Half-year Report

West Bromwich Building SocietyAnnouncement of half-year results for the six months to 30 September 2019

The West Brom today announces its half-year results for the six months to 30 September 2019.

Key highlights:

- The average weighted savings rate paid to members was 50% more than the market average1 (30 September 2018: 42% above), delivering a 31% increase in annualised mutual benefit to savers to £13.7m (30 September 2018: £10.5m)

- An already strong Net Promoter Score®2 increasing marginally from +72 at 31 March 2019 to +73, with customer satisfaction up from 94% to 95%

- £251m of new mortgage lending (30 September 2018: £466m), reflecting a deliberate strategy to moderate lending volumes. 43% of new lending was to first-time buyers (30 September 2018: 38%)

- A 7% increase in profit before tax to £6.4m (30 September 2018: £6.0m)

- An uplift in the net interest margin to 1.04% (30 September 2018: 1.02%)

- Delivery of cost efficiencies led to the improvement of the management expense ratio to 0.83% (30 September 2018: 0.88%)

- The Society's Common Equity Tier 1 (CET 1) capital ratio now stands at 16.2% (31 March 2019: 16.0%)

Jonathan Westhoff, Chief Executive, commented:

The Society has delivered a strong half-year performance, despite an increasingly competitive mortgage market, delivering a 31% increase in annualised member benefit to its savers. A 7% increase in pre-tax profit contributed to an increase in the CET 1 ratio, which not only ensures the Society has the necessary capital to weather any economic challenges that may result from the current political and Brexit uncertainties but is also able to continue to deliver on its purpose by continuing to offer real value to savers and mortgage products that promote home ownership.

Our role in supporting those who aspire to own their home saw advances to first-time buyers accounting for 43% of our total new lending during the last six months. We have continued to broaden our mortgage proposition directed at helping those that find it challenging to achieve their home ownership ambitions, including our new range of shared ownership and assisted mortgage products.

For savers, we continue to offer a range of savings products to fit a variety of requirements, while paying an average interest rate some 50% higher than the market average1, delivering £13.7m of annualised mutual benefit to savers. We also provide services for retirement and later life planning and have been raising awareness about planning for retirement through a series of clinics hosted by independent financial advisers in our branches.

Despite the heightened levels of political and economic uncertainty surrounding Brexit and a forthcoming general election, the last six months has seen intensified mortgage market pricing competition, created in part by the ongoing availability of very low cost funding. Regrettably this has had the unfortunate outcome of reducing rates available for savers in general and whilst the Society resisted the pressure to lower its savings rates during the first half of our financial year, we have reduced some rates in response to this competitive pressure since the half-year period ended.

As a modern building society, we have become increasingly innovative in how we provide our services to members through our online offering. Over the last six months we have upgraded our website and launched an online mortgage application tracker service to enable our new mortgage borrowers and intermediary partners to view the status and progression of mortgage applications online. Future developments to expand the Society's online offering are in progress and will continue to be a significant area of focus for us, underpinned by ongoing investment in our core technology platforms to allow greater digital capability and operational resilience.

We expect no let up in the challenges that currently face us, whether that is the ever intensifying margin pressure in the mortgage market, the general economic uncertainty caused by the unknowns around future global trading relationships and the ever escalating focus on climate change which will have an impact on the UK housing stock. Despite these challenges, as a mutual, the West Brom will continue to progress with the best interests of both its saving and borrowing members at the heart of decisions made.

1 Average market rates sourced from Bank of England Bankstats table A6.1

2 Net Promoter Score and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.

ENQUIRIESThe West Brom Press Office - 8848 Communications

01902 907520 or 07772 443367

Jonathan Westhoff - Chief Executive

Ashraf Piranie - Group Finance & Operations Director

West Bromwich Building Society

Condensed consolidated

half-yearly financial information

30 September 2019

Chief Executive's Business Review

A clear strategy to steer through uncertain times

The six months to 30 September have again witnessed the Society delivering on its purpose by balancing the needs of both its saving and borrowing members, and continuing to offer real value to savers and mortgage products that promote home ownership.

