Britannia Building Society - Co

Transcription

Britannia Building Society
Report and Cessation Accounts
For the period ended 31 July 2009
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Directors’ report
Business review
The period covered by this review is 1 January 2009 to 31 July 2009. On 1 August 2009, the Society
transferred its engagements to The Co-operative Financial Services (‘CFS’), following approval by its
members and confirmation by the Financial Services Authority (‘FSA’).
This report has been prepared by the Cessation Accounts Committee (‘the Committee’), a Committee
comprising six former directors of the Society, namely Rodney Baker-Bates, Neville Richardson, Phil Lee,
Tim Franklin, Chris Jones and Stephen Kingsley. A statement of the responsibilities of the directors and the
Committee in respect of the preparation of the Report, Cessation Accounts and the Annual Business
Statement is set out on pages 6 and 7.
During the period, the Society remained focused on its mission to become known as Britain’s best mutual
whilst undertaking the extensive planning and integration activity required to ensure the successful
completion of the merger with CFS – the first ever merger between two different types of mutually-owned
businesses.
Basis of preparation
The accounts have been prepared on a going concern basis as the entire business of the Group and the
Society has continued to operate within the CFS business from 1 August 2009.
Results for the period
Challenging market conditions and the low interest rate environment, with base rates at an all time low of
0.5%, have had a significant impact on the Group’s interest margins. Despite this, the Group delivered
strong profits with pre-tax operating profit, before charging costs of £26.9 million relating to the merger with
CFS, for the period of £70.7 million (2008 full year : £23.2 million). During the period the Society purchased
£99.5 million of its own subordinated debt and £99.1 million of structured debt issued by its Leek
securitisation vehicles. These transactions resulted in a profit of £57.9 million recognised through gains less
losses from other financial instruments. Consistent with its previous practice, and in line with its risk
management policies, the Group continued to close out swap positions during the period generating
significant profits. These are included within gains less losses from derivative financial instruments for the
period of £45.0 million (2008 full year : £25.3 million).
At 31 July 2009, total assets stood at £34.0 billion, a decrease of £3.2 billion from the year end position.
Mortgage balances had fallen to £23.8 billion (2008 : £24.2 billion) due to constrained market conditions and
management actions to retain the organisation’s focus on balance sheet strength rather than growth. Net
lending in the period totalled £(480) million (2008 : £(1,462) million). Since the end of 2008 total share
balances fell slightly by £0.5 billion, to £18.2 billion.
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Liquid assets, in the form of cash and authorised investments were £8.2 billion, representing 29.2% of share
and deposit liabilities (2008 : 33.5%). In 2008, the Bank of England launched its Special Liquidity Scheme
which allows banks to swap their high quality mortgage-backed and other securities for UK treasury bills for a
defined period. In common with many banks and building societies, the Group has used this facility as an
efficient way of maintaining a high level of liquidity. In 2009 the Society issued a £1.4 billion covered bond to
enable it to access this scheme.
The Group recognised net increases in the fair value of investment securities carried at fair value of £12.0
million (2008 : reduction of £40.8 million) during the period through the available-for-sale reserve. These
increases in fair value will only be realised if the Group chooses to sell the investment securities before they
reach maturity, at which point they are expected to be redeemed at face value.
Total Group capital remained at a healthy level, standing at 14.1% (2008 : 13.8%) under the Financial
Services Authority’s new capital adequacy requirements.
Key performance indicators
The Group managed its performance using a balanced scorecard approach and Key Performance Indicators
(KPIs). KPIs of the Group (other than profit) include three financial indicators and two non-financial
indicators.
The financial indicators were:
•
Member Business net interest margin. The Society continued to demonstrate high value to members
through competitive rates for both mortgagors and savers and kept the net interest margin at below 1%;
•
Management expenses as a percentage of mean total assets under management. The Group
maintained a strong focus on managing ongoing expenses but the reduction in assets resulted in the
ratio of management expenses as a percentage of mean total assets under management increasing
slightly to 0.64% (2008 : 0.62%). This ratio has been calculated on an annualised basis and excludes
impairment losses for counterparties, merger costs and compensation levies.. Exceptional costs of
£26.9 million relating to the merger and integration with CFS were charged in the period; and
•
Britannia Membership Reward (BMR) - a BMR payment of £20.0 million has been accrued for the period
to 31 July 2009. The final amount to be paid out will be dependent on profits of the Britannia business
over the full calendar year and will be approved by the CFS Board in 2010.
The non-financial indicators were:
•
Customer satisfaction. The Group has maintained its impressive record of customer advocacy with
some 88% of members saying that they would recommend Britannia; and
•
Employee satisfaction. Our independent surveys show that 95% of our people were proud to work for
Britannia.
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Principal risks and uncertainties and financial risk-management objectives and policies
The Group as a whole had a low appetite for risk and actively sought to mitigate its exposure to risks and
uncertainties, particularly so in the ongoing challenging market conditions during the period.
The Group’s objective was to minimise the impact of financial risks upon its performance. The key risks
faced by the business were credit risk, liquidity risk, market risk and operational risk. A high-level summary
of these risks and uncertainties is included below and more detail is included in Notes 51 - 57 to the
accounts:
•
Credit risk is the risk that customers or treasury counterparties cannot meet their obligations to us
as they become due. Credit risk for the Group arose from loans to retail and commercial customers,
the liquid and investment assets held and from derivative contracts with other banks. The economic
circumstances made identification and management of credit risk more challenging due to the
heightened risk of customer and counterparty default and the difficulty in estimating the expected
cash flows where loans were identified as impaired. The Group’s processes for identifying,
evaluating and managing this risk are set out in Note 52 to the accounts;
•
Liquidity risk is the risk of having insufficient liquid assets to fulfil obligations or liabilities as they
become due, or the risk that the cost of raising liquid funds is too expensive or sufficient wholesale
funds are not available. The Group’s processes for identifying, evaluating and managing this risk
are set out in Note 53 to the accounts;
•
Market risk is the risk that the value of, or income or costs arising from, the Group’s assets and
liabilities change as a result of changes in interest rates, exchange rates or FTSE indices. The
Group used derivative financial instruments to manage, or hedge, these risks. The Group’s
processes for identifying, evaluating and managing this risk are set out in Note 54 and the approach
to hedging is set out in Note 55 to the accounts; and
•
Operational risk is the risk of loss arising from poor or failed processes or systems, human error or
external events. The Group’s processes for identifying, evaluating and managing this risk are set
out in Note 57 to the accounts.
The Group managed these risks through a risk-management framework, Board policies and its Treasury and
Credit Risk departments. A number of committees, including the Audit Committee, Asset and Liability
Committee and the Group Credit Committee supported the Board in the measurement and management of
these risks.
Disclosure of information to the auditors
The Committee confirms that, so far as it is aware, there is no relevant audit information of which the
Society’s auditors are unaware and that it has taken all steps that it ought to have taken to make itself aware
of any relevant audit information and to establish that the Society’s auditors are aware of that information.
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Directors
The Directors of the Society during the period to 31 July 2009 were:
Rodney Baker-Bates *
Keith Cameron *
Tim Franklin
Bill Gordon (retired 21 April 2009)*
Francis Gugen *
Peter Harvey *
Chris Jones *
Stephen Kingsley *
Phil Lee
David McCarthy
Neville Richardson
Bridget Rosewell *
Tom Sawyer *
* Non-executive director
Francis Gugen ceased to hold office as a director on 19 September 2008 in accordance with Rule 24(1)b of
the Society’s rules as a result of ceasing to hold in his own right a shareholding of not less than £1,000. This
was due to a personal oversight on the part of Mr Gugen and, upon becoming aware of it, Mr Gugen
promptly informed the Board, opened a new investment account and was re-appointed by the Board as a
non-executive director of the society on 24 February 2009. The Board has satisfied itself that no decisions of
the Board or any committees of the Board on which Mr Gugen served would have been affected by these
facts but has nevertheless ratified all such decisions taken during the period that Mr Gugen had ceased to
hold office.
On 1 August, the Society transferred its engagements to CFS. Tim Franklin, Phil Lee and Neville Richardson
were appointed as Directors and Rodney Baker-Bates, Peter Harvey, Chris Jones and Stephen Kingsley as
Non-executive Directors of CFS following the merger.
None of the Directors had any interest in the share capital of the Society’s connected undertakings at any
time during the financial period.
Employees
The Society was an equal opportunity employer and it gave full consideration to all applications for
employment from disabled people. All applicants for roles within the Group were assessed solely on their
ability to carry out the role. If existing staff members became disabled then every effort was made to
maintain their position or, if this was not possible, to provide appropriate training to enable them to take on a
role elsewhere in the Group.
