OneSavings Bank plc
Interim report for the six months ended 30 June 2020
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 2020.
Following the Combination with Charter Court Financial Services Group plc (CCFS) on 4 October 2019 this press release includes results on an underlying and pro forma underlying basis in addition to a statutory basis, to provide a clear basis for comparison with the previous period . 1
- Underlying profit before tax 2 decreased 14% to £156.3m (H1 2019: pro forma underlying £182.8m) and statutory profit before tax increased 10% to £99.3m (H1 2019: restated £90.5m 3 )
- Underlying net loan book grew by 2% to £18.5bn in the period, or 7% excluding structured asset sales, and statutory net loan book grew by 2% to £18.8bn. Organic originations were £2.1bn (H1 2019: pro forma underlying £3.1bn)
- Continued focus on cost discipline and efficiency delivered an improved underlying cost to income ratio 4 of 26% (H1 2019: pro forma underlying 29%) and statutory cost to income ratio of 31% (H1 2019: restated 29% 3 )
- Underlying net interest margin (NIM) 5 of 250bps (H1 2019: pro forma underlying 270bps) includes the impact of the delay in passing on the base rate cuts in full to savers and the prudently higher liquidity levels that the Group was holding. Statutory NIM of 217bps (H1 2019: 278bps) also impacted by the amortisation of the fair value uplift on acquisition of CCFS net assets
- Underlying loan loss ratio 6 increased to 60bps (H1 2019: pro forma underlying 11bps) and statutory loan loss ratio increased to 59bps (H1 2019: 12bps) due primarily to the impact of adopting more adverse COVID-19 related macroeconomic scenarios in our IFRS 9 models
- To support its customers, the Group had granted payment holidays to c. 26k accounts as at 30 June 2020. The majority of these customers have resumed payment with only 18% of these maturing payment holidays by value being extended
- Fully-loaded Common Equity Tier 1 capital ratio strengthened to 17.4% (31 December 2019: 16.0%)
- As expected, the Group has been informed that it will be subject to a full bail-in requirement for MREL from July 2025 with an expected interim requirement of 18% of risk weighted assets by July 2023
- Underlying basic earnings per share 7 of 26.1p (H1 2019: pro forma underlying 30.3p) and statutory basic earnings per share of 15.5p (H1 2019: 25.5p)
- Underlying return on equity 8 of 18% (H1 2019: pro forma underlying 24%) and statutory return on equity of 9% (H1 2019: 20%)
- Underlying gain on structured asset sales of £33.0m (H1 2019: pro forma underlying £29.8m), as the Group disposed of its remaining notes under the Canterbury No.1 securitisation and PMF 2020-1B, statutory gain of £19.9m
- The Board will continue to assess the appropriateness of dividend payments at year end 2020
Commenting on the results, Group CEO, Andy Golding said:
I am extremely proud of the way that OSB has performed during the COVID-19 pandemic. Our business model and systems have proved to be very resilient and our colleagues have all demonstrated dedication and flexibility, as they worked hard responding to the needs of our savers and borrowers.
We remain focused on supporting our customers who may be experiencing financial difficulty and as at the end of June had provided payment holidays to c. 26k accounts representing 28% of the loan book by value. I am however pleased to report that the majority of these customers have resumed payment after the end of their holiday term, with only 18% of these maturing payment holidays by value being extended.
We entered 2020 with a robust pipeline and continued to attract strong application levels in our core businesses prior to the COVID-19 lockdown restrictions, which then significantly impacted application and completion volumes in the second quarter. Underlying NIM in the first quarter was broadly flat to full year 2019, however it was diluted in the second quarter by delays in passing on the base rate cuts in full to our savers. The lower NIM also reflects the impact of prudently drawing down excess liquidity.
I am encouraged by the recovery in application volumes for our products since the housing market reopened, which are currently approaching 60% of pre-COVID-19 lockdown levels on tighter lending criteria and higher pricing. We expect to deliver double digit underlying net loan book growth for the full year, excluding the impact of the structured asset sales in January. Based on current pricing we expect underlying NIM for the full year to be broadly flat to the first half with the base rate cuts passed on to retail depositors in full by the end of the third quarter. We also expect the underlying cost to income ratio for the full year to be marginally higher versus the first half due to higher other income in the first half from the gain on structured asset sales.
It remains too early to say what the full impact of COVID-19 will be on the UK economy, nevertheless we will continue to be there for our customers, supporting them in the best way that we can. The foundations of our business remain extremely strong, with a very strong capital position and a prudent business model, all of which position us well to respond to the challenges and opportunities ahead and to continue to support our colleagues, customers and communities and deliver value to our shareholders over the long-term.
OneSavings Bank plc Brunswick Group
Alastair Pate, Investor Relations Robin Wrench/Simone Selzer
t: 01634 838973 t: 020 7404 5959
A webcast presentation for analysts will be held at 9:30am on Thursday 27 August.
The presentation will be webcast or call only and will be available on the OneSavings Bank website at www.osb.co.uk/investors/results-reports-presentations.
The UK dial in number is 020 3936 2999 and the password is 234706. Registration is open immediately.
About OneSavings Bank plc
OneSavings Bank 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. OSB is a specialist lending and retail savings Group authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority.
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, InterBay Commercial and Prestige Finance. It is differentiated through its use of highly skilled, bespoke underwriting and an 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, the Term Funding Schemes and the Bank of England Indexed Long-Term Repo operation.
Charter Court Financial Services Group
CCFS focuses on providing Buy-to-Let and specialist residential mortgages, mortgage servicing, administration and credit consultancy and retail savings products. It operates through its three brands Precise Mortgages, Exact Mortgage Experts 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, the Term Funding Schemes and the Bank of England Indexed Long-Term Repo operation.