Our strategy has remained clear and uncomplicated: to complete sustainable levels of residential lending, offer a safe and rewarding home for savings and provide our members with the benefits of belonging to a secure and efficient building society.

Despite the uncertainty created by the ongoing challenges of Brexit and a forthcoming general election, the period has witnessed an intensification of competition in the mortgage market, driven in part by the ongoing availability of very low cost funding. Regrettably this has had the unfortunate outcome of reducing rates available for savers in general. Although the West Brom resisted the pressure to lower its savings rates in the 6 months, since the period end some rates have been reduced in response to this competitive pressure. Not to have done so would have meant the Society holding excess, and expensive, funding which ultimately impacts its members negatively. 

A performance that delivers for both savers and borrowers

Financial strength

A 7% increase in profit before tax, to £6.4m (30 September 2018: £6.0m), has resulted in an increase in the key capital ratio, Common Equity Tier 1 (CET 1), to 16.2% (31 March 2019: 16.0%). Despite the pressure on net interest margins experienced the Society's margin improved modestly year on year, to 1.04% (30 September 2018: 1.02%), and our focus on cost efficiency delivered an improvement in the key cost efficiency measure (the management expense ratio) in relation to the comparable period, to 0.83% (30 September 2018: 0.88%).

Capital resources

1 Other adjustments mainly relate to intangible assets, deferred tax and IFRS 9 transitional relief.

2 Tier 2 capital excludes accrued interest.

The statutory impairment charge reduced year on year from £3.7m to £0.5m. However, including the impact of positions taken to hedge the commercial lending exposure against the risk of interest rate increases, the cost of credit risk increased by £1.3m, from £2.9m to £4.2m, driven by the ongoing challenges facing the commercial real estate sector, primarily retailers. In addition, a provision of £0.7m was set aside, mainly to cover the potential cost of redress following the late surge in PPI claims as the August deadline for making a claim approached.

The movements in the cost of credit risk and PPI provisions were more than offset by the benefit of an 8% (£2.0m) reduction in administration costs including depreciation, and a £1.0m increase in the valuation gains relating to the Society's investment property portfolio. This portfolio consists of 870 rental properties, mainly based in the South West and South Wales, with tenants benefiting from our mutual values which drive the approach we take to delivering fair-priced, good quality residential housing. Occupancy levels are consistently near to 100%.

This financial performance has also allowed the Society to meet its forecast distribution policy as announced in the Liability Management Exercise of April 2018. A distribution of £0.50 per core capital deferred share (CCDS) will be made in February 2020.

Balancing members' interests

As referred to above, the mortgage market competition has continued to intensify. As an example, the average market fixed mortgage rate on new business offered at the start of the period was 2.11%1. By September a comparable product was 2.01%. The Society has responded to this margin pressure, whilst maintaining savers' rates significantly above the market average. Indeed savers received, on average, rates some 50%2 above the market average during the 6 months to 30 September, an improvement on the premium offered in the comparable period in 2018 of 42%. On an annualised basis, this represents a very considerable £13.7m (30 September 2018: £10.5m) distributed to our savings members.

However, a consequence of the competition in the mortgage market is a materially lower volume of lending for the period. In the six months, £251m of new mortgages were advanced, compared with £466m in the same period in 2018, albeit this was higher than the second six months of the financial year to 31 March 2019 of £225m. A key driver for this reduction was our belief that, at times, the pricing in the market for some lending types had reduced to an extent where the potential costs of the risks of bad debts were not sufficiently covered. It is in these circumstances where a mutual has a clear responsibility to its members not to lend and risk depleting capital.

We have maintained our focus on providing a broader mortgage proposition that reflects the changing needs of society. Our new range of shared ownership products has proved a popular addition, supporting borrowers looking for a modern route into homeownership. This extension, along with our wider product proposition, evidences our continued support to first-time buyers, who have accounted for 43% of all lending during the first six months.

