Half-year Report

10 August 2017

Aldermore Group PLC

Half Year 2017 Results

32% increase in profit before tax to £78m (H1 2016: £59m)

· Operating income up 17% to £150m (H1 2016: £128m)

· Underlying cost to income ratio¹ improved to 44% (H1 2016: 46%) while continuing to invest in the Group

Delivering a high-teens return on equity

· Return on equity of 19% (H1 2016: 16%)

· Basic earnings per share grew by 45% to 14.9p (H1 2016: 10.3p)

Continued strong, profitable organic growth and robust credit control across the diversified portfolio

· Excellent loan origination; up by 10% to £1.6bn (H1 2016: £1.5bn)

· Loan growth of 8% to £8.1bn (FY 2016: £7.5bn), with healthy pipeline at £0.8bn (H1 2016: £0.7bn)

· Business Finance loans +8% to £1.9bn; Mortgages +9% to £6.2bn

· Net interest margin in line with guidance at 3.5% (H1 2016: 3.6%)

· Continued secure and well controlled credit performance; cost of risk 14bps (H1 2016: 20bps)

Continued strong organic capital generation

· CET1 capital ratio up 30bps to 11.8% (FY 2016: 11.5%)

· Anticipate delivering a CET1 above 12% by FY17, enabling the Board to consider the payment of dividends

· Total capital ratio of 14.9% and leverage ratio of 6.9% (FY 2016: 15.6%, 7.0%) with £40m Tier 2 notes called in May

· Tangible book value per share up 9% to 167p (FY 2016: 153p)

Further strategic progress

· Announced investment in SME Broker AFS demonstrates our commitment to the broker market and provides strategic opportunities to enhance returns

· Continuing focus on dynamic service, enhancing our proposition to intermediaries in both Business Finance and Mortgages through our "we back you" campaign

· Continue to delight our customers, with Net Promoter Score ("NPS") increasing to +44 (2016: +43)

Phillip Monks OBE, Chief Executive Officer, commented:

"We have made excellent progress during the first half of 2017, building on our track record of delivery in loan growth, deposit growth and profitability, leaving us well positioned entering the second half with a strengthened capital position and a strong pipeline of new lending.

"We have continued to adopt a balanced approach to growth through strong organic origination and a consistent, robust approach to risk management. We approved £1.6bn of new customer loans in the period taking total lending to customers to more than £8.1bn.

"SMEs play a vital role in the UK's economic prosperity and we remain focused on helping them access the working capital and investment funding they need to succeed. Business Finance lending grew by 8% during the first half of the year and our agreed investment in AFS, one of the UK's largest asset and commercial finance introducers, highlights our continued commitment to this market. Mortgage lending increased by 9%, to £6.2bn, as we continue to serve landlords, first time buyers and the self-employed.

"We are delighted with the performance and strategic progress made so far in 2017. Whilst we remain vigilant to the risks posed by the economic uncertainty facing the UK, continued earnings and balance sheet momentum provide us with greater resilience and position us well to capitalise on further strategic opportunities."

¹ Underlying basis excludes goodwill impairment of £4.1m (pre-tax and post-tax) in 2016. No exceptional items have been recognised with respect to 2017 financial results.

Enquiries

A live webcast of the analyst presentation will be broadcast on our IR website www.investors.aldermore.co.uk at 9:30am on 10 August 2017 and is available via a listen only conference call by dialling +44 (0) 20 3059 8125. An indexed version of the webcast will be made available on the website shortly after the event.

Important disclaimer

This document contains certain forward-looking statements with respect to the business, strategy and plans of Aldermore Group PLC ("Aldermore") and its current goals and expectations relating to its future financial condition and performance. Such forward-looking statements include, without limitation, those preceded by, followed by or that include the words "targets", "believes", "estimates", "expects", "aims", "intends", "will", "may", "anticipates", "projects", "plans", "forecasts", "would", "could", "should" or similar expressions or negatives thereof. Statements that are not historical facts, including statements about Aldermore's, its directors' and/or management's beliefs and expectations, are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by Aldermore or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in exchange rates, stock markets, inflation, deflation, interest rates and currencies; policies of the Bank of England, the European Central Bank and other G8 central banks; the ability to access sufficient sources of capital, liquidity and funding when required; changes to Aldermore's credit ratings; the ability to derive cost savings; changing demographic developments, and changing customer behaviour, including consumer spending, saving and borrowing habits; changes in customer preferences; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the potential for countries to exit the European Union (the "EU") or the Eurozone, and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural and other disasters, adverse weather and similar contingencies outside Aldermore's control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts; geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards or practices, including as a result of an exit by the UK from the EU; regulatory capital or liquidity requirements and similar contingencies outside Aldermore's control; the policies and actions of governmental or regulatory authorities in the UK, the EU or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; market relating trends and developments; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and the success of Aldermore in managing the risks of the foregoing.

