test resilience
| ICON Up arrow | Group cost of risk remains low at 23bps (2015: 19bps) reflecting the maturation of the book and a move to less benign conditions. The heightened uncertainty for the UK economy following the referendum vote, and the implementation of the result, has increased the possibility of higher future credit losses. |
Capital and Liquidity Risk The risk that we fail to hold sufficient or appropriate reserves to support growth, meet regulatory requirements, or repay obligations as they fall due. | · Monthly monitoring of capital adequacy against targets and forecasts · Maintenance of a liquidity buffer based on stressed requirements · Daily monitoring of liquidity buffer · Stress testing and sensitivity analysis of both capital and liquidity · Maintenance and annual review of the Contingency Funding Plan · Ongoing review, analysis and impact assessment of regulatory changes
| ICON Right arrow | The Group's capital remains stable and well above regulatory minimum requirements. We successfully raised additional £60m Tier 2 capital in October 2016. The Group's liquidity position remains stable. |
Market Risk The risk that market movements adversely impact the Group. | · We do not seek to take or expose the Group to market risk and we do not carry out proprietary trading · We match interest rate structures of assets and liabilities to create a natural hedge where possible · Unmatched interest rate exposures are hedged with derivative 'Swap' contracts
| ICON Right arrow | The Group's approach remains prudent and underlying risks remain unchanged. |
Operational Risk The risk of loss due to failure in processes, systems or human error, including outsourcing. | · Embed and ensure all staff understand and follow the Operational Risk Management Framework · Analysis of Risk Event Reporting and follow-up actions · Monitoring of the operational risk profile, and risk event reporting · Continuing to invest in information security and cyber controls following our Cyber strategy · Implementation of a Third Party Supplier Framework
| ICON Right arrow | The Group continues to invest in its IT infrastructure including Cyber controls and resilience. |
Compliance, Conduct and Financial Crime Risk The risk of sanctions or financial loss as a result of a failure to comply with applicable laws, including anti-money laundering and the risk of causing unfair outcomes or detriment to customers. | · The Group provides simple and transparent products and operates solely in the UK market. · Provide and monitor against clear policy frameworks, including Conduct Risk and Product Governance · Continued investment in staff training and awareness · Horizon scanning and impact assessment of potential regulatory change
| ICON Right arrow | Whilst the financial services sector remains subject to increasing regulation and scrutiny we believe our risks remain unchanged from the prior year. |
Reputational Risk Failure to meet the expectations and standards of our customers, investors, regulators or other counterparties. | · All governance committees have reputational risk considerations as a key part of their remit · Group Corporate Affairs monitors reputational risk, under the executive direction of the Group CEO · All employees are made aware of their responsibilities under the Bank's Reputational Risk Policy · Maintenance of open and transparent relationships with regulators and other key stakeholders
| ICON Right arrow | We believe the risks remain unchanged from the prior year. |
Emerging Risks
Themes | Risk | What we did in 2016 | What we expect in 2017 and Direction | Likelihood change from last year |
Regulatory change/ intervention | ||||
Basel Committee on Banking Supervision.
December 2015 Second consultation on Revisions to the Standardised Approach for Credit Risk proposals | In December 2015 the BCBS issued a second consultative document, (Revisions to the Standardised Approach for Credit Risk) containing, amongst others, proposals to increase the capital treatment of buy-to-let and commercial real estate lending. If these proposals were implemented as outlined, the capital requirements for these market segments would increase significantly and require the execution of management actions to mitigate their impact. | We conducted an impact assessment of the proposed changes, followed by scenario analysis including feasible management actions.
The Bank also undertook a feasibility study on transitioning from Standardised to an Internal Ratings Based (IRB) approach to capital. This included a gap analysis against current regulatory requirements and has informed our thinking into possible responses, including the possibility of applying for regulatory approval to operate in an IRB environment.
| The IFRS9 work on credit models (see Emerging Risks IFRS9) takes us closer to the sophistication required for an IRB approach to capital which may help to mitigate the risk of future changes in capital requirements. We will continue to monitor the cost and benefits associated to moving to IRB, as the regulatory changes and timeframes for implementation become clear. | ICON Up arrow |
IFRS 9 | New reporting requirements under IFRS 9 introduce forward looking credit loss models which will lead to changes in the timing of impairment recognition. The requirement, which comes in to effect from 1 January 2018, requires the development of new risk models. The risk is that the Group is unable to deliver these before new regulation takes effect.
| We assessed the impact of IFRS 9 and have initiated a project plan to ensure compliance with the new standard ahead of its proposed implementation date of 1 January 2018. | We are on track with enhancements to our credit risk models and expect to be IFRS9 compliant ahead of January 2018 when the new accounting standard is introduced. | ICON Right arrow |
Buy-To-Let Mortgages Tax Changes and revised PRA Underwriting Standards | Potentially adverse impact on buy-to-let market of changes to UK tax regime and failure to comply with expectations of the regulator set out in PRA Supervisory Statement on buy-to-let Underwriting Standards issued in September 2016. | Continued monitoring of Buy-to-Let business levels.
