OneSavingsBank plc - 2022 Annual Report and Accounts
LEI: 213800WTQKOQI8ELD692
*OneSavings Bank plc - 2022 Annual Report and Accounts*
In fulfilment of its obligations under section 4.1.3 and 6.3.5(1) of the Disclosure Guidance and Transparency Rules, OneSavings Bank plc (the "Company") hereby releases the unedited full text of its 2022 Annual Report and Accounts for the year ended 31 December 2022.
The document is now available on the Company's website at:
www.osb.co.uk
A copy of the above document has been submitted to the National Storage Mechanism and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Enquiries:
*OSB GROUP PLC*
Nickesha Graham-Burrell
Group Head of Company Secretariat t: 01634 835 796
*Investor relations*
Email: osbrelations@osb.co.uk t: 01634 838 973
*Brunswick *
Robin Wrench/Simone Selzer t: 020 7404 5959
*About OSB GROUP PLC*
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 for 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 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.
*OneSavings Bank plc*
Annual Report and Financial Statements
For the Year Ended 31 December 2022
Company Number: 07312896
Company Information 2
Strategic Report 3
Directors’ Report 70
Statement of Directors’ Responsibilities in respect of the Strategic Report, the Directors' Report and the Financial Statements 76
Independent Auditor’s Report 77
Statement of Comprehensive Income 92
Statement of Financial Position 93
Statement of Changes in Equity 94
Statement of Cash Flows 96
Notes to the Financial Statements 97
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*DIRECTORS* Graham Allatt
Kalvinder Atwal
Andrew Golding
Noël Harwerth
Sarah Hedger
Rajan Kapoor
Mary McNamara
April Talintyre
Simon Walker
David Weymouth
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*COMPANY SECRETARY* Jason Elphick
*REGISTERED OFFICE* Reliance House
Sun Pier
Chatham
Kent
ME4 4ET
United Kingdom
*REGISTERED NUMBER* 07312896 (England and Wales)
*AUDITOR* Deloitte LLP Statutory Auditor Birmingham
United Kingdom
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The Directors present their Annual Report, including the Strategic Report, Directors’ Report and Statement of Directors’ Responsibilities, together with the audited Consolidated Financial Statements and Auditor’s Report for the year ended 31 December 2022.
OneSavings Bank plc (the Company or OSB) is a wholly-owned subsidiary of OSB GROUP PLC (OSBG). The Group comprises OSB and its subsidiaries; the OSB Group comprises OSBG and its subsidiaries.
*Our business model*
The Group is a leading specialist mortgage lender, primarily focused on carefully selected sub-segments of the UK mortgage market. Our specialist lending is supported by our Kent Reliance and Charter Savings Bank retail savings franchises. Our purpose is to help our customers, colleagues and communities prosper.
*Resources and relationships*
Brands and heritage
We have a family of specialist lending brands targeting selected segments of the mortgage market which are underserved by large UK banking institutions. We have well-established savings franchises through Kent Reliance, with its 150-year heritage, and the Charter Savings Bank brand.
Colleagues
Our team of highly skilled employees possess expertise and in-depth knowledge of the lending, property, capital and savings markets, underwriting and risk assessment, and customer management.
Infrastructure
We benefit from cost and efficiency advantages provided by our wholly-owned subsidiaries, OSB India, as well as credit expertise and mortgage administration services provided by Charter Court Financial Services (CCFS).
Relationships with intermediaries and customers
Our strong and deep relationships with the mortgage intermediaries that distribute our products continue to win us industry recognition.
Capital strength
We have a strong common equity tier one (CET1) ratio and capability to generate capital through profitability.
*Our business model explained*
The Group operates its lending business through two segments: OSB and CCFS.
*OneSavings Bank*
Through our brands we tailor our lending proposition to the specific needs of our borrowers. Under our Kent Reliance and Interbay brands all of our loans are underwritten by experienced and skilled underwriters, supported by technology to reduce the administrative burden on underwriters and mortgage intermediaries. We refer to scorecards and bureau data to support our skilled underwriter loan assessments. We consider each loan on its own merits, responding quickly and flexibly to offer the best solution for each of our customers. No case is too complex for us, and for those borrowers with more tailored or larger borrowing requirements, our Transactional Credit Committee meets three times each week, demonstrating our responsiveness to customer needs.
*Buy-to-let/SME sub-segments*
Buy-to-Let
We provide loans to limited companies and individuals, secured on residential property held for investment purposes. We target experienced and professional landlords or high net worth individuals with established and extensive property portfolios.
Commercial mortgages
We provide loans to limited companies and individuals, secured on commercial and semi-commercial properties held for investment purposes or for owner-occupation.
Residential development
We provide development loans to small and medium sized developers of residential property.
Funding lines
We provide loans to non-bank finance companies secured against portfolios of financial assets, principally mortgages.
Asset finance
We provide loans under hire purchase, leasing and refinancing arrangements to UK SMEs and small corporates to finance business-critical assets.
*Residential sub-segment*
First charge
We provide loans to individuals, secured by a first charge against their residential home. Our target customers include those with a high net worth and complex income streams, and near-prime borrowers. We are also experts in shared ownership, lending to first-time buyers and key workers buying a property in conjunction with a housing association.
*Our business model explained *(continued)
*Charter Court Financial Services*
Specialist lending business
Our Precise Mortgages brand uses an automated underwriting platform to manage mortgage applications and to deliver a rapid decision in principle, based on rigorous lending policy rules and credit scores. The platform is underpinned by extensive underwriting expertise, enabling identification of new niches and determining appropriate lending parameters. It allows for consistent underwriting within the Group’s risk appetite. Quick response times help the Group to compete for the ‘first look’ at credit opportunities, while a robust manual verification process further strengthens the disciplined approach to credit risk.
