Half-year Report

Tesco Personal Finance plc

Publication of Interim Financial Report for the six months ended 31 August 2019

In accordance with Listing Rule 9.6.1, a copy of the above document for Tesco Personal Finance plc has been submitted to the UKLA document viewing facility and will shortly be available for inspection at: http://www.morningstar.co.uk/uk/NSM

The document is also available on the Company's website at: www.corporate.tescobank.com 

This announcement also contains additional information for the purposes of compliance with the Disclosure and Transparency Rules, including principal risks and uncertainties, details of related party transactions and a responsibility statement.

Reference to pages and numbers refer to page numbers and notes to the half year accounts in the Interim Financial Report.

2 October 2019

Enquiries:

TESCO PERSONAL FINANCE PLC

INTERIM FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 31 AUGUST 2019

COMPANY NUMBER SC173199

TESCO PERSONAL FINANCE PLC

CONTENTS

Interim Management Report....................................................................................................................................................... 1

Interim Condensed Consolidated Income Statement.................................................................................................................. 8

Interim Condensed Consolidated Statement of Comprehensive Income.................................................................................... 9

Interim Condensed Consolidated Statement of Financial Position............................................................................................ 10

Interim Condensed Consolidated Statement of Changes in Equity............................................................................................ 11

Interim Condensed Consolidated Statement of Cash Flows....................................................................................................... 12

Notes to the Interim Condensed Consolidated Financial Statements........................................................................................ 13

Responsibility Statement............................................................................................................................................................ 47

Independent Review Report to Tesco Personal Finance Plc....................................................................................................... 48

Abbreviations............................................................................................................................................................................. 49

Glossary of Terms....................................................................................................................................................................... 50

TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT

This Interim Financial Report comprises the Interim Management Report and the Interim Condensed Consolidated Financial Statements and accompanying notes. In the Interim Financial Report, unless specified otherwise, the 'Company' means Tesco Personal Finance Plc and the 'Group' means the Company and its subsidiaries and joint venture included in the Interim Condensed Consolidated Financial Statements. The Group operates using the trading name of Tesco Bank.

Tesco Personal Finance Plc is a wholly owned subsidiary of Tesco Personal Finance Group PLC (TPFG), the share capital of which is wholly owned by Tesco PLC. A reconciliation of the results contained within these Interim Condensed Consolidated Financial Statements to the Tesco Bank results presented in the Tesco PLC Interim Results 2019/20 can be found on the Tesco PLC internet page: https://www.tescoplc.com/media/755131/brokerpack_2019.pdf.

Cautionary Statement Regarding Forward-Looking Information

Where this document contains forward-looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this report. These statements should be treated with caution due to the inherent risks and uncertainties underpinning any such forward-looking information. The Group cautions users of these Interim Condensed Consolidated Financial Statements that a number of factors, including matters referred to in this document, could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those discussed under 'Principal risks and uncertainties' on pages 6 and 7 of this Interim Management Report.

Business Model

The Group provides financial services and products to personal customers in the United Kingdom (UK). The Company is incorporated and registered in Scotland. The Company owns 49.9% of Tesco Underwriting Limited (TU), an authorised insurance company. TU is accounted for as a joint venture of the Group.

Strategic Review

Following a strategic review of its activities, the Group announced in May 2019 that it had ceased new Mortgage lending and was actively exploring options to sell its existing Mortgage business, including the complete transfer of related balances and ongoing administration of relevant accounts. The Group, which has offered Mortgages since 2012, has served over 23,000 customers, with total net lending balances of £3,689.1m at 31 August 2019.

In recent years, challenging market conditions have limited profitable growth opportunities. The Group's focus is on how it can best serve Tesco customers and align its resources effectively to their needs while ensuring that its offering remains sustainable in the long-term. To that end, the Group made the strategic decision to focus on serving a broader range of customers in more specific areas, resulting in the move away from the Group's Mortgage offering. In exploring a sale of its Mortgage business, the Group's priority was to complete a commercially acceptable transaction with a purchaser who will continue to serve the Group's customers well.

In accordance with the requirements of International Financial Reporting Standard (IFRS) 5 'Non-current assets held for sale and discontinued operations', the Group has classified its Mortgage business as a discontinued operation at 31 August 2019.

Amounts recognised in the Condensed Consolidated Income Statement in respect of the Mortgage business are presented as a single line item after profit after tax from continuing operations. The prior period has been restated to present this on a consistent basis with the current period. Assets and liabilities of the disposal group representing the Mortgage business are presented separately in the current period Interim Condensed Consolidated Statement of Financial Position, with no requirement to restate prior periods.

Following the Group's decision to sell its Mortgage business, with effect from 1 September 2019 the Group's business model under IFRS 9 'Financial Instruments' in respect of its Mortgage business changed from being solely to collect contractual cash flows from the Mortgage business to being to collect cash flows arising from the sale of the Mortgage business. As a result, the Group has accounted for its Mortgage business at fair value through profit or loss (FVPL) from that date. The Mortgage business was previously accounted for at amortised cost. The Group recognised a fair value measurement gain after tax of £16.7m at 1 September 2019 following this change in business model.