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'Being a great place to work, grow and develop' was one of the Society’s givens. The Britannia Management
Academy (BMA) training programme continued to run through the period to ensure that our managers had
the necessary understanding, tools and support to manage and develop our people. The Society also
recognised the importance of effective communication with its people. Such communication included an
active intranet site, in-house publications and regular team briefings. The Society’s internal staff satisfaction
survey, Viewpoint, continued to show industry-leading levels of staff satisfaction. Overall employee
satisfaction stood at 94% (2008 : 95%).
Fixed assets
The directors consider the estimated market value of the Group’s interest in land and buildings to be not less
than its net book value at 31 July 2009.
Creditor payment policy
The Group paid supplier invoices for the complete provision of goods and services (unless there was an
express provision for stage payments) in full conformity with the terms and conditions of the purchase and
within agreed payment terms. The Group’s policy was to agree the terms of payment at the start of trading
with the supplier, ensure that suppliers are aware of the terms of payment and pay in accordance with its
contractual and other legal obligations.
Creditor days at 31 July 2009 were 12 days (2008 : 13 days).
Charitable and political donations
During the period, the Society and its subsidiaries made donations to charities and other deserving causes
totalling £244,000. Some £214,000 of this total was allocated through the Britannia Building Society
Foundation. No contributions were made for political purposes.
Statement of directors’ responsibilities
In respect of the preparation of the Report, Cessation Accounts and the Annual Business Statement
The Cessation Accounts Committee (‘the Committee’) comprising certain former Directors of the Society, is
responsible for preparing the Directors’ Report, the Corporate Governance Report, the Cessation Accounts
and the Annual Business Statement in accordance with applicable law and regulations.
The Building Societies Act 1986 requires the Committee to prepare Group and Society accounts for the
financial period to 31 July 2009. Under that law it is required to prepare the Group Cessation Accounts in
accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and applicable
law and has elected to prepare the Society Cessation Accounts on the same basis.
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The Group and Society Cessation Accounts are required by law and IFRS, as adopted by the EU, to present
fairly the financial position and the performance of the Group and the Society at the end of the financial
period. In preparing the Group and Society Cessation Accounts the Committee is required to:
•
choose appropriate accounting policies and apply them consistently;
•
make reasonable and prudent judgments and estimates;
•
state whether applicable accounting standards have been followed, subject to any material
departures disclosed and explained in the Cessation Accounts; and
•
prepare the Cessation Accounts on the going-concern basis, unless it is inappropriate to presume
that the Group and Society would have been able to continue in business had it so chosen.
In addition to the Cessation Accounts, the Act requires the Committee to prepare an Annual Business
Statement and a Directors’ Report, each containing prescribed information relating to the business of the
Group.
In respect of accounting records and internal control
The former Directors were responsible for ensuring that the Society and its connected undertakings:
•
kept accounting records in accordance with the Building Societies Act 1986; and
•
took reasonable care to establish, maintain, document and review such systems and controls as are
appropriate to its business in accordance with the rules made by the Financial Services Authority
under the Financial Services and Markets Act 2000.
The former Directors had general responsibility for taking such steps as were reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
The former Directors were responsible for the maintenance and integrity of the corporate and financial
information included on the Society’s website.
Legislation in the UK, governing the preparation and dissemination of cessation accounts may differ from
legislation in other jurisdictions.
Appointment of auditors
Following the transfer of engagements to CFS, PriceWaterhouseCoopers LLP will retire as auditors.
Rodney Baker-Bates
Committee Chairman
On behalf of the Cessation Accounts Committee
22 October 2009
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Corporate governance report
The Board directed and supervised the Group, providing leadership within a framework of prudent and
effective controls, which enabled risk to be assessed and managed. During the period under review, the
Board met on 12 occasions. The Board set strategic aims to ensure that the necessary financial, human and
other resources were in place for Britannia to meet its objectives, and reviewed management performance.
Throughout the period, the Group complied with the Interim Prudential Sourcebook for Building Societies and
the Integrated Prudential Sourcebook as applicable. These are issued by the Financial Services Authority
and include guidance for boards and management. The Group complied with all relevant aspects of the
Combined Code of Best Practice on Corporate Governance.
The Board assessed all of its non-executive directors as being independent in accordance with the criteria
set out in the Code. All Board members had access to the director of corporate governance for any further
information they required. Independent professional advice was available to directors in appropriate
circumstances at the Society’s expense, and Britannia had arranged insurance cover in respect of legal
action against the directors and officers.
The directors maintained a schedule of reserved matters, which were solely for the decision of the Board, for
example the maintenance of the corporate plan and the approval of annual budgets and treasury policy.
Other matters were delegated to the group executive board and senior management as appropriate, for
example product and services development, staffing and marketing. All directors received regular
information about the Group so that they could play a full part in Board meetings.
Directors submitted themselves for re-election every three years and new directors were historically
appointed to the Board on the recommendation of the nominations committee. No new Board appointments
were made in the period under review. Since April 2001, non-executive directors’ tenure could not exceed
seven years. Prior to this the maximum was ten years. The normal retirement age was 60 for executive
directors and 70 for non-executive directors.
In view of the merger with CFS the annual review of the effectiveness of the Board was not carried out.
The Board was ultimately responsible for the Group’s system of internal control (including ongoing reviews of
effectiveness). Through the audit committee, the Board conducted a continuous rigorous review of the
Group’s systems of internal control, which were considered to have been satisfactory through the period.
The review encompassed all material controls, including financial, operational and compliance controls and
risk management systems.
The Board determined the overall risk appetite strategy and owned the Individual Capital Adequacy
Assessment Process, the business’s own review of how well its capital resources met its expected needs, as
required by the Financial Services Authority. The Group had a formal structure for managing risk, including
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established risk limits, reporting lines, mandates and other controls. The Board reviewed this structure
regularly in line with new requirements from regulators.
Day-to-day management of the Group was devolved by the Board to the group executive board. Several
sub-committees acted for the Board to ensure that non-executive directors had a direct role in Britannia’s
corporate governance.
The assets and liabilities committee managed and controlled the balance sheet exposures of the Group. The
committee developed, reviewed and maintained the long-term funding policy, agreed, implemented and
reviewed short-term funding plans, formulated long- and short-term views on interest rate movements and
decided on appropriate courses of action and set and reviewed treasury policy exposure limits within
parameters agreed by the Board. The committee also approved and monitored the Basel treasury rating
systems.
The nominations committee consisted of all members of the Board and met to review the composition of the
Board and its sub-committees, to review the Group approach to the management of high potential talent and
to ensure that Britannia had robust succession plans in place to cover key roles within the business.
The remuneration committee comprised four non-executive directors. The committee met twice in the period
and ensured that Britannia could attract and retain the right people to manage the business by offering
appropriate rewards and incentives.
The audit committee comprised three non-executive directors. The committee oversaw the Group’s internal
controls, accounting policies and financial reports, and monitored compliance with legal and regulatory
requirements. It also liaised with the Group’s external auditors. The committee met five times in the period
and maintained regular contact with key personnel including the head of group risk, the group compliance
officer, the group money laundering reporting officer, the group chief internal auditor, the business leaders
for financial control and financial management, and the internal auditors.
The Group’s external auditors undertook non-audit services, including the provision of advice on taxation
matters. Audit and non-audit fees of external auditors were approved by the audit committee and auditor
objectivity and independence were safeguarded by competitive tendering and regular appraisal.
The Britannia Treasury Services (BTS) sub-committee dealt primarily with initial approval of asset purchases
and sales, and approval of significant changes in BTS policy or strategy.
The group credit committee ensured that lending policies and exposure limits supported the Group strategy,
taking due account of external influences on the markets in which we operated together with the associated
risks and actual performance. The committee approved and monitored the ongoing performance of Basel
rating systems for retail and commercial credit risk. The committee helped the Board to define the Group’s
risk appetite for lending by monitoring the quality of new and existing lending to ensure appropriate action
was taken to mitigate risk.