1 Average market rates sourced from UK Finance table IR5M

2 Average market rates sourced from Bank of England Bankstats table A6.1

Responsible lending and managing legacy exposures

In the 6 months to 30 September, our exposure to the legacy loans to the commercial real estate sector, excluding those loans that are subject to securitisation, reduced only modestly to £406.7m (31 March 2019: £411.9m). The provisions coverage for potential losses against this exposure, however, increased to 16.1% (31 March 2019: 15.7%).

Our residential lending exposure remains very low risk. Cases in arrears by 3 months or more were just 0.31% on our core owner occupied loans (31 March 2019: 0.36%) and 0.15% on our buy to let loans (31 March 2019: 0.12%). These compare favourably with industry UK Finance averages, for arrears of greater than 3 months, of 0.81% and 0.37% respectively.

A safe, stable funding base

The vast majority of the funding the Society uses to meet the requirements of borrowing members is provided by its savers, broadly unchanged over the period at 79%. Within this branch based balances increased marginally as a proportion of savings balances, to 71% (31 March 2019: 69%).

In order to provide security of access for savers to their savings, the Society ensures it maintains liquid resources to meet this need, even in the event of a stress event, for example should there be an unexpected reaction to a 'no deal' Brexit. Given the proximity of our last financial year end to such a risk, we held nearly double the regulatory requirement (referred to as the Liquidity Coverage Ratio, or LCR), at 195%. Given the cost to members of holding excess liquidity, we manage this carefully, and as at the half year we reduced the coverage to 158%, still very substantially above the assessed requirement.

Strong member advocacy and engagement

We pride ourselves on providing a consistent level of outstanding service irrespective of how people choose to interact with us. Our Net Promotor Score3 (a key indicator of how likely our members are to recommend us to others) increased to +73, from +72 at the previous financial year end. This compares with a financial services industry average of +504. 

As well as the outstanding level of service provided by our people, reflected in satisfaction survey results of 95% at 30 September 2019, we are becoming increasingly innovative in how we extend Society services to members through our online offering. Over the last six months we have upgraded our website and launched an online mortgage application tracker service that enables both new mortgage borrowers and intermediary partners to view the status and progression of mortgage applications online.

Future developments to extend our online offering to improve the experience of our members and deliver efficiency are in progress, supported by ongoing investment into a programme of work to improve and upgrade our technology.

Finally, further meetings were held with our Member and Employee Councils. Again, the outputs of these engagements proved to be valuable, informing management's understanding of a diversity of perspectives on a wide range of topics.

The Society's commitment to the community is a continuing source of pride to us. This is epitomised by the support provided to our current chosen charity of the year - the Midlands Air Ambulance Charity - where we have raised nearly £18,000 in the first six months of the year for this emergency response service. The charity completes some 2,000 missions each year, many lifesaving, which is why our fundraising makes an important contribution to this vital cause. 

As well as our fundraising efforts, staff also give their time to community initiatives through our active volunteering programme. That comprised almost 400 hours of volunteering for various regional charities, as well as presentations on financial awareness to local schools.

3 Net Promoter Score and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.

4 NPS UK average for financial services www.customergauge.com/benchmarks/industry/financial-services

Principal risks and uncertainties

The Society continues to recognise that effective risk management is essential to achieving the Society's objectives in an operating environment where the nature of the threats which prevail is continually evolving.

Where applicable, this report provides an update on the principal risks and uncertainties reported on pages 25 to 31 of the 2018/19 Annual Report and Accounts.

Principal risks

In the period, the Society's identified principal risk categories have remained unchanged. Against the backdrop of ongoing economic uncertainty, credit risk management has been a key focus to ensure new loan originations remain in line with Board approved risk appetite. To aid this further, a project to develop new credit application scorecards has commenced to support the underwriters in their decision making process.