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TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Strategic Review (Continued)

The Group completed the sale of the majority of its Mortgage business to Halifax, which is part of Lloyds Banking Group, on 27 September 2019 for cash consideration of £3,694.6m. After settling transaction and other costs associated directly with the sale amounting to £3.8m, the Group's after-tax gain on sale was £21.4m. Immediately following derecognition of the majority of the Group's Mortgage business, the Group entered into a series of receive-fixed interest rates swaps to economically neutralise the effect of its existing pay-fixed interest rate swaps used to hedge the interest rate risk inherent in the Mortgage business. The inception value of these swaps was an after-tax gain of £5.0m.

As is customary in such a transaction, the Group will continue to recognise a small element of the Mortgage business, representing new advances to existing Mortgage customers, until migration of all Mortgage accounts to the purchaser, currently expected to take place in February 2020, is completed. The final gain on sale will be confirmed once migration is completed.

Further information on the Group's discontinued operations is set out at notes 2, 4, 10 and 22.

Impact of Adoption of New Accounting Standards

The Group adopted IFRS 16 'Leases' with effect from 1 March 2019. This was adopted fully retrospectively and prior periods have been restated.

The adoption of IFRS 16 resulted in the recognition of right-of-use assets with a net book value of £16.7m at 1 March 2018. The net impact on lease liabilities, after the release of a previously held operating lease accrual, was to increase lease liabilities by £22.8m. The overall impact on equity, net of a deferred tax asset of £1.6m, was a decrease of £4.5m at 1 March 2018.

Further details of the transitional impact of the adoption of IFRS 16 are set out at note 2.

Headlines

Income Statement

·; Profit before tax from continuing operations is 71.2% lower at £16.8m (August 2018: £58.4m)1,2.

·; Underlying profit before tax from continuing operations, which excludes items which are not reflective of ongoing trading performance, is 8.0% lower at £98.5m (August 2018: £107.1m)1,2. A reconciliation of statutory to underlying profit for the current and prior periods is set out at note 4.

·; Profit after tax from discontinued operations has decreased by 1.7% to £17.4m (August 2018: £17.7m).

·; Profit before tax from continuing operations

The key drivers of the decrease in profit before tax from continuing operations are:

o a 4.1% increase in net interest income to £240.1m (August 2018: £230.7m)1,2, reflecting higher interest earnings on the back of lending growth. Net interest margin has remained broadly similar at 4.2% (August 2018: 4.3%)1,2;

o a 0.1% increase in fee and commission income to £169.8m (August 2018: £169.7m)2. This includes a credit to insurance income of £10.7m relating to commission recognised by the Group in line with IFRS 15 'Revenue from contracts with customers' in respect of future renewals of certain insurance policies managed and underwritten by a third party. This is the point in time at which the Group has satisfied all of its performance obligations in relation to the policies sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods. This has been offset by continued pressure on insurance retention rates due to a highly competitive environment, leading to a reduction in insurance commission income, and a reduction in ATM income as a result of the downward trend in ATM transactions being seen across the market as customers move towards contactless and other card payments;

o a loss on financial instruments at FVPL of £3.2m (August 2018: loss of £0.7m)2;

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

2 The prior period has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 10 for further details.

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TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Income Statement (continued)

o a gain on disposal of investment securities of £0.1m (August 2018: gain of £8.4m);

o a 7.7% increase in operating expenses to £283.8m (August 2018: £263.6m)1,2. This includes an additional payment protection insurance (PPI) charge of £45.0m (August 2018: £7.0m) recognised during the period, further detail on the drivers of which is set out in note 14, and a restructuring charge of £8.2m relating to the Group's strategic review (August 2018: credit of £1.6m relating to the early exit from the Group's offices in central Edinburgh). The prior period also includes a charge of £16.4m in respect of a regulatory provision relating to the November 2016 fraud incident. There was no such charge in the current period. Cost control remains a key focus of the Group and is reflected in the £11.2m decrease in underlying costs to £230.6m (August 2018: £241.8m) set out at note 4. 

o a 25.7% increase in impairment charges to £113.4m (August 2018: £90.2m). This is mainly driven by an increase in the Group's expected credit loss (ECL) allowance as a result of the change in the regulatory landscape within the Credit Cards market (Persistent Debt remediation programme which started in September 2018) as well as the implementation of a number of credit initiatives in recent years. The bad debt:asset ratio (BDAR) in respect of continuing operations increased to 2.6% (August 2018: 2.2%)2 ; and

o a 75.6% increase in the Group's share of profit from its joint venture, TU to £7.2m (August 2018: £4.1m). This includes a credit of £3.7m (August 2018: £nil), representing the Group's share of credits recognised by TU during the period relating to the impact on TU's insurance reserves of a change to the Ogden tables, which are used to calculate future losses in personal injury and fatal accident cases.