1 Statutory basis reflects results for the six months to 30 June 2020 for the combined Group and results for the six months to 30 June 2019 for OSB only as presented in the OSB 2019 Interim Report.
Underlying results for the six months to 30 June 2020 reflect results for the combined Group, excluding exceptional items, integration costs and other acquisition-related items.
Pro forma underlying results for the six months to 30 June 2019 assume that the Combination occurred on 1 January 2019 and include six months of results from OSB and CCFS, excluding exceptional items, integration costs and other acquisition-related items.
2 Before exceptional items, integration costs and other acquisition-related items of £57.0m (H1 2019: £9.7m)
3 The Group restated prior year comparatives to recognise £0.5m of interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity, see note 1 to the financial statements
4 Administrative expenses as a percentage of total income
5 Net interest income as a percentage of a 7 point average of interest earning assets, annualised on an actual days basis
6 Impairment losses as a percentage of a 7 point average of gross loans and advances, annualised
7 Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, divided by the weighted average number of ordinary shares in issue
8 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 shareholders equity (excluding £60m of AT1 securities), annualised
Non-IFRS performance measures
OneSavings Bank believes that the non-IFRS performance measures included in this document provide valuable information to the readers as they enable the reader to identify 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 OneSavings Banks 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. Refer to Alternative performance measures in the Financial review for further details, reconciliations and calculations of non-IFRS performance measures included throughout this document, and the most directly comparable IFRS measures.
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, beliefs or opinions, including statements with respect to the business, strategy and plans of OSB and its current goals 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. Statements that are not historical facts, including statements about OSBs, its directors and/or managements 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. 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 OSBs 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 OSBs control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war or hostility and responses to those acts; geopolitical, pandemic or other such events; changes in laws, regulations, taxation, accounting standards or practices, including as a result of an exit by the UK from the EU; regulatory capital or liquidity requirements and similar contingencies outside OSBs control; the policies and actions of governmental or regulatory authorities in the UK, the EU or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; market relating trends and developments; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and the success of OSB in managing the risks of the foregoing.
Accordingly, no reliance may be placed on any forward-looking statement and no representation, warranty or assurance is made 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 OSBs 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 OSBs business, please see Risk review section in the OSB 2019 Annual Report and Accounts. Copies of this are available at www.osb.co.uk and on request 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 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. Nothing in this document is intended to be, or should be construed as, a profit forecast or estimate for any period.
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.
Key Performance Indicators - statutory
Statutory key performance indicators reflect the results for the combined Group for the six months ended 30 June 2020 and results for OSB only for the six months to 30 June 2019 as presented in the OSB 2019 Interim Report.
| £2.1bn |
Gross new organic lending up 29%
H1 2019: £1.6bn
| £18.8bn |
Net loan book up 2%
FY 2019: £18.4bn
| £99.3m |
Profit before tax up 10%
H1 2019: restated £90.5m 1
| 15.5p 2 |
Basic EPS down 39%
H1 2019: 25.5p
| 217bps 3 |
Net interest margin down 61bps
H1 2019: 278bps
| 31% 4 |
Cost to income ratio up 2pps
H1 2019: restated 29% 1
| 59bps 5 |
Loan loss ratio up 47bps
H1 2019: 12bps
| 70bps 6 |
Management expense ratio improved 4bps
H1 2019: 74bps
| 9% 7 |
Return on equity reduced by 11pps
H1 2019: 20%
| 17.4% |
Fully-loaded CET1 ratio strengthened
FY 2019: 16.0%
| 3 months + in arrears stable 8 |
OSB 1.3%, CCFS 0.5%
FY 2019: OSB 1.3%, CCFS 0.3%
| Customer NPS improved 9 |
OSB +67, CCFS +83
H1 2019: OSB +64, CCFS +72
1. The Group restated prior year comparatives to recognise £0.5m of interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity, see note 1 to the financial statements
2. Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, divided by the weighted average number of ordinary shares in issue
3. Net interest income as a percentage of a 7 point average of interest earning assets, annualised on an actual days basis
4. Administrative expenses as a percentage of total income
5. Impairment losses as a percentage of a 7 point average of gross loans and advances, annualised
6. Administrative expenses as a percentage of 7 point average total assets, annualised
7. 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 shareholders equity (excluding £60m of AT1 securities), annualised
8. Portfolio arrears rate of accounts for which there are missing or overdue payments by more than three months as a percentage of gross loans
9. 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 Groups 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 2020 reflect results for the combined Group, excluding exceptional items, integration costs and other acquisition-related items.
Pro forma underlying KPIs for the six months to 30 June 2019 assume that the Combination occurred on 1 January 2019 and include six months of results from OSB and CCFS, excluding exceptional items, integration costs and other acquisition-related items.
| £2.1bn |
Gross new organic lending down 32%
H1 2019: pro forma underlying £3.1bn
| £18.5bn |
Net loan book up 2%
FY 2019: underlying £18.2bn
| £156.3m |
Profit before tax down 14%
H1 2019: pro forma underlying £182.8m
| 26.1p 2 |
Basic EPS down 14%
H1 2019: pro forma underlying 30.3p
| 250bps 3 |
Net interest margin down 20bps
H1 2019: pro forma underlying 270bps
| 26% 4 |
Cost to income ratio improved by 3pps
H1 2019: pro forma underlying 29%
| 60bps 5 |
Loan loss ratio up by 49bps
H1 2019: pro forma underlying 11bps
| 68bps 6 |
Management expense ratio improved by 13bps
H1 2019: pro forma underlying 81bps
| 18% 7 |
Return on equity reduced by 6pps
H1 2019: pro forma underlying 24%
For definitions of key ratios please see footnotes in KPIs - statutory above.
Progress in the first half of 2020 resilient business
I am very proud of the resilience that OneSavings Bank demonstrated during the first half of 2020 in the face of challenges presented by the Coronavirus outbreak. Throughout this period, we rightly prioritised supporting our customers and partners, acting quickly and assertively to offer help to those who might have been experiencing financial difficulties as a result of the COVID-19 pandemic.
