OneSavings Bank plc - Interim report for the six months ended 30 June 2022

LEI: 213800WTQKOQI8ELD692

*OneSavings Bank plc*
*Interim report for the six months ended 30 June 2022*

OneSavings Bank plc (OSB or the Group), the specialist lending and retail savings group, announces today its results for the six months ended 30 June 2022.

*OSB is a wholly-owned subsidiary of OSB GROUP PLC (OSBG). OSBG has prepared its own interim report for the period ended 30 June 2022 which includes the results **of** OSB and its subsidiaries (the Group) and was published on 11 August 2022. OSB is also required to publish an interim report due to its listed debt. *

*Following the Combination with Charter Court Financial Services Group plc (CCFS) on 4 October 2019, this press release includes results on an underlying basis, in addition to the statutory basis, which Management believe provide a more consistent basis for comparing the Group’s results between financial periods**. Underlying results exclude exceptional items, integration costs and other acquisition-related items (see the reconciliation in the Financial review).*

*Enquiries:*
*OneSavings Bank plc*                                *Brunswick Group *
Alastair Pate, Investor Relations                 Robin Wrench/Simone Selzer
t: 01634 838973                                t: 020 7404 5959
*About OneSavings Bank plc (OSB)*
OSB began trading as a bank on 1 February 2011 and was admitted to the main market of the London Stock Exchange in June 2014 (OSB.L). OSB joined the FTSE 250 index in June 2015. On 4 October 2019, OSB acquired Charter Court Financial Services Group plc (CCFS) and its subsidiary businesses. On 30 November 2020, OSB GROUP PLC became the listed entity and holding company of the OSB Group. The Group provides specialist lending and retail savings and is authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority. The Group reports under two segments, OneSavings Bank and Charter Court Financial Services.

*OneSavings Bank*

OSB primarily targets market sub-sectors that offer high growth potential and attractive risk-adjusted returns in which it can take a leading position and where it has established expertise, platforms and capabilities. These include private rented sector Buy-to-Let, commercial and semi-commercial mortgages, residential development finance, bespoke and specialist residential lending, secured funding lines and asset finance.

OSB originates mortgages organically via specialist brokers and independent financial advisers through its specialist brands including Kent Reliance for Intermediaries and InterBay Commercial. It is differentiated through its use of highly skilled, bespoke underwriting and efficient operating model.

OSB is predominantly funded by retail savings originated through the long-established Kent Reliance name, which includes online and postal channels as well as a network of branches in the South East of England. Diversification of funding is currently provided by securitisation programmes and the Bank of England’s Term Funding Scheme with additional incentives for SMEs.

*Charter Court Financial Services Group (CCFS)*

CCFS focuses on providing Buy-to-Let and specialist residential mortgages, mortgage servicing, administration and retail savings products. It operates through its brands: Precise Mortgages and Charter Savings Bank.

It is differentiated through risk management expertise and best-of-breed automated technology and systems, ensuring efficient processing, strong credit and collateral risk control and speed of product development and innovation. These factors have enabled strong balance sheet growth whilst maintaining high credit quality mortgage assets.

CCFS is predominantly funded by retail savings originated through its Charter Savings Bank brand. Diversification of funding is currently provided by securitisation programmes and the Bank of England’s Term Funding Scheme with additional incentives for SMEs.

*Important disclaimer*

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

Accordingly, no reliance may be placed on any forward-looking statement. Neither OSB, nor any of its directors, officers or employees provides any representation, warranty or assurance that any of these statements or forecasts will come to pass or that any forecast results will be achieved. Any forward-looking statements made in this document speak only as of the date they are made and it should not be assumed that they have been revised or updated in the light of new information of future events. Except as required by the Prudential Regulation Authority, the Financial Conduct Authority, the London Stock Exchange PLC or applicable law, OSB expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this document to reflect any change in OSB’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. For additional information on possible risks to OSB’s business, please see the Risk review section in the OSB 2021 Annual Report and Accounts. Copies of this are available from OSB.

Nothing in this document and any subsequent discussion constitutes or forms part of a public offer under any applicable law or an offer or the solicitation of an offer to purchase or sell any securities or financial instruments. Nor does it constitute advice or a recommendation with respect to such securities or financial instruments, or any invitation or inducement to engage in investment activity under section 21 of the Financial Services and Markets Act 2000. Past performance cannot be relied on as a guide to future performance. Statements about historical performance must not be construed to indicate that future performance, share price or results in any future period will necessarily match or exceed those of any prior period. Nothing in this document is intended to be, or should be construed as, a profit forecast or estimate for any period.

Regarding information provided by third parties, neither OSB nor any of its directors, officers or employees explicitly or implicitly guarantees that such information is exact, accurate, comprehensive or complete, nor are they obliged to keep them updated, nor to correct them in the case that any deficiency, error or omission is detected. Moreover, in reproducing such information by any means, OSB may introduce any changes it deems suitable, may omit partially or completely any of the elements of this document, and in case of any deviation between such a version and this document, OSB assumes no liability for any discrepancy.

Liability arising from anything in this document shall be governed by English law, and neither the Company nor any of its affiliates, advisors or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. Nothing in this document shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.

Certain figures contained in this document, including financial information, may have been subject to rounding adjustments and foreign exchange conversions. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this document may not conform exactly to the total figure given.

*Non-IFRS performance measures *           
OSB believes that the non-IFRS performance measures included in this document provide a more consistent basis for comparing the business' performance between financial periods, and provide more detail concerning the elements of performance which the Group is most directly able to influence or are relevant for an assessment of the Group. They also reflect an important aspect of the way in which operating targets are defined and performance is monitored by the Board. However, any non-IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well. For further details, refer to Alternative performance measures section in the OSB 2021 Annual Report and Accounts. Copies of this are available on request from OSB.