·; Income tax charge on profit from continuing operations

Income tax on the Group's profit from continuing operations for the period is a charge of £15.5m (August 2018: £19.8m)1,2. The Group's current year effective tax rate is higher than the statutory rate principally due to the non-deductibility of the additional PPI charge recognised during the period.

·; Profit after tax from discontinued operations

The decrease in profit after tax from discontinued operations predominantly reflects an increase in net interest income to £41.3m (August 2018: £35.4m), offset by an increase in losses on financial instruments held at FVPL to £6.6m (August 2018: £2.8m) and an accelerated amortisation charge of £3.1m (August 2018: £nil) recognised during the period.

Following the classification during the period of the Group's Mortgage business as a discontinued operation, the Group has reassessed the useful life of certain of its intangible fixed assets, reducing the expected life to a maximum of one year. As this represents a change in accounting estimate, no prior period adjustment is required.

In arriving at the profit after tax from discontinued operations for the current and prior period, it has not been possible under IFRS 5 to allocate any of the Group's cost of funding the Mortgage business to discontinued operations as the related liabilities were not entered into specifically to fund the Group's Mortgage business. After including the Group's notional cost of funding of £29.0m (August 2018: £26.2m) in respect of the Mortgage business, the loss after tax from discontinued operations was £3.8m (August 2018: £1.4m).

Balance Sheet

·; Loans and advances to customers have decreased by 30.1% to £8.7bn (February 2019: £12.4bn). This reflects classification during the period of the Group's £3.7bn (February 2019: £3.8bn) Mortgage business as a disposal group. Reflecting the impact of this classification on the prior period, loans and advances to customers have remained broadly flat at £8.7bn (February 2019: £8.7bn). Credit Card balances have reduced by 1.2%, while Personal Loans have grown by 3.0%.

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

2 The prior period has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 10 for further details.

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TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Balance Sheet (continued)

·; Customer deposits, which continue to be the Group's main source of funding, have decreased by 5.4% to £9.9bn (February 2019: £10.5bn) as the Group began to reduce its Savings balances in response to the planned sale of its Mortgage business. Deposits from banks at 31 August 2019 totalled £1,998.1m (February 2019: £1,663.2m). At the period end, the Group had entered into repurchase transactions of £659.1m (February 2019: £324.2m) and accessed £1,339.0m of funds from the Bank of England's (BoE) Term Funding Scheme (TFS) (February 2019: £1,339.0m). The lower cost of funding provided by the TFS is reflected in competitive offers for the Group's borrowing customers.

·; The balance sheet remains well positioned to support future lending growth from both a liquidity and capital standpoint. At 31 August 2019, the total capital ratio was 18.4% (February 2019: 18.3%)1 and net stable funding ratio (NSFR) was 121.4% (February 2019: 123.1%)1. The decrease in the NSFR over the period reflects decreased available funding of £0.6bn as the Group began to reduce its Savings balances in response to the planned sale of its Mortgage business.

Strategic Priorities

The vision of Tesco Bank is to 'help Tesco shoppers manage their money a little better every day'. In order to further the Group's pursuit of this vision, the Group continues to seek opportunities to make it easier for Tesco customers to bank and insure with the Group through targeted investment in technology and data, making life simpler for both customers and colleagues and driving efficiency gains that can be reinvested in the customer offer. The Group's strategy is to bring the best of Tesco to financial services, offering customers great value across the range of products and earning customer trust through the Group's actions.

The Group now has 323 Travel Money bureaux across the UK, as well as offering online services including click and collect and delivery.

The Bank's mobile banking App has been upgraded to allow customers to buy Travel Money via the App, underlining the Bank's commitment to make it easy for customers to manage their money.

The Group's commitment to offering attractive products and good service for customers has been rewarded with recognition as 'Best Card Provider (Standard Rate)' and 'Best Card Provider (Balance Transfer Rate)' at the 2019 Moneyfacts Awards.

During the period, colleagues raised over £54,000 for the Group's charity partners and volunteered over 1,000 hours to their local communities. In May 2019, the Group marked its second 'Tesco Bank Turns Pink' event, showing the Group's commitment and support to Cancer Research UK's Race for Life.

Regulatory Developments

The Group continues to monitor and prepare for a number of regulatory changes taking effect over the next few years.

The Second Payment Services Directive (PSD2), the first phase of which took effect from 13 January 2018, together with Open Banking, allows customers to choose to share data from their banking products with third party providers (TPPs) and bring together all of their financial relationships and data in one place, potentially leading to a fundamental change in how customers manage both their money and data over the longer term. The aim of these changes is to promote competition and enhance customer choice. They provide potential opportunities for the Group to attract new customers, as well as potentially increasing competition from traditional banking businesses and new providers of financial services, including technology companies. The Group continues to monitor and review the opportunities and risks associated with the introduction of PSD2, including the need to ensure that there is appropriate control and ownership of sensitive and confidential customer data as the use of TPPs becomes more widespread.