The Society's IFRS 9 provisioning and stress testing models continue to provide informed outputs against a range of macroeconomic scenarios that supports the ongoing financial resiliency assessments.

Business conditions and the economic environment

Brexit related uncertainty remains and the potential impact of this on the economy is closely monitored. Whilst the regulatory authorities have commented that the UK Banking system could support the real economy should the UK leave the EU without a transitional deal in place, the potential range of outcomes for Brexit has widened. The Society's UK focus should allow it to be protected from the short-term adverse implications of a problematic Brexit, but it could be impacted by wider long-term economic changes affecting house prices, Bank Rate and employment levels. Our business plans continue to model the impact of a range of scenarios and stress tests are performed to provide comfort that the Society can tolerate the consequences of the spectrum of potential outcomes. In particular, financial projections are reviewed regularly to identify mitigation actions.

Margin compression

As already outlined, notwithstanding the net interest margin increasing modestly, the Society has moderated its lending in the period as the risk adjusted returns on capital thresholds were not being achieved and, in November, the rates on certain savings products were reduced. These management actions continue to be driven by the very low Bank Rate environment, which is now expected to continue at these levels for a prolonged period and the prospect of it dropping further continues to increase as evidenced by market expectations. Indeed, other well established economies, i.e. Japan and the European Union, already have negative interest rates set by their central banks. The reducing mortgage rates in the traditional market will impact the Society's growth opportunities but accepting this position is the responsible thing to do in this environment to protect member value.

Technology investment and operational resilience

The Society continues to invest in a programme of strategic change in its core technology platforms to allow greater digital capability in both savings and mortgage origination that is expected to retain significant management involvement through to 2021.

Building on the investment already made in cyber security infrastructure, the focus on operational resilience has been heightened in the period to ensure the Society's critical business services remain readily available to meet members' demands. The Society remains committed to developing an operational environment that is strong and resilient, meeting members' and regulatory expectations.

Strengthening risk management capabilities

Our capability to assess, manage and control risks has been illustrated by the progress we have made, over recent years, to de-risk the balance sheet. We are also continuing to develop our risk management capabilities through a project to progress the Society towards the Internal Ratings Based approach to credit risk. The project, which was anticipated to result in an application being submitted before the end of 2019, will be deferred to allow the Society's models to be developed to take account of the latest regulatory guidelines from the European Banking Authority and the Prudential Regulation Authority published in CP 21/19 in September 2019.

Outlook

A recurring theme of the recent years has been the uncertain outlook, driven primarily by the issues surrounding the UK's withdrawal from the European Union. This uncertainty remains, with a general election now also on the near term horizon. Forecasting the housing market over the medium term therefore remains very difficult. However, we expect to see a continuing pressure on margins, to the point where levels do not appropriately account for the associated risk.

As I stressed in my year-end report the West Brom, throughout its now 170 year history, has remained resolute in how it has delivered both continuity and change across generations. Our performance in the first six months of this year, delivering increased levels of profit, strengthened capital and sustained member value has been guided by our long-term traditional building society purpose of helping people to save and to have somewhere they can call home. Delivering against these principles continues to evidence the relevance and resilience of our mutual model.

Remaining true to, and delivering consistently against, this purpose will help ensure we are well positioned to respond to both the challenges and opportunities of the future. 

Jonathan Westhoff

Chief Executive

Forward-looking statements

Certain statements in this half-yearly report are forward-looking.  Although the West Brom believes that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of the West Brom. As a result, the West Brom's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. Due to such risks and uncertainties the West Brom cautions readers not to place undue reliance on such forward-looking statements. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Condensed consolidated half-yearly Income Statement 

for the six months ended 30 September 2019

Condensed consolidated half-yearly Statement of Comprehensive Income

for the six months ended 30 September 2019

Condensed consolidated half-yearly Statement of Financial Position

at 30 September 2019

Condensed consolidated Statement of Changes in Members' Interests and Equity

for the six months ended 30 September 2019

Condensed consolidated half-yearly Statement of Cash Flows

for the six months ended 30 September 2019

For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with maturities of three months or less from the date of acquisition:

The Group is required to maintain certain mandatory balances with the Bank of England which, at 30 September 2019, amounted to £10.6m (30 September 2018: £10.7m and 31 March 2019: £10.5m). The movement in these balances is included within cash flows from operating activities.