Any forward-looking statements made in this document speak only as of the date they are made and it should not be assumed that they have been revised or updated in the light of new information of future events. Except as required by the Prudential Regulation Authority, the Financial Conduct Authority, the London Stock Exchange PLC or applicable law, Aldermore expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this document to reflect any change in Aldermore's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The information, statements and opinions contained in this document and subsequent discussion do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.

Aldermore

Aldermore Bank PLC is an operating entity of Aldermore Group PLC. Aldermore Group PLC's shares (ALD.L) are listed on the Main Market of the London Stock Exchange. Aldermore Bank PLC is authorised by the Prudential Regulation Authority, regulated by the Financial Conduct Authority and the Prudential Regulatory Authority and is registered under the Financial Services Compensation Scheme.

Summary financials

1 For details of Alternative Performance Measures ("APMs") please refer to the glossary on page 612 Underlying basis excludes goodwill impairment of £4.1m (pre-tax and post-tax) in 2016. No exceptional items have been recognised with respect to 2017 financial results.

3 The effective tax rate for 2016 is impacted by the goodwill impairment which is not allowable for tax purposes.

CEO review

Banking as it should be

The credit crunch which began ten years ago, revealed the UK's high-street banks to be failing their customers. Aldermore was founded in 2009 specifically to address institutionalised weaknesses in service and culture among the UK's large banks and we have sought since then to challenge the status quo, empowering more people across Britain to seek and seize opportunities in their professional and personal lives by providing "banking as it should be". In doing so, we are addressing a market opportunity that is as real today as it was in the aftermath of the global financial crisis. In fact, as the market has matured, companies and individuals have increasingly recognised that a different kind of banking experience is not only possible but available.

As a specialist bank, we don't compete head on with the traditional banks in their main markets. We go beyond their one-size fits all approach by employing specialist underwriters to understand our customers' circumstances, and by making sure we offer a service that works for them. We operate in carefully selected segments where we have the necessary experience and expertise to deliver strong and sustainable risk-adjusted returns through responsible lending. We benefit from a modern infrastructure and an efficient distribution model, working with approved specialist intermediaries, direct with customers and via partner relationships avoiding the need for a costly branch network.

A strong start to the year

We have made a strong start to 2017, continuing to build on our track record of consistent delivery and performance. Against a backdrop of ongoing economic uncertainty and increasing competitive pressure we have remained focused on our strategic priorities to be 'Customer driven' in our approach, 'Simply delivered' through an efficient and scalable operating model and 'Securely managed' in our approach to risk across the Group.

In the first half of 2017 we have made progress in broadening our customer proposition, enhancing our service promise and developing new market opportunities. We have continued to generate further operating leverage, whilst investing in the business, and we have maintained a well-controlled approach to risk management, which along with the benign credit environment has resulted in continuing low levels of loan impairments and arrears.

This strong start to the year supports our confident outlook for the remainder of 2017, enabling us to enhance our financial guidance.

Continuing commitment to UK businesses, homeowners, landlords and savers

Net loans to customers increased by £0.6bn, or 8%, to £8.1bn, driven by organic origination, across both Business Finance and Mortgages where, respectively, £0.6bn and £1.0bn of new customer loans were provided.

In Business Finance we help small businesses to access working capital and acquire the assets and equipment they need to grow by providing invoice and asset finance facilities. In Asset Finance we have leveraged our efficient broker-led distribution model to build a market leading position in this channel and we have also diversified routes to market via wholesale channels direct with funders, which together contributed to growth in lending of 8% to £1.7bn.

Across our Mortgages franchise we grew lending by 9% to £6.2bn. This was led by robust growth in Buy-to-Let ("BTL") lending, up 15% to £3.8bn. As expected, growth was particularly strong in Q1, as we converted the large pipeline of customers with which we closed 2016. In SME Commercial Mortgages, our expertise in underwriting multi-let investment properties resulted in loan growth of 1% to £0.9bn. In our Residential Mortgages business, where we have strong positions within market niches, lending reduced by 1% to £1.5bn, reflecting increased competition and a higher pace of redemptions, particularly among Help to Buy customers.

Loan growth continues to be primarily funded by our award-winning deposit franchise. The performance of our savings business is driven by our straightforward and transparent proposition and our promise that savers get "great returns effortlessly". Our dynamic online franchise enables customers to tailor products to their needs and our straightforward approach means we don't use teaser rates. This approach drove an increase in deposits of 10% to £7.3bn in the first half of 2017.

