Final Results

PRESS RELEASE

13 March 2025

For immediate release

LEI: 213800CXIBLC2TMIGI76

SECURE TRUST BANK PLC

Preliminary Results for the 12 months to 31 December 2024

Solid growth and improved cost to income ratio

Tangible book value per share increased to £18.64

David McCreadie, Chief Executive, said:

"Secure Trust Bank has remained focused on its medium-term targets and strategic priorities, delivering on balance sheet growth, stabilising net interest margin, and delivering cost efficiencies. The business has delivered an 18.0% increase in its adjusted1 profit before tax pre impairments. We have continued to grow our loan book towards our £4 billion target, at which point we expect to deliver an adjusted1 return on average equity of 14-16%. As such, we remain confident in achieving our medium-term targets which we will have largely delivered by the end of 2025."

Financial Highlights2

Secure Trust Bank PLC ('Secure Trust Bank', 'STB' or the 'Group') achieved net lending growth of 8.8% (£293.2 million), primarily driven by the Consumer Finance business, which grew by 13.4% (£225.7 million). Business Finance saw growth of 4.2% (£67.5 million), which was driven by the Real Estate Finance business with growth of £97.6 million combined with a small year-on-year reduction in Commercial Finance, which continued to be impacted by a subdued market. This resulted in a stable NIM of 5.4% (2023: 5.4%), reflecting improvement in the second half of the year (H2 2024: 5.5%; H1 2024: 5.3%).

Customer deposits reached a record level of £3.2 billion (2023: £2.9 billion) through a combination of growth in Access accounts and ISAs. This increase alongside the use of ILTR funding enabled us to repay £160.0 million of TFSME funding in 2024 ahead of maturity. A further £60.0 million of TFSME funding was repaid by the end of February 2025, leaving £170.0 million outstanding.

Project Fusion, the Group's cost optimisation programme, continued to contribute to our adjusted1 cost income ratio which improved from 54.0% in 2023 to 50.9%, limiting cost growth to 4.1%. Adjusted1 cost income ratio was 48.4% for H2 2024, reflecting the ongoing growth of the loan book and tight cost control.

The impairment charge of £61.9 million (2023: £43.2 million) was significantly impacted by the pause in our collection processes in Vehicle Finance during the second half of 2023 following the FCA's Borrowers in Financial Difficulty ('BiFD') review. Delayed repossession and recovery activities created operational challenges in the first half of 2024 and resulted in an elevated stock of defaulted loans. Strategic initiatives to recover a proportion of these defaults were hampered by the market environment following the Court of Appeal judgment in October 2024. Initiatives to reduce these excess default balances in Vehicle Finance are underway in 2025. The credit quality of new lending in the Vehicle Finance business has improved over time and arrears levels have reduced over the year from 12.2% to 10.0%. Retail Finance cost of risk improved to 1.0% (2023: 1.4%) reflecting the quality of business written and IFRS 9 model enhancements. The impairment charge for the year also reflects a loss of £5.6 million in Commercial Financial due to a client failing through challenges in the market in which it operated.

On an adjusted1 basis the Group achieved a profit before tax of £39.1 million (2023: £42.6 million), a decrease of 8.2%. Total profit before tax of £29.2 million (2023: £33.4 million) was impacted by exceptional items (£9.9 million) in 2024 (2023: £6.5 million). The Group achieved an adjusted1 return on average equity ('ROAE') of 8.0% (2023: 9.6%) and a common equity tier 1 ratio of 12.3% (2024: 12.7%).

Further information on exceptional items relating to BiFD and motor commissions are detailed below. The remaining costs were for the Group's organisational redesign (£1.5 million) relating to employee redundancies, which will deliver the additional annualised savings under Project Fusion of £3 million3 to be realised in 2025.

Capital ratios have reduced in the period by 0.4 percentage points due to the exceptional items impact of 0.3 percentage points and capital generated being utilised to support growth in Risk Weighted Assets ('RWAs') and dividends.

Financial summary2

Optimising for Growth: Further strategic progress

The Group has made good progress against its strategic priorities of Simplify, Enhance Customer Experience and Leverage Networks during the year. This strategic progress has driven our loan book growth and cost efficiency.

Other highlights

Regulatory and legal developments

As highlighted at the end of 2023, we have been working on improving our collections processes, procedures and policies following the FCA's review of BiFD across the industry. The BiFD review resulted in payments to customers for historical distress and inconvenience which were materially provided for in the 2023 accounts. The majority of customer communications have now been distributed, and we expect to complete activities by the middle of 2025. This was a delay on our initial timetable, as we took additional time to ensure the quality and clarity of our correspondence was appropriate for our customers. We incurred an additional £1.5 million of cost (treated as exceptional) during 2024, primarily in relation to managing the programme.

In light of legal and regulatory developments, including the FCA's ongoing review of the historical discretionary commission arrangements ('DCA') in the motor finance market (January 2024), and the Court of Appeal's judgement (October 2024) which is currently under appeal, the Group has recognised costs of £6.9 million (£5.2 million potential redress, £1.7 million costs, of which £6.4 million is recognised as a provision) for both DCA and fixed commission structures.

The Vehicle Finance business sometimes operated DCAs until June 2017, stopping using them well ahead of the FCA banning their use in January 2021. Only 4% of our Vehicle Finance commission payments had these arrangements. Not all of the fact pattern in the three Court of Appeal cases is the same as how the Group operated. A key feature of their fact pattern was the linked sale by a dealer of the vehicle and the direct introduction of the finance by that same dealer. Sales by a dealer made up only 20% of our motor commission payments. 80% of motor commission was not paid through dealers but through brokers and various other introducers. Due to the uncertain outcomes (including the nature, extent and timing) of the legal and regulatory developments, we have undertaken scenario analysis with a number of different assumptions, which have been probability weighted to estimate a potential exposure. As and when new information becomes available, these assumptions will be updated accordingly and so the provision could be materially higher or lower. Further information can be found in Note 29 to the Financial Statements.

Dividend

The Directors are proposing a final dividend of 22.5 pence per share for 2024, which will be payable on 22 May 2025 to shareholders on the register at the close of business on 25 April 2025. The total dividend payable for 2024 is 33.8 pence per share (2023: 32.2 pence per share). This is in line with the Board's decision to move to a progressive dividend policy for the 2024 financial year, reflecting feedback from shareholders. The total dividend pence per share represents a 5% increase against prior year.

Outlook

Although 2024 has left us on balance with a more positive economic outlook, the expected stability and optimism for growth that was promised from a change in UK government has not yet materialised. Interest rates have started slowly to come down following a period of stabilised inflation figures, but concerns exist over growth in the UK economy and the perceived adverse impact of the new Chancellor's Budget on the market, businesses and consumer confidence. There has also been additional geopolitical uncertainty due to the change of legislature in the US, notably how new economic policy will influence global markets.

2024 has been extremely challenging for specialist banks due to the regulatory and legal developments that have taken place with respect to historical motor finance commissions. We are acutely aware that the perceived risk of these proposed developments is dampening investor sentiment to the sector. We are hopeful that the industry will receive the clarity it needs on motor finance commissions mid 2025, and that we can move forward with confidence and renewed focus on delivering against our strategic objectives.

Subject to no adverse changes in the economy and trading environment, we expect by the end of 2025 we will be well positioned to have largely delivered against our £4 billion net lending target.

Footnotes:

1. Adjusted metrics exclude exceptional items of £9.9 million (2023: £6.5 million). Details can be found in Note 8 to the Financial Statements.

2. Performance metrics relate to continuing operations, unless otherwise stated. Further details of the metrics can be found in the Appendix to the 2024 Annual Report and Accounts.

3. £5.0 million cost savings relative to operating expenses for the 12 months ended December 2021. The additional £3.0 million cost savings relative to annualised operating expenses for the six months ending 30 June 2024.

4. pp represents the percentage point movement.

Results presentation

This announcement together with the associated investors' presentation are available on:www.securetrustbank.com/results-reports/results-reports-presentations

Secure Trust Bank will host a webcast for analysts and investors today, 13 March 2025 at 9:00am, which can be accessed by registering at: https://brrmedia.news/STB_FY24

For those wishing to ask a question, please dial into the event by conference call:

Dial +44 (0)330 551 0200

UK Toll Free: 0808 109 0700

Confirmation code (if prompted): Secure Trust Bank

Enquiries: 

Secure Trust Bank PLC

David McCreadie, Chief Executive Officer

Rachel Lawrence, Chief Financial Officer

Phil Clark, Investor Relations

Tel: +44 (0) 121 693 9100

Investec Bank plc (Joint Broker)

Chris Baird

David Anderson

Maria Gomez de Olea

Tel: +44 (0) 20 7597 5970

Shore Capital Stockbrokers (Joint Broker)

Mark Percy / Rachel Goldstein (Corporate Advisory)

Guy Wiehahn (Corporate Broking)

Tel: +44 (0) 20 7408 4090

Camarco

Ed Gascoigne-Pees, Geoffrey Pelham-Lane, Sean Palmer

[email protected]

Tel: +44 (0) 7591 760844

Forward looking statements

This announcement contains forward looking statements about the business, strategy and plans of STB and its current objectives, targets and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about STB's or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. STB's actual future results may differ materially from the results expressed or implied in these forward looking statements as a result of a variety of factors. These include economic and business conditions, risks from failure of clients, customers and counterparties, market related risks including interest rate risk, risks regarding market conditions outside STB's control, expected credit losses in certain scenarios involving forward looking data, operational risks, legal, regulatory, or governmental developments, and other factors. The forward looking statements contained in this announcement are made as of the date of this announcement, and (except as required by law or regulation) STB undertakes no obligation to update any of its forward looking statements.

Group at a glance

Our strategic progress

Simplify

Enhance customer experience

Leverage networks

Enabled by technology

1. £5.0 million cost savings relative to operating expenses for the 12 months ended December 2021. The additional £3.0 million savings will be relative to annualised operating expenses for the six months ended 30 June 2024.

Chair's statement

We have delivered a resilient performance in 2024, in a challenging operating environment with elevated inflation, continued high interest rates, a new UK government and slowing economic growth, causing uncertainty across the markets in which we operate. In addition, like many other firms across the sector, we faced significant legal and regulatory headwinds, which have created further uncertainty and disruption.