The second phase of PSD2 was launched during the period. Open Banking, which is supported by a secure technology standard, is a change for the whole UK banking sector and is designed to give customers more control over their financial data and money. Customers will also be able to more easily compare accounts from different providers, understand features, service quality and pricing, and be able to select which offers best value. Using Open Banking, the Group's customers can choose to connect their Personal Current Accounts, Credit Cards, Instant Access Savings Accounts or Internet Saver accounts to TPPs. TPPs will provide a range of different Apps and websites offering new ways for customers to manage money and make payments.

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details. 

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TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Regulatory Developments (continued)

Amendments to the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) were published in the Official Journal of the European Union (EU) on 7 June 2019. The majority of the CRR amendments will apply from 28 June 2021 and the CRD amendments from 28 December 2020. The impact of these amendments continues to be assessed. Uncertainty remains around the implementation and impact of further regulatory developments arising from the finalisation of Basel III, which will be subject to EU and UK implementation.

In addition, the Group will be subject to the minimum requirements for own funds and eligible liabilities (MREL) on an interim basis from 1 January 2020, with full implementation applicable from 1 January 2022. The requirements are factored into the Group's funding and capital plans. TPFG undertook an initial £250.0m issuance of MREL-compliant debt in July 2019 in support of these requirements and subsequently invested the proceeds in the Company via an intercompany subordinated loan.

Business Review

During the period, Personal Loan balances grew by 3.0% while Credit Card balances reduced by 1.2%. Mortgage balances fell by 2.1% in the period to £3,689.1m (February 2019: £3,767.4m) following the Group's decision to cease new Mortgage lending.

Customer deposits of £9,914.5m (February 2019: £10,478.6m) continue to be the Group's primary source of funding. The Group's customer deposits reduced by 5.4% in the period as the Group began to reduce its Savings balances in response to the planned sale of its Mortgage business.

During the period, the Group maintained its funding from the BoE's TFS at £1,339.0m (February 2019: £1,339.0m).

Money Services products have performed well overall as the Group continues to enhance the product range and expand the customer base. A reduction in ATM transaction volumes, due to the declining use of cash as customers move towards contactless and other card payments, was partially offset by growth in other products, including Travel Money.

A significant and ongoing investment has been made in Motor Insurance pricing in the period, across both new business and renewal policies, in response to price deflation, supporting the Group's commitment to offering value to Tesco customers. This has driven improved Motor Insurance retention rates year-on-year, although the total number of in-force policies has fallen, driven by the impact of overall market price deflation on Motor Insurance premiums.

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TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Key Performance Indicators

The Directors consider the following to be Key Performance Indicators (KPIs) for the Consolidated Income Statement and are quoted in respect of the Group's continuing operations. The methodology applied in calculating the Group's KPI's is set out in the Glossary of Terms:

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

2 The prior period has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 10 for further details.

Capital and Liquidity Ratios

The Directors consider the following to be Key Performance Indicators for capital and liquidity reporting:

The Group's total capital ratio remains above internal targets and regulatory requirements at 18.4% (February 2019: 18.3%)1 and leaves the Group well placed to support future growth.

On 1 March 2018, IFRS 9 came into force and a transitional period was introduced, allowing the Company (being the regulated entity) to phase in the IFRS 9 impact on capital over a period of 5 years.

Under the transitional provisions, the impact as at 31 August 2019 on common equity tier 1 is £12.7m (February 2019: £7.8m). Common equity tier 1 is expected to reduce from inception to end point by approximately 164 basis points (unaudited). The Group's common equity tier 1 capital is disclosed in note 18.

The NSFR, a measure of the Group's liquidity position, is within appetite at 121.4% as at 31 August 2019 (February 2019: 123.1%)1. The Group maintains a liquid asset portfolio of high quality securities of £1.8bn (February 2019: £2.1bn).

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

Principal risks and uncertainties

The Board of Directors has overall responsibility for determining the Group's strategy and related Risk Appetite. The Board's Risk Appetite comprises a suite of Risk Appetite statements, underpinned by corresponding measures with agreed triggers and limits. The Risk Appetite framework defines the type and amount of risk that the Group is prepared to accept to achieve its objectives and forms a key link between the day-to-day risk management of the business, its strategic objectives, long-term plan, capital plan and stress testing. The Risk Appetite is formally reviewed by the Board on at least an annual basis.

The Board is also responsible for overall corporate governance, which includes overseeing an effective system of risk management and that the level of capital and liquidity held is adequate and consistent with the risk profile of the business.

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TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT (continued)

Principal risks and uncertainties (continued)

To support this, a Risk Management Framework (RMF) has been embedded across the Group, creating an integrated approach to managing risk. The RMF brings together governance, Risk Appetite, the three lines of defence, the Policy Framework and risk management tools to support the business in managing risk as part of day-to-day activity, and is underpinned by governance, controls, processes, systems and policies within the first line business areas and those of the second line Risk Management Function.

The Chief Risk Officer (CRO) performs a strategic risk management role and is responsible for managing and enhancing the RMF. The CRO is independent from any commercial function, reports directly to the Chief Executive Officer and can only be removed from his position with the approval of the Board.