CEO review continued

Double-digit earnings growth continues

Statutory profit before tax rose 32% to a record first half high of £78m, driven by our growing franchises, a healthy net interest margin of 3.5% and further improvement in operational leverage, reflected in a cost to income ratio of 44%. Our management of risk remains robust and central to our lending decisions which, together with the benign economic environment experienced over the first half of 2017, resulted in our cost of risk declining to 0.14% and less than 0.5% of our loans by value being classed as non-performing.

Strong organic capital generation and shareholder returns

After becoming capital accretive during 2016 we have continued to generate strong levels of organic capital over the first half of 2017 with our fully loaded CRD IV CET1 ratio increasing by 0.3% to 11.8%. We expect our CET1 capital ratio to continue rising to above 12% by the end of 2017.

Overall, the Group generated earnings per share of 14.9p and a return on equity of 19%.

Strategic priorities

As we seek to enhance the sustainability of returns, our strategic priorities will continue to be delivering growth, increasing efficiency and further strengthening our robust approach to risk management.

Customer driven: Helping more customers to seek and seize opportunities

Our focus remains on growth in large markets through diverse pools of customer demand, where we can operate as a service-focused specialist lender to meet customers' needs.

Highlights in H1 2017:

• Further growth in originations with £1.6bn lent across Business Finance and Mortgages. Total customer numbers also continued to grow to over 230,000, while our customer advocacy continued to improve with our NPS now at +44

• Agreed 48% minority stake in AFS, one of the largest introducers to asset and commercial finance funders in the UK. The investment provides Aldermore with strategic options to enhance our proposition within the broker market and leverage expertise in adjacent markets. We will continue to assess inorganic opportunities to develop our franchise

• Further developed our service proposition to intermediaries across both Business Finance and Mortgages, including enhanced service commitments, increased relationship management and digital upgrades

• Awarded 'Best Service from a Buy-to-Let provider' and Highly Commended as 'Best Service from a Business Bank' by Business MoneyFacts and named 'Best Cash ISA Provider' at MoneyNet's Personal Finance Awards 

Simply delivered: Developing our scalable, effective and efficient operating model

Aldermore benefits from a simple system architecture and an efficient online broker-led distribution model as opposed to a costly branch network. We continue to invest in key capabilities and technology, optimising our operating model to support the delivery of growth with enhanced levels of service, capability and efficiency.

Highlights in H1 2017:

• We continued to generate greater operational leverage in the business, bringing the underlying cost to income ratio down further to 44% while continuing to invest in franchise capability

• We have continued to invest in digital technology and enhancements across the bank, including an upgraded Asset Finance broker portal, and enhancing system functionality to support product development

• We are reviewing the Group's organisational structure to ensure we are operating as efficiently as possible

CEO review continued

Securely managed: maintaining a diverse and well controlled business model

As a specialist underwriter, our ability to understand our customers' circumstances and the value of underlying assets is a source of competitive advantage. Growth is controlled and supported by a consistent risk appetite and robust risk management framework, which drives our prudent approach across all areas of the Group.

Highlights in H1 2017:

• Our credit quality remained well within our appetite as we incurred a cost of risk of 14bps and maintained non-performing loans below 0.5% of our portfolio, supported by benign credit conditions

• We consistently originate in line with centrally controlled underwriting standards including affordability stress tests and monthly re-scoring of the portfolio

• We have completed enhancements to our credit risk models and have entered a parallel run phase as part of our ongoing work to become IFRS 9 compliant ahead of the January 2018 implementation date

A confident outlook

Delivering another great performance reinforces confidence in our ability to continue growing both our business and our capability. However, we are not complacent and we remain alert to the risks presented by the ongoing economic uncertainty in the UK. No concerning trends have emerged within our loan portfolios, but we remain vigilant to any emerging risks in our environment and will continue to appropriately balance growth, risk and returns across the Group, with our priority continuing to be the delivery of high-teens returns.

The Group's cost of risk has remained low and well controlled over the first half of 2017 reducing to 14 basis points. While we remain alert to any deterioration in credit conditions and continue to expect an upward normalisation of impairments over the medium term, we now anticipate the cost of risk for 2017 to be below our medium term range of between 25 - 35 basis points.

Our loan growth of 8% during the first half, achieved with a broadly stable net interest margin, gives us confidence in the delivery of our guided range of 10 - 15% growth for the year. The exact level of lending will depend on market conditions and the continuing opportunity to lend within our prudent risk appetite and to our targeted level of returns. However, we enter the second half of the year in a strong position with a healthy pipeline of £0.8bn, up 8% on the first half of 2016.