Despite these challenges, we have continued to focus on delivering for our customers, which has driven continued lending growth across both our Consumer and Business Finance segments. During the year, we have taken decisions to refocus our Vehicle Finance business, invest in our collections capability and simplify our organisational design, further reducing complexity and costs.

First impressions

I joined Secure Trust Bank because I believe in the underlying strength of the business and the strategic growth opportunities available. Since my appointment as Chair in May 2024, I have engaged with many people across the business and visited our key offices, which has served to reinforce my initial views. I have been particularly impressed by the commitment shown by our people, who are dedicated to delivering for our customers and helping them to fulfil their ambitions. This focus on our customers and achieving good outcomes for them, will drive our future success.

I have welcomed the opportunity to meet with many of our major shareholders and hear their views, on the business and the markets in which we operate. This engagement has been very valuable as I have transitioned into the Chair role.

In-line with feedback from shareholders, we have enhanced our segmental reporting, providing greater granularity on the performance of each business unit, further information on which can be found in Note 3 of the Financial Statements.

Business performance

Adjusted1 profit before tax for the year ended 31 December 2024 was £39.1 million (2023: £42.6 million) and statutory profit before tax was £29.2 million (2023: £36.1 million). Excluding impairment charges, which were impacted by the FCA's Borrowers in Financial Difficulty ('BiFD') review as explained in the following section, adjusted1 profit before tax pre-impairments increased 18.0% to £100.9 million (2023: £85.5 million).

Adjusted1 return on average equity has decreased to 8.0% from 9.6% in 2023; improving the bank's return on equity across the business units is a key area of focus for the Board and management.

We have taken several decisions during the year to accelerate the growth in our return on equity, particularly within our Vehicle Finance business, where we have refined our strategy to focus on higher returning segments of the market and made further investments to improve our collections processes. Across the Group we have implemented centralised operating and governance models, which have reduced complexity, improved the consistency of service to clients, delivered cost efficiencies and resulted in a more agile organisation.

Legal and regulatory developments

The FCA's BiFD review and subsequent engagement with the regulator meant the Group paused collections processes in our Vehicle Finance business during the second half of 2023. During the year, we have invested in our collections capabilities, to enhance the outcomes for our customers and improve our processes. The reduced collections activity into 2024 resulted in a material increase in our impairment charges in 2024, which impacted our profitability for the year. Collections activity returned to normalised levels during H2 24 and we are considering options to manage the level of defaulted stock.

Separately, in January 2024 the FCA launched a review of the historic use of discretionary commission arrangements ('DCAs') in the motor finance market. DCAs were prohibited by the FCA in 2021, although the Group ceased these types of arrangements well before in June 2017.

The Court of Appeal's October 2024 judgment on three motor commission cases led to lending pauses and uncertainty across the motor finance market and is the subject of a Supreme Court appeal. There are important differences in the fact patterns in those cases and our lending model. We also believe that key aspects of the judgment, if upheld, go beyond the regulatory requirements applied by the FCA, and generally understood by market participants, at the time. Further information can be found in Note 29 of the Financial Statements.

Immediately before the Court of Appeal's judgment, the Company's share price had increased by 18% for the year to October. After this judgment and with the continuing uncertainty in the sector, our share price fell by 48% to £3.62 as at 31 December 2024, significantly below the Group's tangible book value of £18.64.

Capital management and dividend

As at 31 December 2024 the Group's Common Equity Tier 1 ratio was 12.3% (2023:12.7%). The optimal deployment of our capital and the returns it generates will be a key area of focus during 2025, as we balance maintaining a healthy capital surplus with investing for growth and returns to shareholders.

With effect from the 2024 AGM we implemented a new progressive dividend policy, which means dividends will be no less than that of the previous year. Under the policy the Board will consider the Group's capital requirements, liquidity and market expectations in determining the specific amount. In-line with that policy the Board proposes a final dividend of 22.5 pence per share (2023: 16.2 pence per share), which if approved by shareholders at the Company's 2025 AGM, will be paid on 22 May 2025 to those shareholders on the register on 25 April 2025.

Governance

There have been a number of changes to the Board during the year. Victoria Stewart, a Non-Executive Director and Chair of the Remuneration Committee, stood down from the Board on 31 December 2024, after entering her ninth year as a Director. I would like to thank Victoria for her stewardship of the Remuneration Committee and her wider contribution to the development of the Group throughout her tenure.

In October, we welcomed Julie Hopes to the Board, who succeeded Victoria as Chair of the Remuneration Committee with effect from 31 December 2024. Julie has strong experience of Chairing Remuneration Committees, particularly within Financial Services, and brings a strategic mindset, experience of business transformation and a strong focus on consumers.

In October, we also appointed Victoria Mitchell, an existing Non-Executive Director to our Risk Committee. Victoria previously served as the Chief Risk Officer of Capital One (Europe) plc and her experience further strengthens and broadens the experience of the Risk Committee.

Outlook

We have a strong, diversified business and see significant growth opportunities in sectors in which we operate. We believe our customer focus positions us well to capitalise on these opportunities and increase our return on equity.

As highlighted, there remains significant legal and regulatory uncertainty across the motor finance sector and the wider macroeconomic environment. Supporting the management team to address the potential implications of the Supreme Court's decision is a priority for the Board.

Throughout this, we will continue to focus on building momentum across our business units, the effective deployment of our capital and increasing our return on equity.

I would like to sincerely thank our customers for their continued trust and our colleagues for their hard work throughout the year; they have demonstrated their resilience and have remained dedicated to delivering for our customers, shareholders and other stakeholders.

1. Adjusted metrics exclude exceptional items of £9.9 million (2023: £6.5 million). Details can be found in Note 8 to the Financial Statements.

Chief Executive's statement

There were a number of challenges that presented themselves during the year, and so, I was pleased that while navigating those, we were also able to deliver improvements, particularly in the second half of the year across lending growth, net interest margin and adjusted1 cost income ratio. This has been achieved with a Common Equity Tier 1 ('CET 1') ratio of 12.3%. Full-year adjusted1 profit before tax pre impairments increased by 18.0% to £100.9 million (2023: £85.5 million). Statutory profit before tax was £29.2 million (2023: £36.1 million).

Progress against our medium-term targets has been encouraging. We achieved an 8.8% growth in net lending (2024: £3.6 billion; 2023: £3.3 billion), moving us closer to our £4.0 billion target and stabilised our net interest margin at 5.4% (2023: 5.4%), just below our target of greater than 5.5%, despite incurring higher funding costs. Project Fusion, our cost optimisation programme, prudent cost management and continued income growth contributed to an improvement in our adjusted1 cost income ratio to 50.9% (2023: 54.0%), a reduction of 310 basis points. Statutory cost income ratio was 55.8% (2023: 57.5%). This is excellent progress towards our target of 44% to 46%. Continued growth in net lending and net interest margin and effective cost management will drive us towards delivering our target return on average equity ('ROAE') of 14% to 16%.

Although the year saw a reduction in the Bank of England Base Rate, we have operated in a highly competitive interest rate environment for Savings accounts. We continue to offer competitive rates to depositors, attracting significant levels of new funding (£1.6 billion), as well as retaining matured funds (£0.9 billion). Our deposits are entirely from retail customers and more than 95% of deposits are fully covered by the FSCS. We have achieved this, despite the challenges we have faced in 2024, with a high interest rate environment and uncertainty around timing of interest rate cuts, slowing economic growth and political changes. This has impacted demand for credit, particularly in Business Finance. We continued to manage credit exposures in a disciplined way and remained agile in managing our balance sheet.

Cost of risk increased from 1.4% to 1.8% and was impacted by the secondary impact of the pause in our collection processes in Vehicle Finance during the second half of 2023, which resulted in an elevated stock of defaulted loans (see section on Regulatory and legal interventions), which increased impairment charges for the year. As a consequence, the cost of risk for Vehicle Finance increased from 3.4% in 2023 to 7.7%. Unfortunately, the initiatives we hoped would restore performance of the Vehicle Finance portfolio towards a normal level for year-end, were not possible to fully execute due to the market environment. We continue to pursue strategic options to manage down the stock of historic defaulted balances. Retail Finance cost of risk improved to 1.0% (2023: 1.4%) reflecting the quality of business written and IFRS 9 model enhancements, which resulted in some one-off provision releases.

As a result, we delivered an adjusted1 profit before tax of £39.1 million (2023: £42.6 million) in the year, which impacted our adjusted1 ROAE of 8.0% (2023: 9.6%). Total ROAE was 5.5% (2023: 7.3%). Three of our specialist businesses grew profitability year-on-year. The higher cost of risk in Vehicle Finance impacted our overall results. Further insight is shared in our segmental reporting which can be found in Note 3 to the Financial Statements.

With our four specialist lending segments all offering compelling propositions in large addressable markets, we have solid foundations in place to make further market share gains. This is demonstrated by our strong track record in recent years. We saw gains in Retail Finance's market share of new business, which grew to 15.3%2; this continues to grow year-on-year (2023: 13.5%). Vehicle Finance's market share of new business was 1.4%3 increasing its position from 2023 (1.2%). As a result, this contributed to net lending growth in the Consumer Finance businesses of 13.4% (£225.7 million) since 2023. Business Finance increased by £67.5 million, despite a subdued trading environment.

During the year, we took the opportunity to showcase our Real Estate Finance and Commercial Finance businesses at Capital Markets events held in July and November. Further details can be found on our website www.securetrustbank.com/presentations

1. Adjusted metrics exclude exceptional items of £9.9 million (2023: £6.5 million). Details can be found in Note 8 to the Financial Statements.

2. Source: Finance & Leasing Association ('FLA'): New business values within retail store and online credit: 2024 15.3% (2023: 13.5%): FLA total and Retail Finance new business of £8,427million (2023: £8,810 million) and £1,289.7 million (2023: £1,185.4 million) respectively. As published at 31 December 2024.