Amendment to Buy-to-Let affordability calculation (interest cover ratio and stress rate) in December 2016 to meet expectations in PRA's supervisory statement. | Further review of PRA's expectations in terms of portfolio landlords and use of personal income in affordability calculation, with expectation that all changes to approach considered necessary will be introduced by the 30 September 2017 deadline.
| ICON Right arrow |
Economic and political environment | ||||
The UK's decision to leavethe European Union | Heightened economic and political risks following the UK's decision to leave the European Union. As a UK focused Group, we are sheltered from the more direct impacts of the Referendum, such as access to European markets but we are exposed to the wider economic impacts. To date we have seen no direct impact on either the lending or deposit sides of our business.
| The Group incorporated these risks in stress testing conducted during 2016. | The Group will continue to monitor the situation and will decide on an appropriate response, based on internal scenario planning, as the situation develops. | ICON Right arrow |
International economic and political environment | The geopolitical environment presents risks to global markets, including the impact of a new administration in the USA, deflationary concerns in the EU and continued political risks in Russia and the Middle East. | We have monitored these risks, and the UK economy has remained robust in the face of these domestic and global headwinds. As a UK-focused business we have not felt any adverse consequences across our trading franchise. | The medium-term outlook is unclear and there remains a possibility that material international events could adversely affect the UK, in addition to any EU exit impacts. These could act as a drag on the UK economy and affect the sectors to which we lend. We aim to manage these risks by maintaining a well-diversified product base, and remaining firmly focused on the UK.
| ICON Up arrow |
Exposure to real estate | We have a substantial lending exposure to the residential, buy-to-let, and commercial property sectors. Any property value falls, or increase in unemployment may lead to a rising number of defaults. | The Group continued to monitor and manage the performance of our real estate backed lending, and identified no significant change in performance in 2016.
We also continued to enforce our underwriting criteria, which includes affordability testing at the point of origination.
| The risks are expected to remain unchanged in 2017. | ICON Right arrow |
Interest rate environment | The low interest rate environment, introduced to stimulate growth following the financial crisis, has persisted for longer than first expected. If interest rates are increased, or growth slows, unemployment may rise and loan servicing costs may increase, which could cause an increase in credit losses.
| We conducted specific stress testing on our loan portfolio and maintained strict underwriting criteria, which includes stressing affordability rates at interest rates above those being paid today. | We will continue to monitor the external environment and respond to any interest rate rises as appropriate. | ICON Right arrow |
Competitive environment | ||||
New entrants and increased 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 incorporated in our forward planning process and the external market is monitored on a consistent basis. | We will continue to monitor the external environment and adapt accordingly. | ICON Right arrow |
Technology risk | ||||
Cyber-crime | Cyber-crime is a significant threat in our increasingly interconnected world and exposes all businesses and in particular financial services companies to financial as well as reputational damage. Cyber threats continue to evolve as demonstrated by high-profile cases. The increased size of the Group, and growing customer base, increases the profile of the Group to would-be cyber attackers.
| During 2015, and continuing into 2016, we strengthened our defences against cyber-crime.
We have a cyber risk response plan, which involves working with our technology partners, and ensures that there is a practical response and appropriate escalation. | This remains a key risk area and the Group will continue to invest in ongoing security improvements. | ICON Right arrow |
System failure/outsourcing | The Group has a number of major outsource partners and critical supplier relationships who are key elements of the overall supply chain. The failure of one of these key partners could significantly impact the Group's operations and reputation.
| The Group has controls in place in relation to sourcing and onboarding suppliers. In 2016, work was begun to further enhance the supplier management framework. | Continued focus during 2017 as the updated framework is implemented across the supplier estate. | ICON Right arrow |
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
1 March 2017
41. Related parties
(a) Controlling parties
Prior to IPO, the Group was 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 2016, 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 8.33 per cent, 11.01 per cent, 11.26 per cent and 9.54 per cent of the Company's ordinary share capital respectively. Although the Principal Shareholders are no longer a controlling party for the Group they continue to have significant influence and are therefore considered to be a related party.
The Group had agreements in place with Syscap Limited which was previously under the control of Anacap Financial Partners II L.P and Anacap Financial Partners, L.P. Syscap Limited ceased to be a related party when Anacap sold their interest on 20 February 2015. Details of the previous agreements in place are listed in the Aldermore Group PLC 2015 report and accounts.
During 2016, the Group also incurred fees of £0.1 million in relation to the Directors who represent the Principal Shareholders (2015: £0.1 million).
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:
2016 £'000 | 2015 £'000 | |
Emoluments | 5,207.8 | 5,035.8 |
Payments in respect of personal pension plans | 104.4 | 45.9 |
Contributions to money purchase scheme | 37.3 | 71.3 |
Loan forgiveness | - | 162.3 |
Termination benefits | 1,161.9 | - |
Share-based payments | 2,439.1 | 1,196.5 |
8,950.5 | 6,511.8 |
The Group made payments of £37,300 in aggregate in respect of seven key persons' personal pension plans during the year ended 31 December 2016 (31 December 2015: £45,900, four key persons).
Key persons' emoluments includes £1.0 million of deferred bonus (31 December 2015: £0.8 million).
Share-based payments ("SBP")
As at 1 January 2015, 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 1,822,022 shares. Further details of the share schemes, including performance conditions are provided in Note 37. In addition, a number of KMP participated in the Sharesave Plan, holding options over a total of 88,828 shares at 31 December 2016.
Transactions with KMP
The aggregate value of transactions and outstanding balances related to KMP (as defined by IAS 24: "Related Party Disclosures") were as follows:
2016 £'000 | 2015 £'000 | |
Deposits | ||
At 1 January | 2,019.2 | 1,565.0 |
Net movement | (1,053.7) | 454.2 |
At 31 December | 965.5 | 2,019.2 |
The table above includes transactions and balances relating to KMP in post at the end of the year.
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.
At 31 December 2016, there is one loan with KMP for the value of £40,000 (31 December 2015: two loans, £126,000). All current transactions, loans and deposits, with KMP are conducted through the ordinary course of business with the Group.
During 2015 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 one month LIBOR.
All deposit arrangements have been operated by the Group on commercial terms and conditions.
Related Shares:
ALD.L