Strong loan growth over the first half of the year has driven further operating leverage, demonstrated by an improvement in the cost to income ratio, while continuing our investment in the business. We continue to anticipate an increase of £15 - £20m on the 2016 underlying cost base in 2017 and for the cost to income ratio to trend below 40% over the medium term.

Consistent delivery means that we now anticipate generating sufficient capital to reach a CET1 ratio of above 12% by the end of 2017. As previously stated, at this level, the Board will be in a position to consider the payment of dividends while taking into account growth opportunities available, anticipated changes in capital requirements and the prevailing economic environment.

In conclusion…

I'm delighted with the continued strategic and financial progress that Aldermore is making across the Group. We have performed very strongly over the first half of the year, delivering a 19% return on equity and I would like to thank all of our colleagues who have worked so hard to deliver on our strategy and build on the success we have achieved to date. Together I am confident that we can continue delivering further value for our customers and generating strong, sustainable returns for our shareholders.

Phillip Monks OBE, Chief Executive Officer

Financial review

Loans to customers are up 8% so far in 2017, with originations up 10% versus H1 2016

Loan growth in the first six months of 2017 was driven by origination across both our Business Finance and Mortgages divisions as we continue to build our diversified portfolio. This growth in originations exceeded redemptions of £1bn in the period resulting in the Group's net lending to customers surpassing £8.1bn at the end of June 2017.

Net lending in Business Finance grew by 8% to £1.9bn, primarily driven by Asset Finance, up 8% to £1.7bn as our expertise in a broad range of asset classes allowed us to maintain our strong position in the broker-channel and to grow our wholesale proposition by 50%. Invoice Finance also grew 8% to £166m as the business continues to focus on enhancing returns through invoice discounting for small businesses and structured finance.

In Mortgages, net loans increased by 9% to £6.2bn. Commercial Mortgages grew by 1% to £0.9bn despite having tightened our appetite for development-based lending following the EU referendum in 2016. In Buy-to-Let, we entered the year with a strong pipeline of applications as a result of the market-wide changes in affordability tests, which combined with our broad customer offering, has enabled us to grow lending by 15% to £3.8bn. Residential Mortgages reduced by 1% to £1.5bn as we continue to see redemptions on the large number of mortgages written two years ago.

Deposit growth of 10%, as £947m Term Funding Scheme ("TFS") utilised to date

Deposits grew 10% to £7.3bn in the first half of 2017 with the mix remaining broadly stable (70% from retail; 30% from SME and corporate customers).

We continued to diversify our sources of funding, utilising cost effective sources offered by the Bank of England, including the TFS and Indexed Long Term Repo scheme ("ILTR") with £947m and £100m respectively drawn as at the end of June. The Group also repaid all Funding for Lending Scheme on-balance sheet liabilities in the period.

The underlying mortgages within our Oak 1 securitisation continued to be repaid as reflected in the 18% reduction in the Residential Mortgages Backed Security balance. The balance of subordinated liabilities also reduced as £40m of Tier 2 securities issued five years previously were called in May 2017.

Financial review continued

Profits up 32% demonstrating continued strong, sustainable returns

Profit before tax for the period increased by 32% to £78.1m (H1 2016: £59.1m) as we maintained healthy net interest margins across a larger loan book. Adjusting for the £4.1m goodwill impairment in the first half of 2016, profit before tax on an underlying basis increased by 24%. The post-tax profit for the period stood at £57.8m, a 37% increase over the first half of 2016.

The return on equity generated in the period was 18.8%, in line with our commitment to delivering returns in the high teens. The half year 2017 basic earnings per share were 14.9p and 14.8p on a fully diluted basis.

Operating income increases 17% as average net loans rise 20%

Compared to the first half of 2016, interest income grew by 9% to £192m for the first half of 2017 driven by continuing net loan growth. The Group's average gross yield reduced by 50bps to 4.93%, primarily as a result of the lower rate environment but also as a result of competition in Asset Finance and a slight change in business mix, with the comparatively lower yielding Buy-to-Let portfolio growing at a faster pace than other portfolios.

Despite the balance sheet growth, interest expense reduced by 6% to £56m. The Group's diversified funding base benefitted from a lower cost of deposits combined with access to the Bank of England's TFS, which together helped drive the Group's cost of funding down by 40bps to 1.45%.

As a result, the Group's net interest income rose by 17% to £136m while the net interest margin reduced slightly by 9bps to 3.48%, in line with guidance.

Net fee and other operating income decreased by 7% to £12m driven mainly by a shift away from factoring business in our Invoice Finance portfolio. Movements on derivative contracts were the primary driver in a £2.8m increase on the net derivatives and disposal of debt securities line.