3. Source: FLA. Cars bought on finance by consumers through the point of sale: New business values: 2024 1.4% (2023: 1.2%): Used cars: 2024, FLA total and Vehicle Finance total of £21,281 million (2023: £22,082 million) and £294.4 million (2023: £260.0 million) respectively. As published at 31 December 2024.

Key performance indicators

The following key performance indicators are the primary measures used by management to assess the performance of the Group.

Financial

Loans and advances to customers (bn)

Why we measure this

Shows the growth in the Group's lending balances, which generate income

Net interest margin (%)

Why we measure this

Shows the interest margin earned on the Group's lending balances, net of funding costs

Total return on average equity (%)

Why we measure this

Measures the Group's ability to generate profit from the equity available to it

Common Equity Tier 1 ('CET 1') ratio (%)

Why we measure this

The CET 1 ratio demonstrates the Group's capital strength

Cost to income ratio (%)

Why we measure this

Measures how efficiently the Group uses its cost base to produce income

1. Adjusted cost to income ratio excludes exceptional items.

Cost of risk (%)

Why we measure this

Measures how effectively the Group manages the credit risk of its lending portfolios

Non-financial

Customer Feefo ratings (Stars)2

Why we measure this

Indicator of customer satisfaction with the Group's products and services

2. Mark out of 5 based on star rating from 1,661 reviews (2023:1,989; 2022: 990; 2021: 937; 2020: 1,466).

Employee survey trust index score (%)

Why we measure this

Indicator of employee engagement and satisfaction

Environmental intensity indicator3

3. Total Scope 1, 2 and certain Scope 3 emissions per £million Group operating income.

Why we measure this

Indicator of the Group's impact on the environment

Certain key performance indicators represent alternative performance measures that are not defined or specified under International Financial Reporting Standards ('IFRS').

Definitions of the financial key performance indicators, their calculation and an explanation of the reasons for their use can be found in the Appendix to the 2024 Annual Report and Accounts.

All key performance indicators are presented on a continuing basis, unless otherwise stated.

Further information on discontinued operations are included in Note 10 to the Financial Statements.

Further explanation of the financial key performance indicators is discussed in the narrative of the Financial Review.

Further explanation of the non-financial key performance indicators is provided in the Managing our Business Responsibly and Climate-Related Financial Disclosures sections.

The Directors' Remuneration report in the 2024 Annual Report and Accounts, sets out how executive pay is linked to the assessment of key financial and non-financial performance indicators.

Strategic priorities

Our strategic priorities are simplifying the Group, enhancing customer experience and leveraging our networks, all enabled by technology. These are the right priorities to Optimise for Growth, and will enable us to progress towards delivering all of our medium-term targets.

Simplify

A key initiative of simplification has been Project Fusion, where we achieved the target of £5 million1 in annualised savings at the end of 2024. This was achieved through a sustained focus on cost discipline and we contained our year-on-year cost growth at 4.1%. We continued with supplier reviews to crystallise cost savings, and implemented technology enhancements. This year, this included migrating the e-signing of lending agreements to use in-house developed technology for our Retail Finance business, eliminating the need to use a third party.

The update in our Project Fusion target, announced at the half year, to £8 million1 in annualised savings reflected material cost savings from organisational redesign. In the first half of the year, we consolidated our IT and Operations teams under the Group's Chief Operating Officer, and in the second half of the year this was further refined where we amalgamated product-specific teams under a single management structure. In addition, there were changes within Finance and the Risk Function to ensure they are configured to support the business in the most effective way, this also led to the creation of several new roles. The organisational changes will drive a simpler and more cost-efficient structure, remove duplication and provide clearer career paths and development opportunities. The changes did result in a redundancy programme, which resulted in some colleagues leaving the organisation, at a cost of £1.5 million. I would like to thank all colleagues who have left the business for their hard work and dedication and wish them well for the future. Although not an easy decision to make, these changes position the Group for future success. The organisational changes work was completed in December 2024, and the £3 million cost savings will be fully realised in 2025.

Combined, these initiatives give us high confidence in driving our cost income ratio to our target of 44 to 46% as we achieve our ambition for net lending of £4 billion. With that in mind, we are currently undertaking a strategic review of our business activities and future opportunities to inform the Group's future ambition and objectives beyond 2025.

Enhance customer experience

We are pleased to see that our customers are taking advantage of our digital platforms. During the year, we invested in enhancing our savings application process by simplifying the customer journey on our website. This included making the process a lot more user friendly, and better supporting customers with accessibility needs.

Over 97.1% of our Savings customers are registered to use online banking (2023: 95.8%). Since the launch of our Savings app in 2023, we have seen further uptake of app registrations, which is now at 30.1% and saw over half of servicing transactions being submitted on the Savings app for Access and Notice accounts.

More customers than ever (87.4%) have registered with our Retail Finance online account management system (2023: 80.4%). We also re-launched our AppToPay app, which now offers a mobile-based service platform for all our Retail Finance products, allowing customers to self-serve and initiate payments (see below for further details).

We continue to focus on customer outcomes and improving customer satisfaction, and again we score highly with Feefo, achieving 4.7 (2023: 4.6) for our Consumer Finance businesses. In addition, our Retail Finance business was nominated for Best Consumer Credit Product at the Credit Awards.

Within Business Finance, our Commercial Finance business was recognised by TheBusinessDesk.com North West Rainmakers Award, and was nominated for the 'Asset- based Lending Team'. In September, the business surpassed this and won the ABL/Non-Bank Lender of the Year award at the Midlands Insider Deal Makers Awards, a great achievement. Internal customer satisfaction reviews showed a 97% satisfaction score, which is a testament to a business that is highly reliant on expertise and relationship management model. In Real Estate Finance, 100% of respondents rated the service they receive from the team as 'Excellent'.

Leverage networks

Our relationships with partners, retailers, car dealers, intermediaries, new business originators and advisers support our growth.

Our Retail Finance net lending balance of £1.4 billion (2023: £1.2 billion) was supported by nearly 1,100 retail partners. 2024 saw the business secure longer-term contracts with a large furniture retailer and a jewellery retailer, and gaining new retailers in the lifestyle sector. Vehicle Finance saw an increase of 19.5% in its net lending balance growing from £0.47 billion to £0.56 billion.

API integration is a key feature in our offering to our consumer distribution networks. This enables us to work seamlessly with our partners, creating efficient working practices across both partner organisations and internally. This has long been an advantage as part of our Retail Finance offering to retail partners, integrating at speed.

The power of our relationship model in Real Estate Finance has seen new lending to existing clients increase from 36% in 2021 to 67% in 2024, with reliance on new lending origination from brokers declining from 42% to 13% over the same period. This retention model has the benefit of reduced cost of customer acquisition and provides greater knowledge of customers' risk profiles.

1. £5.0 million cost savings relative to operating expenses for the 12 months ended December 2021. The additional £3.0 million savings (of the £8.0 million) will be relative to annualised operating expenses for the six months ending 30 June 2024.

Enabled by technology

In October, we rolled-out the enhanced capability of our modern Vehicle Finance origination and loan management platform, which is now capable of hosting all new business across products and risk segments. Importantly, customer applications submitted by intermediaries will cascade through our credit tiers and be matched to the most appropriate product terms, which will enable us to offer loans to more customers. This represents a significant investment made over several years allowing us to move forward with technology designed for the market and allow us to migrate away from legacy high maintenance systems.

As noted, we re-launched our AppToPay proposition in December. Initial data shows customers taking advantage of making payments through open-banking, which is more convenient for the customer, and more cost-efficient for the Group. The app provides the initial foundations for providing customers and retailers opportunities to access our full Retail Finance product suite.

Regulatory and legal interventions

As highlighted at the end of 2023, we were working on improving our collections processes, procedures and policies following the FCA's review of Borrowers in Financial Difficulty ('BiFD') across the industry. Customers are now being offered a wider range of forbearance options to support them through financial difficulties. We have identified that it is appropriate to pay £2.2 million to customers (of which £2.0 million was recognised in 2023) where we could have supported them better due to their individual circumstances. A significant part of the customer communications have now been distributed, and we expect to complete activities by the middle of 2025. This was a delay on our initial timetable, as we took additional time to ensure the quality and clarity of our correspondence was appropriate for our customers. We incurred an additional £1.5 million of costs (treated as exceptional) during 2024, primarily in relation to managing the programme.

The BiFD review resulted in a larger stock of defaulted loans within our Vehicle Finance business and increased the associated loan impairment provision. The stock of defaulted Vehicle Finance loans has remained elevated throughout the year, and as noted above, market conditions were not conducive to deliver on our strategic plans to normalise the position by year-end. The impairment charges recognised on the defaulted stock is not a reflection of the underlying quality of the business being originated. Collections activities returned to normal as the year progressed and arrears levels have reduced over the year.

In light of legal and regulatory developments, including the FCA's ongoing review of historical discretionary commission arrangements ('DCA') in the motor finance market, and the Court of Appeal's judgment which is currently under appeal, we have recognised costs of £6.9 million (£5.2 million redress, £1.7 million costs) for both DCA and fixed commission structures. There are important factual differences between those cases and how we operated. Further information can be found in Note 29 to the Financial Statements.

Environmental, Social and Governance ('ESG')

We have made progress against all our ESG focus areas during the year and refreshed our strategy to ensure it is reflective of our ESG aspirations moving forwards.

We were again recognised by UK's Best Workplaces™ by Great Place to Work® for a number of accolades. This is supported by colleagues completing employee opinion surveys at the end of 2023. The Group undertook a survey towards the end of 2024 and achieved a trust index score of 74% (2023: 83%). We had anticipated this fall, with the survey being undertaken during the rollout of our organisational redesign programme, which led to a period of uncertainty for many colleagues and a number of roles ultimately being made redundant. However, the score remained high against similar size organisations, which is positive considering the wide impact of change. I appreciate this time has been very challenging for those impacted as well as those remaining within the organisation. I would like to extend my personal thanks to colleagues for their hard work and commitment while we worked through this period of change.

Our colleagues continued to work hard to donate their time and efforts to support and raise funds for charity across a number of events, which included a golf day and the Three Peaks Challenge, raising nearly £100,000 for great causes this year.