Buy-to-Let
We provide products to professional and non-professional landlords with good quality credit histories, through a wide product offering, including personal and limited company ownership.
Residential
We provide a range of competitive products to prime borrowers and complex prime borrowers, including self-employed, as well as near-prime borrowers.
Bridging
We focus on lending to customers with short-term cash flow needs, for example, to cover light refurbishments, home improvements, auction purchases and to ‘bridge’ delays in obtaining mortgages and ‘chain breaks’.
Second charge
Second charge products under the Precise Mortgage brand were withdrawn in the first half of 2022 and are no longer available to new customers.
*Our business model explained *(continued)
*Retail savings*
The Group is predominantly funded by retail savings deposits sourced through two brands: Kent Reliance and Charter Savings Bank (CSB).
Kent Reliance is an award-winning retail savings franchise with over 150 years of heritage and nine branches in the South East of England. It also takes deposits via post, telephone and online, while CSB, a multi award-winning retail savings bank, offers its products online and via post.
Both Banks have a wide range of savings products, including easy access, fixed term bonds, cash ISAs and business savings accounts. CSB and Kent Reliance have diversified their retail funding sources through pooled funding platforms. The range of products sourced via these platforms includes easy access, longer term bonds and non-retail deposits.
In 2022, both Banks won industry awards, including the prestigious Moneyfacts Consumer Awards for Best Bank Savings Provider, Best Cash ISA Provider and ISA Provider of the Year for CSB and Best Cash ISA Provider from Yourmoney.com Personal Finance Awards for Kent Reliance.
Kent Reliance’s proposition for savers is simple: to offer consistently good-value savings products that meet customer needs for cash savings and loyalty rates for existing customers.
CSB’s philosophy is to maintain and develop its award-winning business, offering competitively priced savings products. Operating with an agile, nimble approach, CSB can respond quickly to the funding requirements of the business at an advantageous cost of funds.
*Our securitisation platforms*
The Group has built attractive diversification opportunities to supplement its retail funding.
CCFS uses its securitisation platform as a means of providing low-cost term funding. Wholesale funding enables the business to rebalance the weighted average life of liabilities away from shorter duration retail funding and thereby optimise the funding mix. The Group recognises the cyclical nature of capital markets funding and therefore utilises it opportunistically, taking advantage of favourable market conditions.
CCFS is a programmatic issuer of high-quality residential mortgage-backed securities (RMBS) through the Precise Mortgage Funding and Charter Mortgage Funding (CMF) franchises, completing 14 securitisations worth more than £4.5bn to 31 December 2022.
In 2019, OSB established its Canterbury Finance securitisation programme, to enable it to issue high-quality RMBS. It has since issued five securitisations of organically originated mortgages totalling £5.6bn to 31 December 2022.
OSB also issued three deals totalling £971m of owner-occupied and Buy-to-Let acquired mortgages via Rochester Financing since 2013.
The Group also has the capability to engage in transactions which could result in the full derecognition of the underlying mortgage assets, through the sale of residual positions in its securitisation vehicles.
The Group also takes advantage of the Bank of England’s funding schemes. Drawings under the Term Funding Scheme for SMEs remained at £4.2bn and the drawings under Index Long-Term Repo were £301m as at 31 December 2022 (2021: £4.2bn and £nil, respectively). *
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*Our business model explained *(continued)
*Unique operating model*
Customer service
The Group operates customer service functions in multiple locations across the UK including Chatham, Wolverhampton, Fareham, London and Fleet. These, together with our wholly-owned subsidiary OSB India, help us deliver on our aim of putting customers first.
The Group has proven collections capabilities and expertise in case management and supporting customers in financial difficulty.
This offers valuable insights into, as well as the opportunity to learn from, the performance of mortgage loan products. We have deep credit expertise through strong data analytical capabilities.
We deliver cost efficiencies through excellent process design and management. We have an efficient, scalable and resilient infrastructure supported by strong IT security and continue to invest in enhancing our digital offering as customer demand changes.
OSB India
OSB India (OSBI) is a wholly-owned subsidiary based in Bangalore and Hyderabad, India.
OSBI puts customer service at the heart of everything it does and we reward our colleagues based on the quality of service they provide to customers, demonstrated by our excellent customer Net Promoter Score (NPS).
At OSBI, we employ highly talented and motivated colleagues at a competitive cost. We benchmark our processes against industry best practice, challenging what we do and eliminating customer pain points as they arise. We continue to invest in developing skills that enable highly efficient service management, matching those to business needs both in India and the UK.
Various functions are also supported by OSBI, including Support Services, Operations, IT, Finance and Human Resources. We have a one team approach between the UK and India. The employee turnover in India compares favourably to local industry averages, despite an increase in the regretted attrition rate to 24% in 2022 as a result of an extremely buoyant recruitment market.
OSBI operates a fully paperless office – all data and processing are in the UK.
*Environmental, social and governance (ESG)*
We operate in a sustainable way with relevant Environmental, Social and Governance matters at the heart of all everything we do.
As a specialist lender, we have been long aware of our responsibilities and the positive impact we can make in society through our activities.
In 2022, we made progress on our path to achieve our commitment to net zero greenhouse gas emissions by 2050. We also launched our first of a range of mortgage products to improve the energy efficiency of a property.
We also renewed our commitment to have 33% women in senior management roles in the UK by 2023 and donated nearly £225k to charitable causes in the year.*Relationships with our key stakeholders *
Building strong relationships with all of our stakeholders through regular engagement and open dialogue is fundamental to achieving the Group’s purpose to help our customers, colleagues and communities prosper. Our relationships with our stakeholders are central to the Group’s strategy and culture; and are embedded in the Board’s responsibilities.
We outline below how the Group and its Directors engaged with key stakeholders, and in doing so, discharged their duties under section 172 of the Companies Act 2006.
*Colleagues*
Our colleagues are our key asset and our success depends on the 2,021 talented individuals we employ.