The principal risks and uncertainties faced by the Group remain unchanged from those set out in the Group's Annual Report and Financial Statements for the year ended 28 February 2019 (pages 8 to 12).

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TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2019

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

2 The prior period has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 10 for further details.

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TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2019

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

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TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

AS AT 31 AUGUST 2019

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

2 The prior period has been restated following a change in presentation of the amount of the ECL allowance recognised under IFRS 9 which exceeds the gross carrying amount of the financial asset as set out at note 11. Refer to note 2 for further details.

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TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2019

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

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TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2019

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

2 The prior period has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 10 for further details.

3 Cash and cash equivalents comprise cash and balances with central banks, excluding mandatory reserve deposits of £31.1m (August 2018: £26.5m).

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TESCO PERSONAL FINANCE PLC

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Interim Condensed Consolidated Financial Statements for the six months ended 31 August 2019 were approved by the Board of Directors on 30 September 2019.

1. Basis of Preparation

The Interim Condensed Consolidated Financial Statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (FCA) and with International Accounting Standard (IAS) 34 'Interim Financial Reporting' as endorsed by the European Union (EU).

Unless otherwise stated, the accounting policies applied, and the judgements, estimates and assumptions made in applying those policies, are consistent with those described in the Consolidated Financial Statements of the Group for the year ended 28 February 2019. The Interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Group for the year ended 28 February 2019, which have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the International Accounting Standards Board (IASB) as endorsed by the EU.

These Interim Condensed Consolidated Financial Statements have been reviewed, not audited, and do not constitute Statutory Financial Statements as defined in section 434 of the Companies Act 2006. The Consolidated Financial Statements for the year ended 28 February 2019 were approved by the Board of Directors on 8 April 2019 and have been filed with the Registrar of Companies. The report of the auditors on those Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

Going concern

The Directors have completed an assessment of the Group's going concern status, taking into account both current and projected performance, including projections for the Group's capital and funding position and having regard to the Group's risk profile. As a result of this assessment, the Directors consider the Group to be in a satisfactory financial position and have a reasonable expectation that the Group has adequate resources to continue in business for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the Interim Condensed Consolidated Financial Statements.

Adoption of new and amended IFRS

There are a number of new accounting standards and amendments to standards which will impact the Group in future reporting periods. Further details of these are included in the Consolidated Financial Statements of the Group for the year ended 28 February 2019.

During the period to 31 August 2019, the Group has adopted the following new accounting standards which became effective with relevant EU endorsement for annual periods beginning on or after 1 January 2019:

IFRS 16 'Leases'

IFRS 16 is a replacement for International Accounting Standards (IAS) 17 'Leases'. IFRS 16 removes the distinction between finance and operating leases and instead provides a single lessee accounting model. The Group, as a lessee, has recognised lease liabilities and corresponding right-of-use assets for all applicable leases.

The recognition pattern for the Group's leases in the Interim Condensed Consolidated Income Statement has changed from the previous pattern for operating leases, with interest on the liabilities and depreciation expense on the right-of-use assets now recognised separately.

In the Interim Condensed Consolidated Statement of Cash Flows, lease payments are categorised within financing activities rather than operating activities.

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TESCO PERSONAL FINANCE PLC

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

1. Basis of Preparation (continued)

IFRS 16 does not significantly change the accounting for leases by lessors.

The Group adopted IFRS 16 on 1 March 2019. As a result, the Group has recognised right-of-use assets in its Interim Condensed Consolidated Statement of Financial Position at the adoption date in respect of property assets previously accounted for as operating leases. A corresponding lease liability has also been recognised, representing the future payments to be made under these leases, discounted at the Group's incremental borrowing rate at lease inception. The Group does not have any short-term leases or leases of low value assets for which it may elect not to apply the above requirements under IFRS 16.

The Group has applied the requirements of IFRS 16 fully retrospectively, including the restatement of prior period comparatives.

Further details of the impact of adoption of IFRS 16 are included in note 2.

New accounting policies

Non-current assets held for sale (or disposal groups) and discontinued operations

Under IFRS 5, the Group classifies non-current assets (or disposal groups) as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable, with the asset available for immediate sale in its present condition.

Non-current assets (or disposal groups) classified as held for sale are measured under IFRS 5 at the lower of their carrying amount and fair value less costs to sell, with the exception of deferred tax balances and financial assets falling within the scope of IFRS 9. These balances are initially measured in line with their respective accounting policies and subsequently remeasured as part of the overall disposal group, in accordance with the requirements of IFRS 5.

Balances in respect of disposal groups held for sale are presented separately in the Interim Condensed Consolidated Statement of Financial Position for the current period, with no requirement to restate prior periods.

The net results of discontinued operations are presented separately in the Interim Condensed Consolidated Income Statement where an entity or component of an entity of the Group has been disposed of or is classified as held for sale and:

(a) Represents a separate major line of business or geographical area of operations; or

(b) Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations.

A component of an entity of the Group comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Group´s operations and cash flows. If an entity or a component of an entity of the Group is classified as a discontinued operation, prior periods in the Interim Condensed Consolidated Income Statement are restated to present these on a consistent basis with the current period presentation of discontinued operations.