As part of our ongoing work on Climate Action, we have become members of the Partnership for Carbon Accounting Financials ('PCAF'). Our membership of PCAF underlines our ongoing commitment to monitor and manage our environmental impacts as part of our ESG strategy. We have enhanced our emission disclosures around Scope 3 (see Climate-related financial disclosures in the 2024 Annual Report and Accounts). We also surpassed our goal to reduce our Scope 1 and 2 emissions by 50% (from 2021) a year early. During 2024, initiatives such as reducing our office footprint have contributed towards this reduction. We continue to look at internal initiatives to also support the impact we have on the environment, having launched a new employee benefit, a green car scheme, that is enabling our colleagues to lease brand new electric or plug-in hybrid vehicles.

Changes in Executive Committee

During the year, we saw some changes to our Executive Committee. John Bevan who oversaw the Commercial Finance business retired at the end of the year. John was with the Group for over 10 years, establishing the Commercial Finance business in 2014 and growing it to be a significant player in the asset-based lending market. Geoff Ray, Managing Director of the Real Estate Finance business, will retire in April 2025. Geoff joined the business in its early days and has been an integral part of its leadership team. Both have played a key role in developing their teams and growing their franchises with huge passion for their respective sectors. I would like to thank them both for the valuable contribution and wish them well in their retirement.

I would like to welcome Luke Jooste, who joined us on 1 March 2025 from Momenta Finance where he was the Chief Executive Officer. Luke has been appointed as Managing Director, Business Finance and will provide a fresh perspective to both Commercial and Real Estate Finance, and be the Executive Committee lead in setting the future strategy for our proposition to business customers.

Outlook

On balance, 2024 ended with a more positive economic outlook than 2023 with issues such as COVID and the cost-of-living crisis seeming to be largely behind us. However, the expected stability and optimism for growth that was promised from a change in UK government has not yet materialised. Whilst interest rates have started to slowly come down following a period of stabilised inflation figures, concerns over growth in the UK economy and the perceived adverse impact of the new Chancellor's Budget on the market, businesses and consumer confidence. There has also been additional geopolitical uncertainty due to the change of legislature in the US.

2024 has been extremely challenging for specialist banks due to the legal and regulatory developments relating to motor finance commissions. We are hopeful that the industry will receive the clarity it needs in 2025, and that we can move forward with confidence and renewed focus on delivering against our strategic objectives.

Subject to no adverse changes in the economy and trading environment, we expect by the end of 2025 we will have clear line of sight to delivering against our medium-term targets. With that in mind, we are currently undertaking a Group-wide review of our business activities. We have made an initial decision to re-focus the Vehicle Finance business on higher returning segments. I intend to provide an update on the outcome of this work in our 2025 Interim Report.

Financial review

Income statement

Certain key performance indicators and performance metrics represent alternative performance measures that are not defined or specified under International Financial Reporting Standards ('IFRS'). Definitions of these alternative performance measures, their calculation and an explanation of the reasons for their use can be found in the Appendix to the 2024 Annual Report and Accounts.

All key performance indicators are presented on a continuing basis, unless otherwise stated. Adjusted profit before tax refers to profit before income tax from continuing operations before exceptional items. Further information on exceptional items are included in Note 8 of the Financial Statements.

The Directors' Remuneration report in the 2024 Annual Report and Accounts, sets out how executive pay is linked to the assessment of key financial and non-financial performance metrics.

In 2024, we delivered strong lending growth, particularly within our Consumer Finance businesses, with net lending growth, of 8.8% driving income growth of 10.4% at a stable netinterest margin. Cost growth has been actively managed and contained at 4.1%, but we have incurred higher impairments within our Vehicle Finance business due to the operational impacts of the FCA's review of Borrowers in Financial Difficulty ('BiFD'). The Group achieved an adjusted profit before tax of £39.1 million (2023: £42.6 million), with the Common Equity Tier 1 ('CET 1') ratio of 12.3%.

Increased impairment charges have reduced profits, resulting in total Earnings Per Share ('EPS') decreasing from 129.6 pence per share (2023) to 103.4 pence per share. On an adjusted basis, EPS decreased to 150.1 pence per share (2023: 172.3 pence per share). Total return on average equity decreased from 7.3% (2023) to 5.5%. On an adjusted basis, return on average equity decreased to 8.0% (2023: 9.6%).

Detailed disclosures of EPS are shown in Note 11 to the Financial Statements. The components of the Group's profit are analysed in more detail in the following sections.

Operating income

The Group's operating income increased by 10.4% to £203.9 million (2023: £184.7 million). Net interest income on the Group's lending assets continues to be the largest component of operating income. This increased by 10.4% to £184.9 million (2023: £167.5 million), driven by growth in net lending assets, with average balances increasing by 10.1% to £3,413.9 million (2023: £3,099.4 million).

The Group's net interest margin was maintained at 5.4% (2023: 5.4%) by actively increasing gross yields to reflect the higher cost of funds.

The Group's other income, which relates to net fee and commission income, increased by 10.5% to £19.0 million (2023: £17.2 million).

Impairment charge

Impairment charges increased to £61.9 million (2023: £43.2 million) resulting in an increased Group cost of risk of 1.8% (2023: 1.4%).

Increased expected credit losses in the Vehicle Finance business have been the principal reason for the increased impairment charges. Vehicle Finance has experienced increased levels of customer defaults due to a pause in collections activities from second half of 2023 as the business addressed the specific feedback received following the FCA's review of BiFD. The credit quality of new lending in the Vehicle Finance business has improved over time and arrears levels have reduced over the year.

Impairment charges are lower year on year across all other lending businesses. Retail Finance has originated a greater mix of higher-quality loans and also updated to reflect an improved debt sale arrangement. Both Business Finance businesses have incurred charges on specific cases but, overall, the portfolios performed better than 2023.

Overall impairment provisions increased to £111.8 million (2023: £88.1 million) with a total coverage level of 3.0% (2023: 2.6%).

During the financial year, the Group refreshed macroeconomic inputs to its IFRS 9 Expected Credit Loss ('ECL') models, incorporating its external economic adviser's latest UK economic outlook. The forecast economic assumptions within each IFRS 9 scenario, and the weighting applied, are set out in more detail in Note 16 to the Financial Statements.

The Group has applied Expert Credit Judgements ('ECJ's') underlays totalling £5.7 million (2023: £1.2 million underlay), where management believes the IFRS 9 modelled output is not accurately reflecting current risks in the loan portfolios. The majority of the ECJ underlays of £4.5 million (2023: £2.1 million) relate to the Vehicle Finance lending portfolios LGD stage 1 and 2 recovery assumptions being understated in the model; which will be updated in 2025. Further details of these ECJs are included in Note 16 to the Financial Statements. During the year, the Group implemented a new IFRS 9 model for Vehicle Finance prime lending and an enhanced Probability of Default model for Retail Finance. These better reflect the underlying credit quality of business written and has reduced the need for ECJ's. We have also updated IFRS 9 Significant Increase in Credit Risk ('SICR') criteria, and implemented a new curing policy for Consumer Finance, further information can be found in Note 16 to the Financial Statements.

Fair value and other gains on financial instruments

The Group has highly effective hedge accounting relationships, and, as a result, recognised a small hedging ineffectiveness gain of £0.1 million (2023: £0.1 million gain) and £0.6 million gain (2023: £nil) relating to hedge accounting inception and amortisation adjustments (See Note 5 to the Financial Statements). The Group also recognised a gain of £0.5 million (2023: £0.8 million loss) relating to interest rate swaps being entered into ahead of hedge accounting becoming available, which will reverse to the income statement over the remaining life of the swaps.

During 2023, the Group realised a gain of £1.2 million on the buy-back of the 2018 Tier 2 debt.

Operating expenses

The Group's adjusted cost income ratio improved to 50.9% (2023: 54.0%) with the cost base increasing by 4.1% to £103.8 million (2023: £99.7 million). The improved ratio reflects both the increase in operating income and the ongoing programme of initiatives that are driving more efficient and effective operational processes, including digitalisation of processes, supplier and procurement reviews, organisational design and property management. As at the end of 2024, Project Fusion has delivered £5 million of annualised cost savings¹, and will deliver another £3 million of additional annualised savings1 in 2025. Statutory cost income ratio inclusive of exceptional items was 55.8% (2023: 57.5%).

Taxation

The effective tax rate on continuing activities of 32.5%, increased compared with 2023 (26.9%) primarily as a result of non-deductible expenses in exceptional items.

Exceptional items

The Group recognised charges for exceptional items of £9.9 million during the year (2023: £6.5 million).

Further costs have been recognised in 2024 following the FCA's review of BiFD across the industry of £1.5 million (£1.3 million costs and £0.2 million potential redress/goodwill). £4.7 million was recognised in 2023 (£2.7 million costs and £2.0 million potential redress/goodwill).

In light of the FCA's ongoing review of historical discretionary commission arrangements ('DCA') in the motor finance market, and the Court of Appeal's judgment which is currently under appeal, we have recognised costs of £6.9 million (£5.2 million redress, £1.7 million costs) for both DCA and fixed commission structures. Further information can be found in Note 29 to the Financial Statements.

Following an organisational redesign in 2024, £1.5 million was incurred for restructuring costs. In 2023, the Group recognised charges in relation to non-recurring corporate activity of £1.8 million.

Further details on all Exceptional items are included in Note 8 to the Financial Statements.

Distributions to shareholders

The Board recommended the payment of a final dividend for 2024 of 22.5 pence per share, which together with the interim dividend of 11.3 pence per share, represents a total dividend for the year of 33.8 pence per share (2023: 32.2 pence per share). This is in line with the Group's progressive dividend policy.

1. £5.0 million cost savings relative to operating expenses for the 12 months ended December 2021. The additional £3.0 million savings will be relative to annualised operating expenses for the six months ending 30 June 2024.

Summarised balance sheet

New business

2024 was another positive year for new business with new lending of £2,331.9 million, up 1.1% year on year (2023: £2,305.4 million). Consumer Finance, which grew by 11.2% over 2023, offset by lower Business Finance, 24.6% lower than in 2023 due to more challenging market conditions. Further details on the divisional split of this new business can be found in the Business Review.