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The number of Board and committee meetings attended by each director during the period to 31 July
is shown in the table below:
Britannia
Assets and
Treasury
Group
Board
Audit
Liabilities
Remuneration
Nominations
Services
Credit
(12 in period)
(5 in period)
(8 in period)
(2 in period)
(2 in period)
(6 in period)
(7 in period)
1
1
Rodney
Baker-Bates
11
(chair)
Keith
Tim Franklin
10
Bill Gordon
8 (member
(retired
21.04.2009)
(chair)
11
Cameron
2
1
8 (chair)
7
2 (member
2
until
21.04.2009)
until
17.02.2009)
Francis
Gugen
(see note in
11
5
directors’ report
on page 5)
Peter Harvey
9
Chris Jones
12
7
5
2
6
(chair)
Stephen
Kingsley
Phil Lee
11
5
12
3
5
3 (member
until
24.03.2009)
David
McCarthy
Neville
Richardson
Bridget
Rosewell
Tom Sawyer
12
8
11
7
6
2
6
(chair)
11
5
(chair)
7
2
Rodney Baker-Bates
Committee Chairman
On behalf of the Cessation Accounts Committee
22 October 2009
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5
6
11 of 120
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Consolidated income and expenditure account
for the 7 months ended 31 July 2009
Notes
1
2
Interest receivable and similar income
Interest expense and similar charges
Net interest income
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
522.9
(400.6)
122.3
2,107.2
(1,799.7)
307.5
Fee and commission income
Fee and commission expense
Net fee and commission income
3
4
34.3
(18.9)
15.4
62.0
(16.0)
46.0
Gains less losses from derivative financial instruments
Gains less losses from investment securities
Gains less losses from other financial instruments
Other operating income
Total other operating income
6
26
7
8
45.0
6.2
57.9
3.2
112.3
25.3
14.6
5.8
45.7
250.0
399.2
(209.9)
(31.1)
(57.8)
(57.4)
(19.8)
23.2
Total income
Administrative expenses
Merger costs
Depreciation and amortisation
Impairment losses on loans and advances to customers
Impairment losses on counterparties
Provision for additional compensation schemes levies
Operating profit
9
9
13
23
24
42
(122.5)
(26.9)
(16.3)
(45.3)
3.0
1.8
43.8
Share of post-tax (losses)/profits from joint ventures
Profit before tax and Britannia Membership Reward
28
(0.1)
43.7
0.6
23.8
Britannia Membership Reward
Profit before tax
14
(18.9)
24.8
(18.4)
5.4
Taxation
Net profit
15
48
(6.6)
18.2
(0.2)
5.2
Consolidated statement of other comprehensive income
Notes
Net profit for the period
Movement in fair value of available-for-sale assets
Cashflow hedging gain/(loss)
Actuarial gain on pension plan
Amount of pension surplus not recognised under IAS 19
Tax on items through equity other than the income and expenditure account
Total comprehensive income
The accounting policies and notes on pages 18 to 111 form part of these accounts.
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48
49
50
46
46
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
18.2
12.0
29.0
1.9
(4.7)
(10.8)
45.6
5.2
(40.8)
(47.7)
21.8
(99.8)
46.6
(114.7)
Society income and expenditure account
Notes
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Interest receivable and similar income
Interest expense and similar charges
Net interest income
1
2
436.0
(369.5)
66.5
1,795.8
(1,578.7)
217.1
Fee and commission expense
Net fee and commission income
3
4
11.6
(5.4)
6.2
20.5
(3.7)
16.8
Income from investments
Other operating income
Total other operating income
5
6
26
7
8
Total income
50.4
45.1
5.0
36.5
1.5
138.5
28.0
23.0
14.9
5.1
71.0
211.2
304.9
Administrative expenses
Merger costs
Depreciation and amortisation
Provision for additional compensation schemes levies
Operating profit before tax and Britannia Membership Reward
9
9
13
23
24
42
(99.5)
(26.9)
(13.8)
5.2
3.0
2.1
81.3
(169.8)
(27.4)
(9.7)
(57.4)
(19.8)
20.8
Profit before tax
14
(18.9)
62.4
(18.4)
2.4
Taxation
Net profit
15
48
(12.3)
50.1
7.5
9.9
Society statement of other comprehensive income
Net profit for the period
Movement in fair value of available-for-sale assets
Cashflow hedging gain/(loss)
Actuarial gain on pension plan
Amount of pension surplus not recognised under IAS 19
Tax on items through equity other than the income and expenditure account
Total comprehensive income
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Notes
48
49
50
46
46
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
50.1
9.9
13.4
(42.7)
26.8
(45.0)
1.9
21.8
(4.7)
(99.8)
(10.5)
46.3
77.0
(109.5)
Group statement of financial position
Notes
Assets
At 31 July At 31 December
2009
2008
£m
£m
17
18
19
19
25
26
27
28
29
30
31
32
33
34
35
46
591.8
972.5
23,752.9
370.2
5,206.5
1,381.6
1,086.6
2.1
194.8
36.4
131.1
72.6
52.5
18.0
122.2
33,991.8
275.0
1,789.8
24,248.6
538.8
6,133.6
2,033.4
1,583.7
2.2
194.8
39.7
105.5
78.2
53.2
10.7
129.5
37,216.7
Shares
Guaranteed equity bonds
Deposits from banks
Other deposits
Derivative financial instruments
Debt securities in issue
Fair-value adjustments for hedged risk
Other liabilities
Provisions for liabilities and charges
Accruals and deferred income
Current taxes
Subordinated liabilities
Subscribed capital
Total liabilities
36
37
38
39
27
40
40
41
42
43
16,631.5
1,593.2
6,117.6
1,678.0
721.1
4,329.4
632.9
54.1
14.2
207.8
44.3
530.9
318.7
32,873.7
17,234.1
1,480.4
6,936.8
2,054.5
715.7
5,233.5
1,193.8
55.9
24.3
173.0
24.0
691.7
326.5
36,144.2
General reserve
Available-for-sale reserve
Cashflow hedging reserve
Total equity and liabilities
48
49
50
1,219.6
(88.8)
(12.7)
33,991.8
1,203.5
(97.4)
(33.6)
37,216.7
Cash and balances with the Bank of England
Loans and advances to banks
Loans and advances to customers
Investment securities - loans and receivables
Investment securities - available-for-sale
Investments in joint ventures
Goodwill
Intangible assets
Investment properties
Property, plant and equipment
Deferred tax assets
Other assets
Prepayments and accrued income
Retirement benefit asset
Total assets
Liabilities
44
45
These financial statements have been approved for issue by the Cessation Accounts Committee on 22 October 2009.
Rodney Baker-Bates
(On behalf of the Cessation Accounts
Committee)
Neville Richardson
Committee)
15 of 120
Society statement of financial position
Notes
Assets
Investments
Goodwill
Intangible assets
Deferred tax assets
Other assets
Retirement benefit asset
Total assets
At 31 July At 31 December
2009
2008
£m
£m
17
18
19
19
25
26
27
28
29
30
32
33
34
35
46
591.8
326.5
12,151.0
284.6
5,284.6
1,381.6
733.1
70.1
157.9
33.6
57.9
22.4
11,129.9
120.6
32,345.6
275.0
1,289.6
12,348.6
408.8
6,133.6
1,979.6
904.6
65.2
157.9
36.3
62.9
38.3
9,324.9
127.8
33,153.1
Shares
Shares - guaranteed equity bonds
Deposits from banks
Other deposits
Other liabilities
Current taxes
Subscribed capital
Total liabilities
36
37
38
39
27
40
40
41
42
43
16,631.5
1,528.5
5,629.4
405.5
613.6
1,723.5
269.9
3,544.5
12.9
173.5
4.5
530.9
318.7
31,386.9
17,234.1
1,413.6
6,282.8
828.2
580.5
2,294.3
496.4
1,955.5
22.9
144.9
691.7
326.5
32,271.4
General reserve
48
49
50
1,058.9
(88.8)
(11.4)
32,345.6
1,010.9
(98.5)
(30.7)
33,153.1
Liabilities
44
45
These financial statements have been approved for issue by the Cessation Accounts Committee on 22 October 2009.
Rodney Baker-Bates
Committee)
Neville Richardson
Committee)
16 of 120
Statement of cash flows
Notes
Cash flows from operating activities
59
Cash flows from investing activities
Purchase of investment securities
Proceeds from sale and maturity of investment
securities
Purchase of investment property
Proceeds from sale of investment property
Investment in share capital of subsidiaries
Purchase of property, plant and equipment
Proceeds from sale of property, plant and
equipment
Intangible asset additions
Net cash flows from investing activities
Cash flows from financing activities
Repayment of subordinated liabilities
Interest paid on subordinated liabilities
Interest paid on subscribed capital
Net cash flows from financing activities
Net decrease in cash
Cash and cash equivalents at start of period
Cash and cash equivalents at end of period
59
59
17 of 120
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
(1,632.8)
(666.6)
(1,569.3)
(774.5)
(6,774.5)
(23,838.7)
(6,744.8)
(23,823.6)
6,830.8
(26.7)
0.1
(1.6)
23,245.0
(105.6)
(8.7)
6,680.3
(4.9)
(1.5)
23,223.7
(15.0)
(7.9)
0.7
(5.2)
23.6
4.4
(13.3)
(716.9)
0.6
(4.9)
50.4
(24.8)
4.4
(11.3)
28.0
(601.7)
(62.5)
(12.0)
(13.1)
(87.6)
(35.5)
(28.9)
(64.4)
(62.5)
(12.0)
(13.1)
(87.6)
(35.5)
(28.9)
(64.4)
(1,696.8)
3,002.3
1,305.5
(1,447.9)
4,450.2
3,002.3
(1,681.7)
2,980.8
1,299.1
(1,440.6)
4,421.4
2,980.8
Statement of accounting policies
On 1 August 2009, the engagements of the Group were transferred to The Co-operative Financial Services
(‘CFS’). Accordingly, the Cessation Accounts of the Group and Society have been prepared immediately
prior to this transfer and represent a period shorter than one year. Therefore, comparative amounts for the
income and expenditure accounts, statements of comprehensive income, statements of cash flows and
related notes are not entirely comparable.