We have always favoured interactive communication between management and our colleagues through regular town hall meetings, informal sessions with management and opportunities to ask questions anonymously directly to the Chief Executive Officer (CEO), with the questions and responses available on the intranet. These methods of engagement proved popular with employees and have contributed to many initiatives that were undertaken by the business during the year.
How the Board has engaged with colleagues
The Group has adopted a combination of methods for engaging with its workforce, including the establishment of a formal workforce advisory panel and a designated Non-Executive Director (NED).
During 2022, Mary McNamara was the NED appointed by the Board with responsibility for representing employees at Board level and she is a permanent member of the Workforce Advisory Forum (known internally as OurVoice). Mary has direct engagement with the workforce by attending OurVoice meetings and other events organised by the Diversity and Inclusion Working Group. This provides her with an insight into the culture and concerns of the workforce, which she is able to bring to the attention of the Board. Sarah Hedger will become a permanent member of OurVoice and will replace Mary McNamara as the designated NED with responsibility for OurVoice on 11 May 2023.
OurVoice gives the Board and management insight into a broadly representative range of employee views to guide strategic decisions for the future of the Group and oversee their alignment to the Values.
OurVoice has its own Terms of Reference which outlines the objectives and composition of the Forum. Members of the workforce are invited to apply to become an employee representative.
Members of the Board and management attended OurVoice meetings throughout the year in order to understand and discuss employee-related issues directly with representatives across the business. Employee representatives are encouraged to be open and honest in their feedback at each meeting. The themes from OurVoice discussions are shared and discussed with the Board and this informs the approach towards new policies, benefits, resource allocations and any other employee- related projects.
Engagement also took place via the annual Best Companies to Work For survey. 82.5% of UK employees responded to the survey in 2022 demonstrating a high level of engagement. Following the results of the survey, the Group received a 2 star accreditation which means that it was recognised as an ‘Outstanding’ company to work for. The Group Executive Committee and the Board reviewed the results, considered the key themes that had emerged from the responses and discussed what steps could be taken to capitalise on the positive themes and also address areas for improvement. OSB India participates in a separate engagement survey and was officially certified a ‘Great Place to Work’ for a sixth consecutive year in 2022.
The Board and its Committees also received regular updates on matters impacting employees from senior management and the Group’s HR function. Members of the Board oversee the Group’s talent management initiatives and senior management succession planning.
*Relationships with our key stakeholders *(continued)
Finally, the Board has oversight of the Group’s whistleblowing activity and reviews and approves the Group’s gender pay gap reporting and its commitment to the Women in Finance Charter.
The Board monitors the effectiveness of its methods of engaging with employees and adapts them where necessary.
Areas of continued focus include developing a broader people and culture strategy for the Group and continuing to improve in the areas that have been identified as lower scoring in the results of employee surveys.
Outcomes following engagement
· a key topic of discussion at Board level was the impact of continuing interest rate rises and the cost of living and cost of borrowing on our colleagues, both professionally and personally, their well-being and mental health.
· a one-off cost of living payment of £1,200 was made to lower paid employees and two further payments of £600 have been approved for payment in 2023 to the same population.
· the Group became formally accredited as a Living Wage Employer.
· refreshed the Group’s Homeworking Policy to formalise employee hybrid working arrangements.
· approved a higher than usual salary increase arrangement for over 80% of employees in light of the high rate of inflation.
*Customers*
We pride ourselves on building strong, long-term relationships with our customers. Our continued commitment to providing excellent service to borrowers and savers remained a priority in 2022 in light of the rise in cost of living and borrowing.
We offer our savers an opportunity to let us know how we are doing whenever they call or interact with the Banks by listening to their views and acting upon what they tell us. Customer feedback is collected
throughout the year and satisfaction scores produced as a result.
During 2022, as the interest rates continued to rise, we saw a significant increase in the volume of calls from our savers wishing to benefit from attractively priced savings products and our borrowers who were concerned about the rising cost of borrowing. As a result, there was a decrease in the savings and the broker NPS compared to 2021. Service levels have since improved and they remain our key focus.
How the Board has engaged with customers
The Board’s engagement with customers is indirect and Directors are kept informed of customer-related matters through regular reports, feedback and research. Satisfaction scores and retention rates, together with the number of complaints and resolution times, form part of the management and Board monthly reporting packs, ensuring the visibility of our customers’ experiences. Customer satisfaction scores are also used as part of the Executive remuneration assessment, and form the basis of new initiatives and actions which continually improve customer experience.
In addition, each year, the Board allocates additional time at one Board meeting for dedicated deep dives on a range of matters related to how customers are treated.
*Relationships with our key stakeholders *(continued)
The Board was kept informed about progress in embedding the new FCA Consumer Duty requirements as well as the support for customers who require additional assistance.
Customers and intermediaries may be consulted when the business is considering the launch of a new product to ensure it meets their needs and any concerns raised are addressed.
Outcomes following engagement with customers
· ensured that additional support was available to customers who need it.
· a pledge of £50m to the newly-established Landlord Leader Fund to help landords enhance energy efficiency.
· introduced the first of a range of products for landlords wishing to improve the energy efficiency of their properties.
The savings NPS for Kent Reliance in 2022 was +64 (2021: +70) and for Charter Savings Bank was +61 (2021: +71).
*Intermediaries*
Our lending products, with the exception of funding lines and residential development loans, are distributed via mortgage brokers. Mortgage brokers are vital to our success; it is important for us to understand the challenges they face and what they are trying to achieve in terms of serving their customers, so we can adapt the way in which we support them, to provide an even better service.
How the Board has engaged with intermediaries
The Board’s engagement with intermediaries is indirect and Directors are kept informed of customer-related matters through regular updates at Board meetings. Broker and borrower satisfaction scores are tracked on a regular basis, along with details of all complaints, and are reviewed by the Board and management within monthly reporting packs.