*Key Performance Indicators - statutory*

*£2.3bn*

*Gross new organic lending down 7%*
*H1 2021: **£**2.5bn*

*£21.8bn *

*Net loan book up 3%*
*FY 2021: £21.1bn**£268.1**m*
*Profit before tax up 21%*
*H1 20**21**: £**221.9m*

*280bps*
*Net interest margin*^*1** up 44bps*
*FY 2021: £21.1bn**25%*
*Cost to income ratio*^*2 **improved 3pps*
*H1 2021**: **28%*
*1bp*
*Loan loss ratio**^*3*** up 16bps*
*H1 20**21**: **-15bps**73bps*
*Management expense ratio*^*4** up 3bps*
*H1 2021**: **70bps* *21%*
*Return on equity*^*5** improved **2**pps*
*H1 2021**: **19%**18.7%*
*CET1 *^*6 **remained strong*
*FY 2021: 19.4%*

*3 months + in arrears*^*7** stable*
*OSB 1.3%, CCFS 0**.8%*
*FY 2021: OSB 1.**4**%, CCFS 0.**7**%**Customer NPS*^*8** strong*
*OSB +69, CCFS +70*
*H1 2021**: **OSB +68, CCFS +70*

 

1. Net interest income as a percentage of a 7 point average of interest earning assets, annualised on an actual days basis
2. Administrative expenses as a percentage of total income
3. Impairment losses as a percentage of a 7 point average of gross loans and advances, annualised
4. Administrative expenses as a percentage of 7 point average of total assets, annualised
5. Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, as a percentage of a 7 point average of shareholders’ equity (excluding £150m of AT1 securities for the first half of 2022 and £60m of AT1 securities for the first half of 2021), annualised
6. Capital metrics disclosed in this report are on an individual consolidation basis (OSB solo) which includes the Company and subsidiaries except for the offshore servicing entity OSBI, SPVs relating to securitisations and the CCFS entities acquired in October 2019.
7. Portfolio arrears rate of accounts for which there are missing or overdue payments by more than three months as a percentage of gross loans
8. OSB customer Net Promoter Score relates to Kent Reliance savings customers and CCFS customer NPS relates to Charter Savings Bank customers. It is calculated based on customer responses to the question of whether they would recommend the Group’s products to a friend. The responses provide a score between -100 and +100*Key Performance Indicators - underlying*

Underlying key performance indicators for the six months to 30 June 2022 and 30 June 2021 reflect results for the combined Group, excluding exceptional items, integration costs and other acquisition-related items (see Reconciliation of statutory to underlying results in Financial review).

*£21.6bn *
*Net loan book up 3%*
*FY 2021: £20.9bn*
*£294.1**m*
*Profit before tax up 16%*
*H1 20**21**:* *£**252.8m**302bps*
*Net interest margin*^*1** up 34bps*
*H1 2021**: **268bps* *23%*
*Cost to income r**atio*^*2** improved 2ppt**H1 2021**: **25%**2bps*
*Loan loss ratio*^*3 **up 17bps*
*H1 20**21**:** -15bps*

*72bps*
*Management expense ratio*^*4** up 3bps*
*H1 2021: 69bps **24%*
*Return on equity*^*5** unchanged*
*H1 2021**: **24%*
 

For definitions of key ratios please see footnotes in statutory KPIs above.

*CEO Report*

I am delighted with the excellent results delivered by the Group in the first six months of 2022, demonstrating the strength of our strategy and our business model. We grew our lending at attractive margins and the strong credit performance of our borrowers was evidence of our underwriting expertise and rigorous application of our lending criteria.

*Excellent results in the first half *
The Group delivered a record underlying pre-tax profit of £294.1m for the first six months of 2022, up 16% from £252.8m in the prior period. On a statutory basis, profit before tax increased to £268.1m.

The underlying and statutory net interest margins improved to 302bps and 280bps respectively, benefitting from base rate rises (H1 2021: 268bps and 236bps, respectively).

The underlying management expense ratio increased to 72bps reflecting the expected gradual return to pre-pandemic spending level (H1 2021: 69bps), the statutory management expense ratio was 73bps (30 June 2021: 70bps). However, the particularly strong income had a favourable impact on the cost to income ratio which improved to 23% and 25% on an underlying and statutory basis respectively for the first six months of 2022 (H1 2021: 25% and 28%, respectively).

The credit performance of the Group’s loan book remained strong in the first six months of 2022, reflecting our underwriting expertise and a robust rental market. We are cognisant of the impact that rising, cost of living and increasing interest rates may have on some of our borrowers. However, a large majority of our customers have chosen fixed rate mortgages and are therefore entering the uncertain economic environment with clarity over their mortgage repayments.

Finally, I am particularly proud of the consistent and class-leading returns we deliver with an underlying return on equity of 24% for the first half, unchanged from the prior period which benefitted from a £15.1m provision release. Statutory return on equity was 21% (H1 2021: 19%).

*Our lending franchise*
Strong demand for the Group’s lending products supported underlying and statutory net loan book growth of 3% in the first six months of the year to £21.6bn and £21.8bn, respectively (31 December 2021: £20.9bn and £21.1bn). Organic originations of £2.3bn were down 7% from £2.5bn in the first half of 2021, however the prior period benefitted from higher purchase activity due to the stamp duty holiday.

Applications grew strongly during the first half as the Group concentrated on its core business sub-segments: Buy-to-Let, Residential, Commercial and semi-Commercial, and we have a record pipeline of new business. Applications for our Buy-to-Let mortgages increased throughout the period as landlords reported improving levels of tenant demand in the private rented sector which supported rising rents.^1 In addition, we have seen good demand for our Commercial and semi-Commercial products and we relaunched our Residential mortgage proposition in the first half of 2022, building on the popularity of our complex prime and shared ownership mortgages.

The Group continues its planning to achieve goals consistent with its membership of the Net Zero Banking Alliance. I am delighted that we have recently introduced the first of a range of mortgage products targeting landlords wishing to improve the energy efficiency and EPC rating of their properties. The new product includes funding for refurbishment where landlords wish to optimise the capital value, desirability and rental yields of their estate.

*Credit and risk management*
Our loan book continued to demonstrate consistently strong credit performance with balances over three months in arrears remaining broadly stable at just 1.3% and 0.8% of the loan book at the end of June for OSB and CCFS, respectively (31 December 2021: 1.4% and 0.7%). The weighted average LTV of the Group’s loan book reduced to 61% as at 30 June 2022 from 62% at the end of 2021, supported by house price appreciation. The weighted average LTV of new business written by the Group increased marginally to 71% from 69% in the prior period.

The Group recorded an impairment charge of £2.0m on an underlying basis which represented an underlying loan loss ratio of 2bps for the first six months of 2022 (H1 2021: credit of £15.1m and -15bps, respectively). The impairment charge reflects an improved outlook as pandemic related concerns reduced and house prices outperformed, offset by a 10% increase in the downside weighting to address growing cost of living concerns. The statutory impairment was £1.6m equivalent to a loan loss ratio of 1bp (H1 2021: -15bps).

Our Internal Ratings-Based (IRB) models continued to be integrated into key risk and capital management processes and are already informing our strategic decision making and business planning activities. The anticipated delay in Basel 3.1 implementation and extension to the Group’s MREL^2 deadlines provided us with the opportunity to enhance our level of end state compliance prior to submitting our module 1 application. We continue to engage with the PRA to agree a submission date.