New business volumes

2024: £2,331.9m (2023: £2,305.4m)

Customer lending and deposits

Group lending assets increased by £293.2 million (8.8%) to £3,608.5 million (2023: £3,315.3 million), continuing our growth towards our net lending ambition of £4.0 billion.

Consumer Finance balances grew by £225.7 million or 13.4% driven by strong demand from strategic partner retailers, supported by Business Finance balances growth of £67.5 million (4.2%).

Loans and advances to customers

2024: £3,608.5m (2023: £3,315.3m)

Further analysis of loans and advances to customers, including a breakdown of the arrears profile of the Group's loan books, is provided in Note 16 to the Financial Statements.

Customer deposits include Fixed term bonds, ISAs, Notice and Access accounts. Customer deposits increased by 13.0% to £3,244.9 million (2023: £2,871.8 million) driven by lending book growth and as part of the strategy to replace drawings from the Bank of England Term Funding Scheme with additional incentives for SMEs ('TFSME') funding. Total funding ratio of 112.4% increased slightly from 31 December 2023 (111.7%). The mix of the deposit book has continued to change as the Group has adapted to the interest rate environment, with a focus on meeting customer demand for Access products, and retaining stable funds, which is reflected in the proportion of Fixed term bonds and ISAs.

Investments and wholesale funding

Amounts due to banks include drawings from the TFSME facility of £230.0 million, reducing from 2023 (£390.0 million) as the Group actively prepays this funding. In addition, it includes £125.0 million drawn from the Indexed Long-Term Repo ('ILTR') facility as at the end of 2024 (2023: £nil), a routine sterling liquidity management facility provided by the Bank of England.

Tier 2 subordinated liabilities

Tier 2 subordinated liabilities represent £90.0 million of 10.5-year 13.0% Fixed Rate Callable Subordinated Notes, which qualify as Tier 2 capital.

Capital

Management of capital

Our capital management policy is focused on optimising shareholder value over the long term. Capital is allocated to achieve targeted risk adjusted returns, while ensuring appropriate surpluses are held above the minimum regulatory requirements.

Key factors influencing the management of capital include:

Capital resources

Capital resources increased over the year from £397.6 million to £415.7 million. This includes the proposed 2024 final dividend of £4.2 million. The increase was primarily in CET 1 capital and was driven by total profit for the year of £19.7 million, offset by the final 2024 dividend of £4.2 million, and the expected reduction in the IFRS 9 transitional adjustment of £2.0 million. The remainder of the increase was from Tier 2 (£4.6 million) as capital eligibility increased through asset growth.

The resultant CET 1 and Total capital ratios are 12.3% (2023: 12.7%) and 14.6% (2023: 15.0%) respectively.

1. Tier 2 capital, which is solely subordinated debt net of unamortised issue costs, capped at 25% of total Pillar 1 and Pillar 2A requirements.

Capital requirements

The Total Capital Requirement, set by the PRA, includes both the calculated requirement derived using the standardised approach and the additional capital required, derived from the Internal Capital Adequacy Assessment Process ('ICAAP'). In addition, capital is held to cover generic buffers set at a macroeconomic level by the PRA.

The increase in lending balances through the year resulted in an increase in risk weighted assets over the period, bringing the total risk exposure up from £2,653.4 million to £2,855.7 million.

Liquidity

Management of liquidity

The Group uses a number of measures to manage liquidity risk. These include:

The Group was above the LCR minimum threshold (100%) throughout the year, with the Group's average LCR being 219.6% (2023: 208.0%) based on a rolling 12 month-end average.

Liquid assets

We continued to hold significant surplus liquidity over the minimum requirements throughout 2024, managing liquidity by holding HQLA and utilising funding (predominantly from retail funding) to support lending. Total liquid assets increased to £469.0 million (2023: £400.3 million) which, amongst other things, reflects the levels of liquidity at the end of 2024 to support funding required to fund the pipeline and fixed term bond maturities.

The Group is a participant in the Bank of England's Sterling Money Market Operations under the Sterling Monetary Framework and has drawn £230.0 million under the TFSME (2023: £390.0 million) and £125.0 million under the ILTR scheme (2023: £nil). The ILTR scheme has used collateral already prepositioned with the Bank of England and was initiated during the year as part of the strategy to repay TFSME before the end of its contractual term. Further drawings of ILTR are planned in 2025 as the remaining balance of TFSME is repaid. The Group has no liquid asset exposures outside the United Kingdom and no amounts that are either past due or impaired.

We continue to attract customer deposits to support balance sheet growth. The composition of customer deposits is shown in the table below:

Business review

Consumer Finance

Retail Finance

We provide quick and easy finance options at the point of purchase.

What we do

2024 performance

Outlook

1. Source: Finance & Leasing Association ('FLA'): New business values within retail store and online credit: 2024 15.3% (2023: 13.5%): FLA total and Retail Finance new business of £8,427 million (2023: £8,810 million) and £1,289.7 million (2023: £1,185.4 million) respectively. As published at 31 December 2024.

Performance history

New business (£m)

Loans and advances to customers (£m)

Net interest margin (%)

Risk adjusted margin (%)

Consumer Finance

Vehicle Finance

We provide quick and easy used car finance options at the point of purchase.

What we do

2024 performance

Outlook

1. Source: FLA. Cars bought on finance by consumers through the point of sale: New business values: 2024 1.4% (2023: 1.2%): Used cars: 2024, FLA total and Vehicle Finance total of £21,281 million (2023: £22,082 million) and £294.4 million (2023: £260.0 million) respectively. As published at 31 December 2024.

Performance history

New business (£m)

Loans and advances to customers (£m)

Net interest margin (%)

Risk adjusted margin (%)

Business Finance

Real Estate Finance

We lend money against residential properties to professional landlords and property developers.

What we do

2024 performance

Outlook

Performance history

New business (£m)

Loans and advances to customers (£m)

Net revenue margin (%)

Risk adjusted margin (%)

Business Finance

Commercial Finance

We support the growth of UK businesses by enabling effective cash flow.

What we do

2024 performance

Outlook

Performance history

New business (£m)

Loans and advances to customers (£m)

Net revenue margin (%)

Risk adjusted margin (%)

Savings

We look after our customers' savings and provide a competitive return.

What we do

2024 performance

Outlook

Performance history

Total deposits (£m)

Total funds raised (£m)

2024: £3,244.9m

2023: £2,871.8m

Market review

The Group operates exclusively within the UK and its revenue is derived almost entirely from customers operating in the UK. The Group is therefore particularly exposed to the condition of the UK economy. Customers' borrowing demands are variously influenced by, among other things, UK property markets, employment levels, inflation, interest rates and customer confidence. The economic environment and outlook affect demand for the Group's products, margins that can be earned on lending assets and the levels of loan impairment provisions.

As a financial services firm, the Group is subject to extensive and comprehensive regulation by governmental and regulatory bodies in the UK. The Group conducts its business subject to ongoing regulation by the Financial Conduct Authority ('FCA') and the Prudential Regulation Authority ('PRA'). The Group must comply with the regulatory regime across many aspects of its activities, including: the training, authorisation and supervision of personnel; systems; processes; product design; customer journey; and documentation.

Economic review

Economic growth, measured in real annual UK Gross Domestic Product ('GDP'), was estimated to be 0.9% in 2024 (2023: 0.4%). Economists' base case forecasts indicate GDP growth will increase in 2025, with full-year growth in GDP expected to be 1.4%. However, there is some scepticism that the new UK government's first Budget will have the desired effects of boosting growth, and that household savings are less available to be deployed to boost consumer spending. This has led to downward revisions in more recent UK GDP forecasts, in contrast to global growth forecasts, which have improved partly due to the expected loosening of US fiscal policy under President Trump.

The rate of inflation fell sharply in 2024 and was largely back to the Bank of England target of 2% by June 2024, but there was a small increase to 2.5% by the end of the year and a further increase to 3.0% in January 2025. Reflecting the 2024 fall in inflation, the Bank of England reduced the Base Rate from 5.25% to 5.00% in August 2024 and from 5.00% to 4.75% in November 2024. A further decrease to 4.50% was announced in February 2025. Financial markets have responded to the Bank of England reducing rates and the expectation that inflation has largely stabilised by pricing in further Base Rate reductions through 2025, albeit at a relatively cautious level.

Employment levels in December 2024 were 74.9%1 which represents a small decrease during the period from 75.0%1 in December 2023. In line with this fall, unemployment has risen from 3.9%1 in December 2023 to 4.4%1 at December 2024. Vacancies in the labour market were circa 0.8 million and have been decreasing for two and a half years. Although unemployment levels have risen during the period, wage growth remained strong, at 5.9%1 and remains ahead of inflation. The latest forecasts suggest that unemployment has peaked, and will remain near its current level throughout 2025.

UK house prices grew by 4.6%2 in 2024 and the risk of a large correction in prices has reduced. The uncertainty over the timing and quantum of Base Rate cuts has given rise to some mortgage rate volatility in the year, albeit the overall position is one of lower rates being available than in recent years. Net mortgage borrowing showed 1.5%3 annual growth in December 2024, with mortgage approvals up significantly year on year.

Outlook

Interest rates are expected to fall further in 2025 with the market expecting Base Rate to end the year below 4.00%. The UK economy is expected to grow in 2025 by less than 1%3 per the Bank of England's latest forecast down from its previous forecast of 1.5%. House prices are expected to continue to grow as mortgage rates soften and borrower affordability improves. Unemployment is expected to remain near its current level of 4.4%1 for 2025. The longer-term expectation is that unemployment will recover towards a long run level of 4.0% by 2028.

1. Source: Office for National Statistics, data as at 31 December 2024, unless otherwise stated.

2. Source: HM Land Registry

3. Bank of England

Government and regulatory

This has been another eventful year for government and regulatory announcements that impact the Group and/or the markets in which it operates. The key announcements in 2024 are set out below.

Prudential regulation

During March 2024, the PRA issued PS5/24 'Solvent exit planning for non-systemic banks and building societies'. This is intended to provide an alternative to resolution and creates a new requirement for non-systemic banks to perform a Solvent Exit Analysis to develop an understanding of how firms would exit from PRA-regulated activities, while remaining solvent, the main barriers and risks faced in doing so, and how they would make timely and effective decisions during the process. The Group has commenced work on the Solvent Exit Analysis ahead of the implementation date of 1 October 2025.