The accounts have been prepared on a going-concern basis as the entire business of the Group and Society
has continued to operate within the CFS business from 1 August 2009.
Basis of presentation
The Group’s consolidated financial statements have been prepared under the historical cost convention as
modified by the revaluation of available-for-sale financial assets and all derivative contracts.
The Group is required to prepare its consolidated financial statements in accordance with International
Financial Reporting Standards (IFRSs) adopted by the European Union, interpretations issued by the
International Financial Reporting Interpretations Committee (IFRIC) and with those parts of the Building
Societies (Accounts and Related Provisions) Regulations 1998 applicable to organisations reporting under
IFRS.
The Group has adopted the following pronouncements in these accounts:
•
IFRS 8 Operating Segments, which requires that information on operating segments is reported
based on how it is reported and evaluated internally (see Note 16);
•
IAS 1 Presentation of Financial Statements (revised) which fundamentally revises the format of the
financial statements; and
•
IAS 23 Borrowing Costs (revised) which requires that borrowing costs on assets that take a
substantial time to prepare for intended use or sale must be capitalised.
Other pronouncements include:
•
IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements –
portable financial instruments and obligations arising on liquidations (amended);
•
IFRS 3 Business Combinations (revised);
•
IAS 27 Consolidated and Separate Financial Statements (amended); and
•
IFRICs 13,15,16,17 and 18.
The above pronouncements, while mandatory for the period ended 31 July 2009, are not relevant to the
Britannia Group.
18 of 120
Consolidation
The financial information of the Group incorporates the assets, liabilities and results of Britannia Building
Society and its subsidiaries. Subsidiaries include special purpose entities (SPEs) as defined below.
Subsidiaries
Subsidiaries are entities over which the Group can exercise control, particularly of their financial affairs and
operating policies.
In the Group accounts, subsidiaries are fully consolidated from the date on which control is transferred to the
Group. Identifiable assets acquired, including intangible assets and liabilities and contingent liabilities
assumed in a business combination are measured initially at their fair values at the acquisition date. The
excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets
acquired is recorded as goodwill.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are
eliminated.
In the Society accounts, investments in subsidiary undertakings are stated at cost less provisions for any
impairment in value.
Special purpose entities
The Group’s SPEs, entities created to accomplish a narrow and well defined objective, include
•
various securitisation transactions in which it sold mortgages to SPEs. The equity of these SPEs is
not owned by the Group; and
•
a covered bond transaction, in which a limited liability partnership was established to act as
guarantor for the covered bond issue.
In accordance with the Standing Interpretations Committee (SIC) Interpretation 12, the Group is deemed to
have control over the SPEs and therefore they are included as subsidiaries in the consolidated financial
statements. The Group continues to recognise the securitised assets as loans and advances to customers
on the balance sheet and income from the securitised assets continues to be recognised as Group income.
Interests in joint ventures
The Group’s interests in joint ventures are accounted for using the equity method. Under this method the
Group’s share of profits or losses is recognised in the income and expenditure account and the Group’s
share of net assets is shown on the balance sheet.
Foreign currency translation
Functional and presentation currencies
The consolidated financial statements are presented in sterling, which is the Group’s functional currency (ie
the primary currency in which it transacts business) and presentation currency.
19 of 120
Transactions and balances
Foreign currency transactions are converted into sterling using the exchange rates prevailing at the dates of
the transactions. Foreign exchange gains and losses resulting from the conversion and settlement of
currency transactions and from the translation at period-end exchange rates of monetary assets and
liabilities denominated in foreign currencies (for example, certain investments and Euro- and US dollardenominated debt securities) are recognised in the income and expenditure account.
Interest income and expense
This comprises:
•
interest income and expense for financial assets and financial liabilities at amortised cost, calculated
using the effective-interest-rate method. This includes accrued interest income on financial assets
written down as a result of an impairment; and
•
interest income and expense on available-for-sale investments and derivatives, which are measured
at fair value.
All derivative financial instruments are entered into for the purpose of hedging exposures. Interest income or
expense on derivative financial instruments that are hedging assets is included in interest receivable and
similar income. Interest income or expense on derivative financial instruments that are hedging liabilities is
included in interest expense and similar charges.
Effective interest rate
The effective interest rate (EIR) is calculated at initial recognition by discounting the asset’s or liability’s
estimated future cash flows back to its net carrying amount over its expected life.
The main impact for the Group is in relation to income from ‘loans and advances to customers’. The EIR
calculation includes application fees charged to customers, broker fees payable, mortgage discounts and
incentives, and estimates of future early repayment fees. The calculation makes no allowance for losses
arising from non-payment by customers.
The calculation requires assumptions to be made, particularly regarding the expected lives of future cash
flows relating to the asset or liability, using both historical data and management judgments. These
assumptions are monitored, regularly reviewed and amended when necessary. The carrying amounts of
assets and liabilities are amended to reflect actual and revised estimated cash flows. The entity recalculates
the carrying amount by computing the present value of estimated future cash flows at the financial
instruments’ original effective interest rate.
Fee and commission income other than that directly related to loans is recognised over the period for which
the service has been provided, or on completion of an act to which the fee relates.
20 of 120
A liability for the Britannia Membership Reward is recognised when a payment has been approved by the
Board. It is disclosed separately in the income and expenditure account in view of its size and importance.
The liability is included within other liabilities in the balance sheet.
Tax
Tax on the profit for the period comprises current tax and deferred tax.
Current tax
The expected tax payable on the results for the period is called current tax. It is calculated using the tax rates
in force at the balance sheet date. The current tax charge includes adjustments to tax payable in prior
periods.
Deferred tax
Deferred tax is provided in full using the liability method where there are temporary differences between the
carrying value of assets and liabilities for accounting and for tax purposes.
Deferred tax is calculated using the tax rates that are expected to apply when the related deferred tax asset
is realised or deferred tax liability is settled.
The principal temporary differences arise due to:
•
differences in the accounting and tax treatment of payments made into the pension scheme;
•
provisions for loan impairment in the accounts not immediately deductible for tax purposes;
•
differences in depreciation and capital allowance rates used for taxation;
•
differences in tax rules for securitisation companies; and
•
tax losses carried forward.
Tax losses available to carry forward and other deferred tax assets are only recognised as assets where it is
probable that there will be future taxable profits against which to offset them.
Movements in deferred tax are recognised in the income and expenditure account except when they relate to
items such as unrealised profits or losses on available-for-sale investments taken directly to reserves. In
such cases the tax is also recognised directly in reserves and is subsequently recognised in the income and
expenditure account at the same time as the related profit or loss is realised.
21 of 120
Financial assets
Classification
The Group’s financial assets are categorised as follows:
a.
Loans and receivables
Loans and receivables are assets with fixed or determinable payments that are not quoted in an active
market. They include:
•
cash and balances with the Bank of England;
•
loans and advances to banks;
•
loans and advances to customers; and
•
investment securities reclassified from ‘available-for-sale’, or acquired, during an inactive market.
b.
Available for sale
Investment securities available for sale are assets held principally to manage the Group’s liquidity. They are
generally debt instruments that are held until they mature, although they may be sold in response to needs
for liquidity or changes in interest rates. Where the market in such assets became inactive in 2008, the
Group reclassified such assets as loans and receivables in accordance with the amendments to IAS 39
Financial Instruments : Recognition and Measurement and IFRS7 Financial Instruments : Disclosures.
c.
Financial assets at fair value through income or expense
This category covers assets acquired principally for the purpose of selling in the short term or those
designated at initial recognition by management. It includes:
pledged assets; and
derivative financial instruments (unless they are designated as effective hedges).
The Group’s derivatives can be split into three categories:
•
derivatives that meet the conditions for applying hedge accounting;
•
derivatives that provide economic hedges against underlying items but do not meet conditions for
applying hedge accounting; and
•
derivatives that were acquired to hedge other financial instruments, but that no longer meet the
conditions for applying hedge accounting.
22 of 120
Recognition and derecognition
Financial assets at fair value through income and expense are initially recognised at fair value on the date
that the Group commits to purchase the asset. The fair values of quoted instruments in active markets are
based on current bid prices. The fair values of investments where there is no active market or the securities
are unlisted are based on valuation techniques including discounted-cashflow analysis, with reference to
relevant market rates, and other commonly used valuation techniques. Associated transaction costs are
taken directly to the income and expenditure account. Gains and losses arising from changes in fair values
are included in the income and expenditure account in the period in which they arise.