I am very pleased with our ability to generate profit despite taking significant impairment charges under IFRS 9 in the period. The Group recorded underlying pre-tax profit of £156.3m and underlying basic earnings per share of 26.1 pence per share in the first half, both down 14% on the prior period due to the increased impairment charges (H1 2019: pro forma underlying £182.8m and 30.3 pence per share, respectively). On a statutory basis, profit before tax increased 10% to £99.3m (H1 2019: restated £90.5m1) and basic earnings per share was 15.5p (H1 2019: 25.5p).
Impairment losses in the first half of 2020 were £54.4m on an underlying basis (H1 2019: £8.6m), representing an underlying loan loss ratio of 60bps (H1 2019: pro forma underlying 11bps), predominantly driven by a £42m charge due to the adoption of more severe COVID-19 related macroeconomic scenarios.
Underlying net interest margin (NIM) was 250bps in the first half of 2020 (H1 2019: pro forma underlying 270bps). Underlying NIM in the first quarter of 2020 was broadly flat to full year 2019, albeit lower than the first half of 2019 due to the changing mix of the OSB loan book as the higher-yielding back book refinanced onto front book pricing. The impact of this mix effect had largely run its course by the end of the first half of 2019. In the second quarter of 2020, NIM was diluted by delays in passing on the base rate cuts in full to our retail savers, and the impact of the higher liquidity that the Group was prudently holding. Statutory NIM of 217bps (H1 2019: 278bps) was also impacted by the amortisation of the fair value uplift on acquisition of CCFS net assets.
The underlying cost to income ratio improved to 26% (H1 2019: 29%) as the business retained its focus on cost efficiency and disciplined running of the combined Group, which was also demonstrated by the underlying management expense ratio improving by 13bps to 68bps for the first half of 2020 (H1 2019: 81bps).
We continue to generate excellent returns despite higher impairment losses, with underlying return on equity for the first half of 2020 at 18% (H1 2019: 24%).
Our colleagues supporting our customers
I am very grateful to each and every colleague, for the effort, perseverance and dedication that they have shown throughout this difficult time. To enable our colleagues to assist our customers to the best of their ability, it was important to ensure that they were supported and kept safe, which we managed whilst everyone did a fantastic job of keeping operations running effectively. I am particularly pleased with the operational performance and resilience shown by our wholly-owned subsidiary OSBIndia.
The majority of our colleagues, both in the UK and India, are currently working from home. Our small branch network remains open for those customers who prefer this channel, and we are responsibly helping those who work in offices, by operating under appropriate protocols. Throughout the pandemic, it has become especially clear how well OSB and CCFS employees are working together, and even though colleagues are not currently physically close, I feel we have truly become one team.
OSB responded rapidly to support customers who might have been facing financial difficulty by offering self-certified payment holidays of up to three months. We are proud that as at the end of June we had helped c. 26k accounts in this way, equivalent to 28% of the Groups mortgage book by value, even though it was apparent that many people who requested payment holidays were doing so to prudently safeguard their cash flow, rather than as a necessity.
Encouragingly, as at 14 August 2020 the majority of these customers were paying, with only 18% of accounts by value with a payment holiday, as at the end of June that have since matured, being extended. We are seeing low levels of requests for new payment holidays.
Towards the end of the period, the Groups application to participate in the Coronavirus Business Interruption Loan Scheme was approved, enabling us to offer financial support to certain smaller business customers, particularly in the area of asset finance.
Strong credit and risk management
The credit quality of the Groups mortgage books remains strong with three months in arrears balances stable at 1.3% for OSB and 0.5% for CCFS at the end of June (31 December 2019: 1.3% and 0.3%, respectively). The weighted average loan to value (LTV) of the Groups mortgage book was 66% as at 30 June 2020 with a weighted average LTV of new business at 68%. Importantly, the Group continues to observe a tight clustering of LTVs around the weighted average.
Throughout the first six months of the year and particularly as mortgage lending began to recover, the Group exercised strong diligence over loan and customer assessment. On an underlying basis, impairment losses in the first half of 2020 were £54.4m (H1 2019: £8.6m), representing an underlying loan loss ratio of 60bps (H1 2019: pro forma underlying 11bps). The increase in impairment losses was predominantly driven by a £42m charge due to the adoption of more adverse macroeconomic scenarios used by the Group in modelling the expected credit losses under IFRS 9 as the onset of the Coronavirus pandemic changed the outlook for the UK economy. The Group receives updated macroeconomic scenarios from its advisors on a regular basis.
The Group, in line with the industry and guidance from regulators, does not consider payment holidays as an automatic transfer from stage 1 to stage 2 under IFRS 9. However, the Group considered whether there were other triggers to determine whether payment holiday accounts should be moved into stage 2, with a lifetime expected credit loss estimate held against the exposure. This has resulted in a proportion of higher risk payment holiday accounts being moved into stage 2 and higher provisions being held. As at 30 June, 26% of payment holiday accounts were in stage 2.
The Group continued to work on its Internal Ratings-Based project in the period. The progress is encouraging post Combination and the Group is planning to submit module 1 to the Prudential Regulation Authority during 2021.
A trusted lender with a strong franchise
The first half of 2020 was a period of contrasting quarters with the Group attracting strong applications and completions in the first quarter, in line with management expectations and at attractive margins, followed by a significant slowdown in the second quarter, through lockdown, mirroring the wider mortgage market and UK economy in general.
When market activity was subdued at the peak of lockdown, we concentrated on progressing existing applications for our customers where we had an existing physical valuation and flexed our operations ensuring that resources were deployed to support customers, including those who wished to take a payment holiday. We quickly adjusted lending criteria, including maximum loan sizes and LTVs, for new business to match our appetite for risk and lending volumes, given the uncertainty surrounding the outlook for house prices, employment levels and economic growth.