Basel 3.1 changes remain the core focus of regulatory change for the Group alongside the Small Domestic Deposit Takers ('SDDT') regime. Slightly later than anticipated due to the general election, in September 2024, the PRA issued PS9/24 'Implementation of the Basel 3.1 Standards near-final part 2' and four consultation papers relevant to the topic. The policy statement set out the awaited changes to Credit Risk, Pillar 3 disclosures and consequential reporting changes, which completed the framework when considering PS17/23, issued in December 2023.

The simplified capital regime proposal for SDDT firms was set out in CP7/24. The highlights from these proposals included the removal of Pillar 1 requirements for counterparty credit risk and credit valuation adjustment risk, simplified Pillar 2A approaches to credit risk, credit concentration risk, operational risk, the removal of some methodologies and proposed replacement of Pillar 2B capital buffers with a new non-cyclical Single Capital Buffer ('SCB'). In addition, it also proposed reduced reporting, including changes to the Internal Capital Adequacy Assessment Process ('ICAAP').

The Group undertook an initial impact analysis of the combined PS9/24 and PS17/23 amendments, also considering the proposals set out in CP7/24 to understand the impact under SDDT. The Group expects the impact to be broadly neutral overall.

In the second half of 2024, the Group received confirmation of its successful application to join the SDDT regime. PS17/23 confirmed that firms, that are part of the SDDT regime, do not need to adopt full Basel 3.1 rules and can remain on the interim rules equivalent to the current UK Capital Requirements Regulation regime until the capital rules applicable to the SDDT regime are applicable.

In November 2024, the PRA issued PS19/24 'Strong and simple framework: The definition of an Interim Capital Regime', which set out the process firms should follow to apply to adopt the Interim Capital Regime ('ICR'). The ICR was expected to apply from 1 January 2026 with the expected SDDT implementation date being 1 January 2027. However, on 18 February 2025, the PRA announced a delay to Basel 3.1 implementation by one year to 1 January 2027. As a consequence we expect a delay in the implementation date for SDDT. The Group has applied for a Modification by Consent waiver to apply the ICR.

Conduct regulation

Throughout 2024, FCA publications focused on Consumer Duty, including the findings from their review of implementation, which highlighted good practice and areas of improvement. Dear CEO letters and speeches have reiterated the focus on ensuring firms prioritise areas where there is the greatest risk of consumer harm, setting and testing higher standards, and promoting competition and positive change. The application of the Duty to closed products came into force on 31 July 2024 with limited impact to the Group.

In January 2024, the FCA introduced temporary changes to the rules for handling motor finance complaints. This was to allow time for its review of historical discretionary commission arrangements ('DCAs'), information requests for which were sent to motor finance firms in the period. On 25 October 2024, the Court of Appeal issued its decision on three motor finance commission cases.

The lenders involved have been granted permission to appeal the judgment to the Supreme Court, the hearing for which will take place in April 2025. The FCA will update firms on its next steps after the Supreme Court decision. The pause in complaints responses was extended to 4 December 2025 for all motor finance commission complaints. The FCA also issued a Dear CEO letter directing firms to maintain adequate financial resources, with a view to the implications for firms of any potential remedial activities arising from DCAs. Further details on the impact of these developments can be found in Note 29 to the Financial Statements.

In April 2024, the FCA published two policy statements. One on protections for Borrowers in Financial Difficulty, incorporating aspects of the Tailored Support Guidance into the FCA's sourcebooks with effect from November 2024; the requirements for this have been addressed through an internal project. The other bringing Consumer Credit product sales data reporting into force in Q4 2025. This will be the focus of an internal project during 2025.

Government and monetary policy

The Bank of England MPC announced two rate reductions over 2024, 0.25% rate cuts in August and November 2024, reducing UK Bank Base Rate to 4.75% as at 31 December 2024.

Principal risks and uncertainties

Risk management

The effective management of risk is a key part of the Group's strategy and is underpinned by its Risk Aware value. This helps to protect the Group's customers and generate sustainable returns for shareholders. The Group is focused on maintaining sufficient levels of capital, liquidity, operational control, and acting in a responsible way.

The Group's Chief Risk Officer is responsible for leading the Group's Risk function, which is independent from the Group's operational and commercial teams. The Risk function is responsible for designing and overseeing the embedding of appropriate risk management frameworks, processes and controls, to enable key risks to be identified, assessed, monitored, and accepted or mitigated in line with the Group's risk appetite. The Group's risk management practices are regularly reviewed and enhanced to reflect changes in its operating environment. The Chief Risk Officer is responsible for reporting to the Board on the Group's principal risks and how they are being managed against agreed risk appetite.

Risk appetite

The Group has identified the risk drivers and major risk categories relevant to the business, which has enabled it to agree a suite of risk appetite statements and metrics to underpin the strategy of the Group. The Board approves the Group's risk appetite statements annually and these define the level and type of risk that the Group is prepared to accept in the pursuit of its strategic objectives.

Risk culture

A strong risk-aware culture is integral to the successful delivery of the Group's strategy and the effective management of risk.

The Group's risk culture is shaped by a range of factors including risk appetite, risk frameworks and policies, values and behaviours, as well as a clear tone from the top.

The Group looks to enhance continually its risk culture, and performs an annual assessment against standards based on industry best practice and guidance from the Institute of Risk Management.

Risk governance

The Group's approach to managing risk is defined within its Enterprise-Wide Risk Management Framework. This provides a clear risk taxonomy and an overarching framework for risk management supported by frameworks and policies for individual risk disciplines. These frameworks set the standards for risk identification, assessment, mitigation, monitoring and reporting.

The Group's risk management frameworks, policies and procedures are regularly reviewed and updated to reflect the evolving risks that the Group faces in its business activities. They support decision making across the Group and are designed to ensure that risks are appropriately managed and reported via appropriate committees.

An Executive Risk Committee, chaired by the Chief Risk Officer, reviews key risk management information from across all risk disciplines, with material issues escalated to the Executive Committee and/or the Risk Committee of the Board, as required.

The Group operates a 'Three Lines of Defence' model for the management of its risks. The Three Lines of Defence, when taken together, control and manage risks in line with the Group's risk appetite. The three lines are:

Committee structure:

Board and Board Committees

See Corporate Governance section of the 2024 Annual Report and Accounts.

Group Executive Committee

Chair: Chief Executive Officer

Provides an executive oversight of the ongoing safe and profitable operation of the Group. It reports to the Board through the Chief Executive Officer.

Responsible for the execution of the strategy of the Group at the direction of the Chief Executive Officer.

Executive Risk Committee

Chair: Chief Risk Officer

Responsible for overseeing the Group's risk profile, its adherence to regulatory compliance and monitoring these against the risk appetite set by the Board.

Monitors the effective implementation of the risk management framework across the Group.

Assets and Liabilities Committee ('ALCO')

Chair: Chief Financial Officer

Responsible for implementing and controlling the liquidity, and asset and liability management risk appetite of the Group, providing high-level control over the Group's balance sheet and associated risks.

Set out controls, capital deployment, treasury strategy guidelines and limits, and focuses on the effects of future plans and strategy on the Group's assets and liabilities.

Credit Risk Committees

Responsible for making decisions and providing oversight of credit scorecards and modelling.

Model Governance Committee

Responsible for understanding, challenging and assessing risk and appropriateness of statistical and financial models, and to challenge model assumptions, and to provide oversight of model validation.

Non-Financial Risk Committee

Responsible for providing oversight of all non-financial risks, including, Financial Crime, Operational, Conduct and Compliance, Climate Change, Information Security, IT and Change risk.

Assumptions Committee

Responsible for approving assumptions that have a material impact on the Group's reporting and/or decision-making processes.

Principal risks

Executive management performs ongoing monitoring and assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.

Further details of the principal risks and the changes to risk profile seen during the 2024 financial year are set out below.

The Group also regularly reviews strategic and emerging risks and analysis has been included to detail output of these reviews for 2024. Notes 37 to 40 to the Financial Statements provide further analysis of credit, liquidity, market and capital risks. Emerging risks are identified in line with the Group's Enterprise-Wide Risk Management Framework, using a 'top-down' approach with Group Executive workshops and a 'bottom-up' approach through the business unit Risk and Control Self-Assessment process.

Further details of the Group's risk management framework, including risk appetite, can be found on the Group's website: www.securetrustbank.com/riskmanagement.

Strategic and emerging risks

The key strategic risk for the Group remains the macroeconomic environment in the UK. The Group's operational footprint, lending exposures and funding sources are all in the UK, therefore, overall performance is influenced by the strength and performance of the UK economy. Given the specialist nature of the Group's lending, it is not exposed across all areas and sectors of the UK economy, however, key areas such as consumer confidence and affordability, levels of economic activity and house prices will impact on levels of demand for the Group's products and services. As well as performance of its credit portfolios and achievable returns.

Whilst inflation pressures reduced significantly in 2024, this did not allow for material reductions in the Bank of England Base Rate, which remains high by recent standards. Whilst these issues have not presented at a portfolio level given the prudent approach taken by the Group towards credit risk, these factors are tracked closely through ongoing portfolio monitoring and required changes in lending parameters are undertaken on a proactive basis.

The Group monitors the look forward strategic risk via regular analysis of forecast economic data as part of its review of impairment assumptions and in its annual ICAAP and ILAAP processes. In addition to direct economic factors, the Group is also exposed to the general operating environment in the UK for a regulated business.

The Group is tracking closely the potential legal and regulatory risk associated with the Court of Appeal rulings and Supreme Court appeal about the three historical motor commissions cases (see Note 29 to the Financial Statements). The Group is awaiting the outcome of the Supreme Court appeal and other legal developments, and the FCA's motor finance review to establish whether and how its historical Vehicle Finance lending will be impacted.

In addition to these specific industry events, the Group is also tracking the various consultation papers relating to regulatory change and engaging with industry bodies to provide input into proposed changes, as well as tracking potential impact.