Loans and receivables are recognised at fair value when the cash is advanced. They are carried at
amortised cost using the EIR method, with all movements being recognised in the income and expenditure
account.
Available-for-sale assets are initially recognised at fair value on the date that the Group commits to purchase
the assets. Subsequent movements in fair values are recognised directly in reserves. The fair values of
quoted investments in active markets are based on current bid prices. The fair values of investments where
there is no active market or the securities are unlisted are based on valuation techniques including
discounted-cashflow analysis and other commonly used valuation techniques.
Financial assets are derecognised when:
•
the rights to receive cash flows from the assets have ceased; or
•
the Group has transferred substantially all the risks and rewards of ownership of the assets.
When available-for-sale financial assets are derecognised (or impaired) the cumulative gain or loss,
including that previously recognised in reserves, is recognised in the income and expenditure account.
Mortgage commitments
The Group enters into derivative contracts to reduce the exposure to risk on mortgage commitments made
(for example, where the Group has made an irrevocable offer of a loan to a customer).
Mortgage
commitments and the corresponding derivative contract are recorded at fair value with movements
recognised in the income and expenditure account.
Impairment of financial assets
An asset is impaired if the recoverable amount of the asset (ie the discounted expected future cash flows
from the asset) is less than the carrying value of the asset on the balance sheet.
Assets carried at amortised cost
At each balance sheet date the Group assesses whether there is objective evidence that any of its assets
carried at amortised cost are impaired. The Group assesses assets individually and collectively where a
group of assets has similar risk characteristics.
23 of 120
Objective evidence that an asset (or group of assets) may be impaired includes observable data that loss
events, such as:
•
late or missed repayments of principal or interest;
•
other evidence that borrowers are experiencing financial difficulties; or
•
national or local economic conditions that indicate an increased likelihood that borrowers will default,
have occurred subsequent to initial recognition and their impact on the estimated future cash flows of
the asset (or group of assets) can be reliably estimated.
The Group first assesses whether evidence of impairment exists for individual financial assets. Where the
Group concludes that there is no evidence of impairment for individually assessed assets, it includes those
assets in groups of assets with similar credit characteristics and collectively assesses these groups for
impairment.
Where the Group identifies evidence that an individual asset or group of assets is impaired, it reduces the
carrying amount of the asset on the balance sheet through the use of an impairment provision and charges
the provision to the income and expenditure account. The amount of the provision made is calculated as the
difference between the carrying value of the asset and the present value of future cash flows (excluding
future credit losses that have not been incurred), discounted at the asset’s original effective interest rate.
In estimating these future cash flows, the Group takes into account such factors as the expected proceeds
from the sale of repossessed properties, the time taken to repossess and any further payments expected
from the borrower or counterparty. When an asset is considered uncollectible, it is written off against the
impairment provision on the balance sheet. Such assets are written off after all the possible collection
procedures have been completed and the amount of loss has been determined. Any additional recoveries
from borrowers, counterparties or other third parties made in future periods are offset against the impairment
charge in the income and expenditure account, once they are virtually certain to be received.
Assets carried at fair value
The Group invests in debt instruments, including gilts, certificates of deposit and floating-rate notes, secured
against loan assets and issued by third parties. These investments, including those categorised as available
for sale, are assessed at each balance sheet date to see whether there is objective evidence of impairment
(for example, if there is evidence of significant financial difficulty of the issuer of an instrument). Changes in
value from impairment are recognised in the income and expenditure account.
If, in a subsequent period, the fair value of a debt security classified as available for sale increases and the
increase can be objectively related to an event occurring after the impairment loss was recognised in the
income and expenditure account, the impairment loss is reversed through the income and expenditure
account.
24 of 120
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is
a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis,
or to realise the asset and settle the liability simultaneously.
Sale and repurchase agreements
Securities sold subject to repurchase agreements (repos) are reclassified on the balance sheet as pledged
assets when the transferee has the right by contract or custom to sell or repledge the assets. The liability to
the transferee is also included on the balance sheet, in deposits from banks, other deposits or shares, as
appropriate. The difference between sale and repurchase price is accrued over the life of the agreements
using the EIR method.
Securities purchased under agreements to re-sell (reverse repos) are classified as loans and advances to
banks on the balance sheet, as appropriate.
Securities lent to counterparties are retained on the balance sheet.
Securities borrowed are not recognised on the balance sheet, unless they are sold to third parties, in which
case the purchase and sale are recorded with the gain or loss included in gains less losses from investment
securities in the income and expenditure account. The obligation to return them is recorded at fair value as a
trading liability.
Derivative financial instruments and hedge accounting
Derivatives
Derivatives are financial instruments such as interest rate and currency swaps used by the Group to manage
its interest rate and foreign exchange risks arising from the normal course of business. The Group also uses
equity derivatives to hedge the equity risks within its guaranteed equity bonds (GEBs).
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and
are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active
markets, or calculated using valuation techniques such as discounted-cashflow models where no active
market exists. All derivatives are carried as assets when the fair value is positive and as liabilities when the
fair value is negative.
Financial guarantee contracts
The Society is the holder of a credit-default swap with another Group company which is treated as a financial
guarantee contract. In the absence of any available market price for an identical or similar contract, the
Society uses a probability-adjusted discounted-cashflow analysis to value the contract.
Hedge accounting
Hedge accounting is the matching or elimination of risks arising from potential fluctuations in interest rates,
exchange rates and market indices, typically through the use of derivative hedging instruments.
25 of 120
Portfolio-hedge accounting is applied to fixed-rate mortgages and bonds which are hedged with interest-rate
swaps and meet the hedge effectiveness criteria. Products such as GEBs are fair-valued using external
valuations with movements being taken to the income and expenditure account as they do not meet the
hedge-accounting rules. This is generally fully offset by a corresponding movement in the fair value of the
underlying retail bonds.
Derivatives are used for hedge accounting in the following ways:
a.
Fair-value hedges
The Group creates fair-value hedges primarily by entering into interest-rate swaps whose changes in fair
value will largely offset changes in the fair value of matched assets or liabilities.
Changes in the fair value of derivatives that are designated as fair-value hedges are recorded in the income
and expenditure account. Changes in the fair value of the hedged asset or liability that are attributable to the
hedged risk, adjust the carrying value of the hedged item in the balance sheet and are recorded in the
income and expenditure account.
If the hedge no longer meets the criteria for hedge accounting, the
cumulative adjustment to the carrying amount of a hedged item, generally loans and advances to customers,
is amortised to the income and expenditure account over the period to maturity.
b.
Fair-value-hedge accounting for a portfolio hedge of interest-rate risk
As part of its risk management process the Group identifies portfolios whose interest-rate risk it wishes to
hedge. The portfolios may comprise only assets, only liabilities or both assets and liabilities. The Group
analyses each portfolio into repricing time periods based on expected repricing dates, by scheduling cash
flows into the periods in which they are expected to occur. Using this analysis, the Group decides the
amount it wishes to hedge and designates as the hedged item an amount of assets or liabilities from each
portfolio equal to this.
The Group measures monthly the change in fair value of the portfolio that is being hedged. Provided that the
hedge has been highly effective, the Group recognises the change in fair value of each hedged item in the
income and expenditure account with the cumulative movement in its value being shown on the balance
sheet as a separate item, fair value adjustments for hedged risk, either within assets or liabilities as
appropriate. If the hedge no longer meets the criteria for hedge accounting, this amount is amortised to the
income and expenditure account over the remaining average useful life of the item.
The Group also measures the fair value of each hedging instrument monthly. This value is included in
derivative financial instruments in either assets or liabilities as appropriate, with the change in value recorded
in the income and expenditure account.
Any hedge ineffectiveness is recognised in the income and expenditure account as the difference between
the change in fair value of the hedged item and the change in fair value of the hedging instrument.
26 of 120
c.
Cashflow hedges
The Group creates cashflow hedges by entering into derivatives to reduce the variability of future cash flows.
The effective part of any gain or loss on the derivative is recognised in equity and recycled into the income
and expenditure account in the period when the hedged cashflow affects profit. The ineffective part is
recognised in the income and expenditure account immediately.
Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any such
instrument are recognised in the income and expenditure account.
Certain derivatives embedded in other financial instruments are treated as separate derivatives when their
economic characteristics and risks are not closely related to those of the host contract, and the host contract
is not carried at fair value through the income and expenditure account. These embedded derivatives are
measured at fair value with changes in fair value recognised in the income and expenditure account.
Goodwill
The difference between the cost of acquiring a subsidiary or business and the value of the Group’s share of
the net identifiable assets (including identifiable intangible assets) of an acquired subsidiary or business at
the date of acquisition is called goodwill.