When lockdown restrictions began to ease and the mortgage market started to operate effectively once again, we took the opportunity to undertake a controlled increase of business volumes in our core Buy-to-Let and Residential market sub-segments. Our recently introduced product range continues to reflect the Groups prudent risk appetite. We are encouraged by the volumes and quality of new applications we are seeing for our core products, despite tighter lending criteria and have taken the opportunity to increase asset pricing for those products. We have reduced lending growth in our other market sub-segments; commercial business, bridging, development finance, funding lines and second charge, given the greater dependence these businesses have on the macroeconomic cycle. Overall, across all products, application levels are currently approaching 60% of their pre-COVID-19 levels.
Mortgage originations for the Group were £2.1bn for the first six months of 2020, down from £3.1bn on a pro forma underlying basis in the same period last year, reflecting the reduction in lending and applications during lockdown in all segments, following strong activity in the first quarter of 2020.
The Groups underlying net loan book increased by 2% in the first half of 2020 to £18.5bn, after removing the impact of acquisition-related adjustments. The underlying net loan book would have increased by 7%, excluding the impact of structured asset sales that took place at the beginning of the year. On a statutory basis, net loans grew by 2% to £18.8bn from £18.4bn at the end of 2019.
The Group continued to gain recognition from mortgage customers and intermediaries, and in the first six months of 2020, OSB was named Best Specialist Lender by Mortgage Force Awards and the Paradigm Lender Awards, and Precise Mortgages was recognised by SimplyBiz Mortgage Awards as Best Buy-to-Let Lender.
Sophisticated funding model
The Group remains highly liquid with retail deposits continuing as the major source of funding for the Group. Our competitive retail savings proposition allows the Group to raise significant funds. Through both Kent Reliance and Charter Savings Bank, retail deposits reached £16.7bn by the end of the first half on an underlying basis, up 3% from £16.2bn at the end of 2019. At the end of June, the Group reduced new rates offered to savers after the base rate cuts in March. The base rate cuts are also being passed on in full to the back book of easy access savings, with the last cuts effective in September.
Over 14,000 new savings customers joined Kent Reliance in the first six months of 2020 and Charter Savings Bank grew customer numbers by nearly 8,000. The retention rate for savers remained exceptionally high, reaching 95% amongst Kent Reliance customers with maturing fixed rate bonds and ISAs, together with a Net Promoter Score (NPS) of +67 for the first half. Charter Savings Banks NPS was exceptional at +83 with a retention rate of 86% at the end of June 2020. I am delighted that Charter Savings Bank won ISA Provider of the Year at the Consumer Moneyfacts awards and that Kent Reliance was highly commended in the same category.
We have complemented retail funding by further utilising our capital markets expertise, demonstrating an early success of the integration of the Groups capital markets teams following the Combination with CCFS. We securitised £725m of mortgages in two transactions under the CMF and PMF programmes in January, and in March we completed our largest deal to date, securitising £1bn of prime Buy-to-Let originated assets and retaining all of the notes through the Canterbury programme. This transaction provides a sizeable pool of collateral which significantly increases the contingent wholesale funding options available to us through commercial repo transactions. The bonds can also be used in place of whole loan mortgage collateral, against the Bank of Englands ILTR, TFS and TFSME facilities at significantly reduced haircuts. In January 2020, the Group disposed of its remaining notes under the Canterbury No. 1 issue and PMF 2020-1B, generating a statutory gain of £20m (£33m on an underlying basis).
In the first half of 2020, the Group was accepted for the Bank of Englands TFSME with a combined initial allowance of £2bn. As at the end of June 2020, the total borrowings under this scheme were £100m. The Group intends to use the TFSME funding to refinance and extend the duration of drawings under the previous TFS scheme and the Bank of Englands ILTR scheme. TFSME funding may also be used to fund additional growth opportunities where appropriate and in line with our strategy. In the first six months of 2020, the Group repaid £60m of the Bank of Englands Term Funding Scheme leaving a remaining balance of £2.6bn and had ILTR borrowings of £755m as at 30 June 2020.
Well-capitalised strong and sustainable business
The Groups capital position improved further, with a fully-loaded CET1 ratio of 17.4% as at 30 June 2020 (31 December 2019: 16.0%) and a total capital ratio of 18.6% (31 December 2019: 17.3%). These capital ratios include the beneficial impact of the cancelled final dividend payment for 2019 and the application of the Capital Requirements Regulation Quick Fix package, including more generous IFRS 9 transitional relief, which relates to stage 1 and stage 2 increases and extension of the SME support factor.
In addition, liquidity remained significantly in excess of the 2020 regulatory minimum. As at 30 June 2020, OSB and CCFS had liquidity coverage ratios (LCR) of 325% and 149%, respectively (31 December 2019: 199% and 145%, respectively). The Groups LCR was 245% as at 30 June, as we took early action to increase liquidity given the uncertain economic outlook by drawing an additional £465m through the Indexed Long-Term Repo in the first six months of the year. The Group also saw strong demand for its savings products during the ISA season and experienced high levels of retention amongst customers with maturing fixed rate products.
On 23 July 2020, the Group received its Annual Resolution Letter from the Bank of England setting out its preferred resolution strategy. As anticipated, the Group is subject to a single point of entry bail-in requirement which from July 2023 is expected to be equal to 18% of risk weighted assets, rising to a final requirement of two times Pillar 1 and Pillar 2a from July 2025. The Group intends to fulfil its MREL requirement through senior debt issued via a holding company, which we are in the process of setting up, with the first anticipated debt issue in late 2021 subject to market conditions.
The Group had a leverage ratio of 6.8% as at 30 June 2020 (31 December 2019: 6.5%).