Leases

The Group has entered into leases for office buildings.

Leases are recognised as a right-of-use asset and corresponding lease liability at the date on which the leased asset becomes available for use by the Group.

Right-of-use assets are included within property, plant and equipment in the Interim Condensed Consolidated Statement of Financial Position.

Right-of-use assets are measured at cost, which comprises:

·; the amount of the initial lease liability;

·; any lease payments made at or before the lease commencement date;

·; any initial direct costs; and

·; restoration costs.

Right-of-use assets are depreciated over the lease term on a straight-line basis.

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TESCO PERSONAL FINANCE PLC

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

1. Basis of Preparation (continued)

Lease liabilities are initially calculated as the net present value of expected lease payments, less any lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or if not, at the Group's incremental borrowing rate.

Following initial recognition, lease payments are allocated between the outstanding lease liability and interest expense. The interest expense is charged to the Interim Condensed Consolidated Income Statement over the lease period through interest expense and similar charges so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

2. Restatement of Prior Periods

Leases

The Group has recognised right-of-use assets in its Interim Condensed Consolidated Statement of Financial Position at the adoption date in respect of property assets previously accounted for as operating leases. A corresponding lease liability has also been recognised, representing the future payments to be made under these leases, discounted at the Group's incremental borrowing rate at lease inception. The lease liability replaces a previous operating lease accrual held under IAS 17. A related deferred tax asset was also recognised at the adoption date.

In accordance with the transitional provisions of IFRS 16, the new rules have been applied fully retrospectively and comparatives for prior periods have been restated.

Discontinued operations

Following the Group's announcement during the period of its decision to sell its Mortgage business, the Group has classified transactions in the Interim Condensed Consolidated Income Statement relating to its Mortgage business as discontinued operations. Refer to note 10 for further details.

The prior period Interim Condensed Consolidated Income Statement has been restated in line with the current period presentation of the Mortgage business.

In arriving at the profit after tax from discontinued operations for the current and prior periods, it has not been possible under IFRS 5 to allocate any of the Group's cost of funding the Mortgage business to discontinued operations as the related liabilities were not entered into specifically to fund the Group's Mortgage business. Refer to notes 4 and 10 for further details.

Assets and liabilities of the disposal group representing the Mortgage business are presented separately in the current period Interim Condensed Consolidated Statement of Financial Position, with no requirement to restate prior periods.

Change in presentation of ECL provision

During the second half of the financial year to 28 February 2019, the Group reclassified the amount of ECL allowance recognised under IFRS 9 which exceeds the gross carrying amount of the financial asset from loans and advances to customers to provisions for liabilities and charges. This presentation was reflected in the Group's year end Financial Statements at 28 February 2019. Balances at 31 August 2018 within the Interim Condensed Consolidated Statement of Financial Position have been restated to present these consistently with the approach taken at 28 February 2019.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

2. Restatement of Prior Periods (continued)

Impact of restatements

The impact of these changes on the relevant Financial Statement lines is as follows:

1 These balances as previously reported include the impact of transition to IFRS 9 and IFRS 15 on 1 March 2018.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

2. Restatement of Prior Periods (continued)

Impact of restatements (continued)

3. Segmental Reporting

Following the measurement approach of IFRS 8 'Operating segments', the Group's operating segments are reported in accordance with the internal reporting provided to the Board of Directors, which is responsible for allocating resources to the operating segments and assessing their performance.

As the result of restructuring undertaken during the period, in line with the definition of a reportable segment under IFRS 8, the Group's reportable segments at 31 August 2019 have increased from one to two, being Banking and Insurance. This reflects changes made to the reporting of business results to the Board of Directors, as chief operating decision maker. Prior period disclosures in this note have been restated accordingly.

The Group's two operating segments are as follows:

·; Banking - incorporating Credit Cards, Personal Loans, Savings, Personal Current Accounts, ATMs and Money Services; and

·; Insurance - incorporating Motor, Home and Pet Insurance

There are no transactions between the operating segments. There are no significant seasonal fluctuations that affect the Group's results.

Segmental assets and liabilities comprise operating assets and liabilities, being the majority of the Interim Condensed Consolidated Statement of Financial Position, but exclude unallocated reconciling items such as taxation.

Segmental results of continuing operations and a reconciliation of segmental results of continuing operations to the total results of continuing operations are presented below.

1 The Banking and Insurance segments include only directly attributable administrative costs such as marketing and operational costs. Central overhead costs, which reflect the overhead of operating both the Insurance and Banking businesses, are not allocated against an operating segment for internal reporting purposes.

2 The prior period has been restated following the classification during the period of the Group's Mortgage business as a discontinued operation. Refer to notes 2 and 10 for further details.

3 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

3. Segmental Reporting (continued)

1 The investment of £83.5m (February 2019: £86.4m, August 2018: £83.7m) in Tesco Underwriting Limited (TU), a joint venture company accounted for using the equity method, is shown within the total assets of the insurance segment.