Financial review continued

Greater operating leverage despite investment to support the Group's strategy

Our simple operating model and efficient distribution network of brokers supported us in further leveraging our capabilities, with operating income growing by 17%, while underlying cost growth was controlled to 13%. This resulted in our underlying cost to income ratio declining by 1.4 percentage points to 44.1%.

Operating expenses rose by 6% to £65.9m in the first half of 2017 compared to the same period in 2016. Given its material and one-off nature, costs related to the impairment of goodwill in our Invoice Finance business in 2016 are removed from our financial metrics to provide an 'underlying' view of our performance. On this basis, underlying costs grew 13%, in line with management expectations, and is reflective of the investment made in both the recruitment of colleagues to further support growth and enhance risk management, and expenditure on strategic, regulatory and mandatory projects.

Loan impairments fall as cost of risk reduces to 14bps

We continue to apply a robust approach to risk management and this, combined with a benign credit risk environment, has resulted in our cost of risk remaining low at 0.14%. Impairments reduced by 13% to £5.6m, within which our collective charge fell by 34% to £1.9m primarily reflecting increased conservatism applied to the loss emergence period for mortgages made in 2016. Individual impairments remained low increasing by 6% to £3.7m.

Further information on the Group's credit risk can be found on pages 11 to 26.

Financial review continued

Capital continues to build as profit outstrips balance sheet growth and seasonal costs

After growing CET1 in the second half of 2016, the Group is continuing to build capital with 30bps of CET1 capital accreted in the first half of 2017 bringing the CET1 ratio to 11.8%. This growth reflects the generation of £58m of profit after tax in the period, partly offset by a £300m, or 7%, growth in Risk Weighted Assets ("RWAs") and the post-tax AT1 coupon of £6.6m, payable annually in April.

The 7% growth in RWAs reflects loan growth of 8%, the difference being a lower risk-weighting density due to the portfolio having a greater proportion of mortgages which typically receive a lower risk-weighting relative to other loans, and an increase in the Basic Indicator Approach ("BIA") Operational Risk charge which is updated in the first quarter of each year and is a function of the average of the last 3 years' net operating income.

The Group's total capital ratio reduced by 68bps to 14.9% in the first half of 2017 as £40m of Tier 2 securities were called, while the Group's leverage ratio remains significantly above forthcoming regulatory minimums at 6.9%.

We have completed enhancements to our credit risk models and entered a parallel run phase as part of our ongoing work to become IFRS 9 compliant ahead of the January 2018 implementation date. This takes us closer to the sophistication required for an Internal Ratings-Based approach ("IRB") to capital which may help to mitigate the risk of future changes in capital requirements. Whilst pursuing IRB in the context of IFRS 9, we will continue to monitor the cost and benefits of transition, as the regulatory changes and timeframes for implementation become clear.

Financial review continued

Credit risk

Credit risk is the risk of financial loss arising from the borrower or a counterparty failing to meet their financial obligations to the Group in accordance with agreed terms. The risk primarily arises from our lending activities as a result of defaulting mortgage, lease or loan contracts. Although credit risk arises from our loan book, it can also arise from treasury investment and off-balance sheet activities.

The credit risk section of this report includes information on the following:

1. The Group's maximum exposure to credit risk

2. Credit quality and performance of loans

3. Forbearance granted through the flexing of contractual agreements

4. Diversity and low concentrations within our loan portfolio

5. The value of assets against which loans are secured and details of provisioning coverage

6. Information on credit risk within our treasury operations

1. The Group's maximum exposure to credit risk

The following table presents our maximum exposure to credit risk of financial instruments on the balance sheet and commitments to lend before taking into account any collateral held or other credit enhancements. The maximum exposure to credit risk for loans, debt securities, derivatives and other on-balance sheet financial instruments is the carrying amount, and for loan commitments the full amount of any commitment to lend that is either irrevocable or revocable only in response to material adverse change.

Our net credit risk exposure grew by 9% in the first six months of 2017. This was in line with the growth in loans and advances to customers, our largest credit risk exposure, of 8% to £8,135.6 million.

Financial review continued

Credit risk continued

2. Credit quality and performance of loans

The Group has maintained low levels of impairment reflecting both the controlled approach to risk management and the benign economic environment. The tables below provide our gross lending of £8,135.6 million split by credit risk exposure on the following basis:

A. Whether they are performing (neither past due nor individually impaired)

B. Payments missed, but no impairment is required (past due but not individually impaired)

C. Loans against which an impairment has been recorded, for example, as a result of payments having been missed (individually impaired)

1 The above analysis includes Property Development.

The three categories shown above are further analysed over the following pages.

