LendInvest plc Full Year Financial Results FY22

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

LEI: 213800NWMK3O4UWP9N91

29th June 2022

LendInvest plc

 UNAUDITED PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2022

Record FuM and 90% Adjusted EBITDA growth; Board recommends a maiden dividend

LendInvest plc (LSE: LINV; the "Company" or the "Group"), a leading technology driven asset manager for UK property finance, is pleased to announce its unaudited preliminary results for the year to 31 March 2022.

Rod Lockhart, Chief Executive of LendInvest, commented:

"This has been a landmark year for LendInvest. We have delivered our most profitable set of results to date and successfully listed on AIM to support our growth ambitions. Our performance is testament to the attractiveness of our model, demonstrated by our ability to attract significant capital from our investors and the strong demand from borrowers for our innovative offering and stand-out customer service. We are particularly delighted to have reached a record £2.9bn of funds under management.

"Taking into account our continued strategic progress, attractive financial profile and confidence in our long-term prospects, the Board is pleased to recommend a maiden dividend of 4.4p per share. Moving forward, the Board is confident that the Group's cash flows will comfortably support a progressive dividend policy and enable us to continue with our investment plans to grow the business.

"We remain at the forefront of the digital transformation of one of the last verticals of financial services yet to be disrupted by technology. While we are mindful of the uncertain economic environment, we are very excited about the significant opportunities ahead."

FY 2022 Financial Highlights:

· Strong demand for our Buy-to-Let ("BTL") products resulted in a 67% increase in BTL Platform AuM which drove a 36% increase in total Platform AuM

· Investor appetite for exposure to the UK property finance market via our investment products resulted in an 18% increase in FuM to a record £2.9 billion

· Growth in Platform AuM, a change in the product mix and improved funding terms resulted in a 32% increase in gross profit, and an improvement in gross profit margin from 52% to 57%

· Continued operational leverage and efficiency gains drove Adjusted EBITDA up 90%

· Profit before tax increased 190% to £14.2 million partly driven by profits arising from the completion of our third securitisation and the transfer of a £100 million portfolio of BTL assets to J.P. Morgan under the separate account agreement

· Diluted earnings per share increased 142% to 8.0 pence per share (31 March 2021: 3.3 pence per share)

· Board recommends a maiden full year dividend of 4.4p per share

Strategic highlights:

· Successfully joined the London Stock Exchange on AIM in July 2021, raising £40 million to invest in the Group's property finance product roadmap and the continued development of its technology

· Further strengthened our relationship with J.P. Morgan through the sale of a £100 million portfolio of prime BTL loans in September

· Successful closing of our third Residential Mortgage-Backed Securities (RMBS) transaction ("Mortimer BTL 2021-1 plc"), which achieved the tightest spread on a UK BTL securitisation in over 13 years

· Renegotiation and expansion of financial partnerships with Citi and National Australia Bank, extending the terms and improving capital efficiency, pricing and criteria

· New £150 million financial partnership with Barclays and HSBC to fund short term bridging loans with a particular focus on the retro-fitting and renovation of the UK's ageing housing stock

· Onboarded an additional 519 new brokers to the platform with a first signed application

· Investment in technology continues to drive operating leverage; operational expenditure as a percentage of Platform AuM has dropped significantly from 3.4% to 1.3% over a three-year period

· Launch of EPiC product range in October 2021 that incentivises landlords to refurbish and increase the environmental efficiency of their properties

· Launch of 7-year fixed products which accounted for 27% of Buy-to-Let completions in calendar Q1 2022 demonstrating our ability to respond quickly to changing customer preferences

· Key management hires in technology and for our Specialist Homeowner product which we intend to launch in the second half of FY 2023

Summary Performance

1 See Glossary for an explanation of these terms and their reconciliation, where relevant, to IFRS measures

2 The prior numbers have been restated, please see note 1.6 for further details

Dividend policy The Board seeks to balance delivering attractive shareholder returns while maintaining disciplined capital allocation, balance sheet flexibility, and sufficient surplus of funding for continued product development and potential longer-term strategic opportunities.

The Board has therefore recommended a maiden gross cash dividend of 4.4p per share for the year to 31 March 2022 and plans to pursue a progressive dividend policy.

Board role changes After 14 years of actively building the business, including a successful transition to a public company Christian Faes is looking to adapt his role from Executive Chair to a more traditional Non-Executive Chairman role in the coming year. The board is supportive of his decision and is of the view that it is in the best interest of all stakeholders. The directors look forward to working closely with Christian in his adjusted role.

Presentation and webcastA conference call with management including an opportunity to ask questions will commence at 9.00am (BST) on 29 June 2022. A copy of the presentation will be available on the investor relations section of www.lendinvest.com from 8.55am.

The conference call can be accessed here.

Enquiries:

LendInvest via Tulchan Communications +44 (0)20 7353 4200Rod Lockhart, Chief Executive Officer Michael Evans, Chief Financial OfficerAlex Dee, Head of Investor RelationsLeigh Rimmer, Senior PR Manager [email protected]   

Panmure Gordon (NOMAD and Joint Broker) +44 (0)20 7886 2500Charles Leigh-PembertonAtholl TweedieGabriel Hamlyn

finnCap Limited (Joint Broker) +44 (0)20 7220 0500Jonny Franklin-Adams/George Dollemore (Corporate Finance)Tim Redfern/Alice Lane (ECM)

Tulchan Communications (Financial PR) +44 (0)20 7353 4200Tom MurrayMatt LowMisha BaylissOlivia Lucas

Inside information

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018.

Forward-looking statements

Certain statements in this announcement are forward-looking statements. In some cases, these forward looking statements can be identified by the use of forward looking terminology including the terms "anticipate", "believe", "intend", "estimate", "expect", "may", "will", "seek", "continue", "aim", "target", "projected", "plan", "goal", "achieve" and words of similar meaning or in each case, their negative, or other variations or comparable terminology. Forward-looking statements are based on current expectations and assumptions and are subject to a number of known and unknown risks, uncertainties and other important factors that could cause results or events to differ material from what is expressed or implied by those statements. Many factors may cause actual results, performance or achievements of LendInvest to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Important factors that could cause actual results, performance or achievements of LendInvest to differ materially from the expectations of LendInvest, include, among other things, general business and economic conditions globally, industry trends, competition, changes in government and changes in regulation and policy, changes in its business strategy, political and economic uncertainty and other factors. As such, undue reliance should not be placed on forward-looking statements. Any forward-looking statement is based on information available to LendInvest as of the date of the statement. All written or oral forward-looking statements attributable to LendInvest are qualified by this caution. Other than in accordance with legal and regulatory obligations, LendInvest undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Nothing in this announcement should be regarded as a profit forecast.