The underlying cost to income ratio improved to 26% (H1 2019: 29%) as the business retained its focus on cost efficiency and discipline. Integrating OSB and CCFS continues to achieve cost efficiencies and we are on track to deliver the benefits expected in the first year following the Combination. This includes a streamlined Board, de-duplication of a significant proportion of senior management roles and efficiencies from combining some central and support functions. In light of the pandemic, the Board will take the opportunity to review whether we still want to fully consolidate locations and suppliers or maintain the additional operational resilience. This decision is not expected to have a material impact on the quantum of synergies previously presented at the time of the Combination. The combined Groups efficiency in its business as usual activities is demonstrated by the underlying management expense ratio improving by 13bps to 68bps for the first half of 2020 (H1 2019: 81bps).
There is still significant uncertainty as the Coronavirus pandemic continues to evolve and its impact on the economy begins to be felt. However, we see opportunities in our market segments, demonstrated by strong current demand and expect to achieve double digit underlying net loan book growth for the full year, excluding the impact of the structured assets sales in January. Based on current pricing we expect underlying NIM for the full year to be broadly flat to the first half with the base rate cuts passed on to retail depositors in full by the end of the third quarter. We also expect the underlying cost to income ratio for the full year to be marginally higher versus the first half due to higher other income in the first half from the gain on structured asset sales.
We are seeing the benefits of our combined lending and funding franchises, our secured loan book and strong risk management capabilities. Our capital and liquidity levels are stronger than ever and I am delighted in the way that our people have responded to the challenges so far. Whilst there will be headwinds in front of us, we are in good shape to weather the uncertainty going forward.
Chief Executive Officer
1. The Group restated prior year comparatives to recognise £0.5m of interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity, see note 1 to the financial statements
The first half of 2020 was a period of contrasting quarters. Prior to the Coronavirus pandemic, activity in the mortgage market was flat to the fourth quarter of 2019. From late March 2020, as the Coronavirus pandemic developed and the governments lockdown and social distancing measures were imposed, the overall mortgage market experienced a significant slowdown.
Government restrictions relating to moving home, together with social distancing measures, meant that large valuation firms suspended physical valuations, which negatively impacted the ability to progress mortgage applications. Lenders responded by tightening risk appetite and the number of residential mortgage products offered fell by more than a half, from 5,222 in early March to 2,566 in May 1 , a reduction felt particularly by those who wished to borrow at a higher LTV. In addition, following the governments announcement that mortgage lenders would offer three-month mortgage payment holidays for borrowers in financial difficulties, many lenders chose to concentrate on servicing these requests and reduced new business flows.
For the UK Buy-to-Let market, total gross advances for the first six months of 2020 were £18.5bn compared with £20.8bn in the same period last year 2 reflecting the impact of the Coronavirus pandemic on the wider industry. Landlords confidence continues to be impacted by macroeconomic uncertainty, although research indicates that confidence is gradually recovering. 3
Restrictions in the property industry began to ease on 13 May, and estate agents, housebuilders and mortgage brokers started reporting increased levels of interest, although it is too early to predict the longer term trends. Reduced Stamp Duty Land Tax rates will apply for residential properties purchased from 8 July 2020 until 31 March 2021 inclusive. This is likely to have a positive impact on the housing market, encouraging purchases prior to the end of the period. There has been an increase in the number of mortgages available in the market, albeit still below the levels seen at the beginning of March. Lenders reported that overall spreads on new secured lending to households widened in the second half of 2020 and were expected to widen even more in the third quarter of the year.
1. Moneyfacts, Higher LTV mortgages buck rate trend, 11 May 2020
2. UK Finance, New and outstanding buy-to-let new mortgages, 19 August 2020
3. Bank of England, Credit Conditions Survey 2020 Q2
Review of Groups lending segments
Following the Combination, the Group reports its lending business under two segments: OSB and CCFS.
OneSavings Bank (OSB) segment
The following tables show the OSB segments contribution to statutory profit and statutory loans and advances to customers:
Contribution to profit for the period
|Net interest income||129.7||33.8||163.5|
|Impairment of financial assets||(28.2)||(7.7)||(35.9)|
|Contribution to profit||111.2||27.4||138.6|
|H1 2019, restated 1|
|Net interest income||119.6||30.9||150.5|
|Impairment of financial assets||(5.2)||(0.7)||(5.9)|
|Contribution to profit||109.2||28.2||137.4 |
Loans and advances to customers
|As at 30 June 2020||£m||£m||£m|
|Gross loans to customers||8,986.4||1,950.8||10,937.2|
|Expected credit losses||(48.0)||(23.0)||(71.0)|
|Net loans to customers||8,938.4||1,927.8||10,866.2|
|Risk weighted assets ||4,298.2||817.3||5,115.5|
|As at 31 December 2019|
|Gross loans to customers||8,983.2||1,837.4||10,820.6|
|Expected credit losses||(21.6)||(14.0)||(35.6)|
|Net loans to customers||8,961.6||1,823.4||10,785.0|
|Risk weighted assets||4,244.0||846.0||5,090.0|
1 The Group restated prior year comparatives to recognise £0.5m of interest expense on the £22m Perpetual Subordinated Bonds previously classified as equity
Buy-to-Let/SME sub-segment: gross loans
| 30-Jun-2020 |
| 31-Dec-2019 |
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, bridge finance, residential development finance to small and medium-sized developers, secured funding lines to other lenders and asset finance.
Organic originations in the Buy-to-Let/SME sub-segment decreased by 38% versus the same period in 2019, to £858.3m (H1 2019: £1,374.5m). The volume of new business reflects the three-fold dynamic of lending in the first six months of 2020: strong activity for nearly all of the first quarter, based on previous applications, the reduction in lending and applications for purchase and remortgage during lockdown, followed by a controlled increase in activity as lockdown was eased.