Directors' responsibility statement

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors are required to prepare the Group Financial Statements in accordance with UK-adopted international accounting standards. The Financial Statements also comply with International Financial Reporting Standards ('IFRSs') as issued by the IASB. The Directors have also chosen to prepare the Parent Company Financial Statements under UK-adopted international accounting standards. 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 Company and of the profit or loss of the Company for that period.

In preparing these Financial Statements, International Accounting Standard 1 requires that directors:

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement

Each of the Directors who are in office at the date of this report and whose names and roles are listed on pages 71 to 73 of the 2024 Annual Report and Accounts confirm that to the best of their knowledge:

Consolidated statement of comprehensive income

For the year ended 31 December 2024

Consolidated and Company statement of financial position

As at 31 December 2024

Consolidated and Company statement of changes in equity

Consolidated statement of cash flows

For the year ended 31 December 2024

Company statement of cash flows

For the year ended 31 December 2024

Notes to the consolidated financial statements

1. Accounting policies

The material accounting policies applied in the preparation of these consolidated financial statements are set out below, and if applicable, directly under the relevant note to the consolidated financial statements. These policies have been consistently applied to all of the years presented, unless otherwise stated.

1.1. Reporting entity

Secure Trust Bank PLC is a public limited company incorporated in England and Wales in the United Kingdom (referred to as the 'Company') and is limited by shares. The Company is registered in England and Wales and has the registered number 00541132. The registered address of the Company is Yorke House, Arleston Way, Solihull B90 4LH. The consolidated financial statements of the Company as at, and for, the year ended 31 December 2024 comprise Secure Trust Bank PLC and its subsidiaries (together referred to as the 'Group' and individually as 'subsidiaries'). The Group is primarily involved in the provision of banking and financial services.

1.2. Basis of presentation

The figures shown for the year ended 31 December 2024 are not statutory accounts within the meaning of section 435 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2024 on which the auditors have given an unqualified audit report and did not contain an adverse statement under section 498(2) or 498(3) of the Companies Act 2006 will be delivered to the Registrar of Companies after the Annual General Meeting. The figures shown for the year ended 31 December 2023 are not statutory accounts. A copy of the statutory accounts has been delivered to the Registrar of Companies, which contained an unqualified audit report and did not contain an adverse statement under section 498(2) or 498(3) of the Companies Act 2006. This announcement has been agreed with the Company's auditors for release.

1.3. Consolidation

Subsidiaries

Subsidiaries are all investees controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee, and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group.

The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition, excluding directly attributable costs, 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.

The parent company's investments in subsidiaries are recorded at cost less, where appropriate, provision for impairment. The fair value of the underlying business of the Company's only material investment was significantly higher than carrying value, and, therefore, no impairment was required.

Intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated.

Accounting policies of subsidiaries have been changed, where necessary, to ensure consistency with the policies adopted by the Group.

Subsidiaries are de-consolidated from the date that control ceases.

Discontinued operations

Discontinued operations are a component of an entity that has been disposed of and represents a major line of business and/or is part of a single co-ordinated disposal plan.

1.4. Financial assets and financial liabilities accounting policy

Financial assets (with the exception of derivative financial instruments) accounting policy

The Group classifies its financial assets at inception into three measurement categories: 'amortised cost', 'Fair Value Through Other Comprehensive Income' ('FVOCI') and 'Fair Value Through Profit or Loss' ('FVTPL'). A financial asset is measured at amortised cost if both the following conditions are met and it has not been designated as at FVTPL:

The Group's current business model for all financial assets, with the exception of derivative financial instruments, is to hold to collect contractual cash flows, and all assets held give rise to cash flows on specified dates that represent SPPI on the outstanding principal amount. All of the Group's financial assets are, therefore, currently classified as amortised cost, except for derivative financial instruments. Loans are recognised when funds are advanced to customers and are carried at amortised cost using the Effective Interest Rate ('EIR') method.

A debt instrument would be measured at FVOCI only if both the below conditions are met and it has not been designated as FVTPL:

The Group currently has no financial instruments classified as FVOCI.

See below for further details of the business model assessment and the SPPI test.

On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in other comprehensive income. This election would be made on an investment-by-investment basis. The Group currently holds no such investments.

All other assets are classified as FVTPL.

Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. The Group has not reclassified any financial assets during the reporting period.

Assessment whether contractual cash flows are SPPI

For the purposes of this assessment, 'principal' is defined as the fair value of the financial asset on initial recognition. 'Interest' is defined as consideration for the cost of funds and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. administrative costs), as well as profit margin.

In assessing whether the contractual cash flows are SPPI, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet the condition.

In making the assessment, the Group considers:

Business model assessment

The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes:

Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are classified as FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

The Group currently has no financial instruments classified as FVTPL.

Amortised cost measurement

The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, plus or minus the cumulative amortisation using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument, minus any reduction for impairment.

Derecognition of financial assets

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all of the risks and rewards of ownership or in the event of a substantial modification. There have not been any instances where assets have only been partially derecognised.

Modification of loans

A customer's account may be modified to assist customers who are in, or have recently overcome, financial difficulties and have demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Substantial loan modifications result in the derecognition of the existing loan, and the recognition of a new loan at the new origination EIR based on the expected future cash flows at origination. Determination of the origination Probability of Default ('PD') for the new loan is required, based on the PD as at the date of the modification, which is used for the calculation of the impairment provision against the new loan. Any deferred fees or deferred interest, and any difference between the carrying value of the derecognised loan and the new loan, is written-off to the income statement on recognition of the new loan.

Where the modification is not considered to be substantial, neither the origination EIR nor the origination probability of default for the modified loan changes. The net present value of changes to the future contractual cash flows adjusts the carrying amount of the original asset with the difference immediately being recognised in profit or loss. The adjusted carrying amount is then amortised over the remaining term of the modified loan using the original EIR.

Financial liabilities (with the exception of derivative financial instruments)

The Group classifies its financial liabilities as measured at amortised cost. Such financial liabilities are recognised when cash is received from depositors and carried at amortised cost using the EIR method. Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

Offsetting of financial assets and financial liabilities

Financial assets and financial liabilities are not offset in the consolidated financial statements unless the Group has both a legally enforceable right and intention to offset.

1.5. Foreign currencies

Transactions in foreign currencies are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated into the Company's functional currency at the rates prevailing on the consolidated statement of financial position date. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the period.

2. Critical accounting judgements and key sources of estimation uncertainty

2.1. Judgements

No critical judgements have been identified.

2.2. Key sources of estimation uncertainty

Estimations that could have a material impact on the Group's financial results, and, are therefore, considered to be key sources of estimation uncertainty. Key sources of estimation can be found in:

3. Operating segments

The Group is organised into four operating segments, which consist of the different products available, as disclosed below.

Consumer Finance

Business Finance

Other

This principally includes interest receivable from central banks, interest receivable and payable on derivatives and interest payable on deposits from customers, amounts due to banks and subordinated liabilities, and operating expenses, which are not recharged to the operating segments.

The Group's chief operating decision maker, the Executive Committee, regularly reviews these segments by looking at the operating income, size of the loan books and impairments.

Interest expense is charged to the operating segments in accordance with the Group's internal funds transfer pricing policy. Operating expenses reflect costs incurred directly, and costs incurred centrally that are reallocated to the operating segment to which they can be directly attributed.

Additionally, no balance sheet items are allocated to segments other than loans and advances to customers.

All of the Group's operations are conducted wholly within the United Kingdom and geographical information is, therefore, not presented.

A new presentation layout for operating segments has been adopted in the current year to provide information in a format aligned to the layout of the primary financial statements. 

Prior year data is also presented using the same format to aid comparability. This is intended to provide more clear analysis of how each segment contributes to the Group's performance.

4. Operating income

All items below arise from financial instruments measured at amortised cost unless otherwise stated.

4.1. Net interest income

Interest income and expense accounting policy

For all financial instruments measured at amortised cost, the EIR method is used to measure the carrying value and allocate interest income or expense. The EIR is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to:

In calculating the EIR for financial instruments, other than assets that were credit impaired on initial recognition, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, early redemption penalty charges and broker commissions) and anticipated customer behaviour but does not consider future credit losses.

The calculation of the EIR includes all fees received and paid that are an integral part of the loan, transaction costs and all other premiums or discounts. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial instrument.

For financial assets that are not considered to be credit-impaired ('Stage 1' and 'Stage 2' assets), interest income is recognised by applying the EIR to the gross carrying amount of the financial asset. For financial assets that become credit-impaired subsequent to initial recognition ('Stage 3' assets), from the next reporting period onwards interest income is recognised by applying the EIR to the amortised cost of the financial asset. The credit risk of financial assets that become credit-impaired are not expected to improve such that they are no longer considered credit-impaired, however, if this were to occur, the calculation of interest income would revert back to the gross basis. The Group's definition of Stage 1, Stage 2 and Stage 3 assets is set out in Note 16.

For financial assets that were credit-impaired on initial recognition ('POCI' assets), income is calculated by applying the credit adjusted EIR to the amortised cost of the asset. Collection activity costs are not included in the amortised cost of the assets, but are included in operating expenses in the income statement, and are recognised as incurred, in common with other businesses in the sector. For such financial assets the calculation of interest income will never revert to a gross basis, even if the credit risk of the asset improves.

Further details regarding when an asset becomes credit-impaired subsequent to initial recognition is provided within Note 16.

4.2. Net fee and commission income

Fees and commission income is all recognised under IFRS 15 Revenue from contracts to customers and consists principally of the following:

Fee and commission accounting policy

Fees and commission income that is not considered an integral part of the EIR of a financial instrument are recognised under IFRS 15 when the Group satisfies performance obligations by transferring promised services to customers and presented in the income statement as fee and commission income. All of the Group's fees and commissions relate to performance obligations that are recognised at a point in time.

Fees and commission income and expenses that are an integral part of the EIR of a financial instrument are included in the EIR and presented in the income statement as interest income or expense.

No significant judgements are made in evaluating when a customer obtains control of promised goods or services.

5. Fair value and other gains on financial instruments

1. The inception and amortisation adjustment relates to amortisation of macro fair value hedge accounting relationships derecognised and the amortisation of the fair value adjustment of underlying hedged items at the time hedge accounting relationships commenced or were redesignated. Over the life of the hedged items these adjustments are expected to off-set gains/losses on derivatives taken for hedging purposes before and after they are designated in hedge relationships.