CHIEF EXECUTIVE OFFICER'S REVIEW

Financial progress

I am pleased to report another year of strong growth in Platform AuM and profitability. Our growth is underpinned by our proprietary end-to-end technology infrastructure, which drives efficiency and facilitates operating leverage as well as delivering a more seamless process for our customers.

Platform AuM increased by 36% to £2.1 billion for the year to 31 March 2022 and FuM increased by 18% to £2.9 billion. This led to an increase of 21% in revenue and 32% increase in gross profit. Driving performance was the strong demand for our Buy-to-Let products and the completion of a number of capital markets transactions.

Adjusted EBITDA increased by 90% to £20.3 million for the year and profit before tax increased by 190% to £14.2 million, demonstrating further improvement in operating leverage over the period.

Our business is highly cash-generative, and these cash flows support returning capital to shareholders via ordinary dividends. The Board has recommended paying a maiden dividend in respect of the whole of the 2022 financial year of 4.4p per share and proposes subsequently to adopt a progressive dividend policy.

Strategic progress

We have enjoyed significant progress during the year with a number of strategic highlights that have contributed to a record level of FuM.

On the funding side, we completed our third securitisation for £280 million and a new £150 million financial partnership with HSBC and Barclays. In addition, we extended our £725 million separate account mandate with JP Morgan and the £500 million financial partnerships with Citi and National Australia Bank. Being able to attract such large and diverse pools of capital from existing and new investors demonstrates their trust in our platform to originate and manage their exposure to property finance.

During the year, we surpassed £4 billion in lending to date, as well as £2.1 billion in Platform AuM, two fantastic milestones for the business. It was a huge achievement to pass the £2 billion Platform AuM milestone in January. We took over 10 years to reach £1 billion of Platform AuM in July 2019, but reached £2 billion just 30 months later.

Driving the growth in Platform AuM is our ability to launch and scale new products. We have been able to demonstrate this over the years by launching into Bridging, Development and Buy-to-Let. Over the past year we continued this trend by launching a Regulated Bridging product, our first residential mortgage product, as well as our innovative EPiC green mortgage range within Buy-to-Let, which has been a huge success.

Our competitive edge is our technology. At the IPO, we said that we wanted to accelerate our technology roadmap, and we have done exactly that. This has enabled us to launch our new Bridging broker portal, and to accelerate the development of our Specialist Homeowner product which we aim to launch in the second half of FY 2023. This is a significant new market segment for the business. The specialist homeowner market is ripe for disruption by technology due to the complex nature of the loans, the lack of automation in the application process and poor customer experiences.

ESG

Creating a positive impact on the environment, the communities our borrowers serve and the talented people that make up our team is at the heart of our approach. From rewarding borrowers that use environmentally sound practices and contributing to social regeneration in underinvested regions, to supporting our employees' career development and fostering diversity and mental health awareness, we seek to do right by all of our stakeholders.

People and culture

The dedication of our talented team, our high-quality customer service and our continued investment in technology has enabled us to deliver strong growth.

We have grown the team by 26%, with growth of 76% within our technology teams. This is especially pleasing given the backdrop of a competitive hiring market, particularly in the technology sector. This is testament to our talented team, culture, and the quality of the technology we have built to date.Over the past 14 years, the Group has benefited from Christian Faes' entrepreneurialism, foresight and judgement. Over the coming year, he will transition his role from Executive Chair to a more traditional Non-Executive Chair role. The board and the entire management team look forward to continuing to work closely with Christian and benefiting from his vision.

Current trading and outlook The tragic events in Ukraine have created global uncertainty and macro headwinds. We're now dealing with the highest inflation since 1982 and interest rates have risen to their highest point in 13 years.

Despite this backdrop the property market continues to be strong with growth of 9.7% in average house prices over the 12 months to March 2022. Although we expect this growth to slow down, we do not see this as a material concern. We have a relatively low loan-to-value of below 70%, providing some protection from the risk of needing to absorb any losses from potential defaulting borrowers even in a contracting market.

The rising interest rate environment and volatility in interest rate swaps has been challenging, particularly for pricing our Buy-to-Let products. Our strategy has been to pass on the rising costs with higher borrowing rates, as well as offering longer term fixed rate products that have been hugely popular.

The diversity of both our types of funders and our lending product range is one of our key strengths. This, alongside the agility of our platform, allows us to adapt product mix, launch new products and adjust risk appetite as market conditions change. For example, we recently launched a Portfolio Buy-to-Let solution backed by a separate account with a US annuity provider.

The combination of these factors provides for a resilient business model and one that gives us confidence in meeting market expectations.

Rod LockhartChief Executive Officer

STRATEGY

Using technology to disrupt one of the few remaining verticals in UK financial services. Our core strategy is to:

Grow

- We grow our platform investor base (our FuM) by taking advantage of prominent, developing trends that include a shift towards private debt, a growing preference for real assets, and alternatives with an ESG focus

- We match the investment requirements of pension funds and insurance companies with the long-term, secure, stable income-producing asset class of UK property finance

Progress during the year

- Increased the J.P. Morgan Separate Account by £100 million to £725 million

- Agreed a new £150 million financial partnership with Barclays and HSBC

- Successfully closed our third RMBS transaction of £280 million, which achieved the best pricing on a UK Buy-to-Let securitisation in over 13 years

- Renegotiated and expanded financial partnerships with Citi and National Australia Bank

Optimise

- We optimise our FuM by continuously seeking the most appropriate investors and financial partners to match the risk-reward profiles of our assets, leveraging our loan engine technology which automates and optimises loan allocation and management

- We perform advanced data analytics to iterate our credit model and improve the risk adjusted returns provided to investors and financial partners

- As a fast-growing and agile firm we are constantly reviewing costs to further grow profitability and optimise shareholder returns

Progress during the year

- Use technology to improve operating leverage - opex as % of Platform AuM improved from 1.5% to 1.3%