2 Assets and liabilities of the disposal group in respect of the Group's Mortgage business are included within the banking segment.

3 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

4 The prior period has been restated following a change in presentation of the amount of the ECL allowance recognised under IFRS 9 which exceeds the gross carrying amount of the financial asset as set out at note 11. Refer to note 1 for further details.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

4. Underlying Profit

The Group's financial performance is presented in the Interim Condensed Consolidated Income Statement on page 8. A summary of the Group's financial performance in respect of its continuing operations on an underlying basis, excluding items which are not reflective of ongoing trading performance, is presented below.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

5. Net Interest Income

1 The prior period has been restated following the retrospective adoption of IFRS 16 in the current period. Refer to note 2 for further details.

2 The prior period has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2, 4 and 10 for further details.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

6. Net Fees and Commissions Income

With the exception of other revenue from contracts with customers, all of the above fees and commissions relate to financial assets and financial liabilities measured at amortised cost. These figures exclude amounts incorporated in determining the effective interest rate (EIR) on such financial assets and financial liabilities.

1 The prior period has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 10 for further details.

7. Impairment Loss on Financial Assets

1 The prior period has been restated following the classification of the Mortgage business as a discontinued operation. Refer to notes 2 and 10 for further details.

2 Included within the impairment loss on loans and advances to customers is an amount of £0.8m (August 2018: £4.4m) received through the sale of debt to third parties.

8. Income Tax

The tax charge in the Interim Condensed Consolidated Income Statement is based on Management's best estimate of the full year effective tax rate based on expected full year profits to 29 February 2020.

Income tax on the Group's profit from continuing operations for the period is a charge of £15.5m (August 2018: £19.8m) and on the Group's discontinued operations is a charge of £6.5m (August 2018: £6.6m). The Group's current effective tax rate is higher than the statutory rate principally due to the non-deductibility of the additional PPI charge recognised in the period.

The March 2016 Budget Statement included an announcement that the standard rate of corporation tax in the United Kingdom (UK) would be reduced to 17% from 1 April 2020. This rate reduction was enacted during the year ended 28 February 2017 and is therefore incorporated in these Interim Condensed Consolidated Financial Statements. The rate change is expected to reduce the Group's effective tax rate in the medium term.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

9. Capital Expenditure and Commitments

In the six months ended 31 August 2019 there were additions to property, plant and equipment and intangible assets of £18.7m (August 2018: £12.7m). Commitments for capital expenditure contracted for but not provided at 31 August 2019 were £nil (February 2019: £nil) on property, plant and equipment and £4.0m (February 2019: £0.8m) on intangible assets. In the 6 months ended 31 August 2019 there were disposals of intangible assets amounting to £3.7m (August 2018: £0.1m). At 31 August 2019, TU has a commitment of £nil (February 2019: £1.2m) to subscribe to the Tritax Property Income Fund Unit Trust as part of its investment portfolio.

The Group's Management are confident that future net revenues and funding will be sufficient to cover these commitments.

10. Assets/Liabilities of the Disposal Group and Discontinued Operations

Assets/Liabilities of the disposal group

During the period to 31 August 2019, secured Mortgage lending balances have been reclassified from loans and advances to customers set out at note 11 to assets of the disposal group following the Group's decision to sell its Mortgage business. Cash in transit balances in relation to Mortgages have also been reclassified from other assets and other liabilities to assets and liabilities of the disposal group respectively as these balances relate to amounts which will be applied to Mortgage accounts and therefore form part of the Mortgage business being sold. The Group agreed the sale of its Mortgage business on 3 September 2019 and completed the sale of the majority of its Mortgage business on 27 September 2019. Further information in respect of this disposal is set out at note 22.

At 31 August 2019, the Group had contractual lending commitments of £53.9m in respect of the assets of the disposal group.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

10. Assets/Liabilities of the Disposal Group and Discontinued Operations (continued)

Discontinued operations - income statement

The table below shows the results of discontinued operations in relation to the Group's Mortgage business which are included in the Interim Condensed Consolidated Income Statement and Interim Condensed Consolidated Statement of Cash Flows for the period to 31 August 2019.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

10. Assets/Liabilities of the Disposal Group and Discontinued Operations (continued)

Discontinued operations - statement of cash flows

11. Loans and Advances to Customers

1 The prior period has been restated following a change in the presentation of the amount of the ECL allowance recognised under IFRS 9 which exceeds the gross carrying amount of the financial asset. Refer to note 1 for further details.

Contractual lending commitments and ECL provision

At 31 August 2019, the Group had contractual lending commitments of £11,820.5m (February 2019: £12,226.2m). An additional ECL provision of £8.6m was also recognised at 31 August 2019 (February 2019: £8.5m). This represents the excess of total ECLs for both drawn and undrawn balances over the gross carrying balances as above. Refer to note 14 for further details.

Secured Mortgage lending

During the period to 31 August 2019, the secured Mortgage lending balances and related fair value hedge adjustments have been reclassified from loans and advances to customers to assets of the disposal group. Refer to note 10 for further details.