Towards the end of 2022, research was commissioned with the aim of supporting our brokers and landlords with improving the sustainability of their investment properties. A number of key findings were identified which included the creation of a Landlord Leaders community to bring brokers, landlords and other industry members together. The Board received updates and reviewed the progress of this initiative. Further information on this can be found on page 14.
We pride ourselves in providing unique and consistent lending propositions across all lending brands, which fulfil our goal of making it easier for intermediaries to serve their customers, our borrowers. Regular engagement with the broker community extends beyond our propositions and enables us to continuously enhance the service we provide, with our business development managers working closely with intermediaries to discuss cases and help to obtain swift and reliable decisions.
The Group’s Sales teams participated in 330 physical and virtual intermediary events during 2022. The events are an opportunity for the Sales team to interact with brokers, discuss their requirements and keep up to date with industry developments.
Outcomes following engagement with intermediaries
· launch of the Landlord Leaders thought leadership report and the creation of a landlord leaders community, bringing brokers, landlords and other industry members together.
The broker NPS for OSB in 2022 was +37 (2021: +55) and for CCFS was +39 (2021: +42), both impacted by high application and completion volumes as a result of the market disruption following September’s mini budget.
*Relationships with our key stakeholders *(continued)
*Suppliers*
Our business is supported by a large number of suppliers, which allows the Group to provide high standards of service to our customers.
How the Board engages with suppliers
The members of the Board do not interact directly with the Group’s suppliers; however, they are involved in overseeing the Group’s supplier relationships and are kept up to date by management on supplier considerations and developments.
Supplier payment practice reports are published on a six-monthly basis and approved and signed by the CFO and Chief Operating Officer on behalf of the main operating entities. The Group enters into standard terms with suppliers, which include terms requiring payment within 30 days of the invoice date following receipt of a valid invoice. Over 95% of all invoices are paid within 30 days in line with the standard payment period for qualifying contracts. The average time taken to pay invoices ranges from five to 11 days across the Group. The maximum contractual payment period agreed varies between 30 days to 45 days. There have been no changes to the standard payment terms in the reporting period.
Any complaints received in respect of invoice payments are considered as part of the dispute resolution process. During the year, the Group did not deduct any sums from payments under qualifying contracts as a charge for remaining on a supplier list.
In 2022, the Board was also involved with the following aspects of supplier relationships: consideration of the risks associated with suppliers and the framework for assurance; oversight of key supplier relationships including engagement between the Group Audit Committee and the external auditor; and oversight of all levels of insurance in place for the Group.
We are committed to complying with both the law and best practice in respect of Modern Slavery, workforce rights and the environment. We expect our suppliers to share that commitment by complying with our Vendor Code of Conduct and Ethics.
The Group’s Modern Slavery and Human Trafficking Statement is reviewed and approved on an annual basis by the Board and can be found on our website at www.osb.co.uk.
ESG is being embedded into every aspect of our business and part of doing so is to ensure that our suppliers share similar values and aspirations to our own.
During 2022, our suppliers and business partners were asked to complete a questionnaire in order for us to understand how they are addressing topics such as climate change, Diversity, Equity and Inclusion and Modern Slavery and to identify areas of focus in the future. We understand that organisations will be at various stages of their own ESG and sustainability journey and we are committed to encouraging and supporting our suppliers with their transition to an ESG strategy that aligns to the Group’s ambitions.
Outcomes following engagement with suppliers
· enhanced understanding of suppliers’ ESG and sustainability strategies to ensure that they are in alignment with the Group’s ESG ambitions.
*Relationships with our key stakeholders *(continued)
*Regulators*
The Board recognises the importance of having an open and continuous dialogue with all of our regulators, as well as other government bodies, trade associations and UK Finance.
How the Board engages with Regulators
The Group maintains a proactive dialogue with the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). Engagement typically takes the form of regular and ad hoc meetings attended by both members of the Board and Executives, as well as subject matter experts.
Even though the Directors do not participate in all meetings, Executives, including the Group Chief Risk Officer and Group Chief Credit and Compliance Officer, provide the Board and its Committees with feedback and regular updates in respect of the broader regulatory developments and compliance considerations. The PRA was invited to and attended one Board meeting during 2022.
The Group also regularly interacts and has constructive relationships with the Bank of England and HM Revenue & Customs, amongst others, which helps to ensure that the Group is aligned with the relevant regulatory frameworks and that the business is engaged with issues impacting the financial services industry.
Outcomes following engagement
· Meetings held with regulators during the year covered, amongst other topics, operational resilience, operational continuity in resolution, resolvability assessment framework, business continuity, capital management and the optimisation of our capital structure. These are all areas that have been considered by the Board in its meetings.
*Communities*
The Group partners with national and local charities, which offer employees the chance to make a difference both nationwide and closer to home. Giving something back to our community is important to all of us, whether it is through volunteering, fundraising or efforts that help protect our environment, and aligns with the Group’s Values. Our nominated charity partners are chosen by employees with the aim of making a meaningful impact to these charities and to the lives of those that the charities help.
How the Board engages with communities
The Board and management actively encourage and fully support engagement with our local communities to make a positive impact.
Outcomes following engagement with communities
· The total amount donated to charity partners and good causes by the Group and colleagues in the year was nearly £225k.
*Relationships with our key stakeholders *(continued)
*Environment*
Sustainability is becoming increasingly important to the Board and management. The Group operates under the highest governance and ethical standards and is focused on reducing its impact on the environment.
The Board and management are cognisant of the impact of social and environmental change on our business and stakeholders and regularly promote awareness of environmental issues among our employees, as well as adhering to our plan to become a greener organisation and comply with enhanced regulation and disclosures.
The Board is responsible for encouraging and overseeing an environmentally friendly culture and ensuring that the business is ready to respond to the growing impact of climate change on the Group’s activities in line with its Stewardship value.