- Continue to grow profitability - Adjusted EBITDA growth of 90%

- Glasgow has been selected as the location for our second UK office. It provides a pool of talented individuals and significant efficiencies versus Central London. The office will open later this year

Expand

- We expand our Platform AuM by delivering a superior service, leveraging our Genesys technology to create a seamless application process. This leads to increased broker conversion and higher repeat rates, resulting in a "flywheel" effect

- Our technology also enables us to introduce new products (such as Specialist Homeowner mortgages and Portfolio Buy-to-Let) at scale and penetrate the markets that we do not yet operate in

Progress during the year

- New brokers to the platform - 519 brokers have submitted an application for the first time in the past 12 months

Invest

- We continue to innovate and invest in our technology infrastructure, further improving the customer experience

- Further technology development will also enable the launch of new products, such as Specialist Homeowner that will provide more growth verticals for our business to expand

Progress during the year

- Accelerate technology roadmap - New Bridging broker portal launched; Increased tech headcount by 76% 

- Grow in existing products - Strong growth in Platform AuM; Record Buy-to-Let AuM growth and applications

- Launch new products - Launch of our EPiC green mortgage product range; Relaunch of Regulated Bridging product; Specialist Homeowner product on track for launch

KEY PERFORMANCE INDICATORS

Platform AuM What we measureIn simple terms, Platform AuM is the amount of money our customers have borrowed from us. The more they borrow, the more we can earn.

In less simple terms, we measure Platform AuM as the (i) total amount of outstanding loans and advances (including accrued interest, and gross of impairment provisions and fair value adjustments), as reported on an IFRS basis in the notes to the accounts in our Financial Statements, and (ii) off-balance sheet assets, which represents the total amount of outstanding loans and advances (including accrued interest) that we originate but do not hold on our balance sheet, comprising those loans that are held by our off-balance sheet entities.

How we performed Platform AuM increased 36% to £2.1 billion driven by a 67% increase in Buy-to-Let Platform AuM. This was underpinned by strong growth in FuM following the extension of our J.P. Morgan Separate Account and our third RMBS transaction of £280m BTL loans in June 2021.

FuM

What we measure In simple terms, FuM is the amount of money our investors have given us to invest into the UK property finance market on their behalf. The more money they invest with us, the more we can lend to our borrowers ergo the more we can earn.

In less simple terms, FuM is the aggregate sum available to us under each of our funding lines. Our FuM is used to originate revenue generating AuM. We view the difference between FuM and Platform AuM as the headroom for future growth.

How we performed FuM increased 18% to £2.9 billion as we extended the J.P. Morgan Separate Account agreement and completed our third RMBS transaction of £280 million BTL loans in June 2021.

Revenue

What we measure Revenue includes income generated from interest on loans and advances, gain on derecognition of financial assets, origination and loan fees, and asset management, fund and servicing fees.

How we performed

Revenue increased 21% to £87.8million, reflecting higher fees and interest income generated as a result of the increase in Platform AuM.

Adjusted EBITDA

What we measure The Adjusted EBITDA figure represents our earnings before interest, tax, depreciation and amortisation, adjusted for any non-cash income or expense items. Growth in adjusted EBITDA supports our free cash flow which helps fund our investments for growth and shareholder returns.

How we performedAdjusted EBITDA increased 90% to £20.3 million driven by continued operational leverage and efficiency gain from technology investment.

Profit before Tax

What we measureThe Group's profits before consideration of taxation.

How we performed

Profit before tax increased by 190% to £14.2 million. This improved due to the growth in revenue and gross profit margin, in addition to profits arising from the transfer of a £100 million portfolio of BTL assets to J.P. Morgan under the separate account agreement.

Diluted EPS

What we measureGrowth in diluted EPS reflects the increase in profitability of the business, change in the tax rate and adjusted for the effects of potentially dilutive share options.

How we performed

Diluted EPS increased by 142% to 8.0p.

CHIEF FINANCIAL OFFICER'S REVIEW

Overview

I am pleased to report that LendInvest has made significant operational and financial progress in 2022. Our track record in innovation and new product development delivered strong customer uptake of our Buy-to-Let products which drove our growth during the year. In the year to 31 March 2022, Platform AuM increased by 36% to £2.1 billion; Gross Profit increased by 32% to £49.7 million; Adjusted EBITDA increased by 90% to £20.3 million and Profit before tax increased by 190% to £14.2 million.

Summary income statement

1 The reported figures for the year ended 31 March 2021 have been restated. Details of the restatement are disclosed in note 1.6 of the financial statements.

2 See Glossary for an explanation of this term and reconciliation back to IFRS measures.

Revenue increased by 21% to £87.8 million (2021: £72.4 million) primarily driven by strong growth in our Buy-to-Let Platform AuM which grew by 67% to £1.5 billion (2021: £0.9 billion) taking total Platform AuM to £2.1 billion (2021: £1.6 billion.

Gross profit increased by 32% to £49.7 million (2021: £37.6 million) partly driven by enhanced funding terms which reduced our cost of sales. This included our third securitisation last June which substantially reduced our Buy-to-Let funding costs and renegotiated terms with our financial partners, Citi and National Australia Bank. These improvements in gross profit were partially offset by a 5% reduction in our short-term lending Platform AuM to £646 million (2021: £678 million) as a result of a buoyant property market, in which borrowers completed their projects and sold the underlying asset quickly. The net impact of these movements was an improvement in our gross profit margin to 57% (2021: 52%).

Adjusted EBITDA increased 90% to £20.3 million (2021: £10.7 million) partly due to the benefits of the operating leverage in our business model. Our non-exceptional operational expenditure increased by 20% to £25.0 million (2021: £20.9 million). Our impairment charge reduced by 4% to £4.4 million (2021: £4.6 million) as a result of an improved macro-economic environment as the COVID-19 vaccine was rolled out and lockdown conditions were lifted.

Profit before tax increased 190% to £14.2 million (2021: £4.9 million). In addition to the factors outlined above, a £1.2 million gain on derivatives was recognised (2021: £2.2 million loss), largely derived through the cancellation of swaps following a Buy-to-Let portfolio sale to J.P.Morgan in September 2021 and our third securitisation in June 2021. Profit after tax increased by 187% to £10.9 million (2021: £3.8 million). The effective tax rate in the year was 23% which is higher than the corporate tax rate of 19% due to a prior year adjustment of £0.6 million largely relating to a reversal of tax losses recognised in the year to 31 March 2020 in the Mortimer 2020-1 securitisation vehicle.

Basic earnings per share improved by 141% to 8.33 pence per share (2021: 3.45 pence per share) and diluted earnings per share improved by 141% to 8.04 pence per share (2021: 3.34 pence per share).

Lending Product Highlights

* Refer to the Glossary for an explanation of this term and reconciliation to Loans and Advances

Buy-to-Let Lending

Platform AuM from Buy-to-Let products increased by 67% to £1.5 billion. Demand for our Buy-to-Let products was strong throughout the year and increased in October 2021 following the launch of our new 7-year fixed product and a range of green products which incentivised borrowers with cheaper lending rates where security for the loan was against a property with an EPC rating of C or above. 

Revenue from Buy-to-Let grew by 57% to £45.6 million (2021: £29.1 million). The increase was driven by higher Platform AuM and fee income earned through loans sold to the J.P. Morgan separate account, which was launched during the previous year.

Gross profit from Buy-to-Let increased by 80% to £27.0 million (2021: £15.0 million) as we benefited from higher Platform AuM combined with lower cost of funding as a result of our third RMBS securitisation of £280 million Buy-to-Let loans and renegotiated terms with Citi and National Australia Bank.

These changes resulted in a 7 percentage points increase in the gross profit margin to 59% (2021: 52%).

Short-Term Lending

Short-term Platform AuM reduced by 5% reflecting elevated repayments throughout the year due to the strength of the underlying property market and our borrowers' ability to exit their projects. The Group decided during the previous year to reduce higher risk development lending as a precautionary measure during the COVID-19 lockdown period.

This reduction in Short-Term Lending Platform AuM is reflected in the reduction in revenue of 3% to £42.2 million (2021: £43.3 million). Cost of sales decreased by 6% due to improved funding costs from the new relationship with Barclays and HSBC. The effect of these was to increase the gross profit margin to 54% from 52% in the previous year.

Cash and Cash Flow

Our business is highly cash-generative, and these cash flows can support a progressive dividend over time. We actively manage our capital to seek to maximise value to shareholders and support our strategy by either investing that capital to improve shareholder returns in the future or returning it to shareholders.

As at 31 March 2022, the Group held cash and cash equivalents of £118.2 million, an 90% increase since the prior year. Of this total, £79.1 million was restricted for loan funding purposes.

The remaining cash balance of £39.0 million increased by £21.3 million, having grown by 120% in the year largely due to the £40 million of capital raised through the Group's IPO in July 2021, offset by cash used to co-invest in Buy-to-Let loans held on our balance sheet.

Dates for the FY 2022 dividend (subject to shareholder approval at the Company's forthcoming AGM)

MICHAEL EVANS

Chief Financial Officer

Consolidated statement of profit and loss

Consolidated Statement of Other Comprehensive Income

Consolidated statement of financial position

Consolidated statement of cash flows

Consolidated statement of changes in equity

NOTES TO THE FINANCIAL STATEMENTS

1. Basis of preparation and significant accounting policies

1.1 Going concern

The Group's business activities together with the factors likely to affect its future development and position are set out above. It is on this basis that the directors have continued to prepare the accounts on a going concern basis.

1.2 General Information

LendInvest plc (previously LendInvest Limited) is a public company incorporated and domiciled in the United Kingdom under the Companies Act 2006. The Group listed on AIM, a market operated by the London Stock Exchange on 14 July 2021. The Company's registered number is 08146929. The principal place of business of the Group is the United Kingdom.

The unaudited summary financial information set out in this announcement does not constitute the Group's consolidated statutory accounts for the years ended 31 March 2022 or 31 March 2021. The results for the year ended 31 March 2022 are unaudited. The statutory accounts for the year ended 31 March 2022 will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies in due course. The statutory accounts are subject to completion of the audit and may also change should a significant adjusting event occur before the approval of the Annual Report.

The financial information for the year period ended 31 March 2022 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not include references to any matter to which the auditors drew attention by way of emphasis without qualifying their report and did not include any statement under section 498(2) or 498(3) of the Companies Act 2006.

This preliminary announcement for the year ended 31 March 2022 was approved by the Board for release on 29 June 2022 and has been agreed with the Company's auditor.

1.3 Basis of preparation

The financial statements have been prepared in accordance with the Companies Act 2006 and the UK-adopted International accounting standards.

On 31 December 2020, IFRS as adopted by the European Union at that date was brought into the UK law and became UK-adopted International Accounting Standards, with future changes being subject to endorsement by the UK endorsement board. LendInvest plc transitioned to UK-adopted International Accounting Standard in its consolidated financial statements on 1 April 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework.

The financial statements have been prepared on a historical cost basis, except as required in the valuation of certain financial instruments which are carried at fair value. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in this note 1.21.

The Group maintains its books and records in pound sterling ("£"). The financial statements are presented in pounds sterling, which is the Group's and the Company's functional currency. All amounts have been rounded to the nearest million, unless otherwise indicated

Changes in accounting standards and policies since the last published Annual Report

IBOR reform amendments

The IASB issued a Phase 1 Amendments to IAS39, IFRS 9 and IFRS7 for IBOR Reform in September 2019. The amendments provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by IBOR reform. The reliefs have the effect that IBOR reform should not generally cause hedge accounting to terminate.

In prior periods the Group adopted specific amendments that provide temporary relief to the requirements of its fair value hedge accounting for a portfolio hedge of interest rate risk (macro hedge), these are:

· Risk components - the Group separately identifies LIBOR risk component only at initial hedge designation and not an ongoing basis

· IAS 39 prospective assessments - the Group assumes that interest rate cash flows of the hedged item and hedging instrument do not change as a result of IBOR reform

· IAS 39 retrospective effectiveness test - if the effect of IBOR reform results in fair value changes that cause hedge effectiveness to fail the prescribed 80%-125% range, hedge accounting is not discontinued

The amendments set out triggers for when the reliefs are to end, which include the uncertainty arising from interest rate benchmark reform no longer being present.

During the year-ended 31 March 2022 the Group discontinued its fair value hedge relationships upon transfer of the hedged item and termination of the hedging instruments. The designated hedged items and hedging instruments in the new fair value hedge relationship are measured on the same replacement index, SONIA. As such the uncertainty arising from the interest rate benchmark reform with respect to hedge accounting no longer applies to the Group. The Group has not applied the phase 1 amendments for IBOR reform to the hedge results presented in these financial statements.

In August 2020 the IASB issued Phase 2 Amendments to IAS39, IFRS 9 and IFRS7 for IBOR Reform. The Group has adopted Phase 2 amendments which provide relief so that:

· When changing the basis for determining contractual cash flows for financial assets and liabilities (including lease liabilities), the effect of the changes that are required by an interest rate benchmark reform (i.e. a direct consequence of IBOR reform and are economically equivalent) will not result in an immediate gain or loss in the income statement.

· The hedge accounting reliefs will allow most IAS 39 or IFRS 9 hedge relationships that are directly affected by IBOR reform to continue. However, additional ineffectiveness might need to be recorded. Cash flows of financial assets and liabilities as a result of a required change in an interest rate benchmark (i.e. as a direct result of IBOR reform) will not result in immediate gain or loss in the income statement.

The Group has not applied Phase 2 amendments for the results presented for the year ended 31 March 2022, as it does not have designated hedge accounting relationships requiring relief provided by the amendment.

For the year-ending 31 March 2022, the Group's risk exposure that is directly affected by the IBOR reform is a portfolio of BTL fixed-rate mortgages, that revert to a floating rate indexed to LIBOR after a fixed term, £622.6m (2021: £741.7m).

Since 2021 Q1 the Group originates BTL mortgages with a BBR reversion index. In September 2021 the FCA announced that it would permit and support the use of synthetic LIBOR with respect to legacy contracts that had proved difficult to transition. The FCA has not set a date for the withdrawal of synthetic LIBOR, however it does have the power to require the continued publication of synthetic LIBOR rates for up to 10 years.

Given the FCA's decision and the absence of a regulatory or legislative requirement to transition borrowers on LIBOR linked contracts to an alternative rate, the Group is unable to place reliance on the fall-back provisions of such contracts. As such these contracts remained indexed to LIBOR and have not been transitioned. The Group will continue to review its IBOR transition related exposure in accordance with legal and regulatory requirements.

 New standards and amendments not yet effective

The IASB has issued a number of amendments to reporting standards which the Group has determined as being applicable to its financial reporting. These amendments are effective in future accounting periods and the Group has not opted for any early adoption. The following amendments are effective for the period beginning on or after 1 April 2022 and are not expected to have a material impact on the Group:

· IAS 1 (Amendment to classification of liabilities as current or non-current when settlement date is uncertain)

· IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Amendment - Definition of an accounting estimate, and distinction between change in accounting estimate and change in accounting policy)

· IFRS 3 Business Combinations (Amendment - Updating reference to conceptual framework)

· IAS 16 Property, Plant and Equipment (Amendment - Prohibits deduction from the cost of assets, the amounts received from selling items produced while preparing asset for intended use)

· IAS 37 Provisions, Contingent Liabilities and Contingent Assets (Amendments - Clarification of cost input in determining onerous contracts)

· IAS 12 Income Taxes (Amendments regarding deferred tax on leases)

·  IFRS 9 Financial Instruments (Amendments - Inclusion of fees in the '10 per cent' test for derecognition of financial liabilities)

1.4 Foreign currency

Items included in the financial statements are measured using the currency of the primary economic environment in which they operate (their "functional currency") and are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in the statement of profit and loss

1.5 Cash and cash equivalents

Cash and cash equivalents comprise of cash balances and balances with a maturity of three months or less from the acquisition date which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

1.6 Changes in prior year figures

i) The Group has restated its March 2021 consolidated statement of financial position in accordance with IAS 1:54(n), which requires the inclusion of liabilities and assets for current tax as a separate line item in the statement of financial position. It was previously incorrectly shown within the Trades and other payables line item. This has had no impact on the March 2021 consolidated statement of profit and loss or the March 2021 consolidated statement of cash flows.

ii) The Group has restated its 31 March 2021 consolidated statement of profit and loss, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows in accordance with IFRS9 which requires a financial liability to be derecognised when it is extinguished. In March 2020, the Group purchased £7.3 million of its bonds from a third-party bond holder for £5.9 million. A gain was recognised in the consolidated statement of other comprehensive income in the year ended 31 March 2020. These bonds were cancelled in April 2020 and the Group recognised a gain of £1.4 million in the consolidated statement of profit and loss in the year to 31 March 2021. 

According to IFRS9, the gain in the consolidated statement of profit and loss should have been recognised in full in the financial statements for the year ended 31 March 2020. This change does not affect the retained earnings of the Group at 31 March 2021. Retained earnings at 31 March 2020 will be £1.1 million higher, the fair value reserve will be £1.1 million lower, the deferred tax liability will be £0.3m lower and the current tax liability will be £0.3m higher. Total equity in the statement of financial position is unaffected at 31 March 2020. Recognising the gain through the P&L in the year ended 31 March 2020 will not affect the tax position of the group at 31 March 2021, as this gain will be taxed at the same rate as it was when it was recognised through the P&L in the year ended 31 March 2021. Basic earnings per share for the year to 31 March 2021 has changed from 4.31 pence per share to 3.45 pence per share. Diluted earnings per share for the year to 31 March 2021 has changed from 4.09 pence per share 3.34 pence per share. Please see note 32 for further details.

iii) The Group has restated its 31 March 2021 consolidated statement of profit and loss, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of financial position, and consolidated statement of cash flows. This is in accordance with IFRS9 which requires all fees and transaction costs, which are integral to the creation of a loan, to be included in the effective interest rate calculation. The Group has previously incorrectly amortised any relevant transactions costs through cost of sales and these have been reclassified to interest revenue in the consolidated statement of profit and loss. Any unamortised fees and transaction costs have previously been held in Trade and other payables, and Trade and other receivables respectively. These amounts have been transferred to Loans and Advances. This change to the Loans and Advances has had a commensurate change in the Fair Value Reserve account and this is reflected in the consolidated statement of changes in equity. Movements in the Loans and Advances, Trade and other payables, and Trade and Other Receivables accounts have also been reflected in the consolidated statement of cash flows.

The change to the consolidated statement of profit and loss is a reclassification between revenue and cost of sales and does not change the overall profitability of the Group in the prior year. The change to the consolidated statement of financial position is a reclassification.

iv) The Group has restated its 31 March 2021 consolidated statement of profit and loss. Previously revenue earned on the investor self-select platform of £3.3 million was incorrectly shown within the Interest revenue line item in the consolidated statement of profit and loss. The nature of this revenue is aligned with fee income as the assets on which income is earned do not sit on the Group's consolidated statement of financial position. This revenue has been reclassified from Interest revenue to Fees and other income in the consolidated statement of profit and loss. This restatement is a reclassification within revenue and has no impact on the consolidated statement of financial position, consolidated statement of other comprehensive income, consolidated statement of changes in equity or consolidated statement of cash flows.

v) The Group has restated its March 2021 consolidated statement of profit and loss in accordance with IAS 1, which requires gains from the derecognition of financial assets to be shown separately in the statement of profit and loss. These amounts were incorrectly previously shown within fee income and cost of sales. Fee income has reduced by £8.4m, cost of sales by £2.6m and gain on derecognition of financial assets has increased by £5.8m. This change has no effect on the Group's profits or net assets.

Restated comparative consolidated statement of financial position

Restated comparative condensed consolidated statement of profit and loss

Restated comparative condensed consolidated statement of comprehensive income

Restated opening balance of condensed consolidated statement of changes in equity

 Restated balance of condensed consolidated statement of changes in equity

Restated opening comparative consolidated statement of financial position

Restated comparative condensed consolidated statement of cash flows

1.7 Basis of consolidation

Subsidiary companies and other controlled entities

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company as if they were a single entity.

Intra-Group transactions, balances and unrealised gains or losses are eliminated on consolidation.

The Group operates a share incentive plan ("SIP") trust and an employee benefit trust ("EBT"). These trusts are accounted for under IFRS 10 and the assets and liabilities are consolidated into the Group's balance sheet and shares held by the trusts in the Group are presented as a deduction from equity.

1.8 Revenue recognition

Revenue represents interest and other income from borrowers and for the provision of finance. Revenue recognised on loans held by related and third parties is recognised as follows:

Recognised under IFRS 9:

Interest on loans and advances made by the group is recognised in the consolidated statement of profit and loss using the effective interest rate method. Under the effective interest rate method fees earned from borrowers and transaction costs incurred which are integral to the creation of a loan such as arrangement, valuation and broker fees are amortised over the expected life of the loan or recognised immediately upon a transfer resulting in derecognition of the loan.

Recognised under IFRS 15:

Revenue comprises the fair value of the consideration received or receivable in the ordinary course of the Group's activities.

All revenue recorded in the financial statements is sourced from transactions relating to property loans. Fees on these transactions are calculated based on the above revenue recognition policy.

1.9 Fees and commission paid

Fees and commission are recognised as follows:

· Origination fees, representing valuation and broker fees, are considered as incremental costs that would not have been incurred if the loan had not been originated. Fees relating to loans that are held within the Group's loans and advances are recognised using the effective interest rate method whereby amortisation of the cost is recorded in interest on loans and advances as detailed in note 1.8. Origination fees incurred on loans that are sold to third parties are recognised in full at the point of sale in the consolidated statement of profit and loss.

· Funding line amortisation of initial funding line set up costs. These are recognised evenly over the life of the facility

· Asset management, fund and servicing fees, representing introducer fees, and trail commission derived from off balance sheet funds, these costs are recognised as they occur.

1.10 Property, plant and equipment

Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, the cost includes directly attributable costs and the estimated present value of any future unavoidable costs of dismantling and removing items. The corresponding liability is recognised within provisions.

Depreciation is provided on all other items of property, plant and equipment, so as to write off their carrying value over their expected useful economic life. It is provided at the following rates:

Computer equipment 33 - 50% per annum straight line

Furniture and fittings 20 - 50% per annum straight line

Leasehold improvements lesser of lease period or useful life

1.11 Intangible fixed assets

Where they meet the criteria of IAS 38, internally developed software expenditure is capitalised as an intangible fixed asset and is amortised on a straight-line basis over its useful economic life once the asset is available for use. The useful economic life of the assets is identified as part of the project planning stage in line with wider business objectives. The assets are amortised over their expected useful life at 33% per annum.

Software licenses that meet the definition of an intangible asset, i.e. identifiable, controlled by the Group and from which future economic benefits will flow, are initially recognised at cost. Depreciation is provided, so as to write off their carrying value over their expected useful economic life at the following rates:

Computer and telephony software 20 - 50% per annum straight line

1.12 Deposit interest receivable

Interest receivable on bank deposits is recognised on an accruals basis within "Finance Income" in the statement of profit and loss.

1.13 Administration expenses

Expenses are recognised as an expense in the statement of profit and loss in the period in which they are incurred (on an accruals basis).

1.14 Provisions, contingent liabilities and contingent assets

Provisions are liabilities of uncertain timing or amount and contingent liabilities and contingent assets are dependent on one or more uncertain future events. Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The amount recognised as provisions is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation.

 1.15 Financial Instruments

Recognition

Financial instruments are recognised on the balance sheet when the Group attains the right/obligation to receive/deliver cash flows from the instrument and when the risks and rights associated with ownership are transferred to the Group.

Classification and measurement

As per IFRS 9, the Group classifies its financial instruments with reference to both the Group's business model for managing the assets and the contractual cash flow characteristics of the instrument.

Financial assets

The Group's financial assets have been classified into the following categories:

i) At amortised cost

These are assets for which the business model is to hold the asset and collect the contractual cash flows. The cash flows are solely payments of principal and interest and are on specified dates.

The Group holds cash and cash equivalents and trade and other receivables at amortised cost.

On initial recognition the asset is held at its fair value minus any transaction costs. Subsequent measurement is based on the effective interest rate method and is subject to impairment where relevant.

ii) At fair value through other comprehensive income

These are assets for which the business model is to collect the contractual cash flows and to sell the assets. The contractual cash flows are solely payments of principal and interest and are on specified dates.

The Group holds drawn loans and advances at fair value through other comprehensive income.

These assets are initially recognised at fair value, plus any attributable costs. Subsequent changes in fair value are recognised in equity, except for impairment losses which are recognised in the Statement of Profit and Loss.

Upon derecognition, any accumulated movements in fair value previously recognised in equity are reclassified to profit or loss in the Statement of Profit and Loss.

iii) At fair value through profit or loss

These are assets for which the business model is neither to hold nor to hold or sell, or where contractual cash flows are not solely payments of principal and interest.

The Group holds undrawn loans subject to a committed facility at fair value through profit or loss.

These assets are initially recognised at fair value with any subsequent changes in fair value recognised in the Statement of Profit and Loss.

Financial liabilities

i) At amortised cost

All financial liabilities are measured at amortised cost, unless IFRS 9 specifically determines they should be valued at fair value through profit or loss.

The Group holds trade and other payables and interest-bearing liabilities at amortised cost.

On initial recognition the liability is held at its fair value plus any transaction costs. Subsequent measurement is based on the effective interest rate method.

ii) At fair value through profit or loss

Financial liabilities are measured at FVTPL when they meet the definition of held for trading, or when they are designated as such to eliminate or significantly reduce an accounting mismatch that would otherwise arise.

Derivatives

The Group holds a portfolio of derivatives for risk management purposes. Derivatives that do not qualify for hedge accounting are held at fair value through profit or loss.

De-recognition

Financial instruments are only derecognised when the contractual rights/obligations to receive/deliver cash flows from them have expired or when the Group has transferred substantially all risks and rewards of ownership.

1.16 Share capital

Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset.

The costs of equity transactions are accounted for as a deduction from equity to the extent they are incremental costs directly attributable to the equity transactions that otherwise would have been avoided. Transaction costs that relate jointly to an equity transaction and other transactions are allocated using a basis of allocation that is rational and consistent with similar transactions, with the costs allocated to other transactions reported through the consolidated statement of profit and loss.

1.17 Share based payments

Where the issuance of shares or rights to shares are awarded to employees, the fair value of the options at the date of grant is charged to the statement of profit & loss over the vesting period. Non-market vesting conditions are considered by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. If all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied.

Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the statement of profit & loss over the remaining vesting period.

1.18 Current and deferred taxation

The tax expense for the period comprises current and deferred tax. Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the year end date.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred tax is not accounted for if it arises from the initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, affect neither accounting nor taxable profit and loss. Deferred tax is determined using tax rates and laws that have been enacted or substantially enacted at the year-end date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax balances are not discounted. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

1.19 Dividends

Dividends are recognised when they become legally payable. In the case of interim dividends to ordinary and preferred share shareholders, this is when paid by the Group. In the case of final dividends to ordinary and preferred share shareholders, this is when declared by directors and approved by the shareholders at the relevant board meeting.

1.20 Write-offs

Loans and advances are written off (either partially or in full) when there is no reasonable prospect of recovery. This is generally the case when the primary security has been realised and the Group is unable to reach an agreement with the borrower for immediate or short-term repayment of the amounts subject to the write-off. Financial assets that are written off can still be subject to enforcement activities in order to recover amounts due. Amounts subsequently recovered on assets previously written off are recognised in impairment losses on financial assets in the statement of profit and loss.

1.21 Critical accounting estimates and judgements

The preparation of these financial statements in accordance with IFRS requires the use of estimates. It also requires management to exercise judgement in applying the accounting policies.

Judgements

Consolidated Financial Statements

Subsidiary undertakings are all entities (including special purpose entities) over which the Group has power, exposure or rights to variable returns, and the ability to affect those returns through its power over the undertaking.

The Group has a number of associated entities that it considers for consolidation under IFRS 10. Control is reassessed and judgement is used whenever facts and circumstances indicate that there may be a change in these elements of control.

Significant increase in credit risk

The determination of how significant an increase in lifetime PD should be to trigger a move to Stage 2 for impairment requires significant judgement. Management have adopted a test-based approach to derive objective thresholds such that credit deterioration is recognised at the appropriate point.

Fair value measurement

Judgements were applied to determine the unobservable inputs to the fair value models used to calculate the fair values of loans and advances. These include the discount rate, prepayment rates, PDs, LGDs, recovery costs and cure probabilities driven from the ECL models.

Estimates and assumptions

Fair value measurement

A number of assets and liabilities included in the Group's financial statements require disclosure of fair value. The fair value measurement of the Group's financial and non-financial assets and liabilities utilises market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorised into different levels based on how observable the inputs used in the valuation technique utilised are (the 'fair value hierarchy').

Level 1: Quoted prices in active markets for identical items

Level 2: Observable direct or indirect inputs other than Level 1 inputs

Level 3: Unobservable inputs (i.e. not derived from market data and require a level of estimates and judgements within the model).

Expected Credit Loss Calculation

The accounting estimates with the most significant impact on the calculation of impairment loss provisions under IFRS 9 are macroeconomic variables, in particular UK house price inflation and unemployment, and the probability weightings of the macroeconomic scenarios used. The Group has used three macroeconomic scenarios, which are considered to represent a range of possible outcomes over a normal economic cycle, in determining impairment loss provisions:

● a central scenario aligned to the Group's business plan;

● a downside scenario as modelled in the Group's risk management process; and

● an upside scenario representing the impact of modest improvements to assumptions used in the central scenario.

The central scenario represents management's current view of the most likely economic outturn. However, significant uncertainty around the level and trajectory of UK inflation and the subsequent impacts on the wider economy has led management to increase the downside weighting since the prior year ended 31 March 2021. The following weightings of the different scenarios were used across both Buy-to-Let and short term ECL models for the period ended 31 March 2022:

· 45% / 50% / 5% to the central, downside and upside scenarios

The former weightings used at 31 March 2021 were:

· Buy-To-Let ECL model - 40% / 40% / 20% to the central, downside and upside scenarios

· Short Term Lending ECL models - 40% / 50% / 10% to the central, downside and upside scenarios

Changes to macroeconomic assumptions, as expectations change over time, are expected to lead to volatility in impairment loss provisions and may lead to pro-cyclicality in the recognition of impairment provisions.

Sensitivity Analysis on ECL models

Sensitivity analysis has been completed on a number of different scenarios to better assess the impact of changing variables on the ECL calculation in the current environment:

· A 100% downside was applied to all the models. This would increase the ECL by £0.8m

· A 10% increase in the forced sale discount. This would increase the ECL by £1.9m

Valuation of share based payments

Estimating the fair value for share based payment transactions requires determination of the most appropriate valuation method, which depends on the terms and conditions of the award. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option, volatility and the dividend yield and making assumptions about them. The Group uses a Black-Scholes option pricing model for the employee share schemes. The assumptions for estimating the fair value for share based payment transactions are disclosed in note 25.

2. Revenue

3. Cost of sales

4. Earnings per share

5. Dividends

The Directors propose that a final dividend in respect of the year ended 31 March 2022 of 4.4p per share will be paid on the 23th September 2022 to all shareholders on the register of members on the 25th August 2022. This dividend is subject to approval by shareholders at the AGM and has not been accrued as a liability in these Financial Statements in accordance with IAS 10 'Events after the reporting period'.

6. Loans and advances

1Fair value adjustment to gross loans and advances due to classification as FVOCI, based on the Group's business model for managing these financial assets. The significant year on year decrease is due to an increase between reporting dates in market discount rates used in calculating the fair value of the Group's Buy-to-Let loans. Key inputs into the market discount rates used in the Group's Buy-to-Let fair value calculation are forward looking SONIA rates and market Buy-to-Let asset backed security spreads which both increased steeply in the latter part of the financial year causing the increased discount rates and a lower fair value adjustment. This has been offset by mark-to-market increases in the Group's interest rate swaps.

ECL provision

1The ECL provision of £11.0m is stated including the expected credit losses incurred on the interest income recognised on stage 3 loans and advances. The net ECL impact on the income statement for the year is £5.5m (2021: £5.3m). This includes the £4.4m (2021: £4.6m) of impairment provisions shown in the income statement and the total impact of expected credit losses on income recognised on stage 3 loans and advances using the effective interest rate of £1.1m (2021: £0.7m).

2Loans that are written off can still be subject to enforcement activities in order to comply with the Group's procedures for recovery of amounts due. The contractual amount outstanding on loans and advances that have previously been written off and are still subject to enforcement activity is £9.0m (2021: £12.2m).

 1The ECL provision of £8.5m is stated including the expected credit losses incurred on the interest income recognised on stage 3 loans and advances. The net ECL impact on the income statement for the year is £5.3m (2020: £5.1m). This includes the £4.6m (2020: £4.3m) of impairment provisions shown in the income statement and the total impact of expected credit losses on income recognised on stage 3 loans and advances using the effective interest rate of £0.7m (2020: £0.8m).

2Loans that are written off can still be subject to enforcement activities in order to comply with the Group's procedures for recovery of amounts due. The contractual amount outstanding on loans and advances that have previously been written off and are still subject to enforcement activity is £12.2m (2020: £10.9m).

 Analysis of loans and advances by stage

The maximum LTV on stage 1 loans is 82%. The maximum LTV on stage 2 loans is 119%. The maximum LTV on Stage 3 loans is 168% and the total value of collateral (capped at the gross loan value) held on stage 3 loans is £31.4m.

The maximum LTV on stage 1 loans is 82%. The maximum LTV on stage 2 loans is 101%. The maximum LTV on Stage 3 loans is 132% and the total value of collateral (capped at the gross loan value) held on stage 3 loans is £30.7m.

Impairment provisions are calculated on an expected credit loss (ECL) basis. Financial assets are classified individually into one of the categories below:

· Stage 1 - assets are allocated to this stage on initial recognition and remain in this stage if there is no significant increase in credit risk since initial recognition. Impairment provisions are recognised to cover 12 month ECL, being the proportion of lifetime ECL arising from default events expected within 12 months of the reporting date

· Stage 2 - assets where it is determined that there has been a significant increase in credit risk since initial recognition, but where there is no objective evidence of impairment. Impairment provisions are recognised to cover lifetime

· Stage 3 - assets where there is objective evidence of impairment, i.e. they are considered to be in default. Impairment provisions are recognised against lifetime ECL. For assets allocated to Stage 3, interest income is recognised on the balance net of impairment provision

· Purchased or originated credit impaired ("POCI") - POCI assets are financial assets that are credit impaired on initial recognition. On initial recognition they are recorded at fair value. ECLs are only recognised or released to the extent that there is a subsequent change in the ECLs. Their ECL is always measured on a lifetime basis

Where there is objective evidence that asset quality has improved asset will be allocated to a lower risk category for example loans no longer in default (stage 3) will be allocated to either stage 2 or stage 1.

Evidence that asset quality has improved will include:

· Repayment of Arrears

· Improved credit worthiness

· Term extensions the ability to service outstanding debt

If a loss is ultimately realised, it is written off against the provision previously provided for with any excess charged to the impairment provision in the statement of profit and loss.

The impairment loss provisions under IFRS 9 is calculated using macroeconomic variables, in particular UK house price inflation and unemployment, and the probability weightings of the macroeconomic scenarios used. The Group has used three macroeconomic scenarios, which are considered to represent a range of possible outcomes over a normal economic cycle, in determining impairment loss provisions:

· a central scenario aligned to the Group's business plan;

· a downside scenario as modelled in the Group's risk management process; and

· an upside scenario representing the impact of modest improvements to assumptions used in the central scenario.

The central scenario represents management's current view of the most likely economic outturn. However, significant uncertainty around the level and trajectory of UK inflation and the subsequent impacts on the wider economy has led management to increase the downside weighting from the prior year ended 31 March 2021. The following weightings of the different scenarios were used across both Buy-to-Let and short term ECL models for the period ended 31 March 2022:

· 45% / 50% / 5% to the central, downside and upside scenarios

The former weightings used at 31 March 2021 were:

· Buy-to-Let ECL model - 40% / 40% / 20% to the central, downside and upside scenarios

· Short Term Lending ECL models - 40% / 50% / 10% to the central, downside and upside scenarios

Changes to macroeconomic assumptions, as expectations change over time, are expected to lead to volatility in impairment loss provisions and may lead to pro-cyclicality in the recognition of impairment provisions.

The underlying methodology on which the ECL model relies has been amended in the period ended 31 March 2022 to better identify higher risk borrowers. The models for the period ended 31st March 2021 graded accounts on an 18 point scale, where bands 1-17 reflected increasing default risk and band 18 reflected 'Default'. The banding was based on the borrower's behavioural score. The grading model was revised in the period ended 31 March 2022 and continues to use the underlying borrower's behavioural score, however, the number of bands is reduced to 10 with bands 1-9 reflecting increasing default risk and 10 reflecting 'Default'. This ensures more accurate identification of higher risk exposures and supports more efficient portfolio management.

All other major inputs into the models are consistent with the models for the period ended 31 March 2021.

All macroeconomic data inputs have been updated as at 31 March 2022.

Movement analysis of net loans by stage