Due to the more bespoke nature of the Property Development business the analysis in the following sections of the report exclude the portfolio from a number of tables indicated with a footnote. Gross Property Development exposure at 30 June 2017 was £235 million (31 December 2016: £230 million), and net exposure was £234 million (31 December 2016: £229 million).

Financial review continued

Credit risk continued

A. Loans and advances that are neither past due nor individually impaired

The credit quality of assets that are neither past due nor individually impaired is assessed internally as follows:

1 This analysis excludes Property Development.

The categorisation of high, medium and low risk is based on internal grading models utilised in portfolio monitoring. The models are used to generate a consistent Group-wide approach for the grading of customer credit risk exposures for all lending businesses and provide a relative internal ranking of risk. Drivers for the grade mapping include external credit reference agency risk scores, property valuations and qualitative factors. The relative measure of risk reflects a combined assessment of the probability of default by the customer and an assessment of the expected loss in the event of default.

The resulting classification of balances between low, medium and high is consequently driven by a combination of the Probability of Default ("PD") and Loss Given Default ("LGD") grades as further explained. A matrix of eighteen PD (fifteen of which apply to accounts that are not past due) and ten LGD grades determine the category within which each loan is categorised, i.e. those accounts that have a low PD and low LGD are graded as 'low'. Those graded 'high' will be accounts that have either a high PD and/or high LGD.

Financial review continued

Credit risk continued

B. Loans and advances that are past due but not individually impaired

As at 30 June 2017, there was a balance of £41.0 million in relation to loans where customers had missed one or more repayments but no specific loss had yet been recognised. This represented a 5% decrease in the first half of 2017, despite the 8% growth in net loans in the period.

The table below provides further analysis according to the number of months past due:

C. Loans and advances that have been individually impaired

Individually impaired balances are as follows:

¹ The above analysis includes Property Development.

Financial review continued

Credit risk continued

Against the above individually impaired balances at 30 June 2017 of £35.1 million (31 December 2016: £35.6 million), the fair value of collateral was £30.5 million (31 December 2016: £28.8 million). We always seek to pursue timely realisation of collateral in an orderly manner and do not use the collateral for our own operations.

The year to date movement in impaired loans is as follows:

¹ The above analysis includes Property Development.

Financial review continued

Credit risk continued

3. Forbearance granted through the flexing of contractual agreements

Forbearance is defined as any concessionary arrangement that is made for a period of three months or more where financial difficulty is present or imminent. It is inevitable that some borrowers experience financial difficulties which impact their ability to meet their obligations as per the contractual terms. We seek to identify borrowers who are experiencing financial difficulties, as well as contacting borrowers whose loans have gone into arrears, consulting with them in order to ascertain the reason for the difficulties and to establish the best course of action to bring the account up to date. In certain circumstances, where the borrower is experiencing financial distress, we may use forbearance measures to assist the borrower. These are considered on a case-by-case basis and must result in a fair outcome. The forbearance measures are undertaken in order to achieve the best outcome for both the customer and the Group by dealing with financial difficulties and arrears at an early stage.

The most widely used methods of forbearance are temporarily reduced monthly payments, loan term extension, deferral of payment and a temporary or permanent transfer to interest only payments to reduce the borrower's financial pressures. Where the arrangement is temporary, borrowers are expected to resume normal payments within six months. Both temporary and permanent concessions are reported as forborne for twenty four months following the end of the concession. In all cases, the above definitions are subject to no further concessions being made and the customers' compliance with the new terms.

Forbearance levels remain low, with the volume of forborne accounts by payment status shown in the tables below:

1 This analysis excludes Property Development.

Financial review continued

Credit risk continued

As at 30 June 2017, we had undertaken forbearance measures as follows in each of our segments:

1 This analysis excludes Property Development.

When forbearance is granted to a borrower on a specific exposure, all exposures which are connected with that borrower, e.g. by reason of common ownership, are deemed as forborne for reporting purposes.

Financial review continued

Credit risk continued

4. Diversity and low concentrations within our loan portfolio

Aldermore continues to pursue a diversified portfolio. As shown below, we monitor concentration of credit risk by segment, geography, sector and size of loan:

Credit concentration by segment

Details of our net lending by segment are as follows:

¹ The above analysis includes Property Development.

Credit concentration by geography¹

An analysis of our loans and advances to customers by geography is shown in the table below:

¹ The above analysis includes Property Development.

Financial review continued

Credit risk continued

Credit concentration by sector

An analysis of our loans and advances to customers by sector is shown in the table below:

¹ The above analysis includes Property Development.