Condensed consolidated half-yearly Statement of Cash Flows (continued)

for the six months ended 30 September 2019

Notes to condensed consolidated half-yearly financial information

for the six months ended 30 September 2019

1 General information

These half-yearly financial results do not constitute statutory accounts within the meaning of the Building Societies Act 1986. A copy of the statutory accounts for the year to 31 March 2019 has been delivered to the Financial Conduct Authority and the relevant information in this report has been extracted from these statutory accounts. The statutory accounts for the year ended 31 March 2019 have been reported on by the Group's auditor and the report of the auditor was (i) unqualified, and (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report.

The consolidated half-yearly financial information for the six months to 30 September 2019 and 30 September 2018 is unaudited and has not been reviewed by the Group's auditor.

2 Basis of preparation

This condensed consolidated half-yearly financial report for the six months ended 30 September 2019 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim Financial Reporting' as adopted by the European Union. The half-yearly condensed consolidated financial report should be read in conjunction with the Annual Report and Accounts for the year ended 31 March 2019, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

3 Going concern and business viability statement

Details of the Group's objectives, policies and processes for managing its exposure to risk are contained in the Risk Management Report of the 2018/19 Annual Report and Accounts. The Directors also include statements in the Directors' Report in respect of going concern and longer-term business viability on page 36 of the 2018/19 Annual Report and Accounts.

The Directors have reviewed the latest plans and forecasts for the Group giving consideration to liquidity and capital adequacy. They are satisfied that the Group has adequate resources to meet both the normal demands of the business and the requirements which might arise in stressed circumstances for the next 12 months and that the longer-term business viability statement in the 2018/19 Annual Report and Accounts remains appropriate. Accordingly they continue to adopt the going concern basis in preparing these half-yearly financial results.

4 Accounting policies

The accounting policies adopted by the Group in the preparation of its 2019 Interim Financial Report are consistent with those disclosed in the Annual Report and Accounts for the year ended 31 March 2019 with the exception of the adoption of IFRS 16 'Leases', the impacts of which are set out below.

IFRS 16 'Leases'

a) Introduction

IFRS 16 'Leases' was adopted by the Group from 1 April 2019 and replaces IAS 17 'Leases'. The standard amends the definition of a lease and sets out the principles for the recognition, measurement, presentation and disclosure of leases. As permitted by the new standard, the Group has implemented IFRS 16 using the 'modified retrospective' approach and recognised the cumulative impact of transition as an adjustment to 'general reserves' in the Statement of Financial Position at 1 April 2019. Therefore, the comparative information has not been restated and is presented, as previously reported, under IAS 17 and related interpretations.

Previously, under IAS 17 and IFRIC 4 'Determining whether an Arrangement contains a Lease', the Group had no finance leases but had operating lease arrangements for properties whereby lease rentals were expensed to the Income Statement and disclosed within administrative expenses. On adoption of IFRS 16 under the modified retrospective approach, these lease arrangements, where the Group is a lessee, have been brought onto the Statement of Financial Position. Lease liabilities, representing the obligation to make future lease payments, have been recognised within trade and other payables and initially measured at the present value of the remaining lease payments at 1 April 2019, discounted using the Group's incremental borrowing rate at that date. The incremental borrowing rate was determined with reference to pricing for securities with similar risk characteristics and terms to the leased assets. The leased assets, reported as right-of-use assets within property, plant and equipment, were initially measured at an amount equal to the corresponding lease liabilities, adjusted for any prepaid or accrued lease payments recognised at 31 March 2019.