At the end of June 2020, the Buy-to-Let/SME net loan book remained broadly flat at £8,950.0m compared with the year-end value of £8,961.6m and, excluding structured asset sales, it increased by 5% in the period.
The Buy-to-Let gross loan book remained broadly flat at the end of June 2020 at £7,762.8m (31 December 2019: £7,727.0m). The profile of borrowers in this sub-segment continues to reflect the professionalisation of the market, with lending increasingly dominated by professional, multi-property landlords, who represented 94% of completions by value for the Kent Reliance brand and 78% of mortgage applications for house purchases came from landlords borrowing via a limited company (H1 2019: 81% and 73%, respectively). The increase in both of these metrics confirms the continued professionalisation of Buy-to-Let. The Groups share of Buy-to Let originations was 7% in the period.
Refinancing continued to account for the majority of Buy-to-Let advances with 58% of Kent Reliance Buy-to-Let completions comprising remortgages in the first half, and five-year fixed rate mortgages continued to be in high demand at 46% (H1 2019: 61% and 51%, respectively). In addition, Choices, OSBs retention programme, remained popular, with around 69% (H1 2019: 76%) of existing borrowers choosing a new product with the Bank within three months of their original product ending.
Towards the beginning of May, Buy-to-Let lending recommenced at up to 75% LTV as borrowers and intermediaries welcomed the return of physical valuations. Headline prices were increased across the product range, including for certain specialist products such as Houses of Multiple Occupation in order to manage volumes, supporting operational capacity and service levels.
The weighted average loan to value (LTV) of the Buy-to-Let book as at 30 June 2020 was 68% with an average loan size of £260,000 (31 December 2019: 68% 1 and £260,000). The weighted average interest coverage ratio for Buy-to-Let origination during the first six months of 2020 was 203% (H1 2019: restated 189% 2 ).
Through its InterBay brand, OSB 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. The gross loan book in the commercial business reduced to £852.0m (31 December 2019: £888.0m), largely as OSB reviewed its risk appetite, as a result of the uncertain outlook, leading to tightened underwriting criteria for semi-commercial loans in light of the Coronavirus. The business also stopped taking new applications for its commercial products.
The weighted average LTV of the commercial book remained low at 66% and the average loan size was £385,000 for the first six months of 2020 (31 December 2019: 67% and £375,000).
InterBay Asset Finance, which predominantly targets UK SMEs and small corporates financing business-critical assets, followed a similar pattern to our other commercial businesses, with a strong start to the year being halted by the onset of Coronavirus and the impact of lockdown on its customers which began in early March. The primary focus was to support our customers and help them protect their cash flows, although we began to see improvements in the demand for new lending towards the end of the period. The gross carrying amount under finance leases was £52.6m as at 30 June 2020 (31 December 2019: £47.7m).
Our Heritable residential development business provides development finance to small and medium-sized residential developers. The preference is to fund house builders who 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 come primarily from a mixture of repeat business from the teams extensive existing relationships and referrals.
The residential development funding gross loan book remained broadly flat at the end of June 2020 at £150.0m with a further £101.4m committed (31 December 2019: £146.1m and £115.1m, respectively). The construction pipeline was deferred and advances reduced as customers closed down development sites, in line with government guidance, in late March 2020. All of these sites have now reopened.
Since inception through to the end of June 2020, Heritable has written £1,191m of loans, of which £585m have been repaid to date. In addition, as at the end of June, the business had commitments to finance the development of 2,264 residential units, the majority of which are houses located outside central London. We continue to be cautious on approving new developments given current macroeconomic uncertainty.
In the first half of 2020, OSB continued to provide most of its secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as bridging finance and asset finance. Total credit approved limits as at 30 June 2020 were £510.0m with total loans outstanding of £221.6m (31 December 2019: £540.0m and £222.1m, respectively). During the period, lending was paused for the bridging business, reopening recently with stricter criteria. However, the Group continued to fund a small number of non-property borrowers. No new funding lines were added in the period and overall credit approved limits decreased by £30m across existing funding lines. New business opportunities were available but, given the macroeconomic uncertainties, OSB continued to adopt a prudent risk approach.
Buy-to-Let/SME made a contribution to profit of £111.2m, up 2% compared with the restated value of £109.2m 3 in the first six months of 2019, with the benefit of higher income partially offset by an increase in impairment losses to £28.2m (H1 2019: £5.2m) as the Group used more adverse macroeconomic scenarios in modelling the expected credit losses under IFRS 9.
The Group remains highly focused on the risk assessment of new lending, as demonstrated by the average LTV in the Buy-to-Let/SME segment of 68% (31 December 2019: restated 68% 2 ) and with only 2.0% of loans exceeding 90% LTV (31 December 2019: 1.8%). The average LTV for new Buy-to-Let/SME origination was 71%.
1. The Group restated the comparative LTVs due to a change in aggregation methodology
2. Interest coverage ratio was restated for H1 2019 from 175% to 189% due to an improvement in the calculation methodology
3. Net interest income and contribution to profit were restated as a result of the recognition of interest expense on the £22m of Perpetual Subordinated Bonds previously classified as equity.
Residential sub-segment: gross loans
| 30-Jun-2020 |
| 31-Dec-2019 |
This segment comprises lending to owner-occupiers, secured via either first or second charges against the residential home. The Bank also provides funding lines to non-bank lenders which operate in high yielding, specialist sub segments, such as residential bridge finance.
The Residential sub-segment gross loan book was £1,950.8m as at 30 June 2020, up 6% compared with £1,837.4m at the end of 2019, with organic originations of £184.7m during the period (H1 2019: £259.9m). As with the Buy-to-Let/SME sub-segment, the level of organic originations reflects strong activity for nearly all of the first quarter of 2020 based on previous applications, the reduction in lending and applications during lockdown and the controlled increase in activity as lockdown was eased. Residential lending was particularly impacted by the governments restrictions on moving home. Residential first charge lending recommenced towards the beginning of May at LTVs of up to 75%, supported by physical valuations, with stricter underwriting criteria in place and headline price increases.