*Section 172 statement*
The Directors are bound by their duties under section 172(1)(a) to (f) of the Companies Act 2006 and the manner in which these have been discharged; in particular their duty to act in the way they consider, in good faith, promotes the success of the Company for the benefit of its shareholders as a whole.
The preceding pages 8 to 12 demonstrate how the Board has engaged with the Group’s key stakeholders (customers, intermediaries, colleagues, shareholders, suppliers, regulators and the local communities in which we are located). Examples of strategic decisions which have impacted the Group’s key stakeholders are set out below. Pages 8 to 12 and those that follow, set out examples of how Directors complied with the requirements of section 172 during the year.
*Decision making*
The Board recognises that considering our stakeholders in key business decisions is fundamental to our ability to deliver the Group’s strategy in line with our long-term values and operating the business in a sustainable way. Balancing the needs and expectations of our key stakeholders has been at the forefront of the Board’s thinking and has been more important than ever during 2022, as a result of the economic environment and the rising cost of living. The Board acknowledges that some decisions will result in different outcomes for each stakeholder.
*Section 172 statement *(continued)
*Key strategic decisions in the year*
Employee remuneration
The Board has considered the impact of ongoing interest rate rises and the rising cost of living and cost of borrowing in the UK on its employees, in terms of their financial and mental health well-being.
The increase in the cost of living and its impact on employees was discussed at the Workforce Advisory Forum (OurVoice), which includes attendance from members of the Board and the Group Executive Committee. In line with the Group’s commitment to ensuring that employees receive a fair deal, the Board supported the decision approved by the Group Executive Committee in respect of a one-off payment of £1,200 to all qualifying UK employees on lower salary grades representing approximately 80% of the employee population. The Board also supported the decision to increase salaries of the Group’s lowest paid employees in the UK to £19,250 in line with the Living Wage Foundation. The Board recognises the ongoing challenges faced by employees in the current economic environment. In January 2023, the Group Remuneration and People Committee discussed and approved the payment of two further cost of living payments of £600 each for all qualifying UK employees.
Landlord Leaders
The Board received updates on progress in relation to the Landlord Leaders initiative. Following engagement with landlords and brokers, and as part of its commitment to helping customers prosper, the Group has committed to delivering a number of initiatives to support the building of a future-focused sustainable industry. The Group has pledged £50m of funding to the newly established Landlord Leader Fund to help landlords enhance energy efficiency. Other initiatives include the launch of new products
to support landlords with refurbishing their properties, redesigning the underwriting process and partnering with tax specialists to provide advice and guidance on tax planning for parttime landlords looking to professionalise. As part of this commitment, the Group will create a new Landlord Leaders community to bring brokers, landlords and other industry members together.
Customer Experience
The Board was kept informed of a number of enhancements made to the customer journey. In particular, the launch of a new, simplified product range which was proactively communicated to customers to ensure that they had sufficient time to take action prior to the end of their fixed period. Additional resource was allocated to improve the customer experience, including following up with customers who had not taken action upon entering the reversion period. In addition, enhancements were made to the Group’s eligibility criteria to enable more customers to take advantage of the revised rates in order to minimise payment shocks and redemptions.
*Market review*
*The UK housing and mortgage market*
The last 12 months were defined by changing market conditions brought about by the war in Ukraine, continuing supply chain issues, high inflation, rising cost of living and borrowing and the disruption following September’s mini-budget. Despite these developments, the housing and mortgage markets were resilient and activity levels remained strong.
Inflation gathered pace following the invasion of Ukraine, exacerbating supply chain issues and leading to large increases in energy and food prices. Data from the Office of National Statistics (ONS) estimated that prices had seen a year on year increase of 10.5% at the end of December 2022, down slightly from a peak of 11.1% at the end of October.
The Bank of England implemented eight successive increases in the base rate in 2022 to reduce inflation towards its 2.0% target. Overall, the base rate rose to 3.5% in December 2022 from 0.25% in December 2021.
Mortgage interest rates increased significantly over the course of 2022, with rising cost of funds for lenders and volatile swap spreads. According to the Bank of England, the average rate on a new two-year fixed rate mortgage at 75% loan to value rose from 1.64% in January 2022 to 5.43% in December 2022, an increase of +3.79%.
The most significant increase in mortgage rates during the year was observed following September’s mini-budget, which saw mortgage lenders withdrawing products and increasing rates as a result of volatile swap spreads.
Overall, the number of residential property transactions in the UK fell by 14% to 1.3m in 2022 from a record high of 1.5m in 2021, however activity levels in 2021 were inflated by the Stamp Duty Land Tax holiday which saw a large number of property purchases brought forward to benefit from lower transactional costs. Beyond this year-on-year comparison, 2022 saw more property transactions than any other year since 2007
UK gross mortgage lending increased by 4% to £322bn in 2022, reflecting a resilient market that was buoyed by rising property prices, with an average house price increasing by 9.8% in 2022, stimulated by high levels of demand and a lack of supply.
*The UK savings market*
2022 marked the end to the ‘accidental savings’ brought about by pandemic lockdowns, as the rising cost of living saw many customers withdrawing from their savings, or not being able to add to them.
There was more competition in the savings market as providers passed on a proportion of the base rate rises to savers via attractively priced savings products, despite the significant delays in doing so during the first half of the year. The Bank of England reported that savings balances in the UK grew by £67bn from £2,135.3bn at the start of the year to £2,202.4bn in December 2022.
There were also more providers and more savings accounts on offer in the year, with 1,690 savings products promoted in December 2022 compared to 1,646 in December 2021.
According to the ONS, the household savings ratio that peaked at 26.8% in 2020, as a result of ‘accidental savings’, reduced to 9.0% by the fourth quarter of 2022.
The base rate rises introduced by the Bank of England led to higher rates across all types of savings accounts. By the end of 2022, fixed rate bonds had increased by 293bps over the year.
*Market review *(continued)
Easy access accounts held by financial institutions continued to exceed fixed term accounts. This was driven in part by increased rates on traditionally lower-earning easy access accounts, and a likely desire by customers to remain nimble, according to the Household Sector Deposits report.
*The UK mortgage market and climate change*
It has been estimated that privately owned residential properties represent 15% of total carbon emissions in the UK and it is acknowledged that there are significant barriers to implementing energy efficiency improvements. The UK Government’s focus on achieving its net zero goals has highlighted the need to improve the energy efficiency of UK housing stock.
Two key consultations relating to improving home energy performance were held by the Department for Business, Energy and Industrial Strategy, with outcomes yet to be published:
· Improving the Energy Performance of Privately Rented Homes in England and Wales closed in January 2021. The outcome is widely expected to introduce a minimum requirement to ensure that all rental properties achieve an EPC (Energy Performance Certificate) rating of C or higher from 2028. It is also expected to increase the current required works cap (the maximum amount that is expected to be paid to improve the property’s EPC rating) from £3,500 to £10,000, before exemptions can be applied.
· Improving Home Energy Performance through Lenders closed in February 2021. The outcome is expected to impose a requirement on all lenders to report on the EPC of their loan portfolio, along with a commitment to show annual improvements towards an average rating of C or higher.
These changes could have a significant impact on the private rented sector in the UK. The industry eagerly anticipates the publication of the final outcomes from each of these consultations, however discussion as well as action from lenders have already taken place, with the emergence of a ‘green finance sector’. The Green Finance Institute reported that 19 Buy-to-Let lenders had launched dedicated green finance products by the end of May 2022, a notable increase from nine lenders at the end of 2021.
*The Group’s lending sub-segments*
*Buy-to-Let*
According to UK Finance, Buy-to-Let gross advances reached £55.7bn in 2022, a 17% increase from £47.4bn in 2021. This was supported by strong refinancing activity in the year, with Buy-to-Let remortgages increasing by 33% to £37.0bn as the early wave of five-year fixed rate products taken post the PRA’s changes to the underwriting standards reached the end of their initial term.
Research conducted by BVA BDRC on behalf of the Group showed that the number of landlords planning to purchase new properties fell to 9% in the fourth quarter of 2022 from 14% in 2021, and the proportion of landlords looking to sell increased to 30% from 24% in 2021. The Landlords Panel survey suggested that landlords with larger portfolios were more likely to make changes to their portfolio over the next year with 16% looking to buy and 44% looking to sell. It also showed that of those who planned to purchase new properties in the next 12 months, the majority (57%) planned to do so within a limited company structure, further supporting the market-wide trend towards professionalisation.
*Market review *(continued)
Tenant demand remained strong, with RICS reporting that demand was still rising at the time of its December report, with supply remaining weak as evidenced by a decline in landlord instructions coming to market during that month. This imbalance between demand and supply continued to exert upwards pressure on rents in support of the fundamentals underpinning the Private Rented Sector. Rightmove reported that the average asking rent increased by 15.7% in Greater London during 2022 and rose by 9.7% across the rest of the country.
*Residential*
According to UK Finance, total Residential loans to home owners reached £251bn in 2022, a minor decrease from £255bn in 2021. However this stability in overall lending volumes masked a shift in the type of business written, with a buoyant refinancing market compensating for a declining purchase market during the year.
Purchase completions decreased by 9% to £193bn in 2022 (2021: £213bn) as the prior year benefitted from a spike in purchase completions while the stamp duty holiday was in effect. Despite this, annual purchase completions were still considerably higher than the pre-pandemic period in 2019 (£158bn). Remortgage completions increased by 30% to £107bn (2021: £83bn) as borrowers sought to lock in to the best deals before mortgage affordability deteriorated and rates increased further, with remortgages representing 36% of the market total (2021: 28%).
*Commercial*
Throughout the first half of the year, there was a strong sense of confidence in commercial property, supported by improving valuations and rising rents. In the first quarter capital values increased by 3.9% and by a further 3.0% in the second quarter, with rents rising 1.5% and 1.0% respectively. However, wider geopolitical and macroeconomic challenges began to impact in late summer, reversing the value growth recorded in the first half, although some property types were affected more significantly than others.
Retail rents remained broadly static in 2022 according to CBRE, with some insulation from further declines provided by pandemic-induced price corrections throughout 2020 and 2021. Mixed-use asset classes such as semi-commercial property, which offer a diverse income stream underpinned by residential lettings, remained attractive to investors. This property type demonstrated more resilience due to the residential rentals outperforming expectations. Overall, CBRE reported that capital values for ‘all retail’ decreased by 8.1% during the year whilst rents increased by approximately 0.7%.
During 2022, all commercial segments saw a 10% increase in demand since 2021. The volume of transactions in commercial property investment reached £50.4bn in 2022, just 8% below the five-year average.
*Residential development*
Despite the withdrawal of the government’s pandemic support, housing demand remained strong throughout most of 2022, although tailed off at the end of the year as a result of the uncertainty in future economic conditions and increasing interest rates.
Demand remained strongest for houses that were affordable to local populations. It was notable that sales rates for the few apartment schemes funded in London were also high, seemingly bucking that trend.
*Key performance indicators (KPIs)*
Throughout the Strategic report the Key performance indicators (KPIs) are presented on a statutory and an underlying basis.
Management believes that the underlying results and the underlying KPIs provide a more consistent basis for comparing the Group’s performance between financial periods. Underlying results for 2022 and 2021 exclude exceptional items, integration costs and other acquisition-related items.
For a reconciliation of statutory results to underlying results, see page 29.
*1. Gross new lending*
Statutory £5.8bn (2021: £4.5bn)
Definition - Gross new lending is defined as gross new organic lending before redemptions.
2022 performance:
Gross new lending increased 29% in the year and reflected a return to pre-pandemic criteria in our core sub-segments including the reintroduction of lending at higher LTVs for higher credit quality customers.
*2. Loan loss ratio*
Statutory 13bps (2021: -2bps)
Underlying 14bps (2021: -2bps)
Definition - Loan loss ratio is defined as impairment losses expressed as a percentage of a 13 point average of gross loans and advances. It is a measure of the credit performance of the loan book.
2022 performance:
Statutory and underlying loan loss ratios increased in the year as the Group adopted more severe forward-looking macroeconomic scenarios and post model adjustments to account for the potential impact of rising cost of living and borrowing concerns. Loan book growth and changes in the observed risk profile also added to the charge and were partially offset by a release of pandemic-related adjustments and house price appreciation.
*3. Net interest margin (NIM) *
Statutory 278bps (2021: 253bps)
Underlying 303bps (2021: 282bps)
Definition - NIM is defined as net interest income as a percentage of a 13 point average of interest earning assets (cash, investment securities, loans and advances to customers and credit institutions). It represents the margin earned on loans and advances and liquid assets after swap expense/income and cost of funds.
2022 performance:
Both statutory and underlying NIM improved in 2022, primarily due to the benefit of delays in the market passing on base rate rises to savers in full, especially in the first half of the year, partially offset by a net effective interest rate loss as higher reversionary income was more than offset by customers refinancing earlier.
*Key performance indicators *(continued)
*4. Cost to income ratio*
Statutory 27% (2021: 26%)
Underlying 25% (2021: 24%)
Definition - Cost to income ratio is defined as administrative expenses as a percentage of total income. It is a measure of operational efficiency.
2022 performance:
Statutory and underlying cost to income ratios increased in 2022 as a result of the growth in administrative expenses due primarily to a more normalised level of post-pandemic spend, inflationary headwinds and planned investment in the business, including refreshing and upgrading our technology infrastructure post-integration. These costs were moderated by strong income generation in the year, including fair value gains on hedging activities.
*5. Management expense ratio *
Statutory 81bps (2021: 71bps)
Underlying 80bps (2021: 70bps)
Definition - Management expense ratio is defined as administrative expenses as a percentage of a 13 point average of total assets. It is a measure of operational efficiency.
2022 performance:
Statutory and underlying management expense ratios increased in 2022 largely due to higher administrative costs that reflected a more normalised level post-pandemic spend, inflationary headwinds and planned investment in the business, including refreshing and upgrading our technology infrastructure post-integration.
*6. Return on equity*
Statutory 20% (2021: 20%)
Underlying 23% (2021: 24%)
Definition - Return on equity (RoE) is defined as 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 13 point average of shareholders’ equity (excluding £150m of AT1 securities).
2022 performance:
Statutory and underlying return on equity remained strong in 2022 due to strong profitability in the year.
*Key performance indicators *(continued)
*7. OSB solo CRD IV Common Equity Tier 1 capital ratio*
The PRA has granted the Company a waiver to comply with the Capital Requirements Regulation (CRR) as an individual consolidation which includes the Company and subsidiaries except for the offshore servicing entity OSBI, Special Purpose Vehicles (SPVs) relating to securitisations and the CCFS entities acquired in October 2019, defined as OSB solo.
OSB solo 18.4% (2021: 19.4%)
Definition
This is defined as CET1 capital as a percentage of risk-weighted assets (calculated on a standardised basis) and is a measure of the capital strength of the Company.
2022 performance:
The CET1 ratio remained strong, although reduced marginally as capital generation from profitability in the year was offset by loan book growth and payments of dividends.
*8. Savings customer satisfaction – Net Promoter Score (NPS)*
OSB 64 (2021: 70)
CCFS 61 (2020: 71)
Definition - The NPS measures customers’ satisfaction with services and products. It is based on customer responses to the question of whether they would recommend us to a friend. The response scale is 0 for absolutely not to 10 for definitely yes. Based on the score, a customer is a detractor between 0 and 6, a passive between 7 and 8 and a promoter between 9 and 10. Subtracting the percentage of detractors from promoters gives an NPS of between -100 and +100.
2022 performance:
Savings customer NPS declined slightly due to very strong demand in the year which temporarily impacted the service response times and performance levels.
*Financial review*
*Summary statutory results for 2022 and 2021*
*For the year ended *
*31 December *
*2022* *For the year ended *
*31 December *
*2021*
*Summary Profit or Loss * *£m* *£m*
Net interest income *709.9* 587.6
Net fair value gain on financial instruments *58.9* 29.5
Gain on sale of financial instruments *–* 4.0
Other operating income *6.6* 7.9
Administrative expenses *(206.5)* (166.5)
Provisions *1.6* (0.2)
Impairment of financial assets *(29.8)* 4.4
Impairment of intangible assets *–* 3.1
Integration costs *(7.9)* (5.0)
Exceptional items *–* (0.2)
Profit before taxation *532.8* 464.6
Profit after taxation *411.3* 345.0 * *
*Key ratios* * *
Net interest margin *278bps* 253bps
Cost to income ratio *27%* 26%
Management expense ratio *81bps* 71bps
Loan loss ratio *13bps* -2bps
Return on equity *20%* 20% * *
* * *As at *
*31 December *
*2022* *As at *
*31 December *
*2021*
*Extracts from the Statement of Financial Position* *£m* *£m*
Loans and advances to customers 23,612.7 21,080.3
Retail deposits 19,755.8 17,526.4
Total assets 27,567.5 24,532.5 * *
* *
*Financial review *(continued)
*Statutory profit*
Group’s statutory profit before tax increased by 15% to £532.8m (2021: £464.6m) after exceptional items, integration costs and other acquisition-related items of £59.6m (2021: £57.6m). The increase was primarily due to growth in the loan book, an improved net interest margin and net fair value gains on financial instruments resulting from rising swap rates, partially offset by higher administration costs and an impairment charge compared to an impairment credit in 2021.
Statutory profit after tax was £411.3m in 2022, an increase of 19% from £345.0m in the prior year, and included after-tax exceptional items, integration costs and other acquisition related items of £38.7m (2021: £47.8m).
The Group’s effective tax rate reduced to 22.8% compared to 25.7% in the prior year, 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 2022 was 20% (2021: 20%).
*Net interest income*
Statutory net interest income increased by 21% in 2022 to £709.9m (2021: £587.6m), largely reflecting growth in the loan book and an improved net interest margin.
Statutory net interest margin (NIM) was 278bps compared to 253bps in the prior year, up 25bps, primarily due to the benefit of base rate rises. There were delays, especially in the first half of the year, in the market passing base rate rises on to savers in full. In addition, as rates rose, mortgage interest income benefitted from higher expected reversionary income following the end of the fixed product term. This benefit was partially offset by an expectation that customers would on average spend less time on the higher reversionary rate before refinancing. The impact of this, together with other behavioural changes, resulted in a net effective interest rate (EIR) reset loss of £31.6m (2021: £11.5m gain).
*Net fair value gain on financial instruments *
Statutory net fair value gain on financial instruments of £58.9m in 2022 (2021: £29.5m) included a £57.1m net gain on unmatched swaps (2021: £10.3m) following the significant rise in swap prices in the fourth quarter and a net loss of £8.1m (2021: £2.4m gain) in respect of the ineffective portion of hedges.
The Group also recorded a £10.2m net gain (2021: £13.4m gain) from the unwind of acquisition-related inception adjustments, a £1.2m gain (2021: £3.0m) from the amortisation of hedge accounting inception adjustments and a loss of £1.5m from other items (2021: £0.4m gain).
The net gain on unmatched swaps related primarily to fair value movements on mortgage pipeline swaps prior to them being matched against completed mortgages. This benefitted from a step up in interest rate outlook on the SONIA yield curve largely in response to the actions announced in the September ‘mini budget’. 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.
*Financial review *(continued)
*Gain on sale of financial instruments*
There were no sales of financial instruments in 2022.
The gain on sale of financial instruments of £4.0m in 2021, related to the disposal of A2 notes in the PMF 2019-1B securitisation in February 2021.
*Other operating income*
Statutory other operating income of £6.6m (2021: £7.9m) mainly comprised CCFS’ commissions and servicing fees, including those from servicing securitised loans that have been derecognised from the Group’s balance sheet.
*Administrative expenses*
Statutory administrative expenses increased by 24% to £206.5m in 2022 (2021: £166.5m), due primarily to spend returning to a more normalised level post-pandemic, inflationary headwinds and planned investment in the business, including refreshing and upgrading our technology infrastructure post- integration.
The Group’s statutory cost to income ratio increased to 27% (2021: 26%) as a result of the growth in administrative expenses, moderated by strong income generation in the year, including the fair value gains on hedging activities.
The statutory management expense ratio increased to 81bps in 2022 (2021: 71bps) reflecting the higher administrative expenses.
*Impairment of financial assets *
The Group recorded a statutory impairment charge of £29.8m in 2022 (2021: £4.4m credit) representing a statutory loan loss ratio of 13bps (2021: -2bps).
The Group adopted more severe macroeconomic scenarios in its IFRS 9 models as the outlook deteriorated, which led to a charge of £11.6m. Post-model adjustments, to account for rising cost of living and borrowing concerns amounted to a charge of £13.3m and the strong loan book growth and changes in the risk profile in the year resulted in a charge of £15.2m. These were partially offset by a release of £10.3m due to house price appreciation in the year and a £8.3m release from a reduction in pandemic-related post-model adjustments and modelling enhancements. Other charges amounted to
£8.3m.
In the prior year, the impairment credit was largely due to the Group’s adoption of less severe forward-looking macroeconomic scenarios in its IFRS 9 models, reflecting an improved outlook together with the benefit of strong house price performance in the year.
*Financial review *(continued)
*Impairment of intangible assets*
There were no intangible asset impairments in 2022.
The impairment credit to intangible assets of £3.1m in the prior year related to a partial reversal of the impairment of the broker relationships intangible of £7.0m recorded in 2020, as lending volumes in 2021 were higher than previously anticipated.
*Integration costs *
The Group recorded £7.9m of integration costs in 2022 (2021: £5.0m), which largely related to redundancy costs and consultant fees for advice on the Group’s future operating structure.
*Exceptional items*
There were no exceptional costs in 2022.
In the prior year, exceptional costs of £0.2m related to the insertion of OSB GROUP PLC as the new holding company and listed entity of the Group.
*Balance sheet growth*
On a statutory basis, net loans and advances to customers grew by 12% to £23,612.7m in 2022 (31 December 2021: £21,080.3m), supported by originations of £5.8bn in the year.
Total assets also grew by 12% to £27,567.5m (31 December 2021: £24,532.5m), largely due to
the growth in loans and advances to customers and an increase in liquid assets.
On a statutory basis, retail deposits increased by 13% to £19,755.8m as at 31 December 2022 from £17,526.4m in the prior year, as the Group’s attractively priced savings products proved popular with customers.
The Group complemented its retail deposits funding with drawings under the Bank of England’s schemes. Drawings under the Term Funding Scheme for SMEs as at 31 December 2022 remained unchanged from £4.2bn at the end of 2021 and drawings under the Index Long-Term Repo scheme were £300.9m.
*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 31 December 2022, OSB had £1,494.1m and CCFS had £1,522.8m of HQLA (31 December 2021: £1,322.8m and £1,318.0m, respectively).*Financial review *(continued)
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.
As at 31 December 2