Credit concentration by quantum of exposure

An analysis of loans and advances to customers by quantum of exposure is shown in the table below:

¹ The above analysis excludes Property Development.

Financial review continued

Credit risk continued

Credit concentration by quantum of exposure continued

¹ The above analysis excludes Property Development.

5. The value of assets against which loans are secured and details of provisioning coverage

The principal indicators used to assess the credit security of performing loans are loan-to-value ("LTV") ratios for SME Commercial, Buy-to-Let and Residential Mortgages.

SME Commercial Mortgages1

Loan-to-value on indexed origination information on our SME Commercial Mortgage portfolio is set out below:

¹ The above analysis excludes Property Development.

Financial review continued

Credit risk continued

Property Development

We use "loan-to-gross-development-value" as an indicator of the quality of credit security of performing loans for the Property Development portfolio. Loan-to-gross-development-value is a measure used to monitor the loan balance compared with the expected gross development value once the development is complete. Average loan-to-gross-development-value at origination for Property Development loans at 30 June 2017 was 60 percent (31 December 2016: 58 percent).

Buy-to-Let

Loan-to-value on indexed origination information on our Buy-to-Let Mortgage portfolio is set out below:

Financial review continued

Credit risk continued

Residential Mortgages

Loan-to-value on indexed origination information on our Residential Mortgage portfolio is set out below:

Lending at higher LTV bandings continues to be largely as a result of the Group's participation in mortgage guarantee schemes. We participated in the Help to Buy ("HTB") mortgage guarantee scheme, which covered lending with an LTV over 85%, until the retirement of this scheme at the end of 2016. Following the cessation of the HTB scheme we have introduced the Mortgage Indemnity Guarantee ("MIG") product to cover all new lending over 80% LTV (excluding fees).

As at 30 June 2017, 98% of the exposures with an LTV in excess of 85% relate to either HTB (31 December 2016: 96%) or MIG. The average indexed LTV for mortgages with a guarantee was 87% (31 December 2016: HTB - 87%). As at June 2017, the average indexed LTV of the non-mortgage guarantee owner occupied book is 60% (31 December 2016: 61%).

Invoice Finance

In respect of Invoice Finance, collateral is provided by the underlying receivables (e.g. trade invoices). As at 30 June 2017, the average advance rate against the fair value of sales ledger balances which have been assigned to the Group, net of amounts considered to be irrecoverable, is 61.6% (31 December 2016: 62.3%).

In addition to the value of the underlying sales ledger balances, we will wherever possible, obtain additional collateral before offering invoice finance facilities to a client. These may include limited personal guarantees from major shareholders, charges over personal and other business property, cross guarantees from associated companies and unlimited warranties in the case of frauds or certain other breaches. These additional forms of security are impractical to value given their nature.

Asset Finance

In respect of Asset Finance, collateral is provided by our rights and/or title to the underlying assets which we are able to repossess in the event of default. Where appropriate, we will also obtain additional security such as parent company or personal guarantees.

Financial review continued

Credit risk continued

Asset Finance also undertakes a small volume of unsecured lending where we have obtained an understanding of the ability of the borrower's business to generate cash flows to service and repay the facilities provided. As at 30 June 2017, the total amount of such unsecured lending was £46.6 million (31 December 2016: £40.7 million).

Group impairment coverage ratio

Impairment coverage is as follows:

The total value of individually impaired loans has decreased despite the growth in lending portfolios. This reflects both our controlled approach to credit risk management and the benign economic environment, resulting in a lower coverage ratio.

Financial review continued

Credit risk continued

6. Information on credit risk within our treasury operations

Credit risk exists where we have acquired securities or placed cash deposits with other financial institutions as part of our treasury portfolio of assets. We consider the credit risk of treasury assets to be relatively low. No assets are held for speculative purposes or actively traded. Certain liquid assets are held as part of our liquidity buffer.

Credit quality of treasury assets

The table below sets out information about the credit quality of treasury financial assets. As at 30 June 2017 and at 31 December 2016, none of the treasury assets were past due or impaired. The analysis presented below is derived using ratings provided by Standard and Poor's (see below disclaimer for further details) and Fitch. The worst rating from the credit agencies for each of the counterparties is used as the basis for assessing credit risk of treasury financial assets.

Standard and Poor's disclaimer notice in relation to the ratings information set out above:

"This may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor's. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS OR LOSSES CAUSED BY NEGLIGENCE) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice."

Financial review continued

Funding and Liquidity risk

Liquidity risk is the risk that we are not able to meet our financial obligations as they fall due, or can do so only at excessive cost.