OSBs first charge gross loan book increased 9% in the period to £1,602.0m from £1,466.6m at the end of 2019.
Our Kent Reliance brand provides bespoke first charge mortgages, typically to prime credit quality borrowers with more complex circumstances, for example, high net worth borrowers with multiple income sources and self-employed borrowers. These circumstances often preclude them from the mainstream lenders, as most favour automated decision-making over manual underwriting. The product range also includes near-prime residential products. Kent Reliance also operates in the shared ownership sector, where borrowers buy a property in conjunction with a housing association. A revised shared ownership product set was launched in June 2020, demonstrating commitment to this sub-segment.
The OSB second charge mortgage brand, Prestige Finance, no longer offers new mortgages to borrowers and its loan book is in run-off and managed by Precise Mortgages. Second charge mortgages are currently offered by the Group under the Precise Mortgages brand as a sub-segment of CCFS. The Prestige Finance second charge residential loan book had a gross value of £335.7m as at 30 June 2020 (31 December 2019: £358.6m).
OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, such as residential first and second charge finance. The Bank continued to adopt a cautious approach to these more cyclical businesses given macroeconomic uncertainty. Total credit approved limits as at 30 June 2020 were £29.8m with total loans outstanding of £13.1m (31 December 2019: £31.0m and £12.2m, respectively).
Residential mortgages made a contribution to profit of £27.4m, down 3% compared with the restated value of £28.2m 1 in the same period of 2019. Growth in income during the period was more than offset by higher impairment losses which increased to £7.7m from £0.7m in the prior period reflecting more adverse macroeconomic scenarios used in modelling expected credit losses under IFRS 9.
The average book LTV remained low at 58% (31 December 2019: restated 57% 2 ) with 5.2% of loans by value with LTVs exceeding 90% (31 December 2019: 3.3%). The average LTV of new residential origination in the first six months of 2020 was 69%.
1. Net interest income and contribution to profit were restated as a result of the recognition of interest expense on the £22m of Perpetual Subordinated Bonds previously classified as equity.
2. The Group restated the comparative LTVs due to a change in aggregation methodology.
Charter Court Financial Services (CCFS) segment
The CCFS segment review is presented on an underlying basis and excludes acquisition-related items and reconciliation to the statutory basis is presented in the table below.
Segment results for the six months to 30 June 2019 assume that the Combination occurred on 1 January 2019 and exclude acquisition-related items.
Contribution to profit for the period
|H1 2020|| Buy-to-Let |
| Residential |
| Bridging |
| Second charge |
| Other 1 |
| Total |
| Acquisition- related items |
| Total |
|Net interest income||55.9||33.5||6.8||3.6||3.5||103.3||(33.0)||70.3|
|Fees and commissions income||-||0.1||-||-||2.8||2.9||-||2.9|
|Fair value losses||-||-||-||-||(10.9)||(10.9)||6.5||(4.4)|
|Gain on sale of loans||-||-||-||-||15.1||15.1||(13.1)||2.0|
|Impairment of financial assets||(5.7)||(10.7)||(0.9)||(1.2)||-||(18.5)||0.2||(18.3)|
|Contribution to profit||50.2||22.9||5.9||2.4||10.5||91.9||(39.4)||52.5|
|Net interest income||57.1||31.1||7.9||3.4||0.6||100.1|
|Fees and commissions income||0.1||0.1||-||-||2.1||2.3|
|Fair value losses||-||-||-||-||(7.2)||(7.2)|
|Gain on sale of loans||-||-||-||-||29.8||29.8|
|Impairment of financial assets||(1.0)||(1.3)||(0.3)||(0.1)||-||(2.7)|
|Contribution to profit||56.2||29.9||7.6||3.3||25.3||122.3|
1. Other relates to the net interest income from acquired loan portfolios, fee income from third party mortgage servicing, fair value losses and gains on structured assets sales.
Loans and advances to customers
|As at 30 June 2020|| Buy-to-Let |
| Residential |
| Bridging |
| Second charge |
| Other |
| Total |
| Acquisition-related items 1 |
|Gross loans to customers||4,986.3||2,248.5||199.4||220.2||19.9||7,674.3||242.1||7,916.4|
|Expected credit losses||(9.0)||(14.0)||(1.4)||(1.7)||-||(26.1)||0.7||(25.4)|
|Net loans to customers||4,977.3||2,234.5||198.0||218.5||19.9||7,648.2||242.8||7,891.0|
|As at 31 December 2019|
|Gross loans to customers||4,748.5||2,170.8||214.4||218.6||22.1||7,374.4||294.7||7,669.1|
|Expected credit losses||(3.5)||(3.6)||(0.5)||(0.4)||-||(8.0)||0.7||(7.3)|
|Net loans to customers||4,745.0||2,167.2||213.9||218.2||22.1||7,366.4||295.4||7,661.8|
1. See reconciliation of statutory to underlying and pro forma underlying results in the Financial review.
CCFS gross loans
| 30-Jun-2020 |
| 31-Dec-2019 |
1. Other relates to acquired loan portfolios
Charter Court Financial Services targets specialist mortgage market segments with a focus on specialist Buy-to-Let, residential, bridging and second charge lending.
The CCFS underlying net loan book grew 4% to £7,648.2m to the end of June 2020 (31 December 2019: £7,366.4m) and, excluding the impact of structured asset sales, the underlying net loan book would have been 9% higher than at the end of 2019.