Following transition, leases are identified in accordance with the definition set out in IFRS 16. Operating lease rental costs are replaced with depreciation charges on the right-of-use assets (presented within administrative expenses) and interest expense charged on lease liabilities (presented within interest expense and similar charges). In the six months ended 30 September 2019, the adoption of IFRS 16 resulted in a £0.3m reduction in administrative expenses, offset by a £0.3m increase in depreciation and interest payable.

The Group has elected to apply the following practical expedients which are allowed on transition to IFRS 16:

 - Contracts existing at 1 April 2019 have, without reassessment, been identified as leases only if previously classified as such under IAS 17.

- No right-of-use assets or lease liabilities have been recognised for leases of plant and equipment which are of low value or end within 12 months of the date of IFRS 16 adoption. For these leases, payments continue to be recognised as administrative expenses, on a straight line basis over the lease term.

- Reliance has been placed on previous assessments of whether leases are onerous as an alternative to performing an impairment review. As no provisions for onerous leases were required at 31 March 2019, there were no adjustments to right-of use assets in this respect.

- Initial direct costs have been excluded from the measurement of right-of-use assets at 1 April 2019.

- Where contracts contain termination or extension options, hindsight has been used to determine the lease term.

IFRS 16 adoption has not impacted the reporting of lease arrangements where the Group acts as lessor, with lessor accounting being substantially unchanged from that prescribed by IAS 17.

The Society's first full set of financial statements prepared under IFRS 16 will be published in the Annual Report and Accounts for the year ended 31 March 2020.

b) Changes to accounting policies

The Group's new lease accounting policy is set out below.

Leases

When the Group enters into a contract which conveys the right to control the use of an identified asset for a period of time in excess of 12 months in exchange for consideration, it recognises a right-of-use asset within property, plant and equipment and a corresponding lease liability within trade and other payables in the Statement of Financial Position. The majority of the Group's leases relate to its branch property network.

The lease liability is measured at the present value of the remaining lease payments at the commencement date, discounted using the Group's incremental borrowing rate. The lease term incorporates lease extension or termination options where they are reasonably certain to be exercised. The incremental borrowing rate is determined with reference to the market pricing of securities with similar risk characteristics and terms to the leased assets at the commencement date. The carrying value of the lease liability is adjusted for interest charged and repayments. The lease liability is remeasured for changes in future lease payments, the lease term or the Group's assessment of whether it will exercise a lease extension or termination option. Any remeasurement results in a corresponding adjustment to the right-of-use asset. Interest is charged on the lease liability at the Group's incremental borrowing rate and recorded in interest expense and similar charges within the Income Statement.

The right-of-use asset is measured at cost, less any accumulated depreciation and impairment losses, and adjusted for remeasurement of the corresponding lease liability. The initial measurement of the right-of-use asset includes the lease liability, initial direct costs, lease payments made prior to the commencement date and lease incentives received. It is subsequently depreciated using the straight line method over the shorter of the asset's estimated useful life and the period to the end of the lease term. Right-of-use assets are subject to an annual impairment assessment.

The Group does not recognise a right-of-use asset or lease liability for leases of low value or with lease terms of less than 12 months. For these leases, payments are recognised on a straight line basis over the lease term and disclosed within administrative expenses in the Income Statement.

In the Statement of Cash Flows, payments of lease liabilities are categorised as cash flows from financing activities.

c) Financial impact of IFRS 16 adoption

The Group has a number of leased assets, primarily branch properties, which have been recognised as right-of-use assets under IFRS 16. The financial impact of adopting this standard is summarised in the table below.

A reconciliation between the operating lease commitments disclosed in the 2018/19 Annual Report and Accounts and the lease liability recognised at 1 April 2019 under IFRS 16 is set out in the table below.

Notes

(i) Operating lease commitments disclosed at 31 March 2019 included lease agreements signed before the reporting date which did not commence until after 1 April 2019 and are therefore excluded from the lease liability recognised at 1 April 2019.