The extinguishment gain on redemption of subordinated debt relates to the redemption during 2023 at a discount to par of the £50 million 6.75% Fixed Rate Reset Callable Subordinated Notes due in 2028.

As a part of its risk management strategy, the Group uses derivatives to economically hedge financial assets and liabilities. For further information on the Group's risk management strategy for market risk see the Group's Strategic Report in the 2024 Annual Report and Accounts.

Hedge accounting is employed by the Group to minimise the accounting volatility associated with the change in fair value of derivative financial instruments. This volatility does not reflect the economic reality of the Group's hedging strategy, the Group only uses derivatives for the hedging of risks.

5.1. Fair value gain recognised in other comprehensive income

Although the Group uses interest rate derivatives exclusively to hedge interest rate risk exposures, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is not achievable. Where such volatility arises, it will net to zero over the life of the hedging relationship. All derivatives held by the Group have been highly effective in the year, resulting in minimal hedge accounting ineffectiveness recognised in the income statement. Future ineffectiveness may arise as a result of:

How fair value and cash flow hedge accounting affect the consolidated financial statements and the main sources of the residual hedge ineffectiveness remaining in the income statement are set out below. Further information on the current derivative portfolio and the allocation to hedge accounting types is included in Note 17.

Derivative financial instruments accounting policy

The Group enters into derivatives to manage exposures to fluctuations in interest rates. Derivatives are not used for speculative purposes. Derivatives are carried at fair value, with movements in fair value recognised in the income statement or other comprehensive income. Derivatives are valued by discounted cash flow models using yield curves based on Overnight Indexed Swap ('OIS') rates. All derivatives are carried as assets where fair value is positive and as liabilities when fair value is negative. Derivatives are not offset in the consolidated financial statements unless the Group has both a legally enforceable right and intention to offset. The Group does not hold contracts containing embedded derivatives.

Where cash collateral is received, to mitigate the risk inherent in the amounts due to the Group, it is included as a liability within the due to banks line within the statement of financial position. Where cash collateral is given, to mitigate the risk inherent in amounts due from the Group, it is included as an asset in the loans and advances to banks line within the statement of financial position.

Hedge accounting

Following the implementation of IFRS 9, the Group elected to apply IAS 39 for all of its hedge accounting requirements. When transactions meet specified criteria the Group can apply two types of hedge accounting:

The Group does not have hedges of net investments.

At inception of a hedge, the Group formally documents the relationship between the hedged items and hedging instruments, 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 of the hedged items (i.e. the fair value offset between the hedged item and hedging instrument is within the 80%-125% range).

When the European Union adopted IAS 39 in 2004, it removed certain hedge accounting requirements, commonly referred to as the EU carve-out. The relaxed requirements under the carve-out allow the Group to apply the 'bottom up' method when calculating macro-hedge ineffectiveness. This option is not allowed under full IFRS. The Group has applied the EU carve-out accordingly.

Fair value hedge accounting

Fair value hedge accounting results in the carrying value of the hedged item being adjusted to reflect changes in fair value attributable to the hedged risk, thereby offsetting the effect of the related movement in the fair value of the derivative. Changes in the fair value of derivatives and hedged items that are designated and qualify as fair value hedges are recorded in the income statement.

In a one-to-one hedging relationship, in which a single derivative hedges a single hedged item, the carrying value of the underlying asset or liability (the hedged item) is adjusted for the hedged risk to offset the fair value movement of the related derivative. In the case of a portfolio hedge, an adjustment is included in the fair value adjustments for portfolio hedged risk line in the statement of financial position to offset the fair value movements in the related derivative. The Group currently only designates portfolio hedges.

If the hedge no longer meets the criteria for hedge accounting, expires or is terminated, the cumulative fair value adjustment to the carrying amount of a hedged item is amortised to the income statement over the period to maturity of the previously designated hedge relationship and recorded as net interest income. If the underlying item is sold or repaid, the unamortised fair value adjustment is immediately recognised in the income statement.

Cash flow hedge accounting

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income and presented in the cash flow hedge reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in the income statement. Amounts recognised in the cash flow hedge reserve are subsequently reclassified to the income statement when the underlying asset or liability being hedged impacts the income statement, for example, when interest payments are recognised, and are recorded in the same income statement line in which the income or expense associated with the related hedged item is reported.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the periods when the hedged item affects the income statement. When a forecast transaction is no longer expected to occur (for example, the recognised hedged item is disposed of), the cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.

The cash flow hedge reserve represents the cumulative amount of gains and losses on hedging instruments deemed effective in cash flow hedges. The cumulative deferred gain or loss on the hedging instrument is recognised in profit or loss only when the hedged transaction impacts the profit or loss, or is included directly in the initial cost or other carrying amount of the hedged non-financial items (basis adjustment).

6. Operating expenses

Post-retirement obligations accounting policy

The Group contributes to defined contribution schemes for the benefit of certain employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual employees. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. There are no post-retirement benefits other than pensions.

Remuneration of the Auditor and its associates, excluding VAT, was as follows:

Other assurance services related to the interim independent review report and profit certification (2023: interim independent review report, profit certification and a comfort letter in relation to the Tier 2 capital issuance).

7. Average number of employees

8. Exceptional items

Costs associated with these activities are outside the normal course of business and are treated as exceptional.

Motor finance commissions

During 2024, the Group recognised costs of £6.9 million (2023: £nil), of which £6.4 million was recognised as a provision. Further details about the provision can be found in Note 29.

Organisational redesign

During 2024, the Group undertook an organisational redesign where product-specific teams were amalgamated under a single management structure. In addition, there were changes within Finance and the Risk functions to ensure they were configured to support the business in the most effective way. As a consequence, the Group incurred redundancy costs of £1.5 million (2023: £nil).

Borrowers in Financial Difficulty ('BiFD') Vehicle Finance collections review

Following the Financial Conduct Authority's review of BiFD across the industry, and in response to the specific feedback we received on our own collection activities, in 2023, we engaged external support to assist us and, where necessary, enhanced our approach, which included offering a wider range of forbearance options to our customers. In 2023, we incurred or provided for costs of £4.7 million relating to processes, procedures and policies in our Vehicle Finance collections operations. In 2024, a further £1.5 million was incurred or provided.

Income tax on exceptional items

Income tax on exceptional items amount to £1.0 million credit (2023: £0.6 million credit).

Exceptional items accounting policy

Exceptional items are expenses that do not relate to the Group's core activities, which are material in the context of the Group's performance.

9. Income tax expense

The tax has been calculated at the current statutory rate, which is 25.0% for the year ended 31 December 2024 (2023: 23.5%). For the year ended 31 December 2023, the Corporation Tax rate increased from 19% to 25%, with effect from 1 April 2023. At the same time, the banking surcharge reduced from 8% to 3% and the surcharge allowance available to a banking group increased from £25 million to £100 million. These changes were enacted prior to the start of 2023, and so opening and closing deferred asset values were calculated from expected future tax relief based on these enacted rates.

Income tax accounting policy

Current income tax, which is payable on taxable profits, is recognised as an expense in the period in which the profits arise.

Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates and laws that have been enacted or substantially enacted by the statement of financial position date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

10. Discontinued operations

The Group sold Debt Managers (Services) Limited's portfolio of loans during 2022. As the Group has exited this market, the results of the Debt Management business have been presented as discontinued operations.

Operating expenses above relate to the costs of winding down the business.

11. Earnings per ordinary share

11.1. Basic

Basic earnings per ordinary share are calculated by dividing the profit attributable to equity holders of the parent by the weighted average number of ordinary shares as follows:

11.2. Diluted

Diluted earnings per ordinary share are calculated by dividing the profit attributable to equity holders of the parent by the weighted average number of ordinary shares in issue during the year, as noted above, as well as the number of dilutive share options in issue during the year, as follows:

12. Dividends

The Directors recommend the payment of a final dividend of 22.5 pence per share (2023: 16.2 pence per share). The final dividend, if approved by members at the Annual General Meeting, will be paid on 22 May 2025, with an associated record date of 25 April 2025.

The EBT has waived its right to receive future dividends on shares held in the trust. Dividends waived on shares held in the EBT in 2024 were £0.1 million (2023: £nil).

Dividends accounting policy

Final dividends on ordinary shares are recognised in equity in the period in which they are approved by shareholders. Interim dividends on ordinary shares are recognised in equity in the period in which they are paid.

13. Loans and advances to banks

Moody's long-term ratings are as follows:

None of the loans and advances to banks are either past due or impaired.

Loans and advances to banks includes £nil (2023: £5.0 million), which the Group and Company does not have access to.

Where the Group and Company does not have access to cash, it is excluded from cash and cash equivalents. See Note 35.1 for a reconciliation to cash and cash equivalents.

14. Loans and advances to customers

Group and Company

The fair value of loans and advances to customers is shown in Note 41. Loans and advances to customers includes finance lease receivables of £548.4 million (2023: £450.3 million). See Note 15 for further details.

Retail Finance assets of £1,088.2 million (2023: £1,004.9 million) were pre-positioned under the Bank of England's liquidity support operations and Term Funding Scheme with additional incentives for SMEs and are available for use as collateral within the schemes.

The Real Estate Finance loan book of £1,341.4 million (2023: £1,243.8 million) is secured upon real estate, which had a loan-to-value of 56% at 31 December 2024 (2023: 57%).

Under its credit policy, the Real Estate Finance business lends to a maximum loan-to-value of:

All property valuations at loan inception, and the majority of development stage valuations, are performed by independent Chartered Surveyors, who perform their work in accordance with the Royal Institution of Chartered Surveyors Valuation - Professional Standards.

Of cash collateral, £0.3 million has been received as at 31 December 2024 in respect of certain loans and advances (2023: £1.7 million).

The accounting policy for loans and advances to customers is included in Note 1.4 Financial assets and financial liabilities accounting policy.

1. Based on gross development value.

15. Finance lease receivables

Group and Company

Loans and advances to customers include finance lease receivables as follows: