Results for the year ended 31 December 2016

Results for the year ended 31 December 2016

7 March 2017

Shawbrook Group plc

Shawbrook Group plc ("Shawbrook" or "the Group"), the specialist lending and savings bank, today announces continued strong performance and reiterates confidence in its near and medium term outlook, supported by its disciplines on risk, returns and costs to create resilience, durability and sustainability.

Commenting on the results, CEO Steve Pateman said:

"2016 was a pivotal year for Shawbrook - we clearly articulated our 2020 vision at our inaugural Capital Markets Day in May 2016 and have continued to deliver against the strategic pillars we set out. We have achieved sustainable growth across all of our lending divisions and delivered strong risk adjusted returns. Notwithstanding the changes in the political environment and the subsequent uncertainty arising in the macroeconomic climate, we have continued to execute our plans through deep market knowledge, innovation and through close understanding and awareness of our customers' needs.

Shawbrook's journey since listing has been somewhat more challenging than anticipated due to the changes in the macroeconomic climate and outlook and the identification of the controls breach in the Business Finance Division announced on 28 June 20161. However, Shawbrook today has a strengthened management team and sound foundations, making it well placed to take advantage of the opportunities that will continue to arise from the structural changes taking place in the UK banking market. Our disciplines on risk, returns, costs, liquidity and capital are clear and as we move forward, our guiding principles will be quality rather than quantity which, combined with practical banking and good sense, will create resilience, durability and sustainability."

Achieve strong risk adjusted returns2

· Robust financial performance aligned to our strategic pillars:

Ø Net interest margin stability throughout 2016 at 5.6% (2015: 6.2%);

Ø Further reductions in the cost to income ratio to 45.1% (excl. controls breach: 44.7%, 2015: 48.3%);

Ø 14% increase in profit before tax to £91.4 million (29% increase excl. controls breach: £103.4 million, 2015: £80.1 million);

Ø 26% increase in statutory profit before tax to £88.2 million (2015: £70.1 million); and

Ø Statutory earnings per share of 25.9p and recommended dividend per share of 2.7p.

· Our specialist markets continue to offer strong risk-adjusted returns:

Ø Return on tangible equity of 19.4% (excl. controls breach: 22.0%, 2015: 22.7%3); and

Ø Statutory return on tangible equity of 18.8% (2015: 20.7%3).

Maintain excellent credit quality2

· Excluding the controls breach, cost of risk was 35bps (statutory: 64bps, 2015: 24bps).

· Continued investment in the development of the Risk Management Framework, our risk teams and the promotion of a strong risk culture throughout the Group, giving us confidence that we now have in place an effective platform to support the continued growth of the business.

· The non-performing loan (NPL) ratio4 as at 31 December 2016 of 0.99% (1.17% including the controls breach, 31 December 2015: 0.65%) continues to reflect the benign economic environment with the increase largely attributable to slower transaction cycles in a number of prime property segments of the market, the time taken to optimise the recovery of assets in Business Finance and the maturity of the residential mortgage portfolio. Our credit appetite remains conservatively positioned with significant collateral against our watch list cases. Overall, our assessment of the impairment requirement against these cases results in a NPL provision coverage ratio of 51% at 31 December 2016.

Progressively increase originations

· Continuing demand in our carefully selected markets:

Ø Organic originations growth of 14% to £1.9 billion (2015: £1.7 billion); and

Ø Customer loans5 grew 22% to £4.1 billion from £3.4 billion at 31 December 2015.

· Enhancement of product propositions across all divisions and delivery of a number of key initiatives including entry into the development finance market, the launch of Shawbrook International Limited, offering financing solutions in Jersey, and the agreement of strategic partnerships with a number of key affiliates.

Maintain conservative foundations

· We remain well capitalised with a period end Common Equity Tier 1 (CET1) ratio of 13.3%, total capital ratio of 16.4% and leverage ratio of 7.8% on an average risk weighting of 68%6.

· We continue to fund our lending primarily with retail deposits and had a loan to deposit ratio of 102.7% as at 31 December 2016 (31 December 2015: 104.2%). At the end of the period, we utilised c.£120 million of the Term Funding Scheme (TFS) liquidity and we expect to further utilise the TFS going forward.

· The positive results in 2016 have enabled the Board to recommend a maiden final dividend of 2.7p per share, subject to shareholder approval at the Group's Annual General Meeting on 6 June 2017. This is equivalent to c.10% of post-tax profits for the year and in line with the guidance set out at the IPO. The Board continues to target an increase in the dividend payout ratio to 30% of 2017 post-tax profits subject to the continuing evolution of regulatory capital requirements, the rate at which the Group continues to grow, attractive investment opportunities that may arise and the optimal capital composition of the Group's balance sheet.

Enhance customer focus

· Once again, we have achieved exceptional levels of customer service, with a Charterhouse survey conducted in Q4 2016 revealing customer satisfaction of 88%. This is consistent with customer satisfaction levels in 2015 showing our continued focus on supporting and fulfilling the needs of our customers by providing speed and certainty of delivery, specialist and expert knowledge and fair and transparent offerings, all of which translate into exceptional customer service.

· Within our Property Finance division, we entered the development finance market to provide financing solutions to smaller housebuilders, thus helping to resolve the significant supply and demand imbalance in the UK property market.

· The introduction of the Regional Business Centres (RBCs) within our Business Finance Division has enabled us to reposition our offering to put the customer first. We can now offer a broad suite of SME financing solutions, along with our specialist and expert knowledge, from a number of locations around the UK. This has broadened our geographical footprint and increased our direct distribution channels. We expect to have seven fully operational RBCs by the end of 2017.

· In 2016, we successfully entered into partnerships with Saga and RAC, to exclusively offer Consumer products directly to their customers, offering fair and transparent rates and treating our customers individually through our Personal Loans proposition. Throughout 2017, we will continue to build on our current strategic partnerships by developing our product offerings into adjacent markets.

Board and management

· Andrew Didham was appointed as an Independent Non-Executive Director on 1 February 2017, bringing a wealth of experience to the Board of Directors, particularly in the financial services sector.

· Dylan Minto was appointed Chief Financial Officer (CFO) and Executive Director on 6 February 2017 after a successful period as Interim CFO following the departure of Tom Wood in H1 2016.

· The leadership team has also been strengthened by the appointment of Angela Wakelin as Chief Operating Officer in November 2016.

Outlook

· We laid out our strategy and 2020 vision at our Capital Markets Day in May 2016 and, although there remains macroeconomic and regulatory uncertainty, the momentum we have seen in our results and the pipeline we continue to build for 2017 and beyond as we continue to invest in our platform gives confidence in our ability to continue to deliver strong and stable returns whilst we grow the business at a pace appropriate to market conditions as they unfold.

Possible Offer

On 3 March 2017, following share price movement, the Group announced that it was in discussions with Pollen Street Capital Limited (Pollen Street) and BC Partners LLP (BC Partners) (together the Consortium) regarding a possible offer to be made by a new company to be jointly owned by funds managed or advised by Pollen Street and BC Partners for the entire issued and to be issued share capital of Shawbrook Group plc (the Possible Offer). The announcement is available at http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/SHAW/13147364.html

As at the date of publication of the 2016 Annual Report & Accounts, the Board had issued a rejection of the Possible Offer.

ENQUIRIES

Richard Armstrong

Group Head of Marketing and Communications

07809 493 158

[email protected]

Toni Coulson

Head of Investor Relations

07901 002 731

[email protected]

An analyst presentation will be held at 09:00am on 7 March 2017 at Instinctif Partners, 65 Gresham Street, London EC2V 7NQ. The analyst presentation will also be available by webcast and teleconference at 09:00am. The access details are as follows:

To access the webcast please click on the following link http://webcast.instinctif.tv/795-1286-17321/en.

Annual Report & Accounts

Our full 2016 Annual Report & Accounts and Pillar III disclosure are available on our website at investors.shawbrook.co.uk.

References to page numbers relate to page numbers and notes to the financial statements in the Annual Report & Accounts 2016.

General note to the financial information

This announcement has been prepared in accordance with the Listing Rules of the FCA and is based on the 2016 financial statements which have been prepared under International Financial Reporting Standards (IFRS) as adopted by the European Union and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The financial information set out in this announcement does not constitute the Group's statutory financial statements for the years ended 31 December 2015 or 31 December 2016. This announcement is derived from those statutory financial statements, which have been reported on by the Group's auditor. The audit reports for both the year ended 31 December 2016 and 31 December 2015 were unqualified. The statutory financial statements for the year ended 31 December 2015 have been filed with the Registrar of Companies. The statutory financial statements for the year ended 31 December 2016 will be filed with the Registrar of Companies following the Annual General Meeting.

About Shawbrook

Shawbrook is an independent specialist lending and savings bank serving UK SMEs and consumers with tailored products designed to address a selection of high growth sub-sectors of the overall lending industry. The Group's lending activities are primarily funded by a stable retail deposit book consisting of easy access and ISA accounts, variable rate long-dated notice accounts (mostly 95 - 120 days' notice) and fixed rate fixed term accounts (mostly one - five years). Shawbrook Bank Limited is an operating entity of Shawbrook Group plc. In April 2015, Shawbrook Group plc's shares (SHAW.L) listed on the Main Market of the London Stock Exchange. Shawbrook Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the Financial Services Compensation Scheme.

Important disclaimer

Certain information contained in this announcement, including any information as to the Group's strategy, market position, plans or future financial or operating performance, constitutes "forward looking statements". Such forward-looking statements are made based upon the expectations and beliefs of the Group's directors concerning future events impacting the Group, including numerous assumptions regarding the Group's present and future business strategies and the environment in which it will operate going forward, which may prove to be inaccurate. As such, the forward-looking statements contained in this announcement involve known and unknown risks and uncertainties, which may cause the actual results, performance or achievements of the Group or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward looking statements in this announcement speak only as of the date of this announcement and are expressly qualified in their entirety by the cautionary statements contained or referred to in this disclaimer. No member of the Group, nor any of their respective directors, officers, employees, advisers or associates, provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward looking statements contained in this announcement will actually occur. Each member of the Group and their respective directors, officers, employees, advisers and associates, disclaims any intention or obligation to update or revise any forward looking or other statements contained herein, except as required by applicable law.

A number of factors could cause the Group's actual results, plans, strategy and business to differ materially from those expressed or implied by these forward looking statements, including factors beyond the Group's control, including, but not limited to, any of the following: general economic conditions and business conditions in the UK and internationally, inflation, deflation, interest rates and policies of the Bank of England, the European Central Bank and other G8 central banks; fluctuations in interest rates (including low or negative rates), exchange rates, stock markets and currencies, the ability to access sufficient sources of capital, liquidity and funding when required, changes to the Group's credit ratings, the ability to derive cost savings, changing demographic developments, including mortality, 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 one or more countries to exit the European Union (including the UK following its referendum vote to leave the European Union) or the Eurozone, and the impact of any sovereign credit rating downgrade or other sovereign financial issues, technological changes and cyber security risks, natural and other disasters, adverse weather and similar contingencies outside the Group'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 the exit by the UK from the EU or a further possible referendum on Scottish independence, regulatory capital or liquidity requirements and similar contingencies outside the Group's control, the policies and actions of governmental or regulatory authorities in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation, the ability to attract and retain senior management and other employees, actions or omissions by the Group's directors, management or 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, lending companies and digital innovators and disruptive technologies, and the success of the Group in managing the risks of the foregoing.

Specialists in good sense

Shawbrook is a growing UK specialist bank. We challenge the conventional approach of the mainstream banks by taking a thoughtful, good-sense approach to the way we do business.

What sets us apart is the deep relationships we develop with our customers and business partners. We take the time to get to know them; we learn more about their specific needs and this allows us to identify and tailor the products that will help them to maximise their opportunities.

Our chosen target markets are selected carefully and are ones that are poorly served by the mainstream banks. We are determined to support our customers and business partners by being highly engaged, straightforward, agile and easy to do business with.

Drawing on a deep understanding of our clients' businesses and our specialist knowledge, we offer a clear proposition and certainty in the markets in which we operate. It's a refreshingly exciting and good-sense way of building a specialist banking business.

Basis of preparation

The statutory results have been prepared in accordance with International Financial Reporting Standards (IFRS). Where appropriate, certain aspects of the results are presented to reflect the Board's view of the Group's underlying performance without distortions caused by non-recurring items that are not reflective of the Group's ongoing business activities.

Underlying results should be considered in addition to, and not as a substitute for, the Group's statutory results, and the Group's presentation of underlying results should not be construed as an indication that future results will be unaffected by exceptional items. Underlying results have limitations as analytical tools, and they should not be considered in isolation or as substitutes for analysis of the Group's results as reported on a statutory basis. Limitations may include, but are not limited to, the following:

· they may not reflect every cash expenditure, future requirements for capital expenditure or contractual commitments; and

· they may not reflect the impact of earnings or charges resulting from matters the Directors consider not to be indicative of ongoing operations.

Because of these limitations, underlying results are not intended as an alternative to the Group's statutory results as an indicator of the Group's operating performance. The Group compensates for these limitations by using underlying results, along with other comparative tools, together with statutory results, to assist in the evaluation of operating performance.

The following items have been excluded from underlying results:

· IFRS 2 charges amounting to £2.2 million recognised in relation to share-based awards to Steve Pateman, Chief Executive Officer, in 2016 which were fully satisfied by Special Opportunities Fund (Guernsey) LP. This charge is a transfer from the income statement to retained earnings and is the result of a one-off award for compensation against forfeited long-term incentives at a previous employer.

· Corporate activity costs amounting to £1.0 million in 2016 relate to the cost of the incremental deposits raised to prefund the acquisition of the c.£300 million property portfolio at the end of 2015, which completed in H2 2016. During the period between acquisition and completion, the portfolio was funded by the vendor due to the length of the transition period, and reimbursed by Shawbrook, thus resulting in Shawbrook paying to fund the portfolio twice. Future transactions would be expected to be structured differently, resulting in lower funding costs. Corporate activity costs of £1.1 million in 2015 include a final £0.6 million of costs incurred in connection with the acquisition of Money2Improve in November 2012. In addition, costs incurred in relation to the acquisition of three asset portfolios (including the incremental costs of raising additional deposits to fund inorganic growth) have been excluded from the underlying results.

· IPO costs of £8.9 million recognised in the income statement in 2015 include expenses incurred in relation to the successful listing of Shawbrook Group plc on the LSE main market. A further £3.7 million was recognised in equity. In addition, the adjustment includes IFRS 2 charges in relation to share-based awards crystallising on listing.

International Organization of Securities Commissions (IOSCO) regulation does not permit adjustment for items that are reasonably likely to occur in the foreseeable future, or activities that affected the entity's recent past, when considering underlying results as in their experience there are rarely circumstances where an explanation is sufficiently robust to result in restructuring costs or impairment losses being described as non-recurring. In addition, European Securities and Markets Authority (ESMA) regulation states that items which affected past periods and will affect future periods - such as restructuring costs or impairment losses - will rarely be considered as non-recurring, infrequent or unusual.

However, in addition to the underlying adjustments outlined above, the Board believes there are additional expenses incurred in 2016 which, in line with IOSCO and ESMA guidelines, have not been adjusted for, but which the Board regards as unusual and highly unlikely to recur. These expenses relate to an £11.2 million impairment charge and £0.8 million of administrative expenses incurred in connection with the controls breach announced on 28 June 2016 in the Business Finance Division (increased from the c.£9 million announced following continued monitoring and assessment of collateral supporting the £14.7 million of impacted facilities - see page 49 in the Risk management report for further details). The Group believes that the steps taken to strengthen our risk controls, including the removal of certain delegated authorities and appropriate segregation of origination and operations, should minimise the risk of a further breach. If this adjustment was made, the underlying profit before tax for the Group would have been £103.4m.

Income Statement

Comparison of statutory KPIs[1] to underlying KPIs

What we do

Shawbrook is a specialist UK lending and savings bank focused on Property Finance, Business Finance and Consumer lending and savings. We differentiate ourselves by concentrating on markets where our specialist knowledge and personalised approach to underwriting offers us a competitive advantage. This supports attractive, stable returns and sustainable growth, and also benefits businesses and consumers in parts of the market which continue to be poorly served by mainstream banks.

Our values

· Personal: We treat our customers and business partners as people. We take the time to understand them, and we listen to what they say.

· Pragmatic: We look at every situation on its merits, rather than following rigid guidelines or the accepted way of doing things.

· Expert: Our people are experienced and professional. We know that it's our people and their know-how that make things happen for our customers and business partners.

· Progressive: We are proactive and strive to provide solutions which are quicker, simpler and more efficient than the way we do things today.

Chairman's statement

I am pleased to introduce the Annual Report & Accounts for Shawbrook for a year which has seen us make significant progress against the 2020 strategy laid out by Steve Pateman, our Chief Executive Officer, and his senior management team at our Capital Markets Day in May 2016. In addition to delivering a strong financial performance, a major focus for the year has been on putting in place the sound foundations to deliver excellent service to customers, strong returns to investors and to grow the business at a sensible pace in an uncertain environment.

Results

Shawbrook specialises in property finance, business finance and consumer lending and savings. We use our specialist knowledge and traditional relationship-based approach to serve parts of the market which are poorly served by mainstream banks - a model which not only benefits our customers, but also allows us to deliver attractive and stable returns to our shareholders.

In 2016 we delivered a strong return on tangible equity. We did this without changing our risk appetite during the year, whilst growing the balance sheet and delivering a net interest margin which has remained stable throughout 2016. All of our divisions showed growth and we maintained both a strong capital position and a prudent liquidity position. 

A Charterhouse survey conducted in Q4 2016 revealed a customer satisfaction rate of 88%, well above the norms for the banking sector.

Dividend

The positive results in 2016 have enabled the Board to recommend a maiden final dividend of 2.7p per share, subject to shareholder approval at the Group's Annual General Meeting on 6 June 2017. This is equivalent to c.10% of post-tax profits for the year and in line with the guidance set out at the IPO. The Board continues to target an increase in the dividend payout ratio to 30% of 2017 post-tax profits subject to the continuing evolution of regulatory capital requirements, the rate at which the Group continues to grow, attractive investment opportunities that may arise and the optimal capital composition of the Group's balance sheet.

Governance

Shawbrook is committed to the highest standards of corporate governance and we comply with all elements of the UK Corporate Governance Code. I am delighted to say that the Board has been further strengthened by the appointment in February 2017 of Andrew Didham. Andrew is an Executive Vice Chairman and was formerly the Group Finance Director of Rothschild. He takes over as Chairman of the Board Audit Committee from Roger Lovering, who I am very pleased remains on the Board.

The Board carried out an externally facilitated review of its effectiveness during the year. The review confirmed that the Board has provided effective oversight of the business, and has been highly engaged both in developing robust risk policies and frameworks and in guiding longer term plans and strategies. The review also identified areas where the Board can continue to improve its effectiveness, and its findings are covered more fully in the Corporate governance report.

Risk

We have continued to invest heavily in the development of our Risk Management Framework, our risk teams and the promotion of a strong risk culture throughout the Group and we are confident that we have in place an effective platform to support the continued growth of the business. As a result of this work, we identified the controls breach in the Business Finance Division (see page 49 in the Risk management report for further details). The Board played an active role in the oversight of the resolution of this matter. The current Risk Management Framework is described fully in the Risk management report.

People

Shawbrook is a relationship business serving customers in a way which requires experience, knowledge, judgement and integrity. We are very fortunate to have people throughout the business who possess these qualities in abundance, and who are passionate about what they do, and I am extremely grateful to all my colleagues for their efforts throughout the year. I am particularly grateful to Steve Pateman and his leadership team for their performance during the year.

I would also like to thank the outgoing Chief Financial Officer and Executive Director, Tom Wood, who left us during 2016, for his contribution to our successes. Following Tom's departure the Board embarked on a comprehensive market search for his successor and in February 2017 was delighted to appoint Dylan Minto as Chief Financial Officer and Executive Director. The leadership team has also been strengthened by the appointment of Angela Wakelin as Chief Operating Officer, who arrived in November 2016. I believe we now have in place a strong and experienced leadership team to deliver our vision and take the business forward.

Community

We seek to be a good corporate citizen and in 2016 we established a corporate social responsibility programme with elements covering the community, the environment, the workplace and the marketplace. More detail on this programme is set out in the Corporate social responsibility report on pages 57 to 62.

Outlook

As we look forward we are mindful of the uncertain political, economic and regulatory environment. However, we have built the bank on conservative foundations, established a strong franchise in our chosen markets and have a great team of people. All of these things position us strongly to take advantage of opportunities as they arise, and we are confident that we can continue to deliver strong and stable returns while we grow the business at a pace appropriate to conditions as they unfold.

I would like to finish by reiterating my thanks to my fellow Board members, the leadership team and all colleagues across Shawbrook for their contribution to everything we have achieved together in 2016.

Iain Cornish

Chairman

Chief Executive Officer's review

2016 has been a year of considerable progress for Shawbrook. We have articulated a clear ambition which reflects the opportunities that lie ahead in our three divisions, allowing us to diversify our risk and creating a sustainable momentum that underpins the vision we have set out for the period through to 2020.

2016 results

On an underlying basis, and excluding the impact of the controls breach in the Business Finance Division (see page 49 in the Risk management report for further details), we have achieved each of the financial objectives we set out for the year, notwithstanding some significant changes in our key markets.

Statutory profit before tax (PBT) amounted to £88.2 million (£91.4 million on an underlying basis). Our underlying PBT, excluding the costs of the controls breach in the Business Finance Division, rose by 29% to £103.4 million, supported by strong disciplines in costs, risk and yield management. Net interest margin (NIM) reduced to 5.6% reflecting the impact of the c.£300 million property portfolio acquisition we made in December 2015 and has stabilised at 5.6% throughout 2016. Credit risk impairment continued at low levels with cost of risk, adjusted for the controls breach, at 35bps (64bps on a statutory basis). The growth in revenues led to a reduction in our underlying cost to income ratio to 45.1% (statutory: 46.3%) notwithstanding continued investment in our distribution, risk and technology platforms and the absorption of £1.4 million of management exit costs relating to a number of Executive Committee members leaving the Group throughout 2016. As a result, we have delivered a return on tangible equity (RoTE) of 22.0%, within our stated target range, excluding the impact of the controls breach in the Business Finance Division (underlying: 19.4%, statutory 18.8%).

We are pleased to be recommending a maiden final dividend of 2.7p per share, equating to c.10% of our post-tax profits, in line with the guidance set out at the IPO.

These numbers reflect many aspects of our business but the common theme that underpins our success is our ability to deliver solutions to the financing needs of individuals and businesses that many of the mainstream banks no longer offer. We achieve this through the combination of data and practical banking experience which allows us to interpret the information we have on our customers and their markets, and thus deliver specialist financing solutions based around good sense.

Business progress

Our core focus remains on our lending businesses in Property Finance, Business Finance and Consumer, and we have continued to develop new products and distribution channels in each of these markets.

Within Property Finance, we have built on our core propositions in buy-to-let, commercial property, residential (second charge) and short-term lending by adding development finance, where we are seeking to support small to medium-sized housebuilders, together with the development of a suite of residential lending solutions including interest-only extensions into retirement - a market that has been neglected for some time.

Our asset finance and working capital solutions (invoice finance) businesses have been integrated and their product suite will be distributed primarily through a network of Regional Business Centres, which also provide a broader suite of lending solutions to small and medium-sized enterprises. We will continue to provide specialist asset finance solutions building on our expertise in the taxi, marine and aviation, professional services and healthcare sectors, alongside growing our newer specialisms in agriculture, vendor finance and technology, and establishing the Shawbrook business in Jersey.

Structured Finance, which includes our block finance proposition, grew its balance sheet to over £420 million and is now broadening its offering so that it can support the Regional Business Centres and bring structured finance solutions to small and medium-sized enterprises.

Whilst retaining its strong position in the home improvement market, Consumer lending has continued to diversify its product range allowing us to post year-on-year growth in balances of £132 million despite a significantly smaller market for solar panels. In 2016, we launched a range of personal and retail finance propositions across direct, broker and partnership channels with affinity partnerships agreed with Saga and RAC, initially in unsecured finance, but with the intention of broadening out into mortgages, holiday finance, motor finance and savings.

Operational achievements

In addition to the considerable progress made in each of the businesses, we have continued to strengthen our central functions and risk platforms. Each business is now supported by dedicated resources in risk, finance, HR and operations (which includes IT, change, collections and recoveries and data management) led by a strengthened executive team in each of these disciplines. We are well placed to complete our IFRS 9 transition for January 2018 and will use the data from this project to consider whether to progress with an application for Advanced Internal Risk Based (AIRB) permission for our balance sheet.

Our strengthened Risk Management Framework identified the controls breach in the Business Finance Division and, whilst it is disappointing to have taken a significant provision on the impaired balances, the steps we have taken to strengthen our risk controls, including the removal of certain delegated authorities and appropriate segregation of origination and operations, should minimise the risk of a further breach. In addition, we are confident that we have fully identified the impaired portfolio of £14.7 million.

Maintaining effective governance and controls strengthens our ability to innovate, provide solutions and be entrepreneurial, thus meeting the needs of the growing markets that are open to us as the mainstream banks consolidate their core activities and risk appetite.

Our approach focuses above all on quality and returns, consistent with our risk profile, building our balance sheet with care and consideration for the broader economic environment so that we can continue to maintain a RoTE within our target range. We will rein back on markets where risk appetite and pricing levels are not consistent with our long-term return objectives and continue to look for adjacent new opportunities.

We do, however, believe that old-fashioned practical banking has a place in the 21st century. Commoditising risk, which arguably is a function of regulation tailored to correct the mistakes of large high-street banks, creates marginalisation which in turn can impact individual and business ambition. Our role is to help our customers realise their ambitions in a way that also makes sense for us and is attractive for all our stakeholders.

Divisional performance

Each of our divisions posted year-on-year growth as loans and advances grew to £4.1 billion whilst maintaining our NIM of 5.6% despite some adverse mix impacts from the greater flows in Buy to Let, particularly in Q1 2016, and a slower performance in our asset finance business.

Property Finance

Property Finance remained our largest division and a real engine of growth. Full-year originations totalled £1.0 billion which represented a 20% increase on the prior year; buy-to-let flows were strong, particularly in Q1, whilst residential (second charge) originations were broadly flat reflecting the impact on the market of the transition from the Consumer Credit regime to the Mortgage Credit Directive. Short-term property finance improved, although this can be a price-sensitive market and may be constrained by any adverse economic conditions flowing from the UK's decision to leave the EU. Our development finance proposition came on line in Q3 and our 'lending into retirement' proposition will launch in early 2017, with a complex mortgages product set to follow. This diversification will underpin flows in what we expect to be a softer buy-to-let market going forward as tax changes and revised underwriting standards take effect. However, the need for manual underwriting of larger portfolios will benefit specialist providers like Shawbrook.

The portfolio acquisition in December 2015 completed in July 2016 and is now starting to yield direct opportunities.

NIM benefited from lower funding costs and a policy of holding pricing for much of the year, despite significant pricing pressures, and with cost of risk of 0.09% the divisional contribution rose by 33% to £82.5 million.

Business Finance

Within Business Finance, the working capital solutions offering had a much improved year growing balances by 38% to £253 million on new flows of £124 million and strong retention. The Structured Finance sub-division grew its customer balances to £425 million and continues to produce strong returns through a low cost base and prudent risk management.

In contrast, the asset finance offering had a more challenging year ― there was a slowdown in flows as businesses deferred investment plans and the impact of the changes we made following the identification of the controls breach in this business (see page 49 in the Risk management report for further details).

Originations across Business Finance grew despite a 28% reversal in asset finance (direct and broker); gross yield saw a modest dilution to 8.6% but with lower funding costs, NIM emerged at 6.6% supporting a 10% increase in divisional contribution (excluding the controls breach) to £51.5 million (£39.5 million on a statutory basis).

Consumer

Consumer lending had a buoyant year, growing balances to £0.5 billion despite a softer home improvement market reflecting changes in the solar market; there was significant growth in the Retail Finance and Personal Loans sub-divisions. Affinity partnerships were agreed with Saga and RAC, which will underpin further growth.

We have also made significant progress in working with other strategic partners, such as ClearScore - a customer credit-scoring business which helps consumers understand the best possible loan for their individual circumstances.

Divisional contribution rose by 24% to £14.6 million, benefitting from revenue growth and a change in mix with NIM improving to 8.2%. Cost of risk increased to 1.9%, reflecting a higher risk profile in Personal Loans and following some changes to our impairment methodologies to include customer-based probabilities of default.

All of our lending businesses are funded primarily by retail deposits. In 2016, we developed shorter term products which, taken together with the impact of the interest rate changes in August following the decision to leave the EU, allowed us to reduce funding costs of retail deposits by 0.2% to 2.0%. Whilst we would anticipate making further use of the Bank of England's Term Funding Scheme, we will continue to offer relatively attractive rates to savers as we see this source of funding as key to our longer term funding and liquidity profile.

Environment

The year 2016 was one of considerable volatility and uncertainty in the political, economic and market environment and much of that uncertainty remains as we move into 2017. Clearly the UK's future relationship with Europe will continue to dominate economic and political sentiment which, in turn, will influence the confidence and thus investment intentions of many of our customers. Equally, our customers' confidence will be influenced by world events and how these impact our home markets, by way of either trade or price inputs.

It is entirely appropriate to be conscious of the impact of these factors on our future business prospects and the risk profile of our asset base. However, with change comes opportunity and we continue to see the mainstream banks reorganise their business lines to improve their efficiency, which in turn creates opportunities for Shawbrook in terms of products and customers. We thus retain confidence in our longer term ambitions for the Group whilst being cognisant of the need for prudence in our lending standards, capital base and liquidity profile.

Conclusion and Outlook

We laid out our strategy and 2020 vision at our Capital Markets Day in May 2016 and, although there remains macroeconomic and regulatory uncertainty, the momentum we have seen in our results and the pipeline we continue to build for 2017 and beyond as we continue to invest in our platform gives confidence in our ability to continue to deliver strong and stable returns whilst we grow the business at a pace appropriate to market conditions as they unfold. The rationale for Shawbrook is as clear as it was when the bank was first put together in 2011, and then subsequently listed on the London Stock Exchange in April 2015. Whilst it is true that the journey since listing has been somewhat more challenging than anticipated, Shawbrook today has sound foundations and is well placed to take advantage of the opportunities that will continue to arise from the structural changes taking place in the UK banking market.

The management team has been strengthened, systems and infrastructure significantly improved, new partnerships have been established and we are expanding our product capability in each of our three divisions.

These foundations allow us to execute key regulatory projects such as IFRS 9 and to consider how best to apply capital standards across the business, so that we can effectively manage whatever changes may emerge from the latest Basel consultations.

Our discipline on risk, returns, costs and optimal use of liquidity and capital is clear and reflected in our underlying performance in 2016. As we move forward into what will be more challenging markets, our guiding principle will be quality rather than quantity and this, combined with practical banking and good sense, will create resilience, durability and sustainability.

In my first year as CEO, I have very much appreciated the support and commitment of the team around me in Shawbrook; they share my view that treating customers well - helping them achieve their ambitions but doing so in a way that is good for all stakeholders - is the foundation upon which great banks are built. I have equally valued the support and encouragement from my colleagues on the Board and, in particular, our Chairman.

Shawbrook enters 2017 with a clear strategy, solid foundations and high levels of staff and customer engagement. It is thus well placed to continue its growth trajectory notwithstanding the uncertainties that inevitably lie ahead.

Steve Pateman

Chief Executive Officer

Market overview

Macroeconomic environment

Brexit

On 23 June 2016, the UK voted to leave the EU. The Prime Minister set out her 12-point Brexit plan on 17 January 2017, announcing the UK's priorities for exit negotiations, and is expected to trigger Article 50 before the end of March 2017.

Brexit-related effects on Shawbrook's businesses have been limited to date, both on lending volumes and credit quality. Although economic forecasts have been upgraded from their post-referendum lows, it remains likely that the cycle will turn earlier than previously expected; however, given Shawbrook's prudent and conservative risk appetite, it has not felt the need to materially amend its risk appetite or underwriting criteria in light of the referendum outcome. Nonetheless, this is something that is continuously monitored and reviewed.

UK Economy

The economic forecasts for the UK have changed markedly following the UK's decision to leave the EU. The Office for Budget Responsibility (OBR) reduced its 2017 UK growth prediction from 2.2% in March 2016 to 1.4% in November 2016. In January 2017, the International Monetary Fund (IMF) increased its 2017 growth forecast by 0.4% to 1.5%; however, it reduced its 2018 projection from 1.7% to 1.4%. Inflation reached 1.6% by December 2016, with the Bank of England stating that it could increase to 2.75% by 2018. Unemployment has also stayed low and ended 2016 at 4.8% - compared to 4.9% in June 2016.

Outlook

As the UK begins negotiations for Brexit, there will undoubtedly be uncertainty in the UK macro environment which may impact growth, inflation and unemployment forecasts amongst other economic metrics. This in turn could impact consumer confidence and market in a number of the markets in which Shawbrook operates.

Economists are typically assuming slower growth going forward because businesses will be less certain about investing in the UK as the country negotiates its exit from the EU. In addition, the depreciation of Sterling will continue to result in higher prices of British imports such as food and fuel, driving higher inflation.

Monetary policy

On 4 August 2016, the Bank of England reduced the Bank Rate from 50bps to 25bps and introduced a package of measures designed to provide additional monetary stimulus, including the Term Funding Scheme (TFS) and an expansion of the Bank of England's asset purchase programme for UK government bonds.

Bank of England base rate (Bank Rate) reduction

The desired outcome of the reduction in the Bank Rate was to encourage consumer lending by reducing the cost of credit. However, many banks reduced their savings rates by more than 25bps, whilst making only marginal, if any, changes to the cost of credit. This resulted in a highly liquid deposit market with savers having very few options to earn interest. The reduction in deposit rates was further fuelled by the introduction of the TFS. Given the level of existing competition in the first-charge residential mortgage market, margins were already competitive prior to the Bank Rate cut, resulting in many lenders being unable to pass on the reduction to new borrowers without their products becoming loss-making.

Term Funding Scheme

As with the Funding for Lending Scheme (FLS), the TFS was announced with the intention of supplying low-cost funding to banks to encourage greater lending at reasonable rates to consumers. Like the FLS, the TFS works by enabling banks to pre-position collateral with the Bank of England and to receive funding in return. The cost of this funding is equivalent to Bank Rate, and banks can initially encumber up to 5% of their loans and advances and subsequently fund 100% of their growth using the TFS. The introduction of the TFS added to the surplus liquidity in the funding market, resulting in further reductions to deposit rates and an increase in market demand for savings accounts.

Asset purchase programme

The expansion of the Bank of England's asset purchase programme for UK government bonds is expected to lower the yields on securities that are used to determine the cost of borrowing for households and businesses. It is also likely to trigger portfolio rebalancing into riskier assets by current holders of government bonds, further enhancing the supply of credit to the broader economy. The expansion of the asset purchase programme resulted in increased competition, particularly in the asset finance market, as non-bank lenders benefited from the lower costs of their borrowings.

Outlook

Modest increases in the Bank of England base rate could be imposed to manage continued rising levels of inflation and significantly low asset pricing. In order to compete for volume, pricing in some markets has become so low that it could be considered unsustainable as the price does not plausibly cover the level of risk undertaken.

An increase in the Bank Rate, along with the termination of the TFS in January 2018, may have a detrimental effect on the cost of retail deposits as competition in the market increases to fund stable balance sheets and further growth. The level of impact will depend heavily on the extent of the competition, particularly if larger players in the deposit market decide not to pass on the full rate to UK depositors as they seek to widen margins.

Regulation

Mortgage Credit Directive (MCD) for second-charge mortgages

On 21 March 2016, second-charge mortgages became regulated under the MCD with loans written after this date no longer being regulated under the Consumer Credit Act. This resulted in significant changes to the provision of advice, the processes for underwriting and the processing of second-charge mortgages for both lenders and intermediaries.

Buy-to-let (BTL) underwriting standards expectations

On 29 September 2016, the Prudential Regulation Authority (PRA) announced its expectations of firms' underwriting standards for the BTL market, following a review in 2015 and 2016. The PRA's actions are intended to bring all lenders up to prevailing market standards and guard against any slipping of underwriting standards during a period in which firms' growth plans could be challenged by the changing economic landscape and the impact of forthcoming tax changes.

The PRA's statement outlines minimum expectations that firms should meet in underwriting BTL mortgages, including:

· affordability assessments should take into account borrowers' costs including tax liabilities, verified personal income and possible future interest rate increases; and

· lending to portfolio landlords (defined by the PRA as being those with four or more mortgaged BTL properties) should be assessed using a specialist underwriting process.

In addition, the changes to income tax relief on mortgage interest for BTL properties announced in 2015 begin to take effect in April 2017.

Outlook

The implementation of the standard minimum BTL underwriting and the changes to income tax relief on mortgage interest are forecast by most commentators to slow the BTL market. Given the ever present imbalance in supply and demand for property in the UK, this is likely to have a larger impact on the amateur BTL market than the professional BTL market. The introduction of minimum underwriting standards for BTL mortgages from the PRA could arguably be beneficial for specialist lenders such as Shawbrook, whose target market only consists of professional landlords and lenders which already have in place the operational framework for stressed affordability assessments and manual underwriting.

Chief Financial Officer's review

Solid Financial Performance

In 2016, Shawbrook achieved 26% growth in statutory profit before tax (PBT) to £88.2 million (14% growth in underlying PBT to £91.4 million), driven by increased volumes and further cost efficiencies. This includes costs and impairments relating to the controls breach in the Business Finance Division (see page 49 in the Risk management report for further details).

Statutory return on tangible equity (RoTE) amounted to 18.8% (2015: 20.7%) and on an underlying basis, RoTE was 19.4% (2015: 22.7%). When excluding costs and impairments relating to the controls breach in the Business Finance Division, RoTE remained within our guidance, amounting to 22.0%.

Net Operating Income

The Group achieved a net interest margin (NIM) of 5.6% in 2016, down from 6.2% in 2015. This was due partly to a higher proportion of lower yielding property loans following the portfolio acquisition made at the end of 2015; and partly to the higher yielding back book running off and being replaced by a lower yielding front book as a result of the 'lower for longer' interest rate environment and increased competition in some of our markets. However, following the UK's decision to leave the EU, the Bank of England subsequently reduced the Bank Rate and introduced the Term Funding Scheme (TFS), which have both had a beneficial impact on the cost of funds.

The Group's customer loans (including operating leases, net of provisions) amounted to £4.1 billion at 31 December 2016, up 22% from £3.4 billion at 31 December 2015. The Group achieved originations of £1.9 billion in 2016, an increase of 14% compared to £1.7 billion in 2015, with all three divisions delivering record levels of originations as we continue to develop new products and expand into adjacent markets, for example, expansion into the development finance market, expansion into Jersey through Shawbrook International, and the agreement of strategic partnerships which increase our addressable market (e.g. Saga and RAC).

Administrative Expenses

Growth in income, coupled with continued operational efficiencies across the three divisions and in the central functions, resulted in a reduction in the cost to income ratio of 7.8 percentage points to 46.3% (3.2 percentage points on an underlying basis to 45.1%). Administrative expenses (including provisions for liabilities and charges) amounted to £97.1 million in 2016 (£94.9 million on an underlying basis), compared to £90.3 million in 2015 (£80.8 million on an underlying basis). The development of the COO function will drive further efficiencies in 2017 and beyond; however, we will continue to invest in innovative solutions to ensure our competitive advantages of exceptional service, and speed and certainty of delivery, remain best in class.

Impairments and non-performing loans (NPLs)

The impairment charge for 2016 amounted to £24.3 million, £11.2 million of which related to the controls breach in the Business Finance Division. The cost of risk for 2016 was 64bps (35bps excluding the controls breach), compared to 24bps in 2015. The low levels of impairments that we continue to experience are representative of the benign economic environment in which we are operating. The widely anticipated downturn following the UK's decision to leave the EU has yet to materialise, and whilst we remain cognisant of the macroeconomic environment, we have yet to witness any associated material changes in the performance of our loan book. The non-performing loan (NPL) ratio as at 31 December 2016 of 0.99% (1.17% including the controls breach, 31 December 2015: 0.65%) continues to reflect the benign economic environment with the increase largely attributable to slower transaction cycles in a number of prime property segments of the market, the time taken to optimise the recovery of assets in Business Finance and the maturity of the residential mortgage portfolio. Our credit appetite remains conservatively positioned with significant collateral against our watch list cases. Overall, our assessment of the impairment requirement against these cases results in a NPL provision coverage ratio of 51% at 31 December 2016.

Continue to build on conservative foundations 

Funding

The Group continues to be primarily retail deposit funded, with a loan to deposit ratio of 102.7% at 31 December 2016 (31 December 2015: 104.2%). As at 31 December 2016, the Group's deposit balance amounted to £3.9 billion, an increase of 24% from £3.2 billion at 31 December 2015.

Following our entry into the easy access and ISA deposit markets in 2015, we have continued to diversify our deposit base, with 17% relating to easy access products; however, we remain predominantly funded by longer-dated term and notice deposits. The increase in the proportion of easy access products, along with the exceptionally low deposit rates in the market following the Bank Rate reduction and introduction of the government's TFS, has resulted in a decrease in the cost of new deposit flows. The cost of funds has reduced from 2.3% in 2015 to 2.2% in 2016, with further benefit expected in 2017 and beyond as more expensive back-book deposits are replaced.

Capital

As part of its 2016 results announcement, the Group has announced that the Board has recommended a maiden final dividend of 2.7p per share, equating to c.10% of 2016 post-tax profits, subject to shareholder approval at the forthcoming AGM.

The Common Equity Tier 1 (CET1) ratio and total capital ratio at 31 December 2016 were 13.3% and 16.4% respectively (31 December 2015: 14.4% and 18.0% respectively). The CET1 ratio remains above our target minimum and our risk-weighted asset (RWA) density (RWAs divided by customer loans) for the Group at 31 December 2016 was 68%. This resulted in a leverage ratio of 7.8% (2015: 7.6%). We will continue to assess capital optimisation in conjunction with our growth strategy.

The Group continues to use standardised risk weights to calculate its capital requirement. As we progress with our preparations for the implementation of IFRS 9, the models being built put us in a good position to develop internal ratings-based (IRB) models which will allow us to consider the adoption of an advanced IRB approach. A transition to an advanced IRB approach continues to be discussed and considered by management, with the changing regulatory environment being a catalyst for potential adoption.

Liquidity

True to Shawbrook's conservative foundations, the Group continues to position risk appetite against its lending assets, with the majority of the Group's liquidity held with the Bank of England. The liquidity ratio at 31 December 2016 was 16.8% (2015: 25.8%) with 96.4% of the liquidity balance being liquidity buffer eligible assets (2015: 96.2%). The Group has commenced utilisation of the Term Funding Scheme (TFS) to begin to replace its off-balance-sheet Treasury Bills acquired as part of the Funding for Lending Scheme (FLS). Going forward, we expect to continue to utilise the TFS.

Consideration of accounting policy and regulatory changes

During 2016 and continuing into 2017, there has been a particular focus on our preparedness for IFRS 9, which aims to ensure we understand the impacts and have the necessary systems and processes in place ahead of the effective date of 1 January 2018. Progress has been made in developing our Expected Credit Loss (ECL) models, including our Credit Grading Framework (CGF). The IFRS 9 programme, which is jointly sponsored by the Chief Financial Officer and Chief Risk Officer and managed by a dedicated management committee, is currently within its build phase, with the majority of the testing and implementation concluding during 2017. Until such time as the ECL models (including the CGF and future-looking economic scenarios) have been tested, we do not plan to quantify the impacts of IFRS 9.

Outlook

2016 was a pivotal year for Shawbrook, in which we invested significantly across the bank to position us for continued success in the short and medium term. Whilst we have seen little evidence to date to suggest a downturn in the economy, we remain alert to the potential effects of uncertainty in the macroeconomic environment following the triggering of Article 50. We also continue to proactively monitor our risk appetite and underwriting criteria, policies and procedures to ensure our loan book can withstand various macroeconomic scenarios.

Our primary aim in 2017 and beyond is to maintain returns of between 22% and 25% whilst adhering to our conservative risk appetite and prudent approach to managing capital and liquidity. Should the economy weaken and we find ourselves unable to deliver progressive growth within these parameters, we will look to realign our growth ambitions. However, as of today we see no reason to scale back any of our initiatives and we are continuing to develop a number of new product and market opportunities in order to progressively grow our lending portfolio. We are confident that our diverse product offering and the flexibility and agility with which we can deploy capital put us in a favourable position to ensure a successful year ahead, and beyond as we look to deliver towards our 2020 vision.

Dylan Minto

Chief Financial Officer

Business Review

Property Finance

We provide finance to the specialist residential investment and commercial property market and to professional property investors and SME owner-occupiers. In addition we provide second charge mortgages to consumers.

Activity

The Property Finance Division has a well-diversified product range with both residential and commercial mortgage offerings. Within these broad markets, we actively specialise in the following areas:

· Residential: serving homeowners primarily through second-charge mortgages and specialist first-charge mortgages.

· Commercial: serving property professionals in both residential and commercial investment markets through the provision of traditional mortgages and short-term lending, and development finance to established SME housebuilders and well-established SME owner-occupiers.

The Division's products are distributed through the mortgage intermediary market, leveraging long-established relationships and a highly regarded brand.

Differentiation

The Property Finance Division is our most mature business, built on foundations of strong, longstanding relationships with mortgage brokers and intermediaries, working hand in hand to deliver exceptional service and positive outcomes for our customers. We remain progressive in our approach to further product diversification and process innovation in order to continuously improve our customer service proposition. For example, during 2016, we formed a new specialist development finance team; took a leading role in the second-charge mortgage market's transition to mortgage regulation from the consumer credit regime; and introduced an electronic application (E-AIP) system for our investment mortgage products. This E-AIP system now receives the majority of our initial case submissions, allowing us to deliver speedier and more efficient initial agreements in principle.

Our specialist knowledge and deep sector expertise allow us to continue to provide thoughtful judgement and a personal service. We operate selectively within extensive markets and our specialist approach continues to resonate with customers. Each loan is manually underwritten, allowing our teams to provide pragmatic and good sense solutions. As with all our divisions, we continue to maintain a sensible and clearly defined risk appetite which, allied to our robust underwriting processes, positions us appropriately through the cycle. The breadth of our product range, combined with the exceptional service levels delivered by our teams, continue to receive industry accolades - we received a total of 10 awards during 2016.

Residential

Our residential proposition remains predominantly focused on the second-charge mortgage market - we provide a wide range of secured loans, primarily to super-prime and prime borrowers. Loans are provided for a variety of purposes including home improvements, loan consolidation and large consumer purchases.

During 2016, second-charge mortgages transitioned to FCA regulation under the Mortgage Credit Directive, away from the former consumer credit regime. This took place on 21 March 2016 and created significant system, process and documentation changes for the industry. Our teams managed this transition well with minimal disruption to lending flows. This was a testament to the capability of our mortgage platform and the expertise of our teams who, through our Academy programme, took a leading role in supporting our intermediary partners. More broadly, the inclusion of second-charge lending within the mortgage market is having a significant impact on product distribution, as generalist advisers become more aware of the product and the loan application process is more aligned to first-charge lending. This has significant potential to grow the market, although 2016 volumes remained broadly flat. We therefore believe that this growth will take some time to materialise.

Whilst remaining committed to maintaining our prominent position in the second-charge mortgage market, we have made progress with our plans to diversify into specialist segments of the first-charge market. In Q1 2017, we will be actively launching a range of 'lending into retirement' products and continue to explore other segments where our pragmatic approach can deliver good outcomes for carefully identified customer segments.

Commercial

Our activity in the commercial markets remains focused on providing financing to property professionals for the purpose of investment, refurbishment or redevelopment and to SMEs for owner-occupied property. Specialist buy-to-let (BTL) mortgages remain a significant part of our activity and we have seen strong growth during the year.

We have progressed with our ambition to develop a capability within the development finance market, and we now have in place a dedicated and experienced team who have commenced activity in a controlled manner. Our early engagement in the market has reaffirmed our confidence in our product design and capability to offer a selective service to professional SME housebuilders, many of whom we have existing relationships with. Allied to the distribution reach we have with our intermediary partners, we are able to adopt a controlled entry into this market, validating our principles in regard to risk appetite and customer service delivery.

The BTL sector was subject to a number of material events in 2016. The stamp duty surcharge introduction at the beginning of Q2 had a distorting effect on transaction activity in Q1 and, combined with the impending changes to interest tax relief for landlords, has started to drive an emerging trend of lower BTL purchases relative to 2015 levels. This has been offset, however, by significant demand for refinancing driven by increasing liquidity.

Financials and KPIs

The Division has had a record year in terms of originations, driving loan book growth of 21% to £2.5 billion at 31 December 2016. The change in mix following the acquisition of BTL loans and commercial mortgages in December 2015 contributed to a reduction in NIM to 4.3% in 2016 from 4.8% in 2015. Continued adherence to strict underwriting criteria has resulted in a stable cost of risk of 0.1%, reflective of the continued benign macro environment.

Outlook

Going into 2017, most commentators forecast a slowing trend in BTL activity as the headwinds of stamp duty, interest tax relief and the introduction of a higher affordability standard for new lending combine. We are confident our proposition is well placed for the changing and increasingly complex environment in which landlords operate, and that our specialist underwriting capability and service proposition are well suited to supporting customers through these changes.

Following the transition of second-charge mortgages from the consumer credit regime to the Mortgage Credit Directive, there is significant growth potential in the market, although it may take some time to materialise. Following the launch of our 'lending into retirement' products, we would expect increasing originations throughout 2017 and beyond as significant volumes of interest-only mortgages begin to mature.

Business Finance

We primarily finance soft and business critical assets operated by established UK SME and specialist businesses. In addition, we provide finance to smaller UK financial institutions through wholesale and block facilities.

Activity

The Business Finance Division has an extensive product range, enabling it to provide a comprehensive suite of services to address the needs of the poorly served UK SME market. The Division is managed through three propositions:

· Regional Business Centres: proven lenders to established businesses in UK SME markets, primarily through a direct product offering.

· Structured Finance: lending to SME finance companies with security against receivables within their portfolios.

· Specialist Sectors: leasing and hire purchase finance solutions in specialist UK SME market segments such as marine and aviation, healthcare and taxis.

Differentiation

The Business Finance Division provides a comprehensive suite of collateral-backed finance solutions for SMEs across the UK and Jersey, competing on quality of service and speed of delivery. We operate in several niche and poorly served markets, offering a well-diversified range of products.

Following the global financial crisis, many SMEs either lost funding lines due to the tightening of lending criteria from high-street banks and the exit of non-UK-based banks from the UK market, or found that lenders ceased to provide the most appropriate funding to SMEs. Whilst funding has returned to the SME market, levels remain significantly below pre-crisis levels and a proportion of the SME market therefore remains underserved, as there are fewer local experts and minimal opportunity to understand and price for idiosyncratic risk.

Our relationship-led model has an entrepreneurial edge which complements our high-touch, high quality service approach. Our expert teams have deep sector understanding and recognise that every SME is different and has different needs and risks. Our pragmatic and personal attitude to lending allows us to consider each circumstance's merits and risks, manually underwriting each loan to ensure the Division generates strong risk-adjusted returns.

Regional Business Centres

Shawbrook's Regional Business Centres (RBCs) primarily provide leasing finance for business-critical assets operated by established UK SME businesses, and working capital solutions in the form of invoice discounting and asset-based lending. The RBCs provide SMEs with access to the full suite of Shawbrook product offerings and direct access to our sales experts. They also provide intermediaries and key business introducers with a first point of contact for Shawbrook, developing and enhancing the intermediary-led distribution channel within our Business Finance Division.

The locations of the RBCs have been carefully selected to provide a wide and far-reaching geographical footprint, focusing on the regions we believe are key to the growth of the SME market in the UK. Developing and supporting the growth of businesses located outside London is a top priority for the government and we are fully committed to supporting growth in the economy across the whole of the UK.

Whilst retention rates have improved across our working capital solutions offering in 2016, the asset finance business has typically been more challenging due to increased liquidity driving greater competition in the hire purchase and leasing market. The Bank of England's quantitative easing (QE) programme was extended in August 2016, resulting in new, non-deposit-taking lenders entering the markets in which we operate. Our absolute focus on returns and credit quality has resulted in a marginal reduction in asset finance originations. The controls breach in the asset finance business (see page 49 in the Risk management report for further details) led to the acceleration of our plans to restructure the Division, creating a more integrated offering, and further improving the service we deliver to our customers.

Structured Finance

The Structured Finance product set provides wholesale finance and block discounting to smaller UK financial institutions to allow customers to release cash and grow their businesses. Loans are secured against receivables within the customers' portfolios, with the security given by the ultimate borrower taking the form of a hard asset or a pool of loan receivables.

Products are distributed directly through a team of specialists located at our London and Dorking offices. The team continues to expand as we achieve significant growth in our current markets as well as continuing to develop new products to fulfil the needs of customers. In 2016, we launched an investor 'call bridge' product, to provide liquidity to UK private equity funds, to assist them in achieving higher returns. We have also been actively involved in a number of syndicated loan propositions, attracting considerable trade media praise.

2016 was a highly successful year for Structured Finance with record growth at strong margins whilst maintaining excellent credit quality. Lending in Structured Finance is capital-intensive; however, the sub-division continues to contribute to the high risk-adjusted returns delivered by the Group on a consistent basis.

Specialist Sectors

Specialist Sectors provides financing to UK SMEs for business-critical assets in specialist markets including marine, aviation, healthcare, technology, agriculture and taxis. We distribute the majority of our Specialist Sectors products directly through our experienced and expert teams. Leveraging the significant lending and sector experience of our sales teams, we build and develop relationships with our clients by providing specialist insight and advice.

We continued to develop our current product set throughout 2016, recently entering adjacent markets such as marine leisure, technology and agriculture. Whilst we have achieved loan book growth of 5% across the range of our Specialist Sectors offerings, success in the various markets has been mixed, with challenges arising primarily from internal market dynamics - notably in the taxi market. However, these challenges have been counteracted by sustainable growth in areas such as marine and aviation, as our knowledge and relationships continue to deliver growth in both originations and the overall loan book.

In late 2016, we recruited Adam Dawson, a very experienced banker, to develop and head up our product offering in Jersey. As with all our markets, we identified a poorly served market with an opportunity to fulfil the needs of SMEs and consumers in the vicinity. We have started to establish our brand and develop our relationships, and initiated underwriting in Q4 2016.

Financials and KPIs

The 2016 financial year has been a successful one for the Business Finance Division with the loan book reaching £1.1 billion, a 17% increase from 31 December 2015. The Division achieved originations of £636 million, driven by strong originations in Structured Finance. This was partly offset by the negative impact on asset finance originations of uncertainty surrounding Brexit and the removal of certain delegated authorities following the identification of the controls breach in this Division.

Cost of risk for the Division was 137bps. Excluding the controls breach, this was 31bps - a 14bps reduction compared with 2015 which is in line with management's expectations and reflective of the benign credit environment. In addition, the net interest margin of 6.6% generated on the Business Finance portfolio in 2016 gave more than adequate coverage of the heightened cost of risk, resulting in a positive contribution of £39.5 million.

Outlook

Looking further into 2017, we will continue with the roll out of our RBCs, with current plans to have seven fully operational centres by the end of 2017. Whilst we remain mindful of the economic climate, we have yet to experience any material deterioration in credit quality following Brexit. We firmly believe our credit risk appetite remains appropriate through the cycle; however, we continuously monitor this, making minor changes where necessary. The current forecasts by independent researchers are far less severe than initially thought post Brexit; however, should the economy soften, the diversity of our product offering provides a degree of protection, given the counter-cyclical nature of our invoice discounting portfolio.

Within Structured Finance, we will continue to leverage the benefits of integrating our block discounting and wholesale teams through the sharing of knowledge and expertise. Growth in Structured Finance will be primarily driven by continued development and enhancement of our current product set, along with further identification of opportunities.

As we go into 2017, we will continue to identify opportunities in specialist sectors where SMEs are being poorly served as mainstream banks and other lenders continue to deal with internal issues, taking their attention away from customer needs. This will allow us to achieve strong returns while maintaining our conservative risk appetite, through exceptional service as well as speed and certainty of delivery.

Consumer

We provide tailored finance and savings products directly to consumers and through strategic partners. We use efficient systems, combined with human oversight to underwriting and the latest technology to give fast and fair credit decisions with transparent pricing.

Activity

The Consumer Division has an extensive product range, enabling us to provide unsecured loans for a variety of purposes, in addition to a range of savings products for consumer and business customers.

Consumer lending operates through relationships with major home improvement firms, in-store and online retailers, carefully selected holiday ownership companies, loan broker partners, affinity partners and through our newly launched direct to consumer channel. Savings products are available directly to personal and business customers. The Division is managed in three lending sub-divisions: Home Improvement/Holiday Ownership (HIL/HOL), Retail Finance and Personal Loans, alongside the Savings sub-division.

Differentiation

Shawbrook has a specialist and deep understanding of the consumer market, both in lending and savings. Our key differentiator is our commitment to offer fair and transparent products and pricing to all customers.

The Division's lending proposition has significant potential to grow through our Retail Finance and Personal Loan offerings, as well as through entering adjacent markets. We provide innovative solutions to our partners and customers enabling a seamless process for the provision of credit. Our advanced risk management and scoring techniques combined with our expert judgement allow us to make sensible lending decisions whilst providing the best possible outcome for our partners and customers.

In Savings, we maintain consistently competitive rates across our broad range of simple and straightforward retail deposit offerings, providing exceptional levels of service from our UK call centre. Our savings franchise is not an advised service, and has no sales incentives. Our deposit book is fully administered in-house, which offers the advantage of rapid execution of decisions on pricing and service.

Home Improvement/Holiday Ownership (HIL/HOL)

The HIL/HOL sub-division provides financing for home improvement and holiday ownership. We distribute our products through carefully selected partners, working closely with them to understand their needs and key customer demographics to ensure alignment with our own target markets. We continue to develop innovative solutions to enhance end-customers' experiences and deliver a seamless and timely service.

The HIL/HOL growth strategy was designed to counter the fall in the solar market following the feed-in tariff changes in early 2016, whilst achieving increased originations year on year. We have successfully achieved this by continuing to execute on our proven approach and growing our loan book through building new, and enhancing existing, relationships. In the lead-up to the EU referendum, activity in the home improvement market was marginally suppressed as consumers adopted a 'wait and see' approach to investment; however, following the referendum activity in this market returned to expected levels.

Retail Finance

The Retail Finance sub-division provides point-of-sale consumer finance in partnership with recognised retail brands both in-store and online. This is a rapidly growing sector and we have a strategy built on maintaining and developing strong relationships with SMEs, ensuring that their product offerings and target markets are aligned to our values.

During 2016, we focused on a significant repositioning of the Retail Finance proposition, as we ended partnerships with a number of underperforming retailers and brokers in the early part of the year at the same time as investing further in our experienced Retail Finance team. We achieved significant growth during 2016 by developing our strategic partnerships and bringing new retailers on board.

Personal Loans

The personal loans market in the UK is dominated by extremely low representative teaser rates which are subsidised, in many cases, by a group of customers being offered much higher rates than those advertised. Shawbrook's Personal Loans offering is built on the principles of fairness and transparency, providing a risk-based pricing solution to consumers who may be unable to obtain the super-prime loss-leading rates available in the mainstream personal loans market.

Our personal loans are primarily distributed through affinity partnerships and specialist broker partners. In H2 2016, we launched a direct-to-consumer proposition to further expand our distribution capabilities and grow originations in this sector. Through our website, a consumer can obtain a fair and transparent price quotation which is tailored to them as an individual, and which they receive upon successful completion of a full credit application. We have partnered with ClearScore to promote our products directly to our target market (see case study on page 38) and we continue to be optimistic about the growing potential of digital intermediaries.

In addition to the successful launch of our direct-to-consumer proposition, we have continued to develop strategic partnerships with third parties where our propositions are aligned. We announced in our Q3 2016 Interim Management Statement the agreement of a partnership with Saga plc and have subsequently launched a bespoke personal loan product to their customers. In Q4 2016, we agreed a four-year strategic partnership with RAC to offer personal loans exclusively to their customer base, with our products being successfully launched in Q1 2017. We continue to work closely with all our strategic partners to develop our relationships and enhance our offerings.

Savings

The Savings sub-division provides a wide range of cash savings solutions, primarily targeting affluent UK consumers. The broad product range, which includes notice, fixed rate, cash ISAs, and the more recently launched Easy Access products, has driven sustainable deposit growth by meeting a wider range of customer savings needs. It has increased our addressable market as we have, and continue to develop, an active presence in all key UK savings categories, for example, our growing easy access and shorter term product sets. Whilst the business attracts deposits from all customer demographics, a significant proportion of the customer deposit base continues to be sourced from affluent customers, with a wide range of savings needs and high average balances.

Our exceptional levels of customer service and satisfaction combined with a wide product range have translated into deeper relationships with our customers, resulting in 20% of new account openings in 2016 being made by existing customers. In addition, our fair and transparent pricing across both our existing and new customer segments has driven continued strong fixed rate retention performance.

Whilst we continue to generate new deposits predominantly through our direct online offering, we have also built a distribution capability with three affinity partners, who work alongside us to market Shawbrook's Savings offerings to our target markets. Focus on this area will continue through 2017 as we develop additional affinity relationships with selected partners and explore other potential markets.

The transition towards a fully digitised savings business that is supporting the progressive growth of the balance sheet continued throughout 2016, with 66% of all applications made online (2015: 61%) and 68% of customers being registered for online servicing as at 31 December 2016. Further investment into digital capability, including an enhanced online banking and application experience and increased 'straight-through' self-service, will take place during 2017.

Financials and KPIs

The Consumer loan book was £0.5 billion at 31 December 2016, up 39% on 2015 driven by originations of £291 million. The mix change towards personal loans has offset competitive pressures resulting in a stable gross yield of 10.6%. The cost of risk increased to 1.9% compared with 0.7% in 2015 as we continue to grow our higher yielding personal loan portfolio and following some changes to our impairment methodologies to include customer-based probabilities of default. The 1.9% cost of risk for 2016 is in line with management's expectations and the average expected through the cycle cost of risk of 2.0% that we articulated to the market in the H1 2016 results presentation.

The Consumer deposit book increased by 24% in 2016 to reach a balance of £3.9 billion at 31 December 2016, as the Group continues to be predominantly retail deposit funded. The loan to deposit ratio at 31 December 2016 was 102.7%, down marginally from 104.2% at 31 December 2015. The highly liquid market following the Bank of England's base rate reduction in August 2016 and the announcement of the Term Funding Scheme resulted in significant pricing reductions to savings products across the entire deposit market. Our in-house operational capabilities allowed us to manage our deposit pricing strategy actively, giving us flexibility and agility to control deposit inflows whilst still offering consistently competitive rates. The decline in market interest rates, combined with Shawbrook's greater product diversity as our Easy Access proposition continues to strengthen, has resulted in a lower than anticipated cost of funding, with further tailwinds expected as our higher-costing fixed term deposits mature and we continue to realign our back book in line with the market, whilst maintaining fairness in customer pricing.

Outlook

The consumer credit market has continued its expansion since 2012, buoyed by low interest rates and record levels of employment. Despite this, a number of external factors continue to present a mixed message and uncertain outlook. In particular, the continued uncertainty relating to the UK's vote to leave the EU has manifested in fragile consumer confidence. Levels of personal indebtedness are also at record levels, and affordability may be squeezed by forecast rises in inflation. The personal loans industry also continues to be subject to intense competition, with teaser rates at all-time low levels and a number of new fintech disruptors entering and working with the market.

Nevertheless, we are well placed to deliver against our strategic plan by continuing to focus on specialist lending segments, building new strategic affinity partnerships and diversifying our portfolios through strong credit risk management, optimised pricing and market expertise.

The HIL/HOL sub-division is the most mature element of our Consumer lending proposition, and our growth going forward will be delivered through maintaining existing business by deepening our supplier relationships and through long-term strategic deals with our key partners.

We will further grow the Retail Finance portfolio by working with our current partners and creating new partnerships in the sectors and industries where we currently operate. In addition, we will look to expand our proposition through offering our products to emerging retail markets such as the legal and funeral services sectors.

We plan to expand the distribution channels for our Personal Loans offerings and continue to enhance our decision-making capabilities, to enable further growth in our existing segments and adjacent ones. We will further develop our broker channel by gaining, maintaining and deepening relationships, building on the progress we made in 2016. We will also enhance customer-level pricing, credit risk and automated decision-making, thus optimising acceptance rates and customer journeys.

Risk Management Report

The Group seeks to manage the risks inherent in its business activities and operations through close and disciplined risk management which quantifies the risks taken, manages and mitigates them as far as possible and prices appropriately for the residual level of risk carried in order to produce an appropriate commercial return through the cycle.

The Group's approach to risk management continues to evolve and has benefited from further investment during 2016 to ensure that it remains comprehensive, consistent and scalable to accommodate the Group's growth plans. The embedding of the new Risk Management Framework was substantively completed in 2016 with further enhancement of testing and quality assurance planned for completion during 2017.

This enterprise-wide Risk Management Framework is underpinned by the following key elements:

Risk strategy

The risk strategy sets out the risk management objectives which support the achievement of the Group's commercial goals and the operation of business activities which seek to deliver those objectives. The risk strategy sets out which risks are to be acquired or incurred and how they will be managed by the organisation.

The strategic risk management objectives are to:

· identify material risks arising in the day-to-day activities and operations of the Group;

· quantify the risks attaching to the execution of the Group's business plans;

· set an appropriate risk appetite with calibrated measures and tolerance levels;

· optimise the risk/reward characteristics of business written;

· set minimum standards in relation to the acquisition, incurring and management of risk;

· secure and organise the required level and capability of risk infrastructure and resources;

· undertake remedial action where any weaknesses are identified; and

· scan the external horizon for emerging risks.

Risk appetite

The level of risk that the Group is willing to tolerate in operating the various elements of its business is defined in the risk appetite statement, which is agreed by the Board and reviewed on a regular basis. This articulates qualitative and quantitative measures of risk which are cascaded down through various areas of the Group's operations, calibrated by reference to the Group's absolute capacity for risk absorption, limit of appetite and target thresholds. During 2016 the Group completed a full annual review of the Group Risk Appetite Framework incorporating enhancements in the assessment of concentration risk, information security and the development of divisional risk appetite statements.

Risk Management Framework

All the Group's business and support service activities, including those outsourced to third-party providers or originated via brokers and other business intermediaries, are executed within the parameters of a single comprehensive Risk Management Framework. This sets out minimum requirements and ensures consistent standards and processes are set across the organisation. Risks are identified, measured, managed, monitored, reported and controlled using the Risk Management Framework. The design and effectiveness of the framework is overseen and reviewed by the Board Risk Committee. The key elements of the framework are set out later in this report.

Governance

All the Group's risk activities are subject to detailed and comprehensive governance arrangements which set out how risk-based authority is delegated from the Board to executive management and the various risk committees and individuals. These bodies and senior officers are accountable and responsible for ensuring that day-to-day risks are appropriately managed within the agreed risk appetite and in accordance with the requirements of the Risk Management Framework. Escalation and reporting requirements are set out in risk policies and by the risk appetite thresholds.

Culture

The Group is led by an experienced senior team with a combination of significant underwriting expertise and institutional and regulatory banking experience at various major financial institutions and specialist lenders. This heritage provides the platform for a set of values and behaviours where the client is at the heart of the decision-making process and business areas are held fully accountable for risk performance. At the individual level this process begins with job descriptions and the induction program and job descriptions; it is carried through into the setting of individual objectives and performance reviews, and ultimately is reflected in the compensation and reward structure.

Risk appetite statement

The Risk appetite statement (RAS) is a detailed and granular expression of the level of risk the Group is willing to accept in relation to the pursuit of its business strategy. The RAS is not static and will evolve to both reflect and support the Group's business objectives, the operating environment and risk outlook.

Whilst the RAS provides an aggregated measure of risk temperature and performance, it is not just a reporting tool. Just as importantly, it also provides a framework which is used dynamically to inform strategic and operational management decisions, as well as supporting the business planning process.

The RAS is reviewed periodically by the Board Risk Committee and agreed with the Board on an annual basis as a minimum. A dashboard with the status of each metric is monitored monthly. Management and the Board exercise their judgement as to the appropriate action required in relation to any threshold trigger breach, dependent on the scenario at the time.

The RAS identifies four groups of risk appetite objectives which are further subdivided into 21 appetite dimensions as set out diagrammatically below. A suite of qualitative statements and quantitative measures have been set for each dimension, with hard risk limits calibrated by reference to absolute capacity, maximum risk tolerance and a threshold trigger level.

Risk appetite statement objectives and dimensions

Risk Management Framework

Responsibility for risk management sits at all levels, both across the Group and from the Board and Executive Committee down through the central functions, and in turn to each divisional head and their business managers and risk officers.

In 2016 the Group continued to invest in enhancing the design and build of its integrated Risk Management Framework to support its strategic and commercial objectives. This activity will continue into 2017 as the framework is further embedded across the Group and supported by further enhancements to testing and quality assurance.

The Group's Risk Management Framework describes the various activities, techniques and tools which are mandated to support the identification, measurement, control, management, monitoring, reporting and challenge of risk across the Group. It is designed to provide an integrated, comprehensive, consistent and scalable structure which is capable of being communicated to and clearly understood by all our employees, and is shown diagrammatically below.

The Risk Management Framework also incorporates the organisational arrangements for managing risk, with specific responsibilities distributed to certain functions. This ensures that that there is clear accountability, responsibility and engagement at appropriate levels within the organisation which can provide robust review and challenge as well as be challenged. Operationally, the Risk Management Framework is organised around the key risk categories. 

Risk governance

Risk governance describes the architecture through which the Board allocates and delegates primary accountability, responsibility and authority for risk management across the organisation.

Responsibility for risk oversight is delegated from the Board to the Board Risk Committee and Board Audit Committee. The ultimate responsibility for risk remains with the Board.

Accountability, responsibility and authority for risk management are delegated to the Chief Executive Officer (CEO) and Chief Risk Officer (CRO), who in turn allocate responsibility for oversight and certain approvals across a number of management committees.

Authority and responsibility for material operational risk management, decision-making and risk assurance is vested in the CRO and the Group Risk function. Lesser levels of authority are cascaded to senior management within the support functions and divisions.

These bodies and senior officers are accountable and responsible for ensuring that the risks are appropriately managed within the agreed risk appetite and in accordance with the requirements of the Risk Management Framework. Individuals are encouraged to adopt an open and independent culture of challenge which is essential to ensuring risk issues are fully surfaced and debated with views and decisions recorded. Risk governance and culture is reinforced by the provisions of the FCA's Senior Managers Regime.

Formal risk escalation and reporting requirements are set out in risk policies, individual committee terms of reference and the approved risk appetite thresholds and limits.

Committee Structure and Risk Responsibilities

An abbreviated Board and management committee structure is set out below, highlighting those Risk Committees with primary risk-related duties:

The monitoring and controlling of risk is a fundamental part of the management process within the Group. The Board oversees the management of the key risk categories across the organisation. 

The Board delegates specific powers for some matters to committees, details of which are set out in the Corporate Governance section of our website at investors.shawbrook.co.uk.

During 2016 the Group made a number of changes to enhance its risk governance. These included the launch of its Enterprise Risk Management Committee (ERMC), which takes an enterprise-wide view of the risk profile of the Group and is the senior risk committee within the Group. The ERMC replaced the Group Credit Committee (GCC) and the Conduct and Operational Risk Committee (CORC). To support the ERMC in embedding the Risk Management Framework and to reflect the Group's development of credit grading, the ERMC implemented two new groups. The Model Management Group (MMG) oversees the development, approval and monitoring of the Group's models and the Policy Review Group (PRG) oversees the consistent development, approval and monitoring of the Group's policies.

'Three lines of defence' model

The Group's approach to risk management is underpinned by the 'three lines of defence' model, which is summarised on page 45 of the Annual Report & Accounts.

First line of defence

Responsibility for risk management resides in the front-line business divisions and functions, and line managers are directly accountable for identifying and managing the risks that arise in their business or functional area. They are required to establish effective controls in line with the Group risk policy and act within the risk appetite parameters set and approved by the Board. The first line of defence comprises each of the three lending divisions. The first line of defence also includes the Finance function led by the Chief Financial Officer (CFO), Operations led by the Chief Operating Officer (COO) and Human Resources (HR) led by the Group HR Director as, although they are not customer-facing themselves, they provide support and back-up to the customer-facing divisions and have insight into many operational factors that could ultimately impact on the Group's exposure to market, liquidity, credit, regulatory, legal, conduct, compliance and operational risk.

Each division and functional area operates to set risk policies to ensure that activities remain within the Board's stated risk appetite for that area of the Group. The risk policies are approved by the appropriate Committee in accordance with its terms of reference and reviewed annually, with any material changes requiring approval at Committee level.

The first line of defence has its own operational process and procedures manuals to demonstrate and document how it conforms to the approved policies and controls. Likewise, it develops quality control programmes to monitor and measure adherence to and effectiveness of procedures. All employees within a customer-facing unit are considered to be part of the first line of defence. Each employee is aware of the risks to the Group of their particular activity and the divisional and function heads are responsible for ensuring there is a 'risk- aware' culture within the first line of defence. For certain key policies, divisional staff complete regular online training programmes to ensure knowledge is refreshed and current.

Second line of defence

The second line of defence comprises the Group's central and independent risk management and compliance function led by the Chief Risk Officer, who reports to the Chairman of the Board Risk Committee and to the CEO. It also includes the General Counsel & Company Secretary (who is also the Money Laundering Reporting Officer), who reports to the CEO.

The high-level risk structure is set out on page 46 of the Annual Report & Accounts.

The second line of defence is necessarily and deliberately not customer-facing and has no responsibility for any business targets or performance. It is primarily responsible for:

· the design and build of the various components of the Group's Risk Management Framework and embedding these, together with the risk strategy and risk appetite, throughout the organisation;

· independent monitoring of the Group's activities against the Board's risk appetite and limits, and provision of monthly analysis and reporting on the risk portfolio to the ExCo and the Board;

· issuing and maintaining the suite of Group risk policies;

· undertaking physical reviews of risk management, controls and capability in the first-line units and providing risk assurance reports to the ExCo and the Board on all aspects of risk performance and compliance with the Risk Management Framework;

· providing advice and support to the first line of defence in relation to risk management activities;

· credit approvals between divisional and the threshold for Credit Approval Committee; and

· undertaking stress testing exercises and working with Finance and Treasury on the production of the ICAAP, ILAAP, Recovery Plan and Resolution Pack.

Third line of defence

The third line of defence - Internal Audit (currently outsourced to Deloitte LLP) - provides independent assurance on the activities of the Group and the effectiveness of the Group's Risk Management Framework and controls directly to the Board and Board Audit Committee. Internal Audit reports directly to the non-executive Chairman of the Board Audit Committee as well as the CEO and is independent of the first and second lines of defence.

The third line of defence has access to the activities and records of both the first and second lines of defence. It can inspect and review adherence to policy and controls in the first line, the monitoring of activity in the second line and the setting of policy and controls in the second line. The third line of defence does not independently establish policy or controls itself, beyond those necessary to implement its recommendations with respect to the other two lines of defence. The third line may in some cases use as a starting point the reports and reviews compiled by the second line, but is not restricted to them or necessarily influenced by their findings.

The third line of defence's scope of work is agreed with the Board Audit Committee to provide an independent assessment of the governance, risk management and internal control frameworks operated by the Group and to note the extent to which the Group is operating within its risk appetite. It does this by reviewing aspects of the control environment, key processes and specific risks and includes review of the operation of the second line of defence.

The Group's engagement of Deloitte LLP to carry out the functions of the third line of defence provides the Group with access to specialist capabilities beyond its current scale and provides insight into best practice. The performance of Deloitte in this role is reviewed by the Board Audit Committee. The Group is considering transitioning to an 'in-house' model in 2017, when the current arrangements will be up for review.

Risk Policies and Controls

The Risk Management Framework is enacted through a comprehensive suite of control documents and risk policies, setting out minimum requirements and standards in relation to the acquisition and management of risk assets as well as the control of risks embedded in the Group's operations, activities and markets.

The Group's high-level control documents and risk policies are owned and managed by the Group Risk function, headed by the Chief Risk Officer (CRO) and approved by the Board or, where delegated, the appropriate Risk Committee. The suite of policies is grouped according to importance and key risk categories.

Group-level risk policies are supplemented as required by divisional risk processes and procedures, where more specific and tailored criteria are detailed. Divisional processes and procedures are required to be compliant with Group policy and dispensations or waivers are required where gaps are identified. These process and procedures manuals provide staff at all levels with day-to-day direction and guidance in the execution of their duties.

The effectiveness of and compliance with the risk policy framework is evaluated on a continuous basis through the monthly reporting requirements (including risk policy exceptions reporting). Additionally a quarterly control self-certification process, supplemented by a programme of audits, thematic risk assurance reviews and quality control testing, is undertaken by each of the three lines of defence.

The Group set up a Policy Review Group (PRG) in 2016 to assist the ERMC in the oversight of the Group's policy inventory, the review and challenge of the waiver and dispensation process, and the tracking of actions to deliver compliance.

Asset Class Policies

The Group's lending policies are contained in 16 asset class policies. These have been arranged to operate on a Group-wide basis rather than based upon divisional products. This is considered to provide a more stable, consistent risk standard and control across the Group's portfolio of loan assets. Asset classes can also be aligned more readily with risk weightings, probability of default, loss given default and expected loss metrics, which facilitates risk reporting, risk-adjusted profitability analysis and modelling for stress testing and capital adequacy purposes.

Asset class policies are structured on the basis of policy rules, which must be adhered to, and guidelines, where an element of controlled discretion is permitted. All planned exceptions to policy rules require approval at the Group Risk function level and both planned and unplanned exceptions to policy rules are reported monthly to the relevant Risk Committee.

Key Risk Categories

The key risk categories faced by the Group are as follows:

A more detailed summary of each principal risk is contained in the following sections.

Credit Risk

This risk has two main components:

· customer risk (from core lending activity); and

· treasury credit risk (from treasury activity).

The Group's treasury credit risk exposure is limited to short-term deposits placed with leading UK banks.

Credit Risk Approval Process

The Group operates a hierarchy of lending authorities based principally upon the size of the aggregated credit risk exposure to counterparties, group of connected counterparties or, where applicable, a portfolio of lending assets that are subject to a single transaction. In addition to maximum amounts of credit exposure, sole lending mandates may stipulate sub-limits and/or further conditions and criteria.

During 2016, the Group implemented as part of its improving Risk Management Framework a number of changes to its hierarchy of lending mandates. Each division has a maximum authority level allocated, with exposures above these levels requiring approval from an approver in the second line of defence or the Credit Approval Committee (CAC). In each lending division, at least one signatory to the loan must be a segregated first line of defence credit approver who has no responsibility for, or remuneration arrangements linked to, sales targets, or ongoing sales origination or relationship responsibility with the borrower.

The maximum divisional mandate for the Regional Business Centres, Specialist Sectors and Commercial sub-divisions is £1.25 million. The maximum divisional mandate for residential lending in the Property Finance Division is £300,000 and in the Consumer Division £75,000. Exposures beyond these limits up to £5 million may be approved by an approver in the second line of defence, and exposures above this figure, up to the Group single name concentration limit of £25 million, must be approved by the CAC. In addition, where transactions involve financing portfolios of lending assets in excess of £15 million Board approval is also required.

Lending is advanced subject to Group lending approval policy and specific credit criteria. When evaluating the credit quality and covenant of the borrower, significant emphasis is placed on the nature of the underlying collateral. This process also includes a review of the Board's appetite for concentration risk.

Controls Breach in the Business Finance Division

Throughout 2015 and 2016, the Group implemented upgrades to its risk management systems and controls that included, amongst other things, improvements in quality assurance activity. Following this implementation, irregularities were identified in relation to a number of asset finance facilities originated from one of the Group's offices. The irregularities related to a controls breach in the underwriting process for these facilities that did not meet the Group's strict lending criteria and were originated over a period of several years, particularly between 2012 and 2015. The Group engaged external forensic accountants to undertake an investigation to provide assurance on both the scale of the impacted facilities and an assessment of the adequacy of the revised control framework. Following this external investigation, the Group announced that it would be recognising a charge of c.£9 million on a £14.7 million portfolio of impacted facilities. The Group has continued to monitor and assess the collateral supporting the impacted facilities and, as a result, has increased the impairment charge to £11.2 million. Associated costs amounted to £0.8 million. The Group has simplified its business model into three divisions with clear management lines and has continued to implement and embed its upgraded Risk Management Framework into the divisions. The Group believes that the steps taken to strengthen risk controls, including the removal of certain delegated authorities and appropriate segregation of origination and operations, should minimise the risk of a further breach. In addition, the results of the external forensic investigation and the ongoing stability of the £14.7 million impaired portfolio give confidence that the entirety of the affected portfolio has been fully identified and that the contagion risk is limited.

Credit Monitoring

Approval and ongoing monitoring control is exercised both within the businesses and through oversight by the Group Credit Risk function. This applies to individual transactions as well as at the portfolio level by way of monthly credit information reporting, measurement against risk appetite limits and testing via risk quality assurance reviews.

The divisions operate timely collections and arrears management processes. It is recognised that the credit environment is currently benign and we plan in 2017 to develop our operational arrangements and capabilities for non-performing loan management to ensure that the Group is capable of operating in a more challenging environment where interest rates are rising and there is lower demand and liquidity in property markets.

Liquidity and Market Risk

Liquidity risk is the risk that the Group is unable to meet its current and future financial obligations as they fall due, or is only able to do so at excessive cost.

Market risk is the risk associated with adverse changes in the fair value of positions held by the Group as a result of movement in market factors such as interest rates, currencies, volatility and credit spreads.

The Group has, therefore, developed comprehensive funding and liquidity policies to ensure that it maintains sufficient liquid assets to be able to meet all its financial obligations and maintain public confidence.

The Group's Treasury function is responsible for the day-to-day management of the Group's liquidity and wholesale funding. The Board sets limits over the level, composition, and maturity of liquidity and deposit funding balances, reviewing these at least annually. Compliance with these limits is monitored daily by Finance and Risk function personnel independent of the Treasury function. Additionally, a series of liquidity stress tests are performed weekly by the Risk function and formally reported to ALCo and the Board to ensure that the Group maintains adequate liquidity for business purposes even under stressed conditions.

The Group reports its liquidity position against its liquidity coverage ratio, net stable funding ratio and other key regulatory ratios for regulatory purposes.

A liquid asset buffer of government Treasury Bills acquired under the FLS, and reserves with the Bank of England, are maintained as a source of high-quality liquid assets that can be called upon to create sufficient liquidity in order to meet liabilities on demand.

Operational Risk

The Board Risk Committee receives regular reports across the spectrum of operational risks and information security. These reports cover incidents that have arisen to allow the Committee to assess management's response and proposed remedial actions. Although a number of incidents were raised during the course of 2016, none of these were material in nature and the Committee was satisfied that the actions taken were appropriate and that the control of operational incidents continued to improve. In response to the growing threat posed to information security, a full review of information security risk appetite was undertaken, in addition to a cyber crime risk assessment. A test of the Group's Cyber Incident Response Plan was also undertaken to assess the adequacy of the Group's internal control framework to respond to this threat, and a review of the Group's strategy to manage increasing levels of cyber risk in the marketplace. The operational risk reports were also developed throughout 2016 to include more focus on forward-looking risks, which permits a more strategic discussion at Board Risk Committee level.

Conduct, Legal and Compliance Risk

The Group continually reviews its risk management approach to reflect the regulatory and legal environment in which the Group operates.

The Group has no appetite for knowingly behaving inappropriately, resulting in unfair outcomes for its customers. During 2016 the Group further reviewed its risk appetite for conduct risk to introduce measures across the conduct risk lifecycle, which includes product design, sales or aftersales processes, and culture. It also added new measures to support annual product reviews and risk appetite to support the management of brokers, intermediaries and outsource partners. These measures are reported to the Board monthly and provide the basis for demonstrating that the Group is operating within its risk appetite. Where the Group identifies potential unintended outcomes for customers the Group uses its risk management process to proactively escalate the issue, agreeing appropriate actions and communicating clearly with its customers to ensure a fair outcome is achieved.

Strategic Risk

Strategic Risk focuses on large, long-term risks that could become a material issue for the delivery of the Group's goals and objectives. Management of Strategic Risk is primarily the responsibility of the Executive. The management of Strategic Risk is intrinsically linked to the corporate planning and stress testing processes and is further supported by the regular provision of consolidated business performance and risk reporting to the ExCo and the Board. The Board received and approved a number of reports during 2016 including the Strategy Update and the Group's annual review of risk appetite. It has also been engaged actively in the formation of the Group's ICAAP and ILAAP, which are critical tools for the management of Strategic Risk. 

Systems and Change Risk

Customer expectations for service availability are rising, with the rapid evolution of new technologies leading to a significantly lower tolerance for service disruption. The Group recognises that in order to continue to be recognised for very high levels of customer satisfaction it needs to continually monitor systems risk and ensure that change is delivered with minimum disruption to customers. During 2016 the Group reviewed its approach to managing change, and plans in 2017 to review and further enhance its business continuity and disaster recovery capability in line with its Target Operating Model and, in particular, its location requirements, to deliver its commitments as outlined in the Strategy Update.

Top and emerging risks

The Group's top and emerging risks are identified through the process outlined in the Risk Management Framework section, and are considered regularly by management and subsequently by the Board Risk Committee. The Group sees six themes as its top and emerging risks:

· Economic and competitive environment;

· Pace of regulatory change;

· Intermediary and outsourcing;

· Pace, scale of change and management stretch;

· Credit impairment; and

· Information security. 

Key: ↔ No Change ↓ Risk Decreased ↑Risk Increased

These themes, together with the Group's strategy to mitigate the risk and the direction of each theme, are considered further in the following sections:

ICAAP, ILAAP and Stress Testing

The ICAAP, ILAAP and associated stress testing exercises represent important elements of the Group's ongoing risk management processes. The results of the risk assessment contained in these documents is embedded in the strategic planning process and risk appetite to ensure that sufficient capital and liquidity are available to support the Group's growth plans as well as to cover its regulatory requirements at all times and under varying circumstances. 

The ICAAP and ILAAP are reviewed at least annually, and more often in the event of a material change in capital or liquidity. Ongoing stress testing and scenario analysis outputs are used to inform the formal assessments and determination of required buffers, the strategy and planning for capital and liquidity management, and the setting of risk appetite limits.

The Board and senior management have engaged in a number of exercises which have considered and developed stress-test scenarios. The output analysis enables management to evaluate the Group's capital and funding resilience in the face of severe but plausible risk shocks. In addition to the UK variant test on capital prescribed by the Regulator, the stress tests have included a range of Group-wide, multi-risk category stress tests, generic and idiosyncratic financial shocks, and operational risk scenario analyses. Stress testing is an integral part of the adequacy assessment processes for liquidity and capital, and the setting of tolerances under the annual review of Group risk appetite.

The Group also performed reverse stress tests to help management understand the full continuum of adverse impact and therefore the level of stress at which the Group would breach its individual capital and liquidity guidance requirements as set by the Regulator under the ICAAP and ILAAP processes.

Recovery Plan and Resolution Pack

The Group has prepared and submitted a Recovery Plan and Resolution Pack (RP&RP) in accordance with Prudential Regulatory Authority (PRA) Supervisory Statements SS18/13 and SS19/13 and submitted it to the PRA following Board approval.

The plan represents the Group's 'Living Will' and examines in detail:

· the consequences of severe levels of stress (i.e. beyond those in the ICAAP) impacting the Group at a future date;

· the state of preparedness and contingency plan to respond to and manage through such a set of circumstances; and

· the options available to management to withstand and recover from such an environment.

This plan is prepared annually, or more frequently in the event of a material change in the Group's status, capital or liquidity position. The Board of Directors and senior management are fully engaged in considering the scenarios and options available for remedial actions to be undertaken.

The Board considers that the Group's public status, its business model and the diversified nature of its business markets provide it with the flexibility to consider selective business or portfolio disposals, loan book run-off, equity-raising or a combination of these actions. The Group would invoke the Recovery Plan and Resolution Pack if required.

Group Viability Statement

The Directors have assessed the outlook for the Group over a longer period than the 12 months required by the 'Going Concern' statement in accordance with the 2014 UK Corporate Governance Code.

The assessment relied on:

· the Board-approved Strategic Update presented to the capital markets in May 2016 and the 2017 Budget that outlines the Group's business plans and financial projections;

· the Internal Capital Adequacy Assessment Process (ICAAP);

· the Internal Liquidity Adequacy Assessment Process (ILAAP);

· a review and evaluation of the Group's top and emerging risks (as reported upon earlier in this section);

· consideration of the effect of a moving regulatory landscape on the Pillar 2A, Pillar 2B and the CRD IV Combined Buffer requirements, together with the effect of the Group's Capital Contingency Plan to restore the capital position in scenarios of capital headwinds;

· the assumption that the Group has ongoing access, if required, to the debt capital markets as we consider the optimal capital composition of the Group; and

· the effect of the implementation of the IFRS 9 "Financial Instruments", taking into account the phase-in arrangements proposed by the Basel Committee on Banking Supervision.

The Group is not large enough to participate in the annual Bank of England concurrent stress testing programme but has, as part of its ICAAP, performed a variety of equivalent stress tests and reverse stress tests of its business. These include two market-wide stress tests and two Group-specific (idiosyncratic) stress tests. The stress tests were derived through discussions with senior management and the Board, after considering the Group's principal risks. The Group also considered its funding and liquidity adequacy in the context of the reverse stress testing. The risk of the UK leaving the EU had been considered and the Board believes this risk was captured within its stress testing scenarios. The Board expects there to be a period of uncertainty following the UK Government triggering Article 50 and will keep this under review.

The stress tests enable the Group to assess the impact of a number of severe but plausible scenarios on its business model. In the case of reverse stress testing, the Board is able to assess scenarios and circumstances that would render its business model unviable, thereby identifying business vulnerabilities and ensuring the development of early warning indicators and potential mitigating actions.

The Board aims to build a sustainable lending and savings bank for SMEs and consumers over the medium to long term. The Board monitors a five year Strategic Plan that provides a robust planning tool against which strategic decisions are made. Whilst the Board has no reason to believe that the Group will not be viable for a five year period, given the inherent uncertainty involved, the Board concluded that a three year period is an appropriate length of time to perform a viability assessment with a greater level of certainty.

Based on the results of the above mentioned assessments, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over a period of at least three years.

Corporate social responsibility

During 2016 Shawbrook developed its corporate social responsibility (CSR) programme to better reflect how we operate as a company and how we position ourselves in the communities we operate in. We recognise the importance of social responsibility and are committed to maintaining the highest standards and conducting business in a responsible way.

Shawbrook is committed to maintaining high ethical standards, adhering to laws and regulations, conducting business in a responsible way and treating all stakeholders with honesty and integrity. These principles are reflected in our culture throughout the organisation and are adhered to by our employees.

The Shawbrook approach to CSR addresses both how we deal with our employees and our customers, and how we manage our ethical and environmental responsibilities. Our approach to CSR and sustainability focuses on four main stakeholder areas:

· Environment,

· Marketplace,

· Workplace, and

· Community.

Environment

Shawbrook is dedicated to responsible business through its financial activities, by protecting the environment in which we operate and working sustainably. We are committed to creating a strong business that is not achieved at the expense of the environment. Our Environmental Management defines responsibilities and processes in relation to waste, energy, water and travel at our offices across the UK. Our head office is also ISO 14001 compliant. Smart meter technology is installed across the business and we are able to track the individual performance of our properties. This allows us to monitor ongoing consumption profiles, and alter plant operational times in line with the requirements of each property, reducing energy wastage. We are pleased with our 2016 results but realise this is a journey requiring continual improvement, and have committed to reducing energy consumption in 2017 and beyond across the estate and to increasing the recycling of paper, plastic, aluminium and general waste produced at our offices.

Greenhouse Gas emissions: The main greenhouse gas (GHG) generated as a result of running our business is carbon dioxide, generated from our use of fuels in heating, cooling and lighting our offices, and through business travel. We are committed to reducing carbon dioxide emissions.

We have measured our GHG footprint since 2014 and have set ourselves a target of reducing this figure by 20% by 2020, reflecting our continued efforts to reduce energy consumption and improve efficiency overall.

Using the internationally recognised Greenhouse Gas framework, we have calculated the GHG emissions associated with our Scope 1 and 2 operations using DEFRA Environmental Reporting Guidelines conversion factors. Scope 1 includes fuel emissions from buildings and company vehicles, and Scope 2 includes our emissions from purchased electricity. 

Transport: Measures to reduce the impact of transportation across the business, for both commuting and business travel, has been a focus throughout 2016. Promotion of tele- and video- conferencing facilities has helped improve take-up of these facilities as an alternative to travel. The Group also provides a shuttle bus covering various nearby locations for employees at its head office in Brentwood, thereby reducing the use of personal vehicles.

Marketplace

Our traditional values and culture of respect, care, good sense and thoughtful judgement underpin our approach to working with our supply chain. We recognise the importance of collaborative relationships when doing business and Shawbrook strives to work with suppliers who subscribe to, operate on and promote similar principles.

We take seriously our responsibilities to customers, employees, shareholders, business partners and to the local community. We conduct all business relationships with respect, honesty and integrity, and we promote equitable working relationships throughout the supply chain.

Shawbrook relies on an extensive number of external suppliers and expects all suppliers and staff to behave, and to be seen to behave, ethically at all times during the sourcing and supply of goods and services. In 2017, we will further review our supply chain management and request that our suppliers report their GHG emissions to us, allowing us to collectively monitor and meet shared environmental goal.

Workplace

We pride ourselves in being a bank that is 'specialist in good sense'; however, this can only be achieved if we embed this philosophy with our people. The key to this is having a workplace that provides excellent opportunities for career progression and that encourages accountability and teamwork.

We work hard to create a business where we can attract and retain talented, customer-focused people who can do their best work and grow fulfilling careers.

We aim to attract and reward the most talented and dedicated individuals with first-class development and training programmes, in a workplace that encourages ambition, with a vision of providing first-class customer service. In 2016 we commenced our relationship with specialist resourcing partner Cielo, a leading global provider of talent acquisition services. This partnership will allow us greater scope to accommodate our business growth and further promote the Shawbrook employer brand to a wider market.

Colleague interaction: The 2016 employee survey, urging employees to offer their opinions of the Group.

The survey achieved a 78% response rate, surpassing the previous 76%. It also achieved an 81% overall engagement score: 7% above the financial services benchmark demonstrating our employees' enthusiasm for their workplace.

"This is a very good result when compared with our benchmark group." People Insight.

We also believe in giving back to our employees and offering them the opportunity to be a greater part of our growing organisation. As a result we have continued running our employee Sharesave scheme, which gives permanent and fixed-term-contract colleagues the opportunity to join a tax-free savings scheme and buy shares at a 20% discount.

Training and development: We have devoted considerable efforts to ensuring that all colleagues are supported in their training requirements, enabling them to be the best they can be. In 2016 we invested over £635,000 in employee learning and development. This included both internal training and external qualifications, all with the aim of educating and improving our talent.

The Shawbrook 'Learning Bank', launched in March 2016, also plays a significant part in our training programme and acts as a go- to tool for all training needs and records. The Learning Bank includes both face-to-face and eLearning modules, allowing for individual and independent development. Each staff member is encouraged to complete a minimum of 35 hours continuing professional development per year.

Future talent: This initiative, designed to attract and teach the Shawbrook employees of tomorrow was launched over summer, intending to entice new talented individuals whose core values and prospects are similarly aligned to that of Shawbrook.

"From day one I had a real job to do and the opportunity to contribute. My ideas are listened to despite the limited experience I had in the financial field; I genuinely feel like part of the team with the ability to influence the outcomes of the bank." Georgina Griffin, Graduate

Workforce diversity: We believe in supporting diversity and creating an inclusive culture where all our people feel valued and able to fulfil their potential. During 2016, we signed up to the HM Treasury Women in Finance Charter, in support of our commitment to gender equality, particularly in relation to senior management. Currently, 33% of our Executive Committee members are female - well above the industry average of 14%.

Communication and consultation: We continue to involve and inform employees on matters that affect them. Through our intranet, team meetings, regional/divisional conferences and national conferences, we keep employees informed of news and strategic developments. Through initiatives such as 'My Shawbrook Idea' we seek to harness the ideas of our people to build on this work.

Community

At Shawbrook we are committed to supporting local causes that are close to the hearts of our employees and the communities in which we work, aspiring to make a difference. Dedication to the community is embedded in our core values, and we understand the importance of investing our time and contributions in non-profit organisations.

Charitable partnerships: Over the past three years we have put our time and energy into our charitable partnerships ensuring that they are looked after and rewarded with the greatest achievable donations. Throughout 2016 we continued to develop our charity programme, based on an approach to social investment grounded in the local communities where our employees and customers live. Our two principal chosen organisations are the educational charity Future First, and Contact the Elderly, which supports older people and combats loneliness. During 2016 we contributed over £102,000 to community groups across the country.

Over the past financial year these contributions allowed us to support the building of and roll-out of a mentoring portal that Future First provides to teenagers preparing for life after school, and have helped Contact the Elderly continue its excellent work tackling loneliness and social isolation among older people.

Shawbrook also operates a Communities Committee which provides grants to UK registered charities, particularly in communities where Shawbrook operates. Through its grant programmes focused on education, local and employee-nominated charities, it was able to support more than 30 charities over the year.

Corporate Governance Report

Chairman's introduction

Dear Shareholders

This was a busy year for the Board - its first full year as a listed company - as we continued our journey of ensuring that we have governance appropriate for a growing bank operating in a heavily regulated environment.

We recognise that good governance supported by a strong culture is vital to the successful delivery of Shawbrook's strategy and a key underpinning to our continued ability to grow the bank, to deliver returns to shareholders in a safe and sustainable way and to serve the interests of our customers and our people. We are committed to adhering to principles of the 2014 UK Corporate Governance Code (the Code).

The Board performance evaluation we carried out during the year confirmed the good progress we have made in strengthening the governance framework and more detail on the review is set out on page 74 of this report.

Full details of the Group's governance arrangements are also set out in this report. In addition to its ongoing oversight activities, the key issues on which the Board focused time during 2016 included:

· consideration (in one of two strategy days) of the 2020 strategy which was presented at the Capital Markets Day in May;

· deep-dives into each of the business divisions, considering both current performance and future opportunities and plans;

· the evolution of the Target Operating Model and infrastructure required to support the future development of the Group;

· consideration of the competitive environment and future opportunities in a second strategy day;

· a 2016 governance plan to improve the operation of the Board and ensure it focuses on the main issues;

· the people strategy for the business;

· a number of training and briefing sessions on particular topics, including ICAAP, ILAAP, an overview of IFRS 9 requirements, the Mortgage Credit Directive and Consumer Credit Act, the Market Abuse Directive, remuneration overview and the FCA's regulation of conduct;

· capital and liquidity adequacy, including approval of the ICAAP and ILAAP documents, with specific sessions held to ensure the Board had sufficient opportunity to consider the key elements of both;

· oversight of the Group's response to the controls breach in the Business Finance Division (see page 49 in the Risk management report for further details);

· participation in a review of its own effectiveness facilitated by an independent third party; and

· oversight of the implementation of the Senior Managers Regime.

The Nomination Committee considered the appropriateness of the Board's composition during the year and concluded that it has the appropriate mix of skills and experience to fulfil its responsibilities. There were a number of changes during the year. Both Graham Alcock and Tom Wood stood down and Andrew Didham joined the Board in February 2017, taking over from Roger Lovering as Chair of the Board Audit Committee. Dylan Minto was also appointed CFO in February 2017, after holding the interim position for the past eight months. Profiles of all the Directors are set out on pages 66 to 68. I believe that Shawbrook has a strong and highly committed Board with the mix of expertise, experience and character that the business requires to go on being successful.

We look forward to welcoming shareholders to our second Annual General Meeting on 6 June 2017.

Iain Cornish

Chairman

Key areas of Governance in this section:

Leadership

The Directors believe that the Board has an appropriate balance of skills, experience, knowledge and independence to satisfy the requirements of good corporate governance.

Compliance

Significant time and resource is given to governance matters by the Board and within the everyday operations of the Group. This ensures compliance within the framework of regulations but is also central to delivering sustainable business success.

Effectiveness

The Board understands that an effective corporate governance framework is an inherent part of running a business.

Accountability

A key element of ensuring sound governance is guaranteeing an appropriate system of controls and accountability.

Compliance with the UK corporate governance code

The Directors consider that the Group has been in compliance with the provisions set out in the Code throughout the year.

The Board of Directors

Leadership structure

 The Board

The Board has responsibility for ensuring that the Group is managed effectively and in the best interests of its shareholders, customers, employees and other stakeholders (including regulators), and its principal banking subsidiary, Shawbrook Bank Limited. The Board operates within a formal schedule of matters reserved, which can be found on the website, investors.shawbrook.co.uk, and which is reviewed and updated on a regular basis. 

The Board delegates specific powers for some matters to Committees, details of which are set out below. The outputs from each Committee meeting are reported to the Board, thus ensuring the Board maintains the necessary oversight. More detail on the Committees and their work is described in the Committees section below.

Roles and responsibilities

There is a clear division of responsibility at the head of the Group. The roles of the Chairman and the Chief Executive Officer are separate, clearly defined in writing and have been agreed by the Board.

Board committees

The Board has a number of Committees: Audit, Risk, Nomination and Remuneration. The written terms of reference of the Committees, including their objectives and the authority delegated to them by the Board, are available upon request from the Company Secretary or via the Group's website at investors.shawbrook.co.uk. All Committees have access to independent expert advice and the services of the Company Secretary. The Chairman of each Committee reports to the Board. The constitution and terms of reference of each Committee are reviewed annually to ensure that the Committees are operating effectively and any changes considered necessary are recommended to the Board for approval.

The Board also has a Disclosure Committee, which is responsible for monitoring, evaluating and enhancing disclosure controls and procedures within the Group. In particular, responsibilities set out in its terms of reference include the identification of inside information and maintenance of insider lists, the design, implementation and evaluation of disclosure procedures and the resolution of any questions concerning the materiality of certain information. The Disclosure Committee is also required to help the Group make timely and accurate disclosure of all information where disclosure is required to meet legal and regulatory obligations.

The Board delegates daily management responsibility for the Group to the Executive Committee, which meets three times a month. The Executive Committee is responsible for developing the business and delivering against a strategy approved by the Board and ensuring effective monitoring and control mechanisms. There are also a number of executive sub-committees (a table showing the governance structure is set out on page 69) which assist the Executive Committee in discharging its responsibilities.

Composition, meetings and attendance

The Board currently consists of 11 members, namely the Chairman, six Independent Non-Executive Directors, three Executive Directors and one Non-Independent Non-Executive Director. Biographical details of all Directors are given on pages 66-68.

The Non-Executive Directors have strong and relevant experience across all aspects of banking and specifically have relevant skills in financial management, regulatory, credit assessment and pricing, liability management and conduct matters. To ensure the Board continues to have an appropriate balance of skills, these skill sets are reviewed annually through the completion of a skills matrix which is considered by the Nomination Committee and the Board.

The Board holds meetings at regular intervals, at which standing items such as the Group's financial and business performance, risk, compliance, IT, human resources and strategic matters are reviewed and discussed. There is a comprehensive Board pack and agenda which is circulated beforehand so that Directors have the opportunity to consider the issues to be discussed, and detailed minutes and any actions are documented.

The below list shows some of the other noteworthy matters considered by the Board in the year:

· Review of executive governance

· Membership of Board Committees

· Risk Management Framework and risk policies

· Enterprise Wide Risk Management Report

· Capital and liquidity adequacy, including ICAAP

· Target Operating Model

· Creation of Jersey subsidiary

· Regulatory developments, in particular the Senior Managers Regime and IFRS9

· Corporate development opportunities

· Information security

· HR and people strategy

· The historical controls breach in the Business Finance Division

In addition, the Board also held two strategy workshops where, amongst other matters, the competitive environment and the impact of Brexit were discussed.

Regular meetings are scheduled up to a year in advance, and if any Director is unable to attend then they may provide comments on the papers to the Chairman before the meeting. Meetings are structured so that appropriate time is devoted to all agenda items. In addition to these regular, scheduled meetings, 'ad hoc' Board meetings are held outside the published cycle where circumstances require - for example, to approve appointments to the Board, any material transactions or the approval of regulatory submissions.

Throughout the relevant period, the Chairman has held a number of meetings with Non-Executive Directors, without the Executive Directors being present. The Senior Independent Director has held meetings with Non-Executive Directors, without the Chairman being present.

The attendance of Directors at Board and Committee meetings during the year is set out below. The number of meetings held during the period that the Director held office is shown in brackets.

In 2016, a total of 13 Board meetings were held, 11 of which were scheduled and two of which were ad hoc meetings. Attendance at meetings is shown below:

Since the year-end Andrew Didham was appointed as an Independent Non-Executive Director on 1 February 2017 and Dylan Minto as Chief Financial Officer and Executive Director on 6 February 2017.

Board balance, independence and time commitment

The Board considers that the balance of skills and experience is appropriate to the requirements of the Group's business and that the balance between Executive and Non-Executive Directors allows it to exercise objectivity in decision-making and proper control. Each member of the Board has had access to all information relating to the Group, the advice and services of the Company Secretary (who is responsible for ensuring that Board procedures are followed) and, as required, external advice at the expense of the Group.

The Board has reviewed the structure, size and composition of the Board (together with an evaluation of the Board's balance of skills, knowledge and experience); the membership of the various Board committees and the expected time commitment; and the policy for Board appointments for Executive and Non-Executive Directors throughout the year.

The Board has reviewed the independence of each of the Non-Executive Directors who have served on the Board throughout the financial year and the relevant period and concluded that Robin Ashton, David Gagie, Roger Lovering, Paul Lawrence, Sally-Ann Hibberd and Andrew Didham are independent. Lindsey McMurray, who represents the Group's largest shareholder, is not considered independent. During the relevant period, the Board has satisfied the Code requirements that at least half the Board, excluding the Chairman, should comprise Non-Executive Directors determined by the Board to be independent.

The Non-Executive Directors are considered to be of sufficient calibre and experience to bring significant influence to bear on the decision-making process. The Board has satisfied itself that Robin Ashton is independent notwithstanding his interest in shares in the Group. It has done this by observing the way he has discharged his duties as Chairman of the Board Remuneration Committee, his contribution to and challenge in Board and Committee meetings and the way he interacts with the Chairman in his role as Senior Independent Director, including conducting an evaluation of the Chairman's effectiveness at the end of 2016.

The Board has also considered the independence of Roger Lovering who a Non-Executive Director of Amigo Loans, which has a wholesale facility from the Group and Sally-Ann Hibberd who is a Non-Executive Director of Equiniti, which is the Group's share registrar and concluded that these outsider interests do not affect their independence. This is based on observations of the way both have discharged their duties as members of the Board Committees, their contribution to and challenge in Board meetings.

The terms of appointment of the Non-Executive Directors specify the amount of time they are expected to devote to the Group's business. They are currently required to commit to at least four days per month which is calculated based on the time required to prepare for and attend Board and Committee meetings, meetings with shareholders and training.

Conflicts of interest

All Directors have a duty to avoid situations that may give rise to a conflict of interest. Formal procedures are in place to deal with any conflict of interest. Directors are responsible for notifying the Chairman and the Company Secretary as soon as they become aware of any actual or potential conflict of interest for discussion by the members of the Board who will take into account the circumstances of the conflict when deciding whether to permit potential conflict or to impose conditions on the Director in the interests of the Group. Any actual or potential conflicts of interest are recorded in a central register and Directors are also required, on an annual basis, to confirm that they are not aware of any circumstances which may affect their fitness and propriety and therefore their ability to continue to serve on the Board. In addition, Directors are required to seek the Board's approval of any new appointments or changes in commitments.

Induction, training and professional development

On appointment, all new Directors receive a comprehensive and tailored induction, having regard to any previous experience they may have as a director of a public company or otherwise. The Company also provides additional induction materials and training for those Directors who are also Committee chairs. The content of our Director induction programmes is designed, and the timing planned, with input from the new Director. The induction information is delivered in a variety of formats; these include face to face meetings with the Chairman, Board members and senior management and input from external advisers and training courses as appropriate. These elements are supplemented by the provision of our key governance documents as reading material, including policies, procedures, Board and Committee minutes, the Board meeting schedule and plans, Group structure charts and copies of the Listing Rules, Disclosure and Transparency Rules, the Code and information on directors' duties and responsibilities under the Companies Act 2006.

Appropriate training is made available to any newly appointed Director, having regard to any previous experience they may have as a director of a public company or otherwise. An on-going programme of training is available to all members of the Board which includes professional external training, internal on-line training and bespoke Board training on relevant topics such as regulatory developments, changes to the Companies Act 2006 or accounting requirements. Directors are also encouraged to devote an element of their time to self-development. This is in addition to any guidance that may be given from time to time by the Company Secretary.

The Chairman is responsible for reviewing the training needs of each Director, and for ensuring that Directors continually update their skills and knowledge of the Group. All Directors are advised of changes in relevant legislation, regulations and evolving risks, with the assistance of the Group's advisers where appropriate. Dedicated Board training sessions are held and scheduled around Board meetings. During 2016 training was provided in this format on ICAAP, ILAAP, an overview of IFRS 9 requirements, the Mortgage Credit Directive and Consumer Credit Act, the Market Abuse Directive, a remuneration overview and the FCA's regulation of conduct.

The Board receives detailed reports from executive management on the performance of the Group at its meetings and other information as necessary. Regular updates are provided on relevant legal, corporate governance and financial reporting developments and Directors are encouraged to attend external seminars on areas of relevance to their role.

Board evaluation

The Board carried out an externally facilitated evaluation, using Praesta Partners, an independent facilitator with no links to the Group, at the end of 2016. The assessment was conducted according to the guidance set out in the Code.

Given the changes within the organisation since the IPO in April 2015, the review sought to address whether the Board does the right work, to the right agenda, using the right information, with the right people, and operating the right culture.

The evaluation was based around a number of key areas:

· Board composition, role, skills, diversity, balance and experience

· Board leadership and culture

· Interaction between the work of the Board and the work of the executive; and

· Strategic risk and the wider risk framework.

This review explored the Board's journey to date, looked at its trajectory and considered how Board effectiveness could be enhanced further.

The Review was based on data collected between September and December 2016 and comprised of:

Stage 1 (Comprehensive questionnaires and review of papers)

· Analysis of two electronic questionnaires completed by Directors. One assessed how the Board spent its time and energy to date and how it would like to continue. The other looked at the role and culture of the Board.

· Desk-top reviews of the Board and Committee packs over the past 12 months. This helped determine what the Board looked at in its annual cycle and how the value chains between the Board and the Board sub-committees and between the Board and the Executive Committee operated.

Stage 2 (Interviews and one-on-one discussion)

· Structured, one on one interviews with all Directors, the Interim CFO and the General Counsel to whom the Company Secretariat reports. 

· This involved a structured, round table discussion with other Executive Committee members.

Stage 3 (Observation)

· Observation of the Board Risk Committee and Board Audit Committee meetings held in October and November and of the Board meeting held on 2 November 2016. 

Stage 4 (Evaluation and reporting)

Production of a report with findings based on:

· evaluating the documentary, observation, questionnaire and interview data.

· using the Code and the PRA's Supervisory Statement SS5/16 "Corporate governance: Board responsibilities," as points of reference.

· utilising reviewer insights into how other boards work.

Stage 5 (Discussion)

Discussion with the Chairman, Board and Executive Committee.

Board Review and Insights

The review found that:

· overall the Board provided effective oversight to the business whilst also:

o commissioning and being highly engaged in the drafting, approval and implementation of robust risk policies and frameworks; and,

o providing guidance and input to the Executive Committee's determination of longer term strategies and plans for the Group.

· progress had been made in terms of:

o membership

o the focus of its work

o its delegation to Committees and to the Executive Committee

o culture.

The report found that the conditions are in place to sustain a strong rate of progress.

Follow up:

The results of the evaluation will be discussed with the Chairman, Board and Executive Committee to formulate a plan against which progress can be assessed.

Evaluation of the Chairman

The Senior Independent Director held discussions with other members of the Board to assess the performance of the Chairman. They are satisfied that the Chairman devotes a significant amount of time to the Group's business and that he had performed effectively during 2016. In particular they are satisfied that the Chairman has ensured that the Board focused on the key issues facing the Group.

Internal control

The Board has overall responsibility for the Group's system of internal control and for monitoring its effectiveness. The Audit Committee and Risk Committee have been in operation throughout the relevant period and oversee the Group's system of internal control. Material risk or control matters (which this year included the controls breach in the Business Finance Division (see page 49 in the Risk management report for further information), together with the appropriate remedial action, are reported by the Audit Committee and Risk Committee to the Board. The Board monitors the on-going process by which 'top risks' to the Group are identified, measured, managed, monitored, reported and challenged. This process is consistent with both the Group Risk Management Framework and with internal control and related financial and business reporting guidance issued by the Financial Reporting Council in September 2014, and has been in place for the relevant period under review and up to the date of approval of the Annual Report & Accounts. The key elements of the Group's system of internal control include regular meetings of the Executive and Risk Management Committees, together with annual budgeting, and monthly financial and operational reporting for all businesses within the Group. Conduct and compliance are monitored by management, the Group's Risk function, Internal Audit and, to the extent it considers necessary to support its audit report, the External Auditor.

The Board assesses the effectiveness of the Group's system of internal controls (including financial, operational and compliance controls and risk management systems) on the basis of:

· established procedures, including those already described, which are in place to manage perceived risks;

· reports by management to the Audit Committee and Risk Committee on the adequacy and effectiveness of the Group's system of internal control and significant control issues;

· under the direction of the Chief Risk Officer, the continuous Group-wide process for formally identifying, evaluating and managing the significant risks to the achievement of the Group's objectives; and

· reports from the Audit Committee on the results of internal audit reviews and work undertaken by other departments.

The Group's system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve the Group's objectives and can only provide reasonable, and not absolute, assurance against material misstatement or loss. In assessing what constitutes reasonable assurance, the Board considers the materiality of financial and non-financial risks and the relationship between the cost of, and benefit from, the system of internal control. During 2016 the Group continued to invest in its risk management capability to ensure that it remains relevant, appropriate and scalable to support the Group's objectives over the duration of the strategic plan, and embedded these improvements into the Group's Risk Management Framework.

The Board regularly reviews the actual and forecast performance of the business compared against the annual plan, as well as other key performance indicators.

Lines of responsibility and delegated authorities are clearly defined. The Group's policies and procedures are regularly updated and distributed throughout the Group. The Audit Committee and Risk Committee receive reports on a regular basis on compliance with the Group's policies and procedures.

Shawbrook Bank Limited (the main operating subsidiary of the Group) is subject to regulation by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and as such undertakes an Internal Capital Adequacy Assessment Process (ICAAP) and an Internal Liquidity Adequacy Assessment Process (ILAAP) on a regular basis. These processes benefited from ongoing improvements in risk assessment during 2016 including, in the case of the ICAAP, an update to reflect the latest guidance from the PRA on approaches to the calculation of Pillar 2 capital. The ICAAP and ILAAP are reviewed by the Board from time to time. The process involves an assessment of all the risks that the Group faces in its operating environment, the likelihood of those risks crystallising and their potential materiality and the effectiveness of the control framework in mitigating each risk. This includes a thorough evaluation of how the Group would be impacted by severe, but plausible, periods of stress in its stress testing programme.

The purpose of the process is to establish the level and quality of capital resources that the business should maintain, both under current market conditions and under a range of stressed scenarios, in order to ensure that financial resources are sufficient to successfully manage the effects of any risks that may crystallise. 

Relationships with shareholders

The Board remains committed to maintaining good relationships with shareholders. There is a good dialogue with institutional shareholders. The Chief Executive Officer and the Chief Financial Officer meet with institutional shareholders on a regular basis. Institutional shareholders will in future be given the opportunity to meet with the Chairman and /or other Non-Executive Directors if they have concerns that have not, or cannot, be addressed through the Chief Executive Officer or the Chief Financial Officer.

The Chairman is responsible for ensuring that appropriate channels of communication are established between the Chief Executive Officer (and the other Executive Directors) and shareholders and ensuring that the views of the shareholders are made known to the Board; this includes feedback prepared by the Group's brokers on meetings held with institutional shareholders.

The Group recognises the importance of ensuring effective communication with all of its shareholders. An annual financial report is distributed to all shareholders and to other parties, who may have an interest in the Group's performance. This report, together with a wide range of other information, including the half-yearly financial report, interim management statements, regulatory announcements and current details of the Group's share price, are made available on the Investor section of the Group 's website investors.shawbrook.co.uk.

Report of the Nomination Committee

Dear Shareholder

I am pleased to present the report of the Nomination Committee.

The Committee's primary focus in 2016 has been on Board succession and development plans. This has included considering plans for the continued development of key personnel within the business to ensure a pipeline of executive talent, and we have worked with the Group Human Resources Director to monitor the implementation of these plans. We remain committed to ensuring that our succession and development plans are robust and position us well to deal with any future requirements at Board and senior management levels. Succession planning and talent development will therefore continue to be an area of particular focus for the Committee in 2017 and future years.

During the year the Committee recommended the appointment of Andrew Didham as Chairman of the Board Audit Committee and Dylan Minto as Chief Financial Officer to the Board.

The Board also undertook an externally facilitated Board effectiveness review which found that significant progress had been made in terms of the Board's membership, the focus of its work, its delegation to Committees and to its executive and its culture. The outcomes of the review (further details of which can be found on page 74) will be considered and reviewed throughout 2017.

We have also continued to strengthen our belief in the benefits of a diverse and inclusive working environment and remain committed to seeing that in our workforce. We have signed the Government's Women in Finance Charter, an initiative by HM Treasury which seeks to increase the representation of women in financial services, particularly at senior levels. We have set our own targets in line with the Charter to achieve a third of women on our Board and 40% in senior management positions by 2020. Our diversity policy is described on page 78.

Further information on the activities of the Committee is provided in the following report.

Iain Cornish

Chairman of the Nomination Committee

Role of the Nomination Committee

The Nomination Committee's principal function is to keep the Board's governance, composition, skills, experience knowledge and independence and succession plans under review and to make appropriate recommendations to the Board.

As part of the identification and nomination process for Board approval, the Committee carries out a formal selection process for Executive and Non-Executive Directors and subsequently proposes to the Board any new appointments. Ultimate responsibility for the appointment of Directors resides with the Board.

The Committee also oversees succession planning for Directors and senior managers below Board level. The Nomination Committee also has oversight of recruitment activity in relation to anyone designated a Senior Manager under the Senior Managers Regime.

The Chairman of the Committee reports to the Board on the outcome of meetings.

A full copy of the terms of reference of the Nomination Committee can be found on the Group's website at investors.shawbrook.co.uk.

Membership, composition and meetings

The Nomination Committee is chaired by Iain Cornish (the Chairman of the Group) and its membership comprises three Non-Executive Directors, a majority of whom are Independent Non-Executive Directors in line with provision B.2.1 of the Code. 

Meetings are held at least four times per year. The Nomination Committee met on seven occasions during 2016 to discuss proposed appointments, succession and development and to evaluate the balance of skills, experience, independence and knowledge on the Board. Individual meeting attendance during 2016 is set out below. The number of meetings held during the period, and the number of meetings that each Director was eligible to attend as a member is shown below:

At the invitation of the Chairman of the Nomination Committee, on occasion, other attendees included the Chief Executive Officer, Human Resources Director and Lindsey McMurray (Non-Executive Director). 

Appointments

The Committee ensures that a diverse pool of candidates is considered for any vacancy which arises and any appointments are made based on merit, having regard to the skills, competencies and experience of the candidate.

During the year, the Committee recommended to the Board the appointment of Andrew Didham as an Independent Non-Executive Director, and Dylan Minto as an Executive Director. These appointment processes involved the services of two executive search agencies, Odgers Berndston and Ridgeway Partners, both of which have no other connection with the Group. In each case, the executive search agencies provided a shortlist of candidates who were compared against the role profile and candidate brief and interviewed by members of the Nomination Committee, following which recommendations to appoint Andrew and Dylan were submitted to and approved by the Board. 

Diversity

The Group is committed to improving diversity in its membership and whilst new appointments continue to be based on skill, experience and knowledge, careful consideration is given to diversity. During the year, the Board approved the introduction of a formal Diversity Policy, as recommended by the Nomination Committee.

When searching for candidates for Board appointments, the Nomination Committee takes into account a number of factors, including the benefits of diversity, including gender diversity, and the balance of the composition of the Board. The overriding requirement is to ensure that recommendations for appointments are made on merit against objective criteria, and that the best candidates are put forward for Board appointments.

Succession planning

The Committee is responsible for ensuring that appropriate succession and development plans are in place for appointments to the Board. We are satisfied that the succession planning structure in place is appropriate for the size and nature of the Group. Succession planning arrangements will be kept under regular review in the future.

Election of directors

Having reviewed the findings of the Board effectiveness process, the Nomination Committee is satisfied that the Board continues to be effective and has recommended to the Board that each of the Directors should stand for re-election (in accordance with provision B.7.1 of the Code) at the 2017 Annual General Meeting.

Primary areas of focus during the year

During the relevant period the Nomination Committee considered the following principal items:

· a review of the current structure, size and composition of the Board;

· the time commitment expected of Non-Executive Directors;

· leadership and succession planning;

· the proposed election and re-election of Directors at the forthcoming Annual General Meeting;

· the appointment of new Non-Executive Director;

· the appointment of a new CFO;

· responsibilities under the Senior Managers Regime;

· the Board effectiveness review; and

· the implementation of the Group's Diversity Policy.

Report of the Audit Committee

Dear Shareholder

I am pleased to present my first report as Chairman of the Audit Committee, a role which I assumed on 1 February 2017, having succeeded Roger Lovering, who remains a Committee member. As a Committee, we possess, as required by provision C.3.1 of the UK Corporate Governance Code ('the Code'), recent and relevant financial expertise.

It was a busy year for the Committee in 2016, being the first full financial year following the IPO of the Group. During the year, David Gagie joined the Committee and Graham Alcock stepped down. As a result of these changes, we feel that the Committee has both members with a longstanding knowledge of the business and those who can provide fresh perspectives.

We have an annual work plan framed around the Group's financial reporting cycle which ensures that the Committee considers all matters delegated to it by the Board and covers significant accounting estimates and judgements - which are set out in a table on page 82.

During the year the Financial Reporting Council (FRC) reviewed the 2015 Annual Report and Accounts and raised a number of points to the Board. The resolution of the actions was overseen by the Committee and I am pleased to report that all matters were successfully resolved. The majority of the points related to enhancing disclosures to improve the quality of our Annual Report & Accounts.

Inevitably there are also one-off matters which require the Committee's attention which this year included the impairment relating to the controls breach in the Business Finance Division (see page 49 in the Risk management report for further details). The Committee worked closely with management and the Internal Audit function to scope the size of the issue and determine the appropriate impairment. 

Another key area of focus was the roll-out of the IFRS 9 implementation programme. Particular focus in 2016 was on our preparedness for IFRS 9 and parallel run in 2017, which aims to ensure we understand the impacts and are ready ahead of the effective date. Progress has been made in developing our Expected Credit Loss (ECL) models, including our Credit Grading Framework. The IFRS 9 programme sponsored jointly by the Chief Financial Officer and Chief Risk Officer and managed by a single steering committee is within its build phase with the bulk of the testing and implementation due to take place in early 2017.

During the year the Committee received regular reports on the progress of this project, and has challenged management to ensure its implementation runs smoothly.

Looking ahead to 2017, in addition to the routine audit schedule, the key areas of focus for the Committee will be IFRS 9 and giving consideration to the transition towards our own 'in-house' Internal Audit function.

Andrew Didham

Chairman of the Audit Committee

Role of the Audit Committee

The Audit Committee is responsible on behalf of the Board, for, amongst other things:

· Financial reporting process

o the significant areas of judgement and their application to the results of the Group;

o reviewing the Group's Annual Report & Accounts and the Group's Interim Report to ensure that, taken as a whole, based on the information supplied to it and challenged by the Committee and on its judgement is fair, balanced and understandable and advising the Board to that effect;

o monitoring the integrity of the Annual Report & Accounts and the Interim Report and reviewing the critical accounting policies, disclosure obligations and changes in accounting requirements;

o reviewing and challenging the going concern and viability assessment undertaken by management, further details of which can be found on page 83; and

o reviewing the Group's Pillar III disclosures to ensure compliance with prescribed requirements.

· Internal controls and risk management

o considering the process used to evaluate the effectiveness of internal controls, financial reporting and risk management;

o considering the extent of the work undertaken by the finance function and ensuring the finance teams have adequate resources to ensure that the control environment continues to operate effectively; and

o continuously considering any findings of internal investigations into control weaknesses, fraud or misconduct and management's responses to any deficiencies identified.

· External audit

o making recommendations to the Board in relation to the appointment, re-appointment and removal of the external auditor and approving the auditor's remuneration and terms of engagement; and

o reviewing the findings of the External Audit and the level of challenge produced by the external auditor and considering management's responsiveness to the findings and recommendations.

· Internal audit

o monitoring the activity, role and effectiveness of the Internal Audit function and their audit programme;

o approving the audit plan and budget and monitoring the progress against it at regular intervals, confirming that appropriate resource and capability is in place to execute the plan effectively; and

o considering the internal audit reports, including thematic and routine reviews on prudential and regulatory compliance.

· Whistleblowing

o continuously considering the Group's whistleblowing policies and procedures, including the protection of whistleblowers.

Membership and meetings

The Audit Committee comprises four members. In accordance with provision C.3.1 of the Code, all members of the Committee are Independent Non-Executive Directors of the Group.

The Committee meets as required, but holds at least six meetings a year. The Committee met formally seven times last year, and met on another five occasions to discuss other matters. The number of meetings held during the period that the Director was a member and therefore eligible to attend is shown below.

The Company Secretary acts as secretary to the Committee. Other individuals attend at the request of the Committee Chairman. During the year, the External Auditor, Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Internal Audit and other senior managers as appropriate would usually attend meetings to report to the Committee and provide clarification and explanations where appropriate. The Committee also met with the external and internal auditors without executive management on regular occasions in 2016. 

The Board is satisfied that Andrew Didham and his predecessor, Roger Lovering, have recent and relevant financial experience, as referred to in the Code.

A full copy of the terms of reference for the Audit Committee can be obtained by request to the Company Secretary or via the Group's website at investors.shawbrook.co.uk.

Significant areas of judgement

During 2016 the following significant issues and accounting judgements were considered by the Committee in relation to the 2016 Annual Report & Accounts:

In addition to the matters described above, the Committee considered issues relating to the IFRS 9 implementation process and the acquisition of loan books. The Committee was regularly updated on the progress of the IFRS 9 programme against the programme plan. Areas of focus include the review and interpretation and of technical accounting opinions, policy setting and operational changes required in the Finance function to implement IFRS 9.

The build phase of the IFRS 9 programme is near completion and the Committee will oversee the parallel run in 2017.

At the end of 2015, the Group made a Property portfolio acquisition. During 2016, the Committee considered and challenged the assumptions used in determining the unwind of the fair value discount and concluded that the fair value adjustment as at 31 December 2016 was reasonably stated.

Financial reporting process

During the year, the Audit Committee reviewed and discussed the financial disclosures made in the Annual Report & Accounts, half-yearly financial report, interim management statement and the other trading statements made by the Group together with any related management letters, letters of representation and reports from the external auditors. Significant financial reporting issues and judgments were considered together with any significant accounting policies and changes proposed to them.

Going concern and long-term viability

The Committee reviewed a detailed paper presented by management setting out the assumptions underlying the going concern statement. The paper covered the capital position of the Group, improvements to the Group's Risk Management Framework and governance, and the work performed on the Group's ICAAP. Based on the work performed, the Committee concluded that the Group will have adequate resources to continue in operational existence for the period of assessment of 12 months from the date of signing the accounts. The Committee reported accordingly to the Board, which also considered Going Concern in detail.

In order to support the Board's approval of the statement on page 56 as to the longer term viability of the Group, the Committee reviewed papers from management setting out the intended approach to the disclosures and providing details in support of the statement based in particular on the Group's medium term plan and the results of stress testing.

During the relevant period the Audit Committee discharged its responsibilities by performing the following activities:

Internal controls and risk management

Together with the Group's Risk Committee, the Audit Committee has performed a robust assessment of the Risk Management Framework and principal risks and uncertainties. Details of the risk management systems in place and principal risks and uncertainties are provided within the Risk management report on pages 40 to 56.

The Group's system of internal control has been designed to manage risk and whilst risk cannot be eliminated, the new system improvements assist in providing reasonable assurance against material misstatement or loss.

The Audit Committee receives reports on a regular basis on compliance with the Group's policies and procedures and the effectiveness of the Group's systems and controls. The Group's Internal Audit function as the third line of defence is outsourced to Deloitte LLP providing assurance to the Group that the specialist nature of the Group's activities can be fully assessed.

The Group Risk and Internal Audit functions review the extent to which the system of internal control is effective; is adequate to manage the Group's principal risks; safeguards the Group's assets; and, in conjunction with the Company Secretary and the Group's Legal and Compliance functions, ensures compliance with legal and regulatory requirements. It provides independent and objective assurance on risks and controls to the Board Audit Committee and senior management.

Internal Audit's work is focused on areas of greatest risk to the Group, as determined by a structured risk assessment process involving executive directors and senior management. The output from the process is summarised in an annual audit plan, which is approved by the Audit Committee. 

The role of the Internal Audit function and the scope of its work continue to evolve to take into account of changes within the business and emerging best practice.

On behalf of the Board, the Committee through discharging its responsibilities under its terms of reference undertakes regular reviews of the effectiveness of the Group's systems of internal control as set out on page 75. In addition, following the implementation of upgrades to the Group's risk management systems and controls throughout 2015 and 2016 and the subsequent identification of the controls breach in the Business Finance Division, the Group engaged external forensic accountants to provide assurance on the adequacy of the revised control framework.

Internal Audit

The Group has outsourced the Internal Audit function to Deloitte LLP since June 2013. The Committee is satisfied that in 2016 this continued to be the most appropriate way of managing the delivery of internal audit services, however as the size and nature of the business has changed, the Audit Committee has considered the need and suitability of transitioning to an 'in-house' Internal Audit function, on the subject of which it will make a recommendation to the Board in 2017.

The terms of reference of the Internal Audit function are set out in the Internal Audit Charter. The Audit Committee approves the annual audit plan and audit methodology for Internal Audit and monitors progress against the plan during the year. The Internal Audit Partner agrees the programme of work and reports directly to the Committee on the outcomes. Special reviews are carried out as required.

Internal Audit carried out a significant number of audits during 2016 of varying size and complexity. Thematic audits focused on, amongst other things, new business processes, capital and liquidity and the Risk Management Framework. Audit reports are circulated to the Audit Committee members prior to each scheduled meeting and the Committee monitors progress against actions identified in these reports.

The Committee used a questionnaire to monitor and review Internal Audit's effectiveness using feedback from the Board, senior management and regular attendees. The Audit Committee also assesses annually the resources available to Internal Audit to complete its remit. Internal Audit has unrestricted access to all Group documentation, premises, functions and employees as required to enable it to perform its functions. The appointment and removal of Internal Audit staff is the responsibility of the Audit Committee. 

External Audit

The Audit Committee oversees the relationship with the External Auditor and considers the External Auditor's engagement (including remuneration), their effectiveness, their continued independence and their objectivity. The Committee also considers audit and audit strategy (including the planned levels of materiality). The external auditor attends the Committee meetings as appropriate and meets at least annually with the Committee without executive management. The Chairman of the Committee also meets privately with the External Auditor before each Committee meeting.

During the year, the Committee received regular detailed reports from the External Auditor including formal written reports dealing with the audit objectives; and reports on: the auditors' qualifications, expertise and resources; the effectiveness of the audit process; procedures and policies for maintaining independence; and compliance with the ethical standards issued by the Auditing Practices Board. The External Auditor's management letter is reviewed, as is management's response to issues raised and progress is monitored against actions identified in these reports. 

The Committee monitors the latest ethical guidance regarding rotation of audit partners. Non-audit services provided by the External Auditor is regularly monitored by the Committee. 

External Audit independence and objectivity

The Committee is responsible for reviewing the independence of the Group's External Auditor KPMG LLP and making a recommendation to the Board on their engagement. KPMG LLP has a policy of partner rotation which complies with regulatory standards, and the audit partner changed with effect from March 2016, in line with this requirement. 

Maintaining an independent relationship with the Group's auditor is a critical part of assessing the effectiveness of the audit process. The Committee has a formal policy on the use of the Auditor for non-audit work and ensures that work is only awarded when, by virtue of the Auditor's knowledge, skills or experience are a decisive factor and when the Auditors are clearly to be preferred over alternative suppliers.

The Committee receives and reviews each year an analysis of all non-audit work and reviews the level of audit and non-audit fees paid to KPMG LLP and also ensures that significant assignments are not awarded without first being subject to the scrutiny of the Committee. The fees paid to KPMG for audit and non-audit services are set out in note 7 of the financial statements. The key principles of the policy on non-audit services are:

Summary of non-audit services policy

The Committee reviewed payment for non-audit services in 2016.

(i) Prohibited services include services remunerated on a success fee or participation in activities normally undertaken by management.

(ii) The Committee approved a list of permitted audit related reviews of the Group's interim results or any other review of its accounts for regulatory purposes. (Details of the services provided by the external Auditors can be found in note 7 of the Financial Statements).

(iii) The Committee maintains a list of prohibited services which is aligned to the 'black-list' of services set out in the EU Audit regulations and directives.

(iv) Pre-approved services up to £100,000 require approval by the CFO/CEO or the Chairman of the Audit Committee. All services that are not pre-approved, or are discretional or exceed the monetary threshold of £100,000 should be referred to the Audit Committee for approval.

The Committee confirms that no prohibited services were provided by the External Auditor and it is satisfied that the policy on the supply of non-audit services could not lead to audit objectivity and independence being compromised.

In order to comply with the policy, the External Auditor ceased the provision of tax advisory services from 1 January 2017.

In December 2016 the Committee assessed the effectiveness of the External Auditor and the audit process. The review included seeking the views of Audit Committee members, Executive Directors and senior executives. The review concluded that the external audit process was effective.

The Committee is satisfied with the performance of the External Auditor in 2016 and the policies and procedures in place to maintain their objectivity and independence, and has recommended that they be re-appointed at the forthcoming Annual General Meeting.

Audit Tender

The Group appointed KPMG Audit Plc as External Auditor from 2011 to 2014, and KPMG LLP thereafter. The Group did not carry out a formal tender process in the year as it sought to embed stability in the year following the IPO. KPMG LLP has continued as External Auditor. However, the Committee has adopted the transitional provisions under the EU Statutory Audit Directive permitting the Group to put the external contract out to tender no later than 2021. The Group will keep under review regulatory and legislative developments around the tenure of the Auditors and will undertake a formal competitive tender at the appropriate time. Following discussions with KPMG LLP and consideration by the Committee Chairman and the Chief Financial Officer of possible candidates, approval was given to the appointment of John Ellacott as the Group's new audit partner from March 2016.

The Group has complied with the provisions of the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014.

Whistleblowing

A formalised whistle-blowing policy and procedure for staff to raise issues regarding possible improprieties in matters of financial reporting or other matters has been established and was reviewed during the year. The Audit Committee is responsible for monitoring the effectiveness of the Group's whistle-blowing procedures and any notifications made. The Committee is charged with ensuring that appropriate arrangements are in place for employees to be able to raise matters of possible impropriety in confidence and performing suitable subsequent follow-up action. An alternative reporting channel also exists whereby perceived wrongdoing may be reported via telephone to an external third party. 

The Committee has access to the services of the Company Secretarial function and is authorised to obtain independent professional advice if it considers it necessary.

Governance

The Committee has undertaken a review of its own performance, focussing on the Code requirements for Audit Committees, as part of the Board effectiveness review. The results were positive.

During the year the Financial Reporting Council (FRC) performed a review of Shawbrook's 2015 Annual Report and Accounts and invited comments on a number of reporting areas. The 2015 Annual Report and Accounts was Shawbrook's maiden set of accounts as a FTSE 250 listed organisation and we welcomed the opportunity to improve the quality of our reporting.

All issues raised by the FRC have been discussed by the Committee and, in consultation with the external auditor have been cleared with the FRC with no points outstanding at the date of this report and where applicable, we enhanced our disclosures.

Fair, balanced and understandable

The Committee considered on behalf of the Board whether the 2016 Annual Report & Accounts taken as a whole is fair, balanced and understandable, and whether the disclosures are appropriate. The Committee is satisfied that the 2016 Annual Report & Accounts meets this requirement, and in particular, that appropriate disclosure has been made with respect to any developments in the year. In justifying this statement the Committee has considered the robust procedures around the preparation, review and challenge of the Report and the consistency of the narrative sections with the financial statements. The Annual Report & Accounts is drafted by the Executive with overall governance and co-ordination provided by the Annual Report & Accounts Working Group comprising a team of cross-functional senior management.

Assurances are sought by the Audit Committee on each section of the Annual Report in advance of final sign-off by the Audit Committee and ultimately the Board.

Following its review, the Committee is satisfied that the Annual Report is fair, balanced and understandable, and provides the information necessary for shareholders and other stakeholders to assess the Group's position and performance, business model and strategy and has advised the Board accordingly.

Andrew Didham

Chairman

Board Audit Committee

Report of the Risk Committee

Dear Shareholder

I am pleased to present the report of the Risk Committee, our second as a listed Group. This year we have continued to strengthen our Risk Management Framework and controls in line with the Group's aspirations and risk appetite. 

The following report explains in further detail how the Committee has discharged its responsibilities and highlights the key matters discussed by the Committee in 2016. This has involved balancing the agenda to include standing areas of risk management whilst ensuring key risks which have emerged during the course of the year are appropriately addressed. Considerable time has also been spent contributing to documents such as the ICAAP and ILAAP before making recommendations to the Board.

Good progress has been made during 2016 in further understanding underlying risks and enhancing risk management. We are now well positioned to further embed the revised Risk Management Framework and further enhance testing and quality assurance in 2017.

The environment in which the Group operates continues to evolve and I believe the Committee is well placed to review inherent and emerging risks and embed an appropriate risk culture.

Paul Lawrence

Chairman of the Risk Committee

Committee membership

The Risk Committee comprises six members, all of whom are Independent Non-Executive Directors of the Group.

Meetings are held at least bi-monthly. Individual meeting attendance during 2016 is set out below. The number of meetings held during the period and those that each Director was eligible to attend as a member of the Committee are shown below.

During the year, the members of the Committee were Paul Lawrence, Robin Ashton, Graham Alcock, David Gagie and Roger Lovering, who each also served on the Audit Committee throughout the reporting period. Sally-Ann Hibberd does not sit on the Audit Committee. Andrew Didham was appointed to the Committee on 1 February 2017.

The Company Secretary acts as secretary to the Committee. Other individuals attend at the request of the Risk Committee Chairman and during the year the external auditors, Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, staff from the Internal Audit function and other senior managers as appropriate would usually attend meetings to report to the Committee and provide clarification and explanations where appropriate. During the year, the Committee met on seven occasions.

Role of the Risk Committee

A full copy of the terms of reference of the Risk Committee can be obtained by request to the Company Secretary or via the Group's website at investors.shawbrook.co.uk. 

The purpose of the Committee is to assist the Board in its oversight of risk within the Group, with particular focus on the Group's risk appetite, risk culture, risk profile and the effectiveness of the Group's Risk Management Framework. As well as reviewing the Group's risk assessment processes and methodology it identifies and manages new risks, alongside advising on proposed transactions and reviewing reports on any material breaches of risk limits. The Committee is also responsible for monitoring and reviewing the effectiveness of the risk function and the capital adequacy requirements of the Group's relevant subsidiaries on an on-going basis.

Over the course of 2016, the Committee considered a wide range of risks facing the Group, both standing and emerging, across all areas of risk management in addition to the risk appetite and culture. Below is an outline of these risks, with a summary of the material factors considered by the Committee, including the conclusions that were ultimately reached.

Key matters considered by the Committee in 2016

Primary areas of focus during the year

· ICAAP - The Board was actively engaged in the development of the Group's ICAAP. Activities included workshops to review and approve recommendations of the Group's assessment of its Pillar 2A risks and the review and approval of the macroeconomic scenarios used to assess the Group's risks over a three to five year period. The Committee was also involved in identifying and reviewing risks the Group's business model through the development of idiosyncratic scenarios and the reverse stress testing scenario.

· ILAAP - the Group undertook a comprehensive review of its ILAAP, with the Board Risk Committee with the Board actively involved throughout. This included workshops to enhance and refine the Group's liquidity stress testing framework; review the Group's liquidity risks and resources; and ensure the Group's overall liquidity adequacy.

· Risk Management Framework - continued development and investment to ensure business development and transformation programmes are properly supported;

· Group's risk profile and risk appetite - continually reviewed to ensure they remain appropriate to the current and future strategy of the Group;

· Brexit assessment - continually monitored and reviewed preparedness before the Brexit vote and in light of the referendum result;

· Regulatory and legislative change - continually assessed and monitored;

· Review of internal controls and risk management systems;

· Regular review of strategic, operational and credit risk events;

· Technology infrastructure - considered the adequacy and effectiveness of the technology infrastructure supporting the Risk Management Framework;

· Risk Culture - monitored the training and development requirements of the Group to ensure the requisite skills are in place to control risk and promote an effective risk culture; and

· Recovery and Resolution Plan - monitored and developed the preparedness and contingency plan to respond to and manage levels of severe stress.

Other matters considered in detail by the Committee in 2016

· Block Discount Lending Policy;

· 2016 Business Continuity Test Plan; and

· Intermediary and Broker Management policy.

During 2016 the Group has enhanced its three lines of defence model, as outlined on page 45 in the Risk management report. This model has been implemented through the creation of a comprehensive suite of risk policies, embracing all aspects of the risk management agenda, including the credit, operational, reputational and conduct risk arenas under the auspices of Program Horizon, which is the program initiated in March 2015 to upgrade the risk architecture of the Group.

During 2016 the Group made a number of changes to enhance its risk governance. These included the launch of its Enterprise Risk Management Committee (ERMC), which provides an enterprise wide view of the risk profile of the Group and is the senior risk committee within the Group. The ERMC replaced the Group Credit Committee (GCC) and the Conduct and Operational Risk Committee (CORC). To support the ERMC in embedding of the Risk Management Framework and to reflect the Group's development of credit grading, the ERMC implemented two new groups. The Model Management Group (MMG) to oversee the development, approval and monitoring of the Group's models and the Policy Review Group (PRG) to oversee the consistent development, approval and monitoring of the Group's policies.

The Risk Committee received a number of reports from management that provide strong evidence that the Group's regulatory documents are being embedded into the way the Group does business including in the setting of strategy and risk appetite.

The Group has also undertaken a comprehensive and wide ranging review of credit risk approval governance. The change in framework seeks to deliver under the following key principles:

· providing the required level of independence, governance and assurance in relation to both material individual risks and the profile of the portfolio overall;

· maintaining service standards by way of prompt turnaround times and commercial responses to financing proposals; and

· preserving the 1st Line's Division's culture of accountability for, and focus on, risk.

During the year, revised authority levels were proposed based upon a balanced consideration between risk profile and current practice, namely:

· The Group operates a hierarchy of lending authorities based principally upon the size of the aggregated credit risk exposure to counterparties, group of connected counterparties or, where applicable, a portfolio of lending assets that are subject to a single transaction. In addition to maximum amounts of credit exposure, sole lending mandates may stipulate sub-limits and / or further conditions and criteria.

· The Group implemented as part of its improving Risk Management Framework a number of changes to its hierarchy of lending mandates during 2016. Each Division has a maximum authority level allocated, with exposures above these levels requiring approval from an approver in the second line of defence, or the Credit Approval Committee (CAC). In each Division, at least one signatory to the loan must be a segregated first line of defence credit approver who has no responsibility for, or remuneration arrangements linked to, sales targets, on-going sales origination or relationship responsibility with the borrower.

· The maximum divisional mandate for the Regional Business Centres Business Finance Specialist Sectors and Commercial Property in the Property Division is £1,250,000. The maximum divisional mandate for residential lending in the Property Division is £300,000 and £75,000 in Consumer. Exposures beyond these limits up to £5million may be approved by an approver in the Second Line of Defence and exposures up to the Group single name concentration limit of £25million must be approved by the Credit Approval Committee (CAC). In addition, where transactions involve portfolios of lending assets in excess of £15million Board approval is also required.

· Lending is advanced subject to Group lending approval policy and specific credit criteria. When evaluating the credit quality and covenant of the borrower, significant emphasis is placed on the nature of the underlying collateral. This process also includes a review of the Board's appetite for concentration risk.

This revised framework was approved by the Committee and implemented towards the end of the year.

Priorities for 2017

The Group will continue to invest in its risk management capability during 2017 with a key priority being to fully embed a risk aware culture throughout the Group. During 2017 the Group will complete an update on many of the items delivered in 2016 and deliver / support the transformation agenda. 

The key projects which the Group Risk function are accountable for delivering in 2017 include:

· operationalising the Group's new Credit Grading System into key front-end decision systems;

· delivery of IFRS 9 compliance ;

· delivery of the Enhancing Operational Risk project to systemise the management and oversight of operational risk including embedding risk and control assessments and key indicators;

· development of a problem loan management strategy;

· launch of a credit risk application system; and

· delivery of a plan to support the bank's consideration of Advanced Internal Ratings Based (AIRB) permission.

Statement by the Remuneration Committee Chairman

Dear Shareholder,

On behalf of the Board, as Chairman of the Remuneration Committee, I am pleased to present our 2016 Directors' Remuneration Report.

This report is my first as Chairman of the Committee and sets out how we have implemented the Directors' Remuneration Policy (approved by shareholders at the 2016 AGM) in 2016 and outlines our intentions with regards to remuneration in 2017. The Directors' Remuneration Policy can be found in the 2015 Annual Report and Accounts available on the Group's website www.shawbrook.co.uk.

During 2016 the Committee has, in addition to its regular activities, reviewed the current policy to ensure that it remains fit for purpose. It also considered the leaving arrangements for Tom Wood who left Shawbrook in June 2016 and, in early 2017, approved the remuneration arrangements for his successor, Dylan Minto. 

I have set out below a summary of the key decisions that the Committee has taken during the year including with respect to determining the 2016 bonus outcomes, changes to the implementation of the remuneration policy during the year and a summary of how the policy will be implemented in 2017.

Board changes

At the start of 2016, we welcomed Shawbrook's new Chief Executive Officer (CEO), Steve Pateman, to the Group. His remuneration arrangements were set out in the 2015 Directors' Remuneration Report and are again disclosed in this report. 

Tom Wood, the Chief Financial Officer, left Shawbrook at the end of June 2016. The terms of his departure are set out on page 100 and the treatment is in line with the shareholder approved Directors' Remuneration Policy, the terms of his contract and the relevant share plan rules. 

In February 2017, we appointed Dylan Minto as Chief Financial Officer (CFO) and Executive Director. His remuneration arrangements will therefore be in line with the approved Directors' Remuneration Policy and are set out on page 102.

2016 bonus outcomes

With the exception of the identification of the controls breach referred to below, 2016 has been a positive year for Shawbrook. With continuing demand and strong risk-adjusted returns in our selected markets, financial performance has aligned well to our Strategic Pillars. As a result, the Group has delivered against its 2016 guidance and remains well placed to deliver its 2020 vision.

The 2016 bonus outcomes for Executive Directors were based on a scorecard of financial measure and non-financial measures as well as individual performance.

Financial performance (55% weighting)

The financial element of the 2016 bonus assessment was based on profit before tax (35%) return on tangible equity (10%) and cost to income ratio (10%). 

The Committee considered Shawbrook's financial performance against these metrics and also the impact of exceptional items, which may be excluded from the calculation of financial performance under the bonus plan design.

During 2016, a controls breach was identified in the Business Finance Division which led to an income statement charge of £12 million being recognised in 2016 (see page 49 in the Risk management report for further details). This related to a number of loans, originated over a period of several years particularly between 2012 and 2015, that did not meet the Group's strict lending criteria. Following the identification of the controls breach, a full review of the underlying facts was undertaken and the Committee reviewed the findings when considering the implications for remuneration for 2016. The Committee considered the current Executive Directors' oversight and management responsibilities for the Business Finance Division at the time the issues arose and considered that the charge should be treated as an exceptional item when calculating the bonus outcome for the Executive Directors. The Committee noted that Steve Pateman had joined the Group as Chief Executive Officer (CEO) on 1 January 2016 after the majority of the identified transactions had been originated and ensured that appropriate management focus was provided to the improved Risk Management Framework and controls that enabled the controls breach to be identified, and that Stephen Johnson did not have oversight or management responsibilities for the Business Finance Division at any time during his employment by the Group.

On this basis and following adjustment for the controls breach (but not adjusting for the underlying adjustments described on page 2), the Group achieved profit before tax of £100.2 million, return on tangible equity of 21.3% and a cost to income ratio of 45.9%. Overall, this resulted in a score of 38.6 out of 55 in respect of the financial measures.

Whilst the Committee concluded that Executive Directors' bonus outcomes should not be impacted by the charge relating to the controls breach, in order to ensure alignment of the interests of the Executive Directors with the long-term interests of shareholders, it determined that in light of the charge, an exceptional increase to deferral levels for Executive Director annual bonuses was warranted for the 2016 financial year only. As such, 75% of the total bonus awarded for 2016 will be deferred into Shawbrook shares under the Deferred Share Bonus Plan, which will vest in equal tranches over three years.

Non-financial performance (25% weighting)

The non-financial element of the 2016 bonus assessment was based on risk management (15%), customer (5%) and culture and employee engagement (5%).

During 2016, the Group continued to embed its Risk Management Framework leading to increased first-line risk management capability and much improved oversight, monitoring and reporting. In relation to customer, a Net Promoter Score (NPS) of 27 was achieved, which was a good outcome given external factors and in particular the impact of the current interest rate environment on savings customers. On culture and employee engagement, the maximum score was awarded reflecting the significant work undertaken by senior management in the transformation of the culture of the Group as well as high employee engagement scores. Given this level of performance, the Committee determined that a score of 18.5 out of 25 should be awarded in respect of the non-financial measures.

Individual performance (20% weighting)

The remaining 20% of the bonus was based on individual performance. Since his appointment as CEO in January 2016, Steve Pateman has substantially achieved all his agreed objectives ensuring an appropriate balance between risk, return and customer needs in the delivery of strong financial performance in 2016 as well as driving continued focus on the Group's 2020 strategy. Stephen Johnson has continued to lead the Property Finance business to success with outperformance on margin, costs and contribution leading to an excellent return on tangible equity, whilst maintaining high standards of professionalism, risk management, ethics and team work.

As a result of this performance, the overall bonus outcome for 2016 was 77.1% of maximum for Steve Pateman and 75.1% of maximum for Stephen Johnson. Further details can be found on pages 96 to 98.

Changes to remuneration arrangements during 2016

In our 2015 Directors' Remuneration Report, we highlighted that a review of pension arrangements for Executive Directors, other than the CEO, was being undertaken against wider market practice and pension provision within the Group. With effect from 1 September 2016, the Committee determined that the pension contribution of 7.5% of salary for Executive Directors should be amended to a pension allowance of 15% of salary to ensure the offering remains appropriate, particularly given internal relativities with other senior management. Having made this one-off adjustment, the Committee does not intend to review pension levels again in the foreseeable future.

During 2016, we also reviewed and strengthened our clawback provisions such that deferred bonus awards granted in respect of the 2016 performance period onwards may be subject to clawback at any time prior to the third anniversary of vesting.

2017 implementation and looking ahead

There will not be any significant changes to the implementation of the Remuneration Policy in 2017 for Executive Directors. The salaries of Steve Pateman and Stephen Johnson will not be increased in 2017, as it was decided that the salary increase budget should be targeted at the wider employee base. The annual bonus opportunity will remain the same as 2016. Performance Share Plan (PSP) awards to Executive Directors in 2017 will be granted at a level of 100% of salary.

The Committee has reviewed the performance measures, weightings and targets for the 2017 bonus plan and PSP awards. The 2017 bonus measures are unchanged from 2016, using a scorecard of financial, non-financial and individual performance metrics. Within this scorecard, the customer and employee aspects have been combined for 2017, and the underlying customer and employee metrics have been updated to include a wider range of key goals for Shawbrook, including overall customer satisfaction as well as employee engagement, talent management, diversity and inclusion.

In relation to the PSP, the Committee has decided to retain the relative total shareholder return (TSR), earnings per share (EPS) and risk management measures, as well as including a scorecard of customer and employee metrics. The TSR peer group has been updated to ensure it continues to provide a robust assessment of performance, with the additions to the group being challenger banks. The customer and employee metrics reflect Shawbrook's long-term strategic priorities and goals in this area. For example, during 2016, Shawbrook signed up to HM Treasury's Women in Finance Charter, and therefore the PSP scorecard will measure progress towards our aspirations in this area.

Closing remarks

I welcome any comments from shareholders on the remuneration arrangements set out on the following pages and will be available to answer any queries regarding our remuneration policy at the forthcoming Annual General Meeting.

Robin Ashton

Remuneration Committee Chairman

Annual Remuneration Report

This section summarises how Shawbrook implemented the Remuneration Policy in 2016, and how it is intended to be operated in 2017. This Annual Remuneration Report will be submitted to shareholders for an advisory vote at the 2017 AGM. Where required, sections of the Annual Remuneration Report have been audited by KPMG LLP and this is indicated in the 2016 Annual Report & Accounts. The Directors' Remuneration Policy can be found in the 2015 Annual Report and Accounts available on the Group's website (www.shawbrook.co.uk).

Consideration by the Directors of matters relating to Directors' remuneration

The Board Remuneration Committee comprises three members including the Board Chairman. Meetings are held at least four times per year. Individual meeting attendance during 2016 is set out below. The number of scheduled meetings held during the period that the Director was a member and therefore eligible to attend is shown below.

A full copy of the terms of reference of the Remuneration Committee can be found on the Group's website at www.shawbrook.co.uk.

During the year the Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Group HR Director, Head of Reward and Non-Executive Director, Lindsey McMurray, all attended Committee meetings by invitation. In addition, the General Counsel and Company Secretary and Head of Secretariat provided secretariat support to the Committee during the year. No individual was present for discussions relating to their own remuneration.

Deloitte LLP provided independent advice to the Committee on executive remuneration matters, including a review of the Group's remuneration policy, advice on incentive design and performance measurement, provision of current market trends data and regulatory updates, and support in relation to the Directors' Remuneration Report. In respect of these services, Deloitte was paid fees totalling £79,000. Deloitte LLP also provided risk advisory, internal audit and forensic advisory services to Shawbrook during 2016. Deloitte LLP is a member of the Remuneration Consultants Group and is a signatory to its Code of Conduct. The Committee is satisfied that the advice received from Deloitte LLP was objective and independent.

Single total figure of remuneration

The tables below set out the single total figure of remuneration for Executive and Non-Executive Directors for the financial year ended 31 December 2016.

Year ended 31 December 2016:

The tables below set out the single total figure of remuneration for Executive and Non-Executive Directors for the financial year ended 31 December 2015, reflecting remuneration received from appointment to the Shawbrook Group plc Board in 2015:

Year ended 31 December 2015:

Notes to the single total figure of remuneration table

Taxable benefits and pension

Taxable benefits comprise private medical insurance for all Executive Directors and a living allowance for the CFO (ceased from April 2015).

In our 2015 Directors' Remuneration Report, we highlighted that a review of pension arrangements for Executive Directors, other than the CEO, was being undertaken, against wider market practice and pension provision within the Group. With effect from 1 September 2016, the Committee determined that the pension contribution of 7.5% of salary for Executive Directors should be amended to a pension allowance of 15% of salary to ensure the offering remains appropriate, particularly given internal relativities with other senior management. Having made this one-off adjustment, the Committee does not intend to review pension levels again in the foreseeable future. The pension provision for the CEO which was agreed on appointment remains at 35% of salary, in line with the opportunity offered by his previous employer.

All-employee share plans

No Executive Directors participated in the 2016 SAYE offering. 

Annual bonus

Executive Directors were eligible to participate in the annual bonus in 2016, with a maximum opportunity of 100% of salary.

For each Executive Director, the 2016 annual bonus outcome was based on performance against a scorecard of measures, weighted 55% on financial measures, 25% on non-financial measures reflecting the strategic goals of the Group and 20% on individual objectives. The table below illustrates performance against the targets set for each measure.

Of the 2016 bonus, 55% is based on financial measures before any exceptional profits or losses as determined by the Committee.

The Committee concluded that an income statement charge of £12 million should be treated as exceptional for 2016 bonus purposes for the continuing Executive Directors, Steve Pateman, CEO, and Stephen Johnson, Deputy CEO and Managing Director of the Property Finance Division. This charge arose following the controls breach identified in the Business Finance Division and related to a number of loans, originated over a period of several years particularly between 2012 and 2015 that did not meet the Group's strict lending criteria. The controls breach was identified and accounted for in 2016. In concluding that the charge arising from the controls breach should not impact the amount of the 2016 bonus earned by the two Executive Directors, the Committee noted that:

a) Steve Pateman had joined the Bank as CEO on 1 January 2016 after the majority of the identified transactions had been originated and ensured that appropriate management focus was provided to the embedding of the improved Risk Management Framework that enabled the controls breach to be identified; and

b) Stephen Johnson had only been appointed to the Board in May 2015 and his responsibilities did not extend to management or oversight of the Business Finance business. Stephen's primary role is as Managing Director of the Property Finance Division. Stephen's responsibilities prior to joining the Board were also for the Property Finance Division and he has not had oversight or management responsibilities for the Business Finance business at any time during his employment by the Group.

The Group believes that the steps it has taken to strengthen risk controls, including the removal of certain delegated authorities and appropriate segregation of origination and operations, should minimise the risk of a further breach in the future.

In order to ensure alignment of the interests of the Executive Directors with the long-term interests of shareholders, the Committee has determined that the above treatment warrants an exceptional increase to deferral levels for Executive Director annual bonuses for the 2016 financial year only. Of the total bonus awarded for 2016, 75% will be deferred into share awards under the Deferred Share Bonus Plan (DSBP).

25% of the 2016 bonus is based on non-financial measures

Following a review of the Group's risk management performance over the year and based on input from the Chief Risk Officer and the Chairman of the Board Risk Committee, the Committee determined a payout of 83.33% (being a score of 12.5 out of 15) under the risk management element of the scorecard. This outcome reflects the Group's continued journey towards the embedding of a robust Risk Management Framework in 2016 including increased first line risk management capability, positive regulatory interactions, strong credit risk performance and improved oversight, monitoring and resourcing. In reaching this conclusion, the Committee noted that the improved Risk Management Framework had helped to uncover the controls breach outlined above. 

The Committee also reviewed performance against the 'culture and employee engagement' measure, taking into account input from the Group HR Director, and determined a payout of 100% of maximum was warranted. In reaching this conclusion, the Committee took into consideration the strong scores obtained from two employee engagement surveys undertaken during 2016 as well as the significant work undertaken to further embed structured learning and performance management and to improve employee communication across the Group. The Committee also noted the significant work undertaken to progress the corporate social responsibility agenda and the role this has played in developing the Group's culture.

20% of the 2016 bonus is based on Individual measures

The Committee also assessed the individual performance of the Executive Directors over the year. 

The Committee concluded that Steve Pateman substantially achieved all his agreed personal objectives for 2016 and performed at a high level in the discharge of his duties. In delivering strong financial performance, Steve has ensured an appropriate balance between risk, return and customer needs in maximising opportunities in our carefully selected markets. Having driven the appropriate embedding of our risk management framework, Steve has also championed a strong risk culture throughout the Group that will support the continued growth of the business and allow us to maintain a strong capital position. Steve's personal focus on living the Group's values and good sense approach has helped us to deepen relationships with our customers, community and business partners as well as establish a highly engaged leadership team and wider workforce that is focused on delivering the Group's 2020 strategy. Given this assessment, the Committee determined a payout of 100% in respect of the individual measure (being a score of 20 out of 20).

In assessing Stephen Johnson's individual performance, the Committee determined a payout of 90% under the individual measure (being a score of 18 out of 20). In reaching this conclusion, the Committee noted the strong performance of the Property Finance Division under his leadership, with outperformance on margin, costs and contribution leading to an excellent return on tangible equity. The Committee also recognised the high standards of professionalism, risk management, ethics and teamwork that have been the hallmark of Stephen's leadership as well as his passion and commitment to the Group, its people and customers.

Of the annual bonus earned, 25% has been paid in cash, with the other 75% deferred under the DSBP, which will vest in equal tranches after one, two and three years in March 2018, 2019 and 2020. The bonus outcome for each Executive Director is summarised in the table below:

Performance Share Plan

No PSP awards vested in 2016.

Scheme interests awarded during the financial year

Deferred Share Bonus Plan awards

Awards were made under the DSBP on 9 March 2016 in respect of 50% of the 2015 annual bonus. These are not subject to any further performance conditions.

Performance Share Plan awards

PSP awards were granted to the Executive Directors on 9 March 2016. To the extent that these vest following the end of the performance period, the awards will be subject to a two-year holding period.

The 2016 PSP awards vest subject to the achievement of a balanced scorecard of measures, as set out in the table below:

TSR for the 2016 PSP awards will be measured relative to a group of selected peers as set out in the table below.

The risk management measure will include an assessment of risk and compliance factors by the Committee at the time of vesting, and which include: Board risk appetite metrics, material regulatory breaches, and completion of actions arising from regulatory/audit/control effectiveness reviews, regulatory change programmes and customer complaints.

Recruitment awards

Upon recruitment, Steve Pateman received awards over shares in respect of remuneration forfeited on leaving his previous employment. These awards are not subject to performance conditions, however, they will only vest if he remains in employment. The awards are subject to malus and clawback provisions. Full details of Steve's joining arrangements are provided on page 79 of the Annual Report and Accounts for the year ended 31 December 2015.

Payments to past Directors

There were no payments made to past Directors during 2016.

Payments for loss of office

Tom Wood resigned as a Director of Shawbrook Group plc with effect from 30 June 2016 and his employment with the Group ended on this date. Remuneration arrangements in respect of his departure were determined by the Remuneration Committee in line with the Shawbrook Directors' Remuneration Policy approved by shareholders in June 2016.

Tom Wood's salary, pension and benefits were paid until 30 June 2016. He has received an amount of £228,437.50, less any necessary withholdings for income tax or national insurance contributions, being a sum equal to the value of his salary and employer pension contributions for a period of 6 months in lieu of his contractual notice provision of 12 months. Tom Wood will continue to be provided with private medical healthcare until 30 June 2017.

Tom Wood's unvested awards under the Shawbrook DSBP will be released in accordance with the original timetable in March 2017, March 2018 and March 2019 and remain subject to malus and, where applicable, clawback provisions. He remains entitled to two outstanding deferred bonus cash awards of £16,667 relating to the 2014 performance year, which will be released in accordance with the original timetable in March 2017 and March 2018.

Tom Wood will retain his outstanding 2016 award under the Shawbrook PSP and this will be subject to time pro-rating to 31 December 2016. The original performance conditions will continue to apply to this award. This award will vest on the original vesting date in March 2019 to the extent that the performance conditions are met. This award will remain subject to malus and, where applicable, clawback provisions. Tom Wood will not receive any bonus in respect of 2016.

Statement of Directors' shareholding and share interests

As set out in the Remuneration Policy table, Executive Directors are expected to build and maintain, within five years, a shareholding in the Group equivalent to at least 200% of salary. Until this is achieved, Executive Directors must retain at least 50% of shares acquired on vesting of PSP awards (net of tax).

Unvested shares, including shares under the DSBP, are not taken into account when assessing achievement against the shareholding requirement.

Interests in shares

The table below summarises the shareholdings as at 31 December 2016, and achievement against the shareholding requirements, of the Executive Directors.

Scheme interests

The table below summarises the scheme interests of the Executive Directors as at 31 December 2016.

The table below summarises the shareholdings of Robin Ashton as at 31 December 2016. The other Non-Executive Directors have not been included in the table as they currently hold no shares in the Group.

Change in remuneration of the CEO compared to the wider employee population

The table below sets out the increase in salary, benefits (excluding pension) and bonus of the CEO compared to that of the wider employee population.

Historical TSR performance and CEO remuneration outcomes

The Remuneration Committee considers the FTSE 250 to provide the most relevant comparison as Shawbrook is currently a constituent of this index when comparing TSR performance.

The table below summarises the single total figure of remuneration and annual bonus payout as a percentage of maximum for the CEO for the period used above. Please note that in future years, once the first tranche of PSP awards have vested, the table will also include PSP vesting as a percentage of maximum.

Relative importance of spend on pay

The table below illustrates the total staff costs and dividends paid to shareholders over the relevant financial year and immediately preceding financial year.

External appointments for Executive Directors

Executive Directors are permitted to hold external board appointments. External appointments (and the treatment of any related fees) are subject to prior approval of the Board.

Stephen Johnson is a Director of Latchglen Limited, but does not receive any fees in respect of this appointment. At the time of this report, Steve Pateman did not have any external appointments.

Implementation of the Remuneration Policy for 2017

The Remuneration Policy will be implemented in 2017 in line with the Directors' Remuneration Policy as set out in the Annual Report and Accounts for the year ended 2015, which is available on the Group's website (www.shawbrook.co.uk).

Salary

The Committee determined that there would be no change to the salaries of Steve Pateman and Stephen Johnson as it was decided that the salary increase budget should be targeted at the wider employee base. The salaries effective from 1 January 2017 are set out below. The table also includes the 2017 salary for Dylan Minto who was appointed Chief Financial Officer and Executive Director on 6 February 2017.

Pension

In line with the Remuneration Policy, the CEO receives a pension allowance of 35% of salary. Other Executive Directors receive an allowance of 15% of salary.

Annual bonus

The maximum annual bonus opportunity remains unchanged at 100% of salary for Executive Directors, with 50% of any bonus earned subject to deferral under the DSBP.

For 2017, the annual bonus will be based on:

The overall weightings applicable to financial, non-financial and individual measures for the 2017 annual bonus structure remain unchanged against 2016.

The customer and employee measures used in 2016 have been combined for 2017 and the underlying metrics have been updated to include a wider range of key goals for Shawbrook, including overall customer satisfaction as well as employee engagement, talent management, diversity and inclusion. This will include an assessment of the Group's progress towards its commitments under the HM Treasury's Women in Finance Charter.

For each Executive Director, individual performance will continue to be assessed against a personal scorecard of financial and non-financial metrics (including financial, strategic, risk, customer, and people measures).

The Remuneration Committee retains discretion to reduce the formulaic outcome (including to zero) where the outcome is not reflective of the overall performance of the Group or as a result of the risk adjustment process.

The 2017 bonus targets are considered to be commercially sensitive and have therefore not been disclosed at this time. Performance against these targets will be provided in next year's Directors' Remuneration Report.

Deferred Share Bonus Plan

For DSBP awards granted in 2017 onwards, the clawback provisions have been strengthened such that the Committee will, in exceptional circumstances, have the discretion to clawback the value of DSBP awards at any time prior to the third anniversary of the normal vesting date of the relevant award. Any operation of the clawback provisions would be effected in line with the "Malus and Clawback" section of the Directors' Remuneration Policy and would be disclosed to shareholders in the subsequent Directors' Remuneration Report.

Performance Share Plan

PSP grants in 2017 will be equal to 100% of salary for Executive Directors. Any awards that vest will be subject to a two-year holding period following the end of the three-year performance period, during which time Executive Directors will not be able to sell any shares that have vested.

The PSP awards vest subject to the achievement of a balanced scorecard of measures, as set out in the table below:

Total shareholder return will be measured relative to a revised group of peers as set out in the table below:

The earnings per share (EPS) growth target is based on the average annual growth rate over the performance period. The Committee set the targets taking into account the business plan, external forecasts and anticipated market conditions over the period, including the potential uncertainty arising from the UK's decision to leave the European Union. For the 2017 PSP awards, an EPS growth rate of 10% per annum is required for threshold vesting under this element, rising to full vesting for an EPS growth rate of 25% per annum. The Committee considers these targets to be appropriately stretching in the above context.

The 2016 EPS figure to be used as the base year for the calculation will be the Group's reported EPS excluding the charge relating to the controls breach in the Business Finance Division, being 29.4p. This is to ensure that the targets measure true business performance across the full performance period.

The 'customer (NPS)' measure used for 2016 has been replaced with a more rounded judgement based 'customer & employee' scorecard that will take into account overall customer satisfaction and employee engagement as well as diversity and inclusion and talent management. This will include an assessment of the Group's progress towards its commitments under the HM Treasury's Women in Finance Charter.

The risk and compliance factors which will be taken into consideration by the Committee at the time of vesting include: Board risk appetite metrics, material regulatory breaches, and completion of any actions arising from regulatory/audit/control effectiveness reviews, regulatory change programmes and customer complaints.

The Remuneration Committee has discretion to reduce the formulaic outcome (including to zero) where the outcome is not reflective of the overall performance of the Bank or as a result of the risk adjustment process. In exceptional circumstances, the Committee may vary any performance condition applicable to a PSP award in accordance with its terms if anything happens which causes the Committee to consider it appropriate, provided that it considers the amended condition to be fair, reasonable and not materially less challenging but for the event in question.

Non-Executive Director Fees

The current fees payable to Non-Executive Directors are as set out below.

As the role of Nomination Committee Chairman is performed by the Chairman of the Board, there is currently no additional fee for this role. The Chairman of the Board also receives no additional fee for his membership of the Remuneration Committee.

Statement of voting at the AGM

The Directors' Remuneration Report, including the Remuneration Policy, was put to shareholders for approval at the Group's 2016 AGM. The voting outcomes are set out below:

Approval

This report was reviewed and approved by the Board on 6 March 2017.

Robin Ashton

Remuneration Committee Chairman

Directors' Report

Corporate Governance Statement

The Strategic report and Corporate governance report found on pages 1 to 104 and, together with this report of which it forms part, fulfils section 414C of the Companies Act 2006 and the Financial Conduct Authority's Disclosure Rules and Transparency Rules requirements by including, by cross reference, details of the Group's financial risk management objectives and policies, business review, future prospects and environmental policy.

They consider that the Annual Report & Accounts for the year ended 31 December 2016 and consider that taken as a whole they are fair, balanced and understandable and provide the information necessary for shareholders and other stakeholders to assess the Group's position and performance, business model and strategy.

Compliance with the UK Corporate Governance Code

The Directors consider that the Group has been in compliance with the provisions set out in the Code throughout the year. 

Results for the year

The Group made a profit before tax for the year of £88.2 million (2015: £70.1 million) and a profit after tax of £64.8 million (2015: £58.5 million). The reconciliation of statutory results to underlying results is set out in the Basis of preparation on pages 2 and 3.

For the purposes of DTR 4.1.5R(2) and DTR 4.1.8 this Directors' Report and the Strategic report on pages 1 to 62 comprise the management report.

Dividends

The Board has recommended a maiden final dividend in respect of the year ended 31 December 2016 of 2.7p per share. Subject to shareholder approval at the forthcoming AGM, the dividend is expected to be paid on 30 June 2017 to shareholders on the register of members as at close of business on 2 June 2017. The Board continues to target an increase in the dividend payout ratio to 30% of 2017 post-tax profits subject to the continuing evolution of regulatory capital requirements, the rate at which the Group continues to grow, attractive investment opportunities that may arise and the optimal capital composition of the Group's balance sheet.

Directors

The names and biographical details of the current Directors are shown on pages 66 to 68. Particulars of their emoluments and interests in shares are given on pages 91 to 104. Changes to the composition of the Board since 1 January 2016 up to the date of this report are shown in the table below:

Appointment and retirement of Directors

The Group's Articles of Association sets out the rules for the appointment and replacement of Directors. In accordance with the recommendations of the Code, all Directors shall retire from office and may offer themselves for re-appointment at the Annual General Meeting. The Directors' powers are conferred on them by UK legislation and by the Group's Articles of Association.

Changes to the Group's Articles of Association must be approved by shareholders passing a special resolution and must comply with the provisions of the Companies Act 2006 and the FCA's Disclosure and Transparency Rules.

Directors' interests

The Directors' interests (and those of any Persons Closely Associated with them) in the share capital of the Group during the course of 2016 are set out on pages 91 to 104 of the Directors' Remuneration Report.

Directors' indemnities

The Group's Articles of Association provide that, subject to the provisions of the Companies Act 2006, the Group may indemnify any director or former director of the Group or any associated Group against any liability and may purchase and maintain for any director or former director of the Group or any associated Group insurance against any liability.

The Directors of the Group have entered into individual deeds of indemnity with the Group which constituted "qualifying third party indemnity provisions" for the purposes of the Companies Act 2006. The deeds were in force from 1 April 2015 or from the date of appointment for those Directors appointed after 1 April 2015 and are in force as at the date of this Directors' Report. The deeds remain in force for the duration of a Director's period of office and thereafter in respect of any claims made in accordance with the indemnity in respect of the matters arising during the director's period of office.

The Group has maintained appropriate Directors' and Officers' liability insurance in place throughout 2016.

Share capital

Shawbrook Group Plc is a public company limited by shares.

Details of the Group's issued share capital, together with details of the movements in the Group 's issued share capital during the year, are shown on page 151 in note 27.

The Group's share capital comprises one class of ordinary share with a nominal value of 0.01p each. At 31 December 2016, 250,500,000 ordinary shares were in issue. 500,000 ordinary shares were issued under a block listing in December 2015 and will be used for the award of shares pursuant to the Shawbrook Group Performance Share Plan. Of the 500,000 shares issued under the December 2015 block listing, 71,408 were used in 2016.

Restrictions on the transfer of shares

According to the articles of association and prevailing legislation there are no specific restrictions on the transfer of shares of the Group.

Rights attaching to shares

On a show of hands, each member has the right to one vote at general meetings of the Group. On a poll, each member would be entitled to one vote for every share held. The shares carry no rights to fixed income. No person has any special rights of control over the Group's share capital and all shares are fully paid.

New issues of share capital

Under section 551 of the Companies Act 2006, the Directors may allot equity securities only with the express authorisation of shareholders which may be given in general meeting, but which cannot last more than five years. Under section 561 of the Companies Act, the Board may also not allot shares for cash (otherwise than pursuant to an employee share scheme) without first making an offer to existing shareholders to allot such shares to them on the same or more favourable terms in proportion to their respective shareholdings, unless this requirement is waived by a special resolution of the shareholders.

Shareholder authority for the Group to allot shares up to an aggregate nominal amount of £835,000 for any purposes was granted at the 2016 Annual General Meeting. No shares were allotted pursuant to this authority during the year.

The Board considers it would be appropriate to seek a renewal of the shareholder approval for such authority at the forthcoming Annual General Meeting. Details of the resolution for such authority will be included in the Notice of the forthcoming Annual General Meeting.

Purchase of own shares

Under section 701 of the Companies Act 2006 a Group may make a market purchase of its own shares if the purchase has first been authorised by a resolution of the Group.

The Directors were granted the authority at the 2016 AGM to repurchase up to a maximum of 2,505,000 ordinary shares. No shares were purchased pursuant to this authority during the year. The Board considers it would be appropriate to seek a renewal of the shareholder approval for the authority to purchase shares of up to 10% of its issued share capital at the forthcoming Annual General Meeting.

Details of the resolution renewing the authority are included in the Notice of the forthcoming Annual General Meeting.

Substantial shareholdings

In accordance with the Disclosure and Transparency Rules, DTR 5, the Group as at 6 March 2017 (being the latest practicable date before publication of this report), has been notified of the following disclosable interests in its issued ordinary shares.

Interests as at 31 December 2016 were as follows:

Relationship with major shareholder

On Admission of its shares following the IPO in April 2015, the Group entered into a relationship agreement (the 'Relationship Agreement') with its major shareholder SOF General Partner (Guernsey) LP (the 'Major Shareholder'). Pursuant to the Relationship Agreement, the Major Shareholder has been granted the right to appoint up to two Directors to the Board so long as it holds a substantial interest in 20% of the Group's ordinary 0.01 pence shares; one Director if it holds a relevant interest in 10% of the Group's ordinary 0.01 pence shares. Despite the Major Shareholder holding 38.87% in the Group's shares (as indicated in the table above), the Major Shareholder currently only has one appointee at the Board. The Board confirms that, since the IPO, the Group has complied with the independence provisions included in the Relationship Agreement and that, so far as the Group is aware, the Major Shareholder and its associates have also complied with such provisions.

Disclosure of information under listing rule (LR) 9.8.4r

Additional information, where not already contained in the Directors' Report, required to be disclosed by Listing Rule 9.8.4R, where applicable to the Group, can be found in the following sections of the Annual Report:

Post-balance sheet events

On 3 March 2017, following share price movement, the Group announced that it was in discussions with Pollen Street Capital Limited (Pollen Street) and BC Partners LLP (BC Partners) (together the Consortium) regarding a possible offer to be made by a new company to be jointly owned by funds managed or advised by Pollen Street and BC Partners for the entire issued and to be issued share capital of Shawbrook Group plc (the Possible Offer).

Under the terms of the Possible Offer, shareholders would receive 330p per ordinary share in cash. In addition, shareholders would be entitled to retain the final maiden dividend in respect of the year ended 31 December 2016 referred to in this Annual Report & Accounts. As at the date of publication of this Annual Report & Accounts, the Board had issued a rejection of the Possible Offer. Discussions with the Consortium were ongoing and there was no certainty either that an offer would be made nor as to the terms of any offer, if made.

There have been no other significant events between 31 December 2016 and the date of approval of the Financial statements which would require a change to or additional disclosure in the Financial statements.

Change of control

The Group is not party to any significant contracts that are subject to change of control provisions in the event of a takeover bid.

There are no agreements between the Group and its Directors or employees providing compensation for loss of office or employment that occurs because of a takeover bid.

Significant contracts

Details of related party transactions are set out in note 32 to the Financial Statements. There are no contracts of significance in which a Director is interested.

Business activities

The Group's business activities, together with the factors likely to affect its future development and performance and its summarised financial position are set out on pages 8 to 39 of the Strategic report.

Branches, future developments and financial risk management objectives and policies

The Group operates in the United Kingdom and has one branch in Jersey. Information about future developments, internal control and financial risk management systems in relation to financial reporting and financial risk management objectives and policies in relation to the use of financial instruments can be found in the following sections of the Annual Report which are incorporated into this report by reference:

Future developments - please refer to the Strategic report (pages 8 to 39).

Internal control and financial risk management systems in relation to financial reporting- please refer to the Corporate governance report (page 75).

Financial risk management objectives and policies in relation to the use of financial instruments - please refer to the Risk management report (pages 40 to 56) and note 29 of the Financial Statements.

Research and development activities

During the ordinary course of business the Group develops new products and services within the business units.

Employees

The Group is committed to being an equal opportunities employer and opposes all forms of discrimination. Applications from people with disabilities will be considered fairly and if existing employees become disabled, every effort is made to retain them within the workforce wherever reasonable and practicable. The Group also endeavours to provide equal opportunities in the training, promotion and general career development of disabled employees.

The Group regularly provides employees with information of concern to them, which incorporates the Group's current performance and its future aims and strategies. The Group conducts an Annual Employee Survey and uses the results of this survey to improve performance in areas that are important to staff. A monthly newsletter providing business updates and background information on the Group is circulated to all staff.

Employee share schemes

All employees may participate in the Group's Save as You Earn (SAYE) Scheme. Full details of the Group's employee share schemes are set out on page 131 to 133.

Employee benefit trust

Equiniti Trust (Jersey) Limited is the trustee of the Shawbrook Group plc Employee Benefit Trust, an independent trust, which holds shares for the benefit of employees and former employees of the Group. Unless otherwise directed by the Group, the trustee has agreed to waive all rights to any dividends which may at any time be payable on any shares held by the trust. The trustee has agreed to satisfy a number of awards under the employee share plans. As part of these arrangements the Group funds the trust, from time to time, to enable the trustee to acquire shares to satisfy these awards, details of which are set out in note 27 on pages 151 and 152 of the Financial Statements.

Emissions reporting

Details on performance can be found on page 58 of the Strategic report.

Slavery and human trafficking

In 2016, the Group took the following steps to ensure slavery and human trafficking did not occur within the organisation or supply chain:

· identifying and addressing risks: the Group has updated its processes for evaluating prospective suppliers and reviewing existing suppliers to understand its suppliers' self-assessment of slavery and human trafficking issues;

· developing policy: the Group has and continues to update its compliance policies to include consideration of slavery and human trafficking issues (as applicable); and

· training: the Group has made available training to those of its staff who deal most with its suppliers. Development of an intranet resources page is also underway which staff will be able to access to learn about modern slavery and human trafficking.

Going concern

The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group has the resources to continue in business for the 12 months from the reporting date. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including the current state of the balance sheet, future projections of profitability, cash flows and capital resources and the longer term strategy of the business. The Group's capital and liquidity plans, including stress tests, have been reviewed by the Directors.

The Group's forecasts and projections show that it will be able to operate at adequate levels of both liquidity and capital for the 12 months from the reporting date, including a range of stressed scenarios, the availability of alternative sources of capital if required and appropriate management actions.

After making due enquiries, the Directors believe that the Group has sufficient resources to continue its activities for the twelve months from the reporting date and to continue its expansion, and the Group has sufficient capital to enable it to continue to meet its regulatory capital requirements as set out by the Prudential Regulation Authority.

Fair, balanced and understandable

The Directors are satisfied that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable, and provide the information necessary for members and other stakeholders to assess the Group's position and performance, strategy and business model.

Details of the governance procedures which have been embedded to support this can be found in the Audit Committee Report.

Disclosure of information to the Auditor

The Directors confirm that:

a) so far as each of the Directors is aware, there is no relevant audit information of which the auditor is unaware; and

b) the Directors have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of the Companies Act 2006.

Auditor

Resolutions to reappoint KPMG LLP as the Group's auditor and to give the directors the authority to determine the auditor's remuneration will be proposed at the forthcoming Annual General Meeting.

Annual General Meeting

Shawbrook Group plc's second Annual General Meeting will be held at Instinctif Partners, 65 Gresham Street, London EC2V 7NQ on 6 June 2017 at 10:00a.m. 

By order of the Board

Steve Pateman

Chief Executive Officer

Statement of Directors' responsibilities in respect of the Annual Report & Accounts

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

Company law requires the directors to prepare Group and Parent Company Financial Statements for each financial year. Under that law they are required to prepare the Group Financial Statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Group financial statements on the same basis. 

Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company Financial Statements, the directors are required to: 

· select suitable accounting policies and then apply them consistently; 

· make judgements and estimates that are reasonable and prudent; 

· state whether they have been prepared in accordance with IFRSs as adopted by the EU; and 

· prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. 

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. 

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

Responsibility statement of the Directors in respect of the Annual Financial Report

The Directors as at the date of this statement whose names and functions are set out on pages 66 to 68 confirm that to the best of their knowledge:

· the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole; and

· the Strategic Report and Directors' Report includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

This responsibility statement was approved by the Board of Directors and is signed on its behalf by:

Daniel Rushbrook

Company Secretary

Financial Statements

Consolidated Statement of Profit and Loss and Other Comprehensive Income

The notes on pages 122 to 179 are an integral part of these financial statements.

Consolidated and Company Statements of Financial Position

The notes on pages 122 to 179 are an integral part of these financial statements.

These financial statements were approved by the Board of Directors on 6 March 2017 and were signed on its behalf by:

Steve Pateman Dylan Minto

Chief Executive Officer Chief Financial Officer

Registered number 07240248

Consolidated Statement of Changes in Equity