(ii) Operating lease commitments disclosed at 31 March 2019 represented the Group's minimum contractual commitments, assuming that termination options were exercised where this was possible at the discretion of the lessee. Under IFRS 16, the lease liability includes the Group's expected behaviour in respect of future termination and extension options.

(iii) The lease liability represents the value of future lease payments discounted at the Group's incremental borrowing rate (IBR) at 1 April 2019. The weighted average IBR on adoption of IFRS 16 was 2.6%, with the IBRs applied to individual leases ranging from 1.9% to 2.9% depending on the lease term.

Critical accounting estimates and judgements in applying accounting policies

In the process of applying accounting policies, the Group makes various judgements, estimates and assumptions which affect the amounts recognised in the financial statements. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Under IFRS 16, which was adopted in the period, the Group makes judgements in relation to the exercise of termination and extension options in order to calculate lease terms. Determining the incremental borrowing rate used to discount the future lease payments involves a degree of estimation uncertainty. However, these judgements and estimates are not deemed critical as they do not materially impact the financial statements.

For the half year accounts, tax has been charged on the statutory profit before tax at the UK standard rate of 19%. A full review of the tax position of the Society and its subsidiaries will be carried out at the year end date. Otherwise, the significant judgements in applying accounting policies and key sources of estimation uncertainty at 30 September 2019 are unchanged from those existing at 31 March 2019.

5 Business segments

Operating segments are reported in accordance with the internal reporting provided to the Group Board (the chief operating decision maker), which is responsible for allocating resources to the reportable segments and assessing their performance.

The Group has three main business segments:

• Retail - incorporating residential lending, savings, investments and protection;

• Commercial real estate - primarily representing loans for commercial property investment; and

• Property - a portfolio of residential properties for rent.

Central Group operations have been included in Retail and comprise risk management, finance, treasury services, human resources and computer services, none of which constitute a separately reportable segment.

There were no changes to reportable segments during the period.

Transactions between the business segments are carried out at arm's length. The revenue from external parties reported to the Group Board is measured in a manner consistent with that in the consolidated Income Statement.

Funds are ordinarily allocated between segments, resulting in funding cost transfers disclosed in inter-segment net interest income. Interest charged for these funds is based on the Group's cost of capital. Central administrative costs are also allocated between segments and are disclosed in inter-segment administrative expenses. There are no other material items of income or expense between the business segments.

The Group does not consider its operations to be cyclical or seasonal in nature.

6 Allowance for losses on loans and advances to customers

In accordance with IFRS 9, 'Financial instruments', forecasts of future economic conditions are integral to the expected credit loss calculations. At 31 March 2019, the Group modelled four forward-looking macroeconomic scenarios: central, upside, downside and stress with respective probability weightings of 50%, 10%, 30% and 10%. Individual economic variables within the scenarios are regularly reviewed and updated to reflect the current economic outlook.

At 30 September 2019, the probability weightings were adjusted to skew towards the downside scenarios with uncertainties in the future economic environment, together with geopolitical risk (not least from Brexit), potentially weighing on any upside. The central scenario was still considered the most likely single scenario at 40%. The upside, downside and stress scenarios had probability weightings of 5%, 35% and 20% respectively. Due to the uncertainty of the path of interest rates in the event of a disruptive Brexit, the stress scenario was segmented into two, representing low and high Bank Rate trajectories.

The tables below analyse the movement in residential impairment provisions by IFRS 9 stage.

 The tables below analyse the movement in commercial impairment provisions by IFRS 9 stage.

7 Provisions for liabilities

Other provisions

Other provisions primarily relate to Payment Protection Insurance (PPI) redress for which, following a number of media campaigns, the volume of claims increased significantly leading up to the 29 August 2019 deadline set by the Financial Conduct Authority (FCA). The PPI provision represents the Group's best estimate of the costs to settle its remaining obligations in respect of PPI claims.

8 Loans and advances to customers