To protect the Group and its depositors against liquidity risk, we maintain a liquidity buffer which is based on our liquidity needs under stressed conditions. The liquidity buffer is monitored on a daily basis to ensure there are sufficient liquid assets at all times to cover cash flow movements and fluctuations in funding, enabling us to meet all financial obligations and to support anticipated asset growth.

The components of the Group's liquidity buffer are shown below:

Our liquidity buffer ensures the Group holds sufficient liquidity under stressed conditions. We monitor stress and ongoing commitments to our statement of financial position on a daily basis. We also have access to liquidity through pre-positioned collateral with the Bank of England (until drawn, this remains off-balance sheet so is not included within the calculation).

Financial review continued

Interest rate and market risk

Interest rate risk is the risk of loss through mismatched asset and liability positions which are sensitive to changes in interest rates. Interest rate risk consists of asset-liability gap risk and basis risk.

Asset-liability gap risk

Where possible, we seek to match the interest rate structure of assets with liabilities creating a natural hedge. Where this is not possible, we enter into interest rate swap transactions to convert the fixed rate exposures on loans and advances, customer deposits and available for sale securities into variable three month LIBOR liabilities.

Given timing differences and the price of hedging small gaps, it is not cost effective to have an absolute match of variable rate assets and liabilities. The risk exposure of the overall asset-liability interest rate profile is monitored against approved limits using changes in the economic value of the balance sheet as a result of a modelled 2 percentage point shift in the interest yield curve.

The impact of a 2 percentage point shift in the interest yield curve is as follows:

Financial review continued

Segmental analysis: Asset Finance

Asset Finance predominantly supports the growth of SMEs, providing financing for capital investment in business critical assets. Leveraging our depth and breadth of expertise, we finance a wide array of assets such as plant and machinery, commercial vehicles, technology, office equipment and cars. This flexibility enables us to meet the needs of customers of all sizes across key industries. In addition, we offer wholesale, receivables purchase and block discounting facilities to smaller finance companies and brokerages enabling them to extend credit directly to SMEs.

Performance

Net loans to customers were up £124m to £1.7bn, an increase of 8% driven by organic origination of £0.6bn, extending our Asset Finance franchise to c50,000 small UK businesses.

We maintain a leadership position in the competitive broker-introduced market, supporting a range of customer segments across a broad range of asset classes. We have also expanded our wholesale proposition, up 50% to £150m compared with the six months to June 2016, including a small number of large deals with target clients. Net interest income increased 8% to £32.4m driven by lending growth, with the NIM down slightly to 4.0%, driven by competitive dynamics and the increased use of our wholesale channel. Other income grew by 53% to £2.6m driven primarily by an increase in documentation fees.

Impairments were low at £1.9m (H1 2016: £2.4m), driving the cost of risk down by 10bps to 24bps, reflecting the high quality book backed by high-levels of tangible collateral. The overall segmental profit increased 16% to £26.5m (H1 2016: £22.9m).

Outlook

Asset Finance has made a strong start to the year, growing lending balances by 8% and progressing strategic initiatives to support medium term growth. We continue to maintain underwriting and return standards, despite competition from new entrants and consolidation activity among intermediaries.

Aldermore is well positioned to manage and capitalise on these competitive dynamics, as demonstrated by our agreed investment in AFS Group Holdings, and is expected to continue to generate robust new lending growth via both the broker and wholesale channels over the second half of the year.

Financial review continued

Segmental analysis: Invoice Finance

Invoice Finance helps the UK's SMEs to unlock working capital and vital cash flow for their businesses, providing facilities ranging from vanilla invoice discounting and full-service factoring to more bespoke structured products requiring Aldermore's in-house expertise.

Performance

Performance trends in Invoice Finance have shown continued momentum as a result of our strategy to consolidate and focus on larger discounting facilities to small businesses, demonstrated by a 32% increase in segmental profit.

Invoice Finance has a relatively short lifecycle compared to the Group's other portfolios, with strong growth in originations of 26% translating to net lending growth of 8% to £166.2m (2016: £154.1m). An 8% reduction in fee income to £6.6m reflects our continuing focus toward invoice discounting and structured finance and away from lower value and labour intensive factoring business, which has also contributed to a more than 10% reduction in administrative expenses.

Impairments have fallen by 80% to £0.2m, significantly reducing the cost of risk to 0.27%, down 1.0pp reflecting the improved credit profile of the portfolio.

Outlook

The refocused strategy in Invoice Finance continues to generate strategic and financial benefit, through a higher quality customer base and greater returns. Given the nature of the portfolio balances we anticipate modest growth over the second half of 2017 as new specialist proposition development, such as football finance, offsets the planned attrition from the factoring business.

Financial review continued

Segmental analysis: SME Commercial Mortgages