Fair value hedge adjustments

Fair value hedge adjustments amounting to £9.3m are in respect of fixed rate Loans. The balances at 28 February 2019 and 31 August 2018 also included fixed rate Mortgages. These adjustments are largely offset by derivatives, which are used to manage interest rate risk and are designated as fair value hedges within loans and advances to customers.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

12. Investment in Joint Venture

During the period ended 31 August 2019 the Group's joint venture, TU, completed a share capital reduction of £15.6m. Following the share capital reduction, TU distributed capital of £31.3m. The Group has recognised its share of this distribution, being £15.6m, through a reduction in the carrying value of its investment in TU. The Group's investment in subordinated debt issued by TU has decreased by £7.8m, reflecting the Group's share of loan capital repaid in the period.

13. Debt Securities in Issue

All Floating Rate Bonds were issued by Delamare Cards MTN Issuer plc and are listed on the Irish Stock Exchange. All retail bonds are listed on the London Stock Exchange.

1 This bond was issued on 16 December 2011.

2 This bond was issued on 21 May 2012.

3 This Bond was issued on 6 June 2014. This bond was redeemed on its scheduled redemption date in May 2019.

4 This Bond was issued on 7 November 2017. The scheduled redemption date of this Bond is October 2020.

5 This bond was issued on 27 November 2018. The scheduled redemption date of this bond is November 2020.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

14. Provisions for Liabilities and Charges

Customer redress provision - Payment protection insurance

Of the total customer redress provision balance at 31 August 2019, £60.7m (February 2019: £34.2m) has been provided for customer redress in respect of potential customer claims arising from historic sales of PPI.

In March 2017, the FCA issued a Policy Statement (PS17/3, 'Payment protection insurance complaints: feedback on CP16/20 and final rules and guidance') which confirmed a deadline for PPI claims of August 2019, supported by an FCA led communications campaign.

The policy statement also set out rules and guidance on the handling of PPI claims in light of the Supreme Court's decision in Plevin v Paragon Personal Finance Limited (Plevin), confirming that both up-front commission arrangements and profit share arrangements should also be considered in the calculation of total commission for Plevin claims.

The claims deadline passed on 29 August 2019. In response to the high level of claims received by the Group during the period in advance of the PPI complaint deadline, the Group increased its PPI provision by £45.0m during the half-year ended 31 August 2019 to reflect an updated assessment of the claim rate and average redress.

Although a significant degree of uncertainty remains with regard to the ultimate cost of settling PPI claims, the provision balance represents Management's best estimate at the reporting date of that cost and is based on historical uphold rates, average redress and the associated administrative expenses. The PPI provision and the impact of regulatory changes will continue to be monitored as Management complete their assessment of the significant level of claims received in advance of the claims deadline and levels of redress. Management expect to utilise the provision over the remainder of the year ended 29 February 2020.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

14. Provisions for Liabilities and Charges (continued)

Customer redress provision - Payment protection insurance (continued)

The table below details for each key assumption, actual data to 31 August 2019 and a sensitivity assessment demonstrating the impact on the provision of a variation in the key assumptions. The key sensitivity in relation to PPI claims received is the conversion rate into an upheld complaint.

Customer redress provision - Consumer credit act (CCA)

The Group holds a provision of £0.5m (February 2019: £0.5m) in respect of customer redress relating to instances where certain requirements of the CCA for post-contract documentation were not fully complied with.

In arriving at the provision required, the Group has considered the legal and regulatory position with respect to these matters and has sought legal advice which it took into account when making its judgement. The provision represents Management's best estimate at the reporting date of the cost of concluding the redress programme for Loan and Credit Card customers, and in making the estimate Management have exercised judgement as to both the timescale for completing the redress campaign and the final scope of any amounts payable. Management expect to utilise the provision over the remainder of the year ended 29 February 2020.

Restructuring provision

The restructuring provision is in respect of costs related to the Group's strategic review. Management expect to utilise the provision over the remainder of the year ended 29 February 2020.

Expected Credit Loss provision

The ECL provision represents the amount of ECL allowance recognised under IFRS 9 which exceeds the gross carrying amount of the financial asset as set out at note 11.

Other provisions

Other provisions predominantly reflect:

·; a dilapidations provision related to the anticipated costs of restoring leased assets to their original condition. Management expect that the provision will be utilised at the end of the lease terms, the longest of which is due to end in 2029;

·; a warranty provision in respect of debt sales. This represents post-determination date customer receipts payable to debt purchasers and provision for any accounts which may need to be bought back under the terms of the debt sale agreements; and

·; a provision in respect of the potential cost of refunding fees to customers.

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NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)

15. Subordinated Liabilities and Notes

Subordinated liabilities and notes comprise loan capital issued to Tesco Personal Finance Group PLC (TPFG). This includes £190.0m (February 2019: £190.0m) of subordinated loans maturing in 2030, £45.0m (February 2019: £45.0m) of undated notes with no fixed maturity date and £250.0m notional (February 2019: £nil) of subordinated loans maturing in 2025.