We have entered the final quarter of our three-year integration programme and we are progressing the closing phase of the remaining projects. We delivered annualised run rate savings of £24.6m by 30 June 2022, marginally in excess of our run-rate pledge of £22m by the end of the third anniversary of the Combination. Integration costs to date are also lower than originally expected at £23.3m. The next phase of technology investment will focus on improving efficiency in our business operations, an enhanced user experience for our customers and further streamlining the interaction with our broker community.

*Multi-channel funding model *
Our savings propositions continued to be popular, and in the first six months of 2022, we opened over 72,000 new savings accounts and grew the retail deposit book to £17.9bn (31 December 2021: £17.5bn).

Under our two savings brands, Kent Reliance and Charter Savings Bank, our focus is on combining excellent customer service with transparent and fair savings products. This was reflected in the strong Net Promoter Scores for the first half of the year of +69 for Kent Reliance and +70 for Charter Savings Bank, as well as high retention rates; 95% for maturing fixed rate bonds and ISAs at Kent Reliance and 89% for Charter Savings Bank.

We complement the funding that comes from retail deposits with our expertise in the wholesale funding markets and in August 2022 we completed a fully retained c. £1.3bn securitisation of buy-to-let mortgages under our Canterbury programme. Securitisations provide optionality of funding and the opportunity to increase efficiency in our drawings from the Bank of England funding schemes through the use of retained AAA bonds. As at 30 June 2022, the drawings under the Term Funding Scheme for SMEs remained at £4.2bn (31 December 2021: £4.2bn).

*Capital management*
The OSB solo capital position, which reflects the impact of the OSBG share repurchase programme, remained strong with a CET1 ratio of 18.7% as at 30 June 2022 (31 December 2021: 19.4%).

The £100m share repurchase programme announced by OSBG has progressed well. The OSB solo capital position reflects a deduction of £100m in respect of the programme announced in March. This will reduce over time as dividends are received from CCFS in relation to the programme. To date, dividends received from CCFS in connection with the programme are £13.8m as at 30 June 2022. A further £26.2m of dividend receipts are expected from CCFS in connection with the programme, which is expected to reduce the final impact on completion of the programme to £60m at the OSB solo capital level.

Dividends paid by the Group in the six months to 30 June 2022 were £139.3m of which £44.5m were additional dividends to fund OSBG’s share repurchase programme.

*Looking forward*
Our high quality secured lending book continues to perform well and we have not seen any systemic signs of distress or early indicators of future concerns amongst our borrowers. However, we are cognisant that the macroeconomic outlook for the UK economy remains uncertain. The pandemic related issues and the benefit of house price appreciation have been replaced by growing cost of living concerns, rising interest rates and geopolitical uncertainty. The strong foundations of our business with its secured balance sheet, strong capital position and proven operational resilience position us well to respond to opportunities and challenges as they arise.

We have a record pipeline of new business and we are seeing robust demand for our mortgages. Tenant demand in the private rented sector remains positive, especially amongst our target multi-property portfolio landlords and we continue to see strong interest in our other core business sub-segments.

We have improved our full year underlying net interest margin guidance and now expect it to be broadly flat to the first half. We remain confident in delivering underlying net loan book growth of c. 10% for 2022 based on current pipeline and applications. We continue to expect the underlying cost to income ratio for full year 2022 to increase marginally from 2021.

*Andy Golding*

*Chief Executive Officer*

*12 August 2022*

1. BVA BDRC, Landlords Panel, Q2 2022
2. Minimum requirement for own funds and eligible liabilities

*Mortgage market *

The strong performance in the residential property market was sustained into 2022 and demand for purchase and remortgage finance remained high. Mortgage lenders continued to develop their product offerings to meet this demand, progressively expanding underwriting criteria, including the reintroduction of lending at higher LTVs and increasing the number of mortgage products available to borrowers. Data from the mortgage sourcing provider, Twenty7Tec, demonstrated that the number of mortgage products in the market peaked in March 2022, with product availability reaching over ninety percent of the pre-pandemic maximum.^1 New buyer enquiries grew for eight consecutive months to April 2022^2, despite the average UK house price increasing by 12.8% in the year to May, according to the ONS.^3

The Bank of England implemented five successive increases in the base rate, from 0.1% in December 2021 to 1.25% in June 2022 in an effort to lower inflation towards its 2% target. As a result, mortgage rates were on an upward trajectory in the first six months of 2022 reflecting the base rate rises as well as volatile swap spreads. The Bank of England reported that quoted interest rates on new mortgage lending were up across all loan to value categories between January and April 2022^4 with the average two-year fixed rate on new mortgage lending increasing by 0.73 percentage points to 2.35% over this period.^5

Overall, UK gross mortgage lending in the first six months of 2022 reduced by 10% to £151.4bn from £168.5bn in the same period of 2021.^6

In the private rented sector, conditions were particularly buoyant, and research, conducted by BVA BDRC on behalf of the Group, reported consistently high levels of tenant demand throughout the first quarter of the year.^7 This strong demand was matched by increasing rents, with the annual rental growth at a 14-year high of 11% in the first quarter according to Zoopla.^8 Buy-to-Let gross advances reached £21.9bn to May 2022, an increase of 15% compared with £19.1bn in the same period in 2021 with purchases reducing to 31% of total lending from 40% in the prior period which benefitted from the stamp duty holiday.^9

1. Twenty7Tec, Monthly Mortgage Market Report, May 2022
2. RICS, Residential Market Survey, May 2022
3. ONS, UK House Price Index, May 2022
4. Bank of England, Monetary Policy Report, May 2022
5. UK Finance, Quoted new lending interest rates, UK (BOE), May 2022
6. UK Finance, New mortgage lending by purpose of loan, UK (BOE), July 2022
7. BVA BDRC, Landlords Panel, Q1 2022
8. https://www.zoopla.co.uk/press/releases/average-uk-rents-reach-995-taking-rental-growth-to-highs-not-seen-since-the-global-financial-crisis/
9. UK Finance, BTL mortgages outstanding and gross lending, June 2022

*Segment review*

The Group reports its lending business under two segments: OneSavings Bank and Charter Court Financial Services.

*OneSavings Bank (OSB) segment*

The following tables present OSB’s contribution to profit and loans and advances to customers on a statutory basis:

*Contribution to profit** for the period*
*BTL/SME*
*Residential*

*Total*
*For the six months ended 30 June 2022* *£m* *£m* *£m*
Net interest income *175.7* *42.9* *218.6*
Other income *3.4* *0.7* *4.1*
Total income *179.1* *43.6* *222.7*
Impairment of financial assets *(2.6)* *0.7* *(1.9)*
Contribution to profit *176.5* *44.3* *220.8*      
*For the six months ended 30 June 2021*      
Net interest income 148.0 40.6 188.6
Other income 4.0 1.0 5.0
Total income 152.0 41.6 193.6
Impairment of financial assets 2.7 2.4 5.1
Contribution to profit 154.7 44.0 198.7
*Loans and advances to customers*             *BTL/SME* *Residential* *Total*
*As at 30 June 2022* *£m* *£m* *£m*
Gross loans and advances to customers *10,151.1* *2,167.5* *12,318.6*
Expected credit losses *(74.4)* *(8.7)* *(83.1)*
Net loans and advances to customers *10,076.7* *2,158.8* *12,235.5*      
Risk-weighted assets

*4,732.1* *958.6* *5,690.7*      
*As at 31 December 2021*      
Gross loans and advances to customers 9,936.1 2,121.2 12,057.3
Expected credit losses (72.0) (10.2) (82.2)
Net loans and advances to customers 9,864.1 2,111.0 11,975.1      
Risk-weighted assets 4,614.1 957.6 5,571.7

*OSB Buy-to-Let/SME sub-segment*

*Loans and advances to customers*
*30-Jun-2022*
*£m* *31-Dec-2021*
*£m*
Buy-to-Let *9,099.3* 8,867.7
Commercial *789.5* 794.4
Residential development *132.9* 120.7
Funding lines *129.4* 153.3
*Gross loans and advances to customers* *10,151.1* 9,936.1
Expected credit losses *(74.4)* (72.0)
*Net loans and advances to customers* *10,076.7* 9,864.1

This sub-segment comprises Buy-to-Let mortgages secured on residential property held for investment purposes by experienced and professional landlords, commercial mortgages secured on commercial and semi-commercial properties held for investment purposes or for owner-occupation, residential development finance to small and medium-sized developers, secured funding lines to other lenders and asset finance.

The Buy-to-Let/SME net loan book increased by 2% to £10,076.7m in the first six months of 2022 supported by organic originations of £832.3m (H1 2021: £963.5m).

Buy-to-Let/SME net interest income increased by 19% to £175.7m from £148.0m in the prior period, primarily due to growth in the loan book and the beneficial impact of base rate rises. The Group also recognised a £3.9m net EIR reset gain in the period (H1 2021: £nil) due to updated prepayment assumptions based on observed customer behaviour. This segment benefitted from £3.4m of other income relating to gains on the Group’s hedging activities (H1 2021: £4.0m gain) and recorded an impairment charge of £2.6m (H1 2021: £2.7m credit). The impairment charge was largely due to provisions raised against two specific accounts, growth in Buy-to-Let lending and the updated forward-looking macroeconomic scenarios and weightings, partially offset by house price appreciation in the period. Overall, the Buy-to-Let/SME segment made a contribution to profit of £176.5m, up 14% compared with £154.7m in the first six months of 2021.

The Group remained highly focused on the risk assessment of new lending, as demonstrated by the average LTV for Buy-to-Let/SME originations of 74% (H1 2021: 73%). The average book LTV in the Buy-to-Let/SME segment reduced to 63% (31 December 2021: 65%) benefitting from house price appreciation with only 2.5% of loans exceeding 90% LTV (31 December 2021: 2.5%).

*Buy-to-Let*
The Buy-to-Let gross loan book increased by 3% to £9,099.3m at the end of June 2022 (31 December 2021: £8,867.7m) largely benefitting from strong refinance activity. Originations in this segment were £673.2m in the first half of 2022, down from £799.7m in the prior period.

This year marks the fifth anniversary of the introduction of the PRA underwriting standards for Buy-to-Let mortgages which triggered a shift towards five year fixed rate products. The early wave of mortgages taken post that introduction have been reaching the end of their initial term resulting in an increase in refinance activity. The proportion of Kent Reliance Buy-to-Let completions represented by remortgages increased to 60% from 50% in the first half of 2021 with purchases reducing as the prior period benefitted from a spike in purchase activity due to the stamp duty holiday. Five-year fixed rate mortgages represented 67% of Kent Reliance completions (H1 2021: 59%).

Professional, multi-property landlords continued to add to their portfolios and optimise their businesses from a tax perspective and represented 83% of completions by value for the Kent Reliance brand (H1 2021: 81%) and 76% of mortgage applications in Kent Reliance came from landlords borrowing via a limited company (H1 2021: 73%).

Research conducted by BVA BDRC on behalf of the Group showed that the proportion of landlords planning to purchase new properties has fallen slightly since last year. However, of those planning to acquire more properties, the proportion planning to do so within a limited company ownership structure has increased, especially amongst landlords with portfolios of six or more properties. This signals the continued professionalisation of the Buy-to-Let market sub-segment and the Group is well-positioned to serve this growing audience.

In addition, OSB continued to retain customers under its Choices retention programme, with 62% of existing borrowers choosing a new product with us within three months of their initial rate ending (H1 2021: 76%).

The weighted average loan to value (LTV) of the Buy-to-Let book as at 30 June 2022 was 63% with an average loan size of £250k (31 December 2021: 64% and £250k). The weighted average interest coverage ratio for Buy-to-Let originations during the first six months of 2022 was 211% (H1 2021: 197%).

*Commercial*
Through its InterBay brand, the Group lends to borrowers investing in commercial and semi-commercial property, reported in the Commercial total, and more complex Buy-to-Let properties, reported in the Buy-to-Let total. We have seen increased levels of interest and applications throughout the period as the Group launched a new product set under its InterBay brand. Organic originations increased to £72.0m in the period (H1 2021: £20.3m) supporting the gross loan book of £789.5m as at 30 June 2022 (31 December 2021: £794.4m).

The weighted average LTV of the commercial book remained low at 65% and the average loan size was £375k for the first six months of 2022 (31 December 2021: 69% and £380k).

InterBay Asset Finance, which predominantly targets UK SMEs and small corporates financing business-critical assets, performed strongly in the first half of 2022, with an increase in the average deal size and an improvement in customer credit covenants as businesses continued to recover from the pandemic. The gross carrying amount under finance leases was £141.3m as at 30 June 2022 (31 December 2021: £116.2m).

*Residential development*
Our Heritable residential development business provides development finance to small and medium-sized residential property developers. The preference is to fund house builders which operate outside central London and provide relatively affordable family housing, as opposed to complex city centre schemes where affordability and construction cost control can be more challenging. New applications represent repeat business from the team’s extensive existing relationships.

The residential development finance gross loan book at the end of June 2022 was £132.9m, with a further £172.9m committed (31 December 2021: £120.7m and £188.0m, respectively). Total approved limits were £491.2m, which exceeds drawn and committed funds due to the revolving nature of the facility where construction is phased and facilities are redrawn as sales on the initially developed properties occur (31 December 2021: £500.3m). The increased rates of sale experienced by Heritable’s developer customers continued in 2022, leading to high levels of loan repayments in the first half of the year.

At the end of June 2022, the business had commitments to finance the development of 2,099 residential units, the majority of which are houses located outside central London. Heritable continue to take an exacting approach to approving funding for new customers given the macroeconomic uncertainty.

*Funding lines*
OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, primarily secured against property-related mortgages. Total credit approved limits as at 30 June 2022 were £380.0m with total loans outstanding of £129.4m (31 December 2021: £450.0m and £153.3m, respectively). During the period, the Group maintained a cautious risk approach and closed four property-related funding lines and did not extend any new facilities, choosing to focus on servicing existing borrowers.

*OSB Residential sub-segment *

*Loans and advances to customers*
*30-Jun-2022*
*£m* *31-Dec-2021*
*£m*
First charge *1,971.2* 1,895.9
Second charge *196.3* 224.7
Funding lines *-* 0.6
*Gross loans and advances to customers* *2,167.5* 2,121.2
Expected credit losses *(8.7)* (10.2)
*Net loans and advances to customers* *2,158.8* 2,111.0

This sub-segment comprises lending to owner-occupiers, secured via first charge against a residential home and under the shared ownership scheme.

The Residential sub-segment net loan book grew by 2% to £2,158.8m as at 30 June 2022 (31 December 2021: £2,111.0m) with organic originations of £244.9m during the period (H1 2021: £299.4m).

Net interest income in the Residential sub-segment increased by 6% to £42.9m (H1 2021: £40.6m) due to growth in the loan book and the beneficial impact of base rate rises. The Group recognised a net EIR reset gain of £2.5m (H1 2021: £6.0m) due to updated prepayment assumptions based on observed customer behaviour. This segment also recorded other income of £0.7m (H1 2021: £1.0m) relating to hedging gains and an impairment credit of £0.7m (H1 2021: £2.4m credit), as the updated forward-looking macroeconomic scenarios and weightings were more than offset by a release of pandemic-related post model adjustments and strong house price appreciation. Overall, the contribution to profit from this segment was £44.3m broadly flat to £44.0m in the same period of 2021.

The average book LTV reduced to 46% (31 December 2021: 48%) benefitting from house price appreciation with only 0.6% of loans with LTVs exceeding 90% (31 December 2021: 0.8%). The average LTV of new residential origination in the first six months of 2022 increased to 61% (H1 2021: 48%) as a result of a smaller proportion of shared ownership originations than in the prior period which complete at lower LTVs and an increase in higher LTV owner occupied originations.

*First charge*
First charge mortgages are provided under the Kent Reliance brand, which largely serves prime credit quality borrowers with more complex circumstances. This includes high net worth individuals with multiple income sources and self-employed borrowers, as well as those buying a property in conjunction with a housing association under shared ownership schemes.

The first charge gross loan book increased 4% in the period to £1,971.2m from £1,895.9m at the end of 2021, as the Group relaunched its residential proposition under the Kent Reliance brand introducing a new range for complex prime borrowers.

*Second charge*
The OSB second charge loan book under Prestige Finance is in run-off with total gross loans of £196.3m as at 30 June 2022 (31 December 2021: £224.7m).

*Funding lines*
As at the end of June 2022, OSB provided no secured funding lines with the final exposure repaid in the period (31 December 2021: £0.6m).

*Charter Court Financial Services (CCFS) segment*
The following tables present the segment’s contribution to profit and loans and advances to customers on an underlying basis, excluding acquisition-related items and the reconciliation to the statutory results.

*Contribution to profit for the period*

*For the six months to 30 June 2022* *Buy-to-Let *
*£m* *Residential *
*£m* *Bridging*
*£m* *Second charge*
*£m* *Other*^*1*
*£m* *Total *
*underlying*
*£m* *Acquisition- related items*^*2*
*£m* *Total *
*statutory*
*£m*
Net interest income *102.4* *45.6* *2.1* *3.0* *(2.5)* *150.6* *(25.8)* * 124.8*
Other income *-* *-* *-* *-* *10.7* *10.7* *5.3* *16.0*
Total income *102.4* *45.6* *2.1* *3.0* *8.2* *161.3* *(20.5)* * 140.8*
Impairment of financial assets *(2.6)* *2.5* *(0.1)* *0.1* *-* *(0.1)* *0.4* * 0.3*
Contribution to profit *99.8* *48.1* *2.0* *3.1* *8.2* *161.2* *(20.1)* * 141.1*

*For the six months to 30 June 2021* Buy-to-Let
£m Residential
£m Bridging
£m Second charge
£m Other^1
£m Total
underlying
£m Acquisition- related
items^2
£m Total
statutory
£m  
Net interest income 67.0 37.7 3.0 3.4 (0.7) 110.4 (33.7) 76.7
Other income - - - - 12.4 12.4 7.3 19.7
Total income 67.0 37.7 3.0 3.4 11.7 122.8 (26.4) 96.4
Impairment of financial assets 6.7 1.8 1.2 0.3 - 10.0 (0.5 ) 9.5
Contribution to profit 73.7 39.5 4.2 3.7 11.7 132.8 (26.9) 105.9

1. Other relates to net interest income from acquired loan portfolios as well as gains on structured asset sales, fee income from third party mortgage servicing and gains or losses on the Group’s hedging activities.
2. For more details on acquisition-related adjustments, see Reconciliation of statutory to underlying results in the Financial review.

*Loans and advances to customers *

*As at 30 June 2022* *Buy-to-Let *
*£m* *Residential *
*£m* *Bridging*
*£m* *Second charge*
*£m* *Other*^*1*
*£m* *Total*
*underlying *
*£m* *Acquisition-related items*^*2*
*£m*

*Total statutory*
*£m*
Gross loans and advances to customers *6,748.4* *2,443.9* *83.8* *133.4* *17.1* *9,426.6* *116.1* *9,542.7*
Expected credit losses *(16.5)* *(2.6)* *(0.4)* *(0.2)* *-* *(19.7)* *0.7* *(19.0)*
Net loans and advances to customers *6,731.9* *2,441.3* *83.4* *133.2* *17.1* *9,406.9* *116.8* *9,523.7*                
Risk-weighted assets *2,708.0* *1,026.6* *41.4* *54.8* *6.3* *3,837.1* *112.5* *3,949.6*                
*As at 31 December 2021* Buy-to-Let
£m Residential
£m Bridging
£m Second charge
£m Other^1
£m Total
underlying
£m Acquisition-related items^2
£m

Total statutory
£m
Gross loans and advances to customers 6,301.9 2,451.8 56.3 153.7 17.7 8,981.4 143.1 9,124.5
Expected credit losses (13.9) (5.1) (0.3) (0.3) - (19.6) 0.3 (19.3)
Net loans and advances to customers 6,288.0 2,446.7 56.0 153.4 17.7 8,961.8 143.4 9,105.2                
Risk-weighted assets 2,352.1 1,011.1 29.3 62.2 6.5 3,461.2 68.7 3,529.9

1. Other relates to acquired loan portfolios.
2. For more details on acquisition-related adjustments, see Reconciliation of statutory to underlying results in the Financial review.

*CCFS segment *

*Underlying loans and advances to customers*
*30-Jun-2022*
*£m* *31-Dec-2021*
*£m*
Buy-to-Let *6,748.4* 6,301.9
Residential *2,443.9* 2,451.8
Bridging *83.8* 56.3
Second charge *133.4* 153.7
Other^1 *17.1* 17.7
*Gross loans and advances to customers* *9,426.6* 8,981.4
Expected credit losses *(19.7)* (19.6)
*Net loans and advances to customers* *9,406.9* 8,961.8

1. Other relates to acquired loan portfolios

CCFS targets specialist mortgage market sub-segments with a focus on specialist Buy-to-Let mortgages secured on residential property held for investment purposes by both non-professional and professional landlords. It also provides specialist residential mortgages to owner-occupiers, secured against residential properties, including those unsupported by the high street banks and those borrowing under the Help to Buy scheme. In addition, it provides short-term bridging, secured against residential property in both the regulated and unregulated sectors.

The CCFS underlying net loan book grew by 5% to £9,406.9m at the end of June 2022 (31 December 2021: £8,961.8m) supported by organic originations of £1,204.8m, which increased by 1% from £1,193.1m of new business written in the same period last year.

*Buy-to-Let sub-segment*
In the first half of 2022, CCFS’ organic originations in the Buy-to-Let sub-segment through the Precise Mortgages brand increased by 7% to £867.5m (H1 2021: £808.5m) supporting a 7% growth in the underlying gross Buy-to-Let loan book in the period to £6,748.4m from £6,301.9m at the end of 2021.

Originations benefitted from strong refinance business as 2022 marked the fifth anniversary of the introduction of the PRA underwriting standards for Buy-to-Let mortgages which triggered a shift towards five year fixed rate products. Remortgages represented 50% of completions under the Precise Mortgages brand as at 30 June 2022 (H1 2021: 32%) with purchases reducing as the prior period benefitted from a spike in purchase activity due to the stamp duty holiday. Longer term mortgages continued to be favoured by landlords and five year fixed rate products accounted for 69% of completions, slightly below the 71% recorded during the same period of 2021.

In addition, borrowing via a limited company made up 66% of Buy-to-Let completions for the Precise Mortgages brand in the first half of 2022 (H1 2021: 72%) and loans for specialist property types, including houses of multiple occupation and multi-unit properties, represented 21% of completions in this sub-segment (H1 2021: 24%).

Research conducted by BVA BDRC on behalf of the Group found that over six in ten landlords that intended to acquire new properties planned to do so within a limited company structure, the highest proportion for three years. This proportion increased to almost eight in ten for portfolio landlords with six or more properties.

Precise Mortgages remained the highest ranked specialist lending brand for Buy-to-Let mortgages based on unprompted willingness to recommend in the BVA BDRC’s Project Mercury survey in Q1 2022.

The weighted average LTV of the loan book in this segment remained broadly stable at 67% with an average loan size of £191k (31 December 2021: 68% and £192k). The new lending average LTV was 74% and the weighted average interest coverage ratio for Buy-to-Let origination was 197% in the first half of 2022 (H1 2021: 74% and 192%, respectively).

Underlying net interest income in this sub-segment increased 53% to £102.4m compared with £67.0m in the prior period, due primarily to growth in the loan book and the beneficial impact of base rate rises, partially offset by an underlying EIR reset loss of £6.2m (H1 2021: £6.0m) to reflect updated prepayment assumptions based on observed customer behaviour. This segment recorded an impairment of £2.6m (H1 2021: £6.7m credit) due to growth in Buy-to-Let lending and the updated forward-looking macroeconomic scenarios and weightings, partially offset by house price appreciation in the period. On an underlying basis, Buy-to-Let made a contribution to profit of £99.8m in the first half of 2022, up 35% (H1 2021: £73.7m).

On a statutory basis, the Buy-to-Let sub-segment made a contribution to profit of £81.8m (H1 2021: £49.5m).

*Residential sub-segment*        
The underlying gross loan book in CCFS’ Residential sub-segment remained broadly flat at £2,443.9m at the end of June 2022 (31 December 2021: £2,451.8m) and organic originations were £257.1m in the first half of 2022 (H1 2021: £312.5m).

The Group continued to benefit from CCFS’ expertise, with a strong focus on first time buyers, including those purchasing through the popular Help-to-Buy scheme, self-employed individuals and those with minor adverse records. Despite the Help-to-Buy scheme nearing its closure to new applications in October 2022, the Group continued to see good but reducing activity, with 24% of completions in this sub-segment in the period (H1 2021: 52%).

The average loan size in this sub-segment was £139k (31 December 2021: £136k) with an average LTV for new lending of 66% (H1 2021: 65%) and book LTV of 58% as at 30 June 2022 (31 December 2021: 59%).

Underlying net interest income grew to £45.6m (H1 2021: £37.7m) primarily reflecting the beneficial impact of base rate rises, partially offset by an underlying EIR reset loss of £0.5m (H1 2021: £nil) to reflect updated prepayment assumptions based on observed customer behaviour. The Residential sub-segment recorded an impairment credit of £2.5m versus £1.8m in the first half of 2021 as the updated forward-looking macroeconomic scenarios and weightings were more than offset by a release of pandemic-related post model adjustments and strong house price appreciation. Overall, on an underlying basis, the Residential sub-segment made a contribution to profit of £48.1m, up 22% compared with £39.5m in the same period in 2021.

On a statutory basis, the Residential sub-segment made a contribution to profit of £41.3m (H1 2021: £30.2m).

*Bridging sub-segment*
The Group continued to improve its bridging products offering and in April 2022 relaunched and rebranded its refurbishment product criteria. Short-term bridging originations increased 14% to £77.0m in the first half of 2022 compared with £67.7m in the first half of 2021 and as a result the gross loan book in this sub-segment increased to £83.8m as at 30 June 2022 (31 December 2021: £56.3m).

Underlying net interest income reduced to £2.1m from £3.0m in the first half of 2021, primarily due to redemptions at the beginning of the year. The bridging sub-segment made a contribution to profit of £2.0m in the first half of 2022 on an underlying basis compared with £4.2m in the same period of 2021 and recorded an impairment of £0.1m (H1 2021: £1.2m credit). On a statutory basis, the bridging sub-segment made a contribution to profit of £1.8m (H1 2021: £4.1m).

*Second charge sub-segment*
The second charge gross loan book reduced to £133.4m compared with £153.7m as at 31 December 2021 as the second charge products under the Precise Mortgage brand have recently been withdrawn.

Underlying net interest income in the second charge sub-segment remained broadly stable in the period at £3.0m (H1 2021: £3.4m) and the contribution to profit reduced to £3.1m (H1 2021: £3.7m) after an impairment credit of £0.1m versus £0.3m in the first half of 2021. On a statutory basis, the contribution to profit from the second charge sub-segment was £2.7m (H1 2021: £2.9m).

*Financial review*

*Summary statutory results *
Review of the Group’s performance on a statutory basis for the six months to 30 June 2022 and 2021.

*H1 2022*
*H1 2021*
*Summary Profit or Loss* *£m* *£m*
Net interest income *343.4* 265.3
Net fair value gains on financial instruments *16.4* 16.1
Gain on sale of financial instruments *-* 4.0
Other operating income *3.7* 4.6
Administrative expenses *(91.3)* (80.5)
Provisions *1.2* (0.1)
Impairment of financial assets *(1.6)* 14.6
Integration costs *(3.7)* (1.9)
Exceptional items *-* (0.2)
Profit before tax *268.1* 221.9
Profit after tax *208.9* 161.5
*H1 2022* *H1 2021*
*Key ratios*^*1*    
Net interest margin *280bps* 236bps
Cost to income ratio *25%* 28%
Management expense ratio *73bps* 70bps
Loan loss ratio *1bp* -15bps
Return on equity *2**1**%* 19%
*30-Jun-22* *31-Dec-21* *£m* *£m*
*Extracts from the Statement of Financial Position*    
Loans and advances to customers *21,759.2* 21,080.3
Retail deposits *17,939.0* 17,526.4
Total assets *25,465.2* 24,532.5*Key ratios (OSB solo)*    
Common equity tier 1 ratio *18.**7**%* 19.4%
Total capital ratio *20.**5**%* 21.3%

1. For more detail on the calculation of key ratios, see the Appendix.

*Statutory profit*
The Group’s statutory profit before tax increased by 21% to £268.1m in the first half of 2022 (H1 2021: £221.9m), after integration costs and other acquisition-related items of £26.0m^1 (H1 2021: £30.9m), primarily due to growth in the loan book and a higher net interest margin, partially offset by higher administration costs and an impairment charge compared to a credit in the prior period.

Statutory profit after tax was £208.9m for the first half of 2022, an increase of 29% (H1 2021: £161.5m) and included after-tax integration costs and other acquisition-related items of £14.4m^1 (H1 2021: £28.3m). The Group’s effective tax rate reduced to 22.2%^2 compared to 27.1% in the prior period primarily due to a reduction in the deferred tax provision following the enactment of the expected decrease in the bank surcharge from 8% to 3% from April 2023.

Statutory return on equity for the first half of 2022 improved to 21% (H1 2021: 19%) reflecting the increase in profitability in the period.

*Net interest income*
Statutory net interest income increased by 29% in the period to £343.4m (H1 2021: £265.3m), largely reflecting growth in the loan book and a higher net interest margin. It also included a net effective interest rate (EIR) reset loss of £2.6m to reflect updated prepayment assumptions based on observed customer behaviour.

Statutory net interest margin (NIM) was 280bps compared to 236bps in the prior period, up 44bps, primarily due to the benefit of delays in the market passing on base rate rises to savers, partially offset by the net EIR reset loss which accounted for 2bps of margin.

*Net fair value gains on financial instruments *
Net fair value gains on financial instruments of £16.4m in the first half of 2022 (H1 2021: £16.1m) included a £14.0m net gain on unmatched swaps (H1 2021: £6.1m) and a net loss of £4.3m (H1 2021: £0.6m gain) in respect of the ineffective portion of hedges. The Group also recorded a £6.5m gain (H1 2021: £0.2m) from the amortisation of hedge accounting inception adjustments, a £5.0m loss from the amortisation of de-designated hedge relationships (H1 2021: £2.2m gain) and a £5.2m net gain from other items (H1 2021: £7.0m gain), including the unwind of acquisition-related inception adjustments.

The net gain on unmatched swaps related primarily to fair value movements on mortgage pipeline swaps, prior to them being matched against completed mortgages, and was caused by an increase in interest rate outlook on the SONIA yield curve. The Group economically hedges its committed pipeline of mortgages and this unrealised gain unwinds over the life of the swaps through hedge accounting inception adjustments.

The amortisation of fair value relating to de-designated hedge relationships occurs when hedge relationships are cancelled due to ineffectiveness.

*Gain on sale of financial instruments*
There were no gains on sale of financial instruments in the first half of 2022. The gain on sale of financial instruments of £4.0m in the first half of 2021 related to the disposal of class A2 notes in the PMF 2019-1B securitisation in February 2021.

*Other operating income*
Statutory other operating income of £3.7m (H1 2021: £4.6m) mainly comprised CCFS’ commissions and servicing fees, including those relating to securitised loans which have been derecognised from the Group’s balance sheet.

*Administrative expenses*
Statutory administrative expenses increased by 13% to £91.3m in the first half of 2022 (H1 2021: £80.5m) largely due to higher support and staff costs.

The Group’s statutory management expense ratio increased to 73bps in the first half of 2022 (H1 2021: 70bps) reflecting the expected gradual return to pre-pandemic levels of spending, however the statutory cost to income ratio improved to 25% (H1 2021: 28%) as a result of strong income generation in the period.

The Group has now entered the final quarter of the three year integration programme and progress has been made in the closing phase of the remaining projects. By 30 June 2022, the Group had delivered annualised run rate savings of £24.6m marginally in excess of the run-rate pledge of £22m by the end of the third anniversary of the Combination in October 2022. Integration costs to date of £23.3m are also lower than originally expected.

*Impairment of financial assets*
The Group recorded an impairment charge of £1.6m for the first six months of 2022 (H1 2021: £14.6m credit) and the statutory loan loss ratio was 1bp compared to -15bps in the first half of 2021.

The updated macroeconomic scenarios led to a provision release of £5.9m offset by a charge of £6.8m as the Group increased the downside weighting in its forward-looking macroeconomic scenarios to account for the rising cost of living concerns. There was a further release of £4.9m as a result of a strong house price appreciation in the first half of 2022 and a £3.2m release from pandemic-related post model adjustments which were more than offset by £8.8m of other charges and write-offs.

*Integration costs*
The Group recorded £3.7m of integration costs in the first half of 2022 (H1 2021: £1.9m), largely related to advice on the Group’s future operating structure and redundancy costs due to the transition to the new operating model.

*Exceptional items*
There were no exceptional costs in the first half of 2022. The prior period exceptional costs of £0.2m related to additional costs in respect of the insertion of OSB GROUP PLC as the new holding company and listed entity which is outside this Group with OSB being the only 100% owned direct subsidiary of OSB GROUP PLC.

*Balance sheet growth*
On a statutory basis, net loans and advances to customers grew by 3% to £21,759.2m as at 30 June 2022 (31 December 2021: £21,080.3m) reflecting originations of £2.3bn in the first half.

Total assets grew by 4% to £25,465.2m (31 December 2021: £24,532.5m) largely due to the growth in loans and advances to customers and higher liquid assets.

On a statutory basis, retail deposits increased by 2% to £17,939.0 as at 30 June 2022 (31 December 2021: £17,526.4m) as the Group continued to attract new savers. The Group complemented its retail deposits funding with drawings under the Bank of England’s schemes. During the first half, the Group drew down £220.3m of additional funding under the Indexed Long-Term Repo scheme. Drawings under the Term Funding Scheme for SMEs remained unchanged from £4.2bn at the end of 2021.  

*Liquidity *
OSB and CCFS operate under the Prudential Regulation Authority’s liquidity regime and are managed separately for liquidity risk. Each Bank holds its own significant liquidity buffer of liquidity coverage ratio (LCR) eligible high-quality liquid assets (HQLA).

Each Bank operates within a target liquidity runway in excess of the minimum LCR regulatory requirement, which is based on internal stress testing. Each Bank has a range of contingent liquidity and funding options available for possible stress periods.

As at 30 June 2022, OSB had £1,571.9m and CCFS had £1,541.9m of HQLA (31 December 2021: £1,322.8m and £1,318.0m, respectively).

OSB and CCFS also held portfolios of unencumbered prepositioned Bank of England level B and C eligible collateral in the Bank of England Single Collateral Pool. CCFS’ portfolio of level C eligible collateral increased significantly from 31 December 2021 due to the reintroduction of previously LIBOR-linked mortgage assets following the Bank of England’s approval of the Group’s LIBOR transition plans in May 2022.

As at 30 June 2022, OSB had a liquidity coverage ratio of 269% and CCFS 171% (31 December 2021: 240% and 158%, respectively) and the Group LCR was 216% (31 December 2021: 196%), all significantly in excess of the regulatory minimum of 100% plus Individual Liquidity Guidance.

*Capital*
OneSavings Bank plc’s solo capital position remained exceptionally strong, with a CET1 ratio of 18.7% and a total capital ratio of 20.5% as at the end of June 2022 (31 December 2021: 19.4% and 20.3% respectively). Both ratios reflect the impact of the OSBG share repurchase programme.

1. See the reconciliation of statutory to underlying results below.
2. Effective tax rate excludes £0.4m of adjustments relating to prior periods.

*Summary underlying results *

*Alternative performance measures*
The Group presents alternative performance measures (APMs) below, as Management believe they provide a more consistent basis for comparing the Group’s performance between financial periods.

Underlying results for the six months to 30 June 2022 and 30 June 2021 exclude exceptional items, integration costs and other acquisition-related items.

APMs reflect an important aspect of the way in which operating targets are defined and performance is monitored by the Board. However, any APMs in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well which can be found above.

For the reconciliation between APMs and the statutory equivalents, see the Appendix.

*H1 2022*
*H1 2021*
*Summary Profit or Loss* *£m* *£m*
Net interest income *369.2* 299.0
Net fair value gains on financial instruments *11.1* 10.5
Gain on sale of financial instruments *- * 2.3
Other operating income *3.7* 4.6
Administrative expenses *(89.1)* (78.6)
Provisions *1.2* (0.1)
Impairment of financial assets *(2.0)* 15.1
Profit before tax *294.1* 252.8
Profit after tax *223.3* 189.8
*H1 2022* *H1 2021*
*Key ratios*^*1*    
Net interest margin *302bps* 268bps
Cost to income ratio *23%* 25%
Management expense ratio *72bps* 69bps
Loan loss ratio *2bps* -15bps
Return on equity *24%* 24%    
*30-Jun-22* *31-Dec-21* *£m* *£m*
*Extracts from the Statement of Financial Position*    
Loans and advances to customers *21,642.4* 20,936.9
Retail deposits *17,938.0* 17,524.8
Total assets *25,360.3* 24,404.2

1. For more detail on the calculation of key ratios, see the Appendix.

*Underlying profit*
The Group’s underlying profit before tax was £294.1m in the first half of 2022, an increase of 16% compared with £252.8m in the first half of 2021, primarily due to growth in the loan book and higher net interest margin, partially offset by higher administration costs and an impairment charge compared to a credit in the prior period.

Underlying profit after tax was £223.3m, up 18% (H1 2021: £189.8m) broadly in line with the increase in profit before tax. The Group’s effective tax rate on an underlying basis reduced to 24.1% for the first half of 2022 (H1 2021: 24.9%).

On an underlying basis, return on equity for the first half of 2022 remained unchanged from 24% in the prior period which benefitted from a £15.1m provision release.

*Net interest income*
Underlying net interest income increased by 23% to £369.2m in the first half of 2022 (H1 2021: £299.0m) largely reflecting growt