Goodwill is tested at least annually for impairment by comparing its carrying value to its recoverable amount
calculated on a value in use basis.
The calculation of impairment is performed for each separately
identifiable cash-generating unit within the acquired subsidiary or business.
Goodwill is shown on the
balance sheet at cost less accumulated impairment losses.
Intangible assets
Intangible assets are identifiable non-monetary assets without physical substance.
Computer software
The costs associated with the production of software are recognised as an intangible asset if the Group
considers that the software will generate benefits for more than one year and that the value of these benefits
will exceed the costs incurred. Costs of production include direct development costs, employee costs and a
proportion of relevant overheads. Such assets are amortised on a straight-line basis over their useful lives up
to a maximum of seven years.
The direct costs incurred in the acquisition and bringing-into-use of computer software licences are
amortised on the basis of the expected useful lives of the licences (three to seven years).
Other costs associated with the development and maintenance of computer software are charged to the
income and expenditure account when incurred.
27 of 120
Other acquired intangible assets
Other acquired intangible assets (for example, future profits from cross-sales of products such as mortgages
and insurance to the customers acquired with the business) are recognised if they can be separately
identified and valued. Their useful lives are based on the period for which they are expected to generate
economic benefits. If there are any signs of a decrease in value, the asset will be subject to impairment
testing.
All property, plant and equipment is stated at historical cost less depreciation. Historical cost includes
expenditure that is directly attributable to the acquisition of the assets.
Depreciation is calculated using the straight-line method to depreciate assets to their residual values over
their estimated useful lives, as follows:
Freehold and long-leasehold properties
50 years
Short-leasehold properties
Lease term
Major improvements to properties
4 – 7 years
Equipment
3 – 7 years
An asset that is subject to depreciation is reviewed for impairment whenever events or changes in
circumstances indicate that its recoverable amount is less than its carrying value. The recoverable amount is
the higher of the asset’s fair value (less costs to sell) and its value in use.
Gains and losses on the disposal of tangible fixed assets are determined by comparing the proceeds with
the carrying amount. These are included in the income and expenditure account.
Leases
The Group enters into leases for land and buildings and operating leases for vehicles.
Leases for land and buildings are split between leases for the land and leases for the buildings for
accounting purposes only. The leases are separately assessed as to whether they are finance or operating
leases.
Finance-lease assets are recorded at fair value with an equal liability recorded in other liabilities. Interest is
allocated to the lease payments so as to record a constant rate of charge on the outstanding liability for each
accounting period.
Operating-lease payments are charged to the income and expenditure account on a straight line basis over
the term of the lease.
The Group policy is to provide for the minimum future lease payments on buildings that it does not currently
use.
28 of 120
Investment property
Investment properties are properties held for long-term rental yields and capital appreciation. In accordance
with IAS 40 (revised 2003) investment properties may be carried in the balance sheet either at fair value or
at amortised cost.
The Group carries investment properties in the balance sheet at amortised cost,
represented by purchase price and costs of acquisition, borrowing and improvement in the period of
acquisition. Borrowing costs incurred from the start of the capitalisation period through to the date that the
property is first available for rental are capitalised.
Leasehold properties held for long-term rental yields are classified as investment properties and carried at
amortised cost.
Depreciation of investment properties is calculated using the straight-line method to depreciate assets to
their residual value over the lower of 50 years or the length of the leasehold, if applicable.
Financial liabilities
Financial liabilities are contractual obligations to deliver cash or some other asset to a third party. They
include:
shares;
deposits;
derivatives;
debt securities issued; and
other borrowed funds and liabilities.
Financial liabilities are recognised initially at fair value through profit or loss. Fair value includes the issue
proceeds (the fair value of consideration received) net of issue costs incurred.
Issue costs, including premiums and discounts, commissions and other costs incurred in the issuing of fixedand floating-rate notes and subordinated liabilities, are amortised using the EIR method.
Financial liabilities, other than derivatives and GEBs are subsequently stated at amortised cost.
Any
difference between issue proceeds net of issue costs and the redemption value is recognised in the income
and expenditure account over the period of the borrowings using the EIR method.
Certain non-derivative financial liabilities included within shares (GEBs) have been designated at fair value
upon initial recognition in the balance sheet. Changes in fair value are recognised through the income and
expenditure account. The GEBs are economically matched using equity-linked derivatives, which do not
meet the requirements for hedge accounting. Recording changes in fair value of both the derivatives and the
related liabilities through the income and expenditure account most closely reflects the economic reality of
the transactions. In so doing, this accounting treatment eliminates a measurement inconsistency that would
otherwise arise from valuing the GEBs at amortised cost and the derivatives at fair value.
29 of 120
A financial liability is extinguished when the obligation is discharged, cancelled or expires. Any difference
between the carrying amount of a financial liability extinguished and the consideration paid is recognised
through the income and expenditure account.
Subscribed capital
Interest payable on permanent interest bearing shares (PIBS) is recognised in the income and expenditure
account using the EIR method.
Provisions
Provisions for legal claims are recognised when the Group has a present legal or constructive obligation as a
result of past events, it is more likely than not that an outflow of resources will be required to settle the
obligation, and the amount can be reliably estimated.
FSCS levy
The Society is committed to contribute to the Financial Services Compensation Scheme (FSCS) to enable it
to meet compensation claims from, in particular, retail depositors of failed banks. The Society provides in full
for its obligation based on information provided by the FSCS on the expected amounts of levies.
Employee benefits
The Group operates both defined-benefit and defined-contribution pension plans.
Defined benefit
The defined-benefit plan defines the amount of pension benefit that an employee will receive on retirement,
dependent on one or more factors including age, years of service and salary.
Any plan liability is recognised in the balance sheet at the present value of the Group’s defined-benefit
obligation at the balance sheet date less the fair value of plan assets.
The defined-benefit obligation is calculated annually by independent actuaries using the projected-unit-credit
method. Under this method the present value of the defined-benefit obligation is determined by discounting
the estimated future cash outflows using interest rates of high quality sterling bonds of comparable term to
the related pension liability.
Actuarial gains and losses arising from experience adjustments (ie the effects of differences between
previous actuarial assumptions and what has actually occurred) and changes in actuarial assumptions are
charged or credited each year to reserves and shown in the statement of recognised income and
expenditure.
Where the present value of the Group’s defined-benefit obligation less the fair value of plan assets results in
a surplus, to the extent that it is not recoverable the surplus is unrecognised and is available for offset
against any future actuarial losses which may arise in the plan.
30 of 120
The recoverability of the surplus is tested, in accordance with IAS 19 and IFRIC 14, by reference to future
service costs, expected investment returns on pension-plan assets and interest cost on liabilities.
Past-service costs (ie the costs of improvements to employees’ benefits) are recognised immediately in the
income and expenditure account unless the changes to the pension plan are conditional on the employees
remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are
amortised on a straight-line basis over the vesting period.
Defined contribution
Under the defined-contribution plan the Group and the employee pay fixed contributions into a separate
entity.
The Group has no further payment obligations once the contributions have been paid. The
contributions are recognised as an employee benefit expense when they are due.
Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less
than three months’ maturity from the date of acquisition, including cash and balances with central banks,
treasury bills and other eligible bills, amounts due from other banks and short-term liquid investments.
Segmental reporting
A business segment is a component that engages in business activities from which it may earn revenues or
incur expenses, and for whom discrete financial information is available and regularly used by the Board to
allocate resources and assess performance.
The Group’s only geographical segment is considered to be the UK.
Critical accounting estimates and judgments in applying accounting policies
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities.
Estimates and judgments are continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances.
a.
In accordance with the accounting policy on pages 23 and 24, the Group has assessed
balances with counterparties for objective evidence of impairment. Based on the
evidence available of difficulties arising at certain financial institutions the Group has
reduced provisions by £3.0 million during the period (2008 : made provisions of £57.4
milion). To the extent that the net present value of estimated cash flows differs by 10%,
the provision would change by an estimated £8.3 million (2008 : £8.3 million).
b.
In accordance with the accounting policy on pages 23 and 24, the methodology and
assumptions used for estimating both the amount and timing of future cash flows are
reviewed regularly to reduce any differences between loss estimates and actual loss
experience.
31 of 120
At the period end, the Group carried impairment provisions of £76.4 million (2008 : £79.4
million) against loans and advances to customers. To the extent that the net present
value of estimated cash flows reduces by 10%, the provisions would change by an
estimated £24.3 million (2008 : £28.8 million).
c.
Impairment losses on investment properties
The comparison of the amortised cost of investment properties with their recoverable
amount involves certain judgments on the future cash flows expected from each
property. If such cash flows were to reduce by 5%, there would be a fall in the carrying
costs of investment properties of £3.0 million (2008 : nil).
d.
Fair value of financial instruments
The fair value of financial instruments is calculated using the Group’s treasury system,
applying market rates to the period end treasury balances. External valuations are used
to value derivatives which hedge retail savings accounts linked to performance of such
indices as FTSE etc.
e..
Effective interest rate
The calculation of an effective interest rate requires the Group to make assumptions
around the expected lives of mortgages and the likely levels of fees to be received. The
most critical assumption is on the level of future fees.
Were the fee assumptions to change by 10% there would be an adjustment to profit of
£1.5 million (2008 : £0.8 million).
f.
FSCS levy
The Group has included an estimated provision for its share of the costs of the FSCS for
the year ended 31 March 2010 of £10.1 million, based on information supplied by the
FSCS. The interest rates used in arriving at the estimate are subject to change and take
no account of recoveries the FSCS may make in respect of banking defaults. A change
in interest rates of 0.5% would change the provision by approximately £2.0 million.
g.
Corporation taxes
The Group is subject to corporation taxes in three jurisdictions. Significant estimates are
required in determining the provision for corporation taxes. There are many transactions
and calculations for which the ultimate tax determination is uncertain at the balance
sheet date. In the opinion of the directors, the judgments made are appropriate and the
level of provision is adequate to cover the likely liability.
h.
Pensions
The actuarial valuation of the defined-benefit pension plan is prepared using
assumptions about the long-term return on plan assets, salary increases, inflation and
mortality rates. The assumptions are determined by senior management on the advice
of an independent actuary and are benchmarked against the assumptions used in other
similar plans. The sensitivity of results to changes in key assumptions are set out in
Note 46.
32 of 120
Notes to the consolidated financial statements
1. Interest receivable and similar income
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
On financial assets not at fair value through income or expense
on loans fully secured on residential property
on other loans to connected undertakings
on other loans secured on property
on investment securities
on other liquid assets
on other balances
On financial assets at fair value through income or expense
net (expense)/income on financial instruments hedging
assets
net interest expense on financial
instruments not in a hedging relationship
450.9
105.3
109.3
9.5
0.2
675.2
(131.1)
(21.2)
522.9
1,276.7
242.4
465.6
87.3
20.4
2,092.4
63.3
(48.5)
2,107.2
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
274.0
146.7
40.4
108.7
3.4
0.2
573.4
(127.1)
(10.3)
436.0
613.9
522.4
93.4
462.7
69.0
17.3
1,778.7
67.7
(50.6)
1,795.8
Included within Group interest receivable is £21.0 million (12 months ended 31 December 2008 : £29.7 million) and
within Society £0.5 million (12 months ended 31 December 2008 : £0.3 million) in respect of interest accrued on
impaired financial assets against which the Group and Society are carrying impairment provisions.
2. Interest expense and similar charges
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
On financial liabilities not at fair value through income or expense
on shares held by individuals
226.2
on bank and other deposits
186.1
on deposits by connected undertakings
on subordinated liabilities
12.0
on subscribed capital
13.1
437.4
On financial liabilities at fair value through income or expense
net (income)/expense on financial instruments hedging
liabilities
(35.0)
net interest income on financial
instruments not in a hedging relationship
(1.8)
400.6
33 of 120
750.9
889.9
35.5
28.9
1,705.2
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
226.2
115.7
49.6
12.0
13.1
416.6
750.9
542.1
127.0
35.5
28.9
1,484.4
116.5
(45.3)
116.3
(22.0)
1,799.7
(1.8)
369.5
(22.0)
1,578.7
3. Fee and commission income
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
On financial assets not at fair value through income or expense
mortgage-related fees
other fee and commission income
2.6
31.7
34.3
2.4
59.6
62.0
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
2.4
9.2
11.6
2.1
18.4
20.5
4. Fee and commission expense
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
On financial liabilities not at fair value through income or expense
other fee and commission expense
18.9
16.0
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
5.4
3.7
Included within other fee and commission expense for the Group and the Society is a release of nil (12 months ended 31
December 2008 : release of £0.1 million) relating to movements in regulatory provisions.
5. Income from investments
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Dividend income from shares in subsidiaries
Capital distribution from disposal of shares in subsidiaries
41.8
8.6
50.4
28.0
28.0
6. Gains less losses from derivative financial instruments
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Foreign-exchange gains less losses
Fair-value hedges
Other interest-rate instruments
(1.1)
30.9
15.2
45.0
0.5
30.2
(5.4)
25.3
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
31.6
13.5
45.1
There is no material cashflow hedging ineffectiveness in the period (12 months ended 31 December 2008 : nil).
34 of 120
20.8
2.2
23.0
7. Gains less losses from other financial instruments
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Buy-back of subordinated liabilities
Buy-back of debt securities in issue
36.5
21.4
57.9
-
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
36.5
36.5
-
The Group and Society gains less losses on the buy-back of subordinated liabilities relates to the repurchase by the
Society of its own subordinated debt.
The Group gains less losses on the buy-back of debt securities in issue relates to the Society's purchase of debt securities
issued by Leek Finance Number Seventeen plc, Leek Finance Number Eighteen plc and Leek Finance Number Nineteen
plc.
8. Other operating income
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Rent receivable
Other
2.7
0.5
3.2
2.2
3.6
5.8
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
1.0
0.5
1.5
1.6
3.5
5.1
Included in rent receivable for the Group is £1.5 million (12 months ended 31 December 2008 : £0.1 million) of rental
income relating to investment properties.
9. Administrative expenses
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Staff costs (Note 10)
Profit on sale of property, plant and equipment
Operating lease rentals
Direct operating expenses from investment properties that
generated rental income during the period
Direct operating expenses from investment properties that
did not generate rental income during the period
Other administrative expenses
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
75.7
(0.3)
8.9
119.5
(3.6)
14.0
1.1
-
-
-
0.2
79.8
209.9
29.1
99.5
63.8
169.8
0.1
37.0
122.5
61.9
(0.3)
8.8
95.7
(3.6)
13.9
In addition to the above, merger costs of £26.9 million (12 months ended 31 December 2008 : nil) relate to the merger
with The Co-operative Financial Services which took place with effect from 1 August 2009 (Note 61).
35 of 120
9. Administrative expenses (continued)
Services provided by the Group’s auditors
During the period the Group obtained the following services from its auditors:
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
0.5
0.4
Fees payable to the Society’s auditor for the audit of the Society’s accounts
Fees payable to the Society’s auditor and its associates for other services
the audit of the Society’s subsidiaries, pursuant to legislation
other services relating to taxation
valuation and actuarial services
all other services
0.1
0.8
0.3
0.1
0.1
0.8
The Group has a policy on the use of external auditors for non-audit work. Compliance with this was monitored by the
Group’s audit committee which ensures that external-auditor independence is maintained by approval limits for audit
and non-audit fees.
10. Staff costs
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Wages and salaries
Social security costs
Pension costs (Note 46)
defined-contribution plans
defined-benefit plans
36 of 120
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
62.8
5.9
102.6
10.5
50.6
4.9
81.8
8.6
3.7
3.3
75.7
4.2
2.2
119.5
3.1
3.3
61.9
3.1
2.2
95.7
11. Directors’ remuneration
The remuneration of the Society’s directors is detailed below:
PerformanceLong-term
related bonus incentive plan
(payable
(payable
November
November
Salary/fee
2009)
2009)
7 months ended 31 July 2009
Executive directors
Neville Richardson
Tim Franklin
Phil Lee
David McCarthy
Non-executive directors
Rodney Baker-Bates (chairman)
Keith Cameron
Bill Gordon (retired 21 April 2009)
Francis Gugen (see note in directors' report on
page 5)
Peter Harvey
Chris Jones
Stephen Kingsley
Bridget Rosewell
Tom Sawyer
£000
238
146
159
128
75
34
22
34
29
38
24
28
29
984
£000
£000
167
66
72
58
107
66
72
17
-
-
363
262
Increase/
(decrease) in
accrued
Benefits
pension
£000
£000
7
13
9
19
8
5
6
Total
£000
-
527
296
318
222
-
-
75
34
22
-
-
34
29
38
24
28
29
1,676
48
19
On 1 August 2009, the Society transferred its engagements to The Co-operative Financial Services. All the directors
resigned immediately before the time of the transfer. Tim Franklin, Phil Lee and Neville Richardson were appointed as
directors and Rodney Baker-Bates, Peter Harvey, Chris Jones and Stephen Kingsley as non-executive directors of The
Co-operative Financial Services following the merger.