Organic originations were £1,070.8m in the first half of 2020, down from £1,490.0m of new business written in the same period last year. As with the OSB segment, the volume of new business reflects the three-fold dynamic of the first half of 2020: a strong first quarter, followed by a slowdown as the impact of the governments social distancing measures and UK lockdown took effect, and the measured rise in business as lockdown was eased. As a result of lockdown, physical property valuations became extremely limited and the decision was taken to pause new applications at the beginning of the second quarter of 2020, concentrating instead on managing the existing applications where possible. The subsequent return was gradual, initially with a limited suite of products with tighter lending criteria. Additional products were introduced as the UK mortgage market began to operate more effectively.
In the first half of 2020, CCFS organic originations in the Buy-to-Let sub-segment through Precise Mortgages were £697.2m (H1 2019: £909.1m), in line with reduced activity in the overall UK mortgage market during the second quarter of 2020. The net Buy-to-Let loan book increased 5% in the period to £4,977.3m after structured asset sales. The Groups share of Buy-to Let originations was 7% in the period.
The gradual re-entry into the mortgage market accelerated towards the end of May with a return to lending with products of up to 75% LTV as physical valuations became possible again. Despite tightened underwriting criteria and an increase in headline interest rates introduced in the second quarter of 2020, CCFS Buy-to-Let products were in demand with intermediaries and borrowers, and application levels increased. Of the Buy-to-Let completions in the first half of 2020, 52% represented lending to limited companies, loans for specialist property types including houses of multiple occupation, multi-unit properties and holiday lets represented 33% and five-year fixed rate products were 57% (H1 2019: 49%, 30% and 74%, respectively).
Precise Mortgages maintained its top position in the BVA BDRCs Project Mercury rankings for effectiveness of its marketing efforts for the first quarter of 2020 reflecting its strong brand image amongst the intermediaries.
The weighted average LTV of the book in this segment was 74% with an average loan size of £180,000 (31 December 2019: 71% and £183,000). New lending average LTV was 73% and the weighted average interest coverage ratio for Buy-to-Let origination was 205% in the first half of 2020 (H1 2019: 71% and 204%, respectively).
On an underlying basis, Buy-to-Let made a contribution to profit of £50.2m in the first half of 2020, down 11% (H1 2019: £56.2m) as net interest income decreased 2% to £55.9m and the Group recognised higher impairment losses of £5.7m versus £1.0m in the prior period reflecting the impact of more adverse macroeconomic scenarios used in modelling expected credit losses under IFRS 9.
On a statutory basis, the Buy-to-Let sub-segment made a contribution to profit of £31.6m.
CCFS specialist residential lending decreased in the first half of 2020 compared with the same period in 2019 with new originations down 37% to £237.2m (H1 2019: £376.3m). As a result of the Coronavirus pandemic, prudent additional underwriting checks were applied to lending in the second quarter of 2020 and interest rates were increased marginally, to manage application levels to operational capacity in light of additional demands including managing customers requesting payment holidays. However, CCFS expertise and strong customer propositions, especially in areas such as Help-to-Buy, allowed it to continue to pursue lending with stronger risk-adjusted returns versus mainstream markets.
The average loan size for the residential sub-segment was £159,000 (31 December 2019: £159,000) with an average LTV for new lending of 71% (H1 2019: 72%) and book LTV of 70% as at 30 June 2020 (31 December 2019: 67%).
The residential sub-segment made a contribution to profit of £22.9m on an underlying basis, down 23% compared with £29.9m in the same period in 2019 as impairment losses increased to £10.7m from £1.3m in the same period of 2019 reflecting more adverse macroeconomic scenarios used in modelling expected credit losses under IFRS 9.
On a statutory basis, the Residential sub-segment made a contribution to profit of £11.6m.
The Group maintained its focus on high-quality regulated and unregulated bridging lending, rather than reacting to increased competition in short-term lending during the first quarter of 2020. Short-term bridging originations through CCFS reduced to £108.7m in the first half of 2020 compared with £168.0m in the first half of 2019. This led to a reduction in the gross loan book in this sub-segment to £199.4m (31 December 2019: £214.4m).
The business withdrew its bridging products during lockdown and returned later than with residential and Buy-to-Let lending with a much reduced suite of products, significantly tighter underwriting criteria and stronger pricing.
On an underlying basis, the bridging sub-segment made a contribution to profit of £5.9m in the first half of 2020, down 22% compared with £7.6m in the same period of 2019, reflecting a decrease in net interest income and higher impairment losses of £0.9m (H1 2019: £0.3m).
On a statutory basis, the bridging sub-segment made a contribution to the Groups profit of £5.0m.
Second charge sub-segment
The second charge gross loan book remained largely flat at £220.2m compared with £218.6m as at 31 December 2019. The organic originations in this sub-segment were £27.7m down 24% on £36.6m in the first half of 2019.
The business withdrew its products during lockdown and a revised and more limited product set has been introduced for second charge mortgage, late in the period with a maximum LTV of 50% and loan size of £250k.
The second charge sub-segment made a contribution to profit of £2.4m on an underlying basis, down 27% compared with £3.3m in the first half of 2019 as impairment losses increased from £0.1m to £1.2m in the first half of 2020.
On a statutory basis, the contribution to profit from the second charge sub-segment was £1.8m.
Summary statutory results
Review of the Groups performance on a statutory basis reflecting results for the six months to 30 June 2020 for the combined Group and results for the six months to 30 June 2019 for OSB only as presented in the OSB 2019 Interim Report.
| Restated 1 |
|Summary Profit or Loss||£m||£m|
|Net interest income||233.8||150.5|
|Fair value losses on financial instruments||(12.1)||(7.4)|
|Gain on sale of financial instruments||19.9||-|
|Net fees and commissions||3.7||0.3|
|External servicing fees||-||(0.1)|
|Impairment of financial assets||(54.2)||(5.9)|
|Impairment of intangible assets||(7.0)...|