37 of 120
11. Directors’ remuneration (continued)
Long-term
Performance- incentive plan
related bonus 2006 - 2008
(payable
(payable
Salary/fee March 2009) March 2009)
12 months ended 31 December 2008
Executive directors
Neville Richardson
Tim Franklin
Gerald Gregory (resigned 31 March 2008)
- salary
- compensation payment following
resignation
Phil Lee
David McCarthy (appointed 18 June 2008)
Non-executive directors
Ian Adam (resigned as chairman 23 April
2008, resigned from Board 21 May 2008)
Rodney Baker-Bates (appointed chairman 23
April 2008)
Keith Cameron (appointed 1 August 2007)
Bill Gordon
Francis Gugen (see note in directors' report on
page 5)
Peter Harvey (appointed 1 October 2008)
Chris Jones
Stephen Kingsley (appointed 1 October 2008)
Bridget Rosewell
Tom Sawyer
£000
Increase/
(decrease) in
accrued
Benefits
pension
Total
£000
£000
£000
£000
409
250
-
52
32
14
22
14
10
489
314
65
-
-
6
2
73
155
273
112
-
35
-
20
16
11
-
155
339
128
54
-
-
-
-
54
101
39
63
-
-
-
-
101
39
63
39
10
52
10
48
48
1,728
-
119
78
37
38 of 120
£000
39
10
52
10
48
48
1,962
11. Directors’ remuneration (continued)
The long-term incentive plan, approved by members in 2006, provides a maximum opportunity of 60% of salary in
respect of a three-year performance period. The measures of performance in the plan are:
- member satisfaction with our employees;
- net interest margin; and
- Britannia Membership Reward.
The long-term incentive plan closed on 31 July 2009, therefore the payments made relate to the performance of the
2007, 2008 and 2009 schemes.
Non-executive directors who act as chairs of sub-committees received an additional payment of £4,958 for the 7
month period to 31 July 2009 (12 months ended 31 December 2008 : £8,500).
The following information shows the value of directors’ pension benefits. The accrued pension entitlement shown
is that which would be paid annually on retirement at age 60 based on service as at 31 July 2009. The increase in
accrued pension represents the change in the annual pension to which each director is entitled as a result of
changes in pensionable earnings (excluding inflation), increases in pensionable service and investment return
during the period. The transfer value of accrued benefits represents the present capital value of future payments
from the pension plan rather than remuneration currently due to the director and cannot be meaningfully aggregated
with annual remuneration ie it represents the amount of money the plan needs in order to pay the individual his
pension benefits earned as at 31 July 2009, for the rest of their life.
The transfer values as at 31 July 2009 and 31 December 2008 have been calculated using the Scheme transfer basis
as agreed by the Trustees.
In any period the figures quoted below as increase in transfer value of accrued benefits could be an increase or
decrease on previous period's figures.
All the executive directors will receive benefits from the Society’s registered UK pension arrangements. Certain
directors, who have pension benefits exceeding the Lifetime Allowance, will also receive benefits from an
unfunded plan (employer-financed retirement benefit scheme) which does not qualify for certain tax allowances
under the Finance Act 2004. Neville Richardson has entered into an arrangement whereby he receives a lower
salary in return for an equivalent employer’s contribution to the pension plan (salary sacrifice). Tim Franklin and
Phil Lee also entered this arrangement with effect from 1 April 2008.
Increase in accrued
Accrued pension
pension for the 7
entitlement at
months ended
Executive directors
Neville
Richardson
Tim Franklin
Phil Lee
Transfer value of
accrued benefits at
Increase in transfer
Individual pension
value of accrued
Employees’
contributions via
benefits for the 7 contributions for the salary sacrifice for
Transfer value of
months ended
7 months ended the 7 months ended
accrued benefits at
31 July
31 July
31 July
31 December
31 July
31 July
2009
2009
2009
2008
2009
2009
2009
£000
£000
£000
£000
£000
£000
£000
145
67
61
273
8
5
6
19
2,685
1,097
1,189
4,971
2,506
954
1,037
4,497
179
143
152
474
-
31 July
19
12
13
44
The directors shown above have the option of paying Additional Voluntary Contributions. Neither the contributions
nor the resulting benefits are included in the above table.
The Society also operates a defined-contribution pension plan of which David McCarthy is a member. During the 7
month period to 31 July 2009 the Society paid contributions of £24,600 (12 months ended 31 December 2008 :
£15,000) in respect of this director.
39 of 120
12. Staff numbers
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
Average number of people employed
Full time
head and administrative offices
branch and subsidiary undertakings’ offices
Part time
head and administrative offices
branch and subsidiary undertakings’ offices
Total employees
1,674
1,746
3,420
1,706
1,883
3,589
1,592
1,298
2,890
1,654
1,356
3,010
367
913
1,280
363
941
1,304
352
799
1,151
356
810
1,166
4,700
4,893
4,041
4,176
The number of people employed by the Group at 31 July 2009 was 4,654 (31 December 2008 : 4,764).
13. Depreciation and amortisation
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
8.5
16.5
1.0
1.1
6.8
13.5
16.3
31.1
Amortisation of intangible assets (Note 30)
Depreciation of investment properties (Note 31)
Depreciation of property, plant and equipment (Note 32)
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
7.6
15.2
6.2
12.2
13.8
27.4
14. Britannia Membership Reward
Group and
Group and
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
20.0
19.0
(1.1)
(0.6)
18.9
18.4
Payable to members
Amounts unclaimed from prior periods
The Britannia Membership Reward (BMR) is designed to reward members of the Society for the contribution they have
made to the continued success of the Society, by distributing funds which are not required for the continued growth and
stability of the Society.
The BMR scheme will continue to operate in accordance with its current rules until 31 December 2009. During this
period the amount of any payment under the BMR will be calculated on a consistent basis by assessing the performance
of the former Britannia business as operating within The Co-operative Bank Group. The final BMR payment is subject
to approval by The Co-operative Financial Services Board in early 2010.
40 of 120
15. Taxation
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Current tax
UK corporation tax at 28% (31 December 2008 :
28.5%)
corporation tax – adjustment in respect of prior
periods
Total current tax
Deferred tax
current period
adjustment in respect of prior periods
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
13.5
2.2
6.9
(9.3)
3.1
16.6
(2.3)
(0.1)
6.9
(3.8)
(13.1)
(5.3)
(4.7)
6.6
0.4
(0.1)
0.2
6.7
(1.3)
12.3
4.4
1.2
(7.5)
UK corporation tax has been calculated at the applicable prevailing rate.
Further information about deferred tax is presented in Note 33. The tax on the Group’s profit before tax differs from the
theoretical amount that would arise using the basic tax rate of the parent as follows:
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Profit on ordinary activities before tax
Profit before tax multiplied by standard rate of tax
Effects of
dividends from UK subsidiaries
losses not recognised
expenses not deductible for tax purposes
profits taxed at lower rates
adjustment to tax charge in respect of prior periods
tax on joint ventures not included in tax charge
change in rate
Tax charge/(credit) for period
41 of 120
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
24.8
6.9
5.4
1.5
62.4
17.5
2.4
0.7
0.7
0.4
0.8
(2.2)
6.6
1.2
(0.9)
(2.4)
(0.2)
1.0
0.2
0.3
(4.2)
(1.3)
12.3
(6.2)
0.7
(2.6)
(0.1)
(7.5)
16. Segmental information
The Group reports to the Board through two business segments, Member Business and Britannia Capital Investment
Group (BCIG). The Member Business is a traditional building society focusing on savings, mortgages and other
financial services to members. BCIG offers financial services to corporate clients and individuals who are not members
of the Society. The segmental information has been prepared in accordance with IFRSs.
Transactions between the business segments are on normal commercial terms. Internal charges and transfer pricing
adjustments have been reflected in the performance of each segment. Revenue has been attributed to the business
segment in which it is generated. The Member Business raises retail funds externally to fund BCIG. Funding costs have
been calculated using a funds-transfer-pricing methodology which reflects the nature of the interest received or paid.
Member
Business
£m
Intercompany
BCIG
items
£m
£m
Total
£m
Interest margin
Other income
Total income
Management expenses
Loan losses
Profit before merger costs, impairment losses on
counterparties and provision for additional
compensation scheme levies
Merger costs
Provision for additional compensation scheme levies
Profit before Britannia Membership Reward and tax
Share of post-tax profits from joint ventures
paid to Society
paid to members
Profit before tax
Taxation
Profit after tax
71.2
22.5
29.0
15.9
138.6
51.1
22.5
28.9
8.9
111.4
-
122.3
45.0
57.9
24.8
250.0
(109.9)
(0.8)
(28.9)
(44.5)
-
(138.8)
(45.3)
27.9
38.0
-
65.9
(26.9)
3.0
1.8
-
-
(26.9)
3.0
1.8
5.8
38.0
-
43.8
(0.1)
-
-
(0.1)
18.9
(18.9)
5.7
(18.9)
19.1
-
(18.9)
24.8
(1.5)
4.2
(5.1)
14.0
-
(6.6)
18.2
Segment assets
Mortgages
Total assets
10,716.4
27,251.3
13,036.5
22,660.8
(15,920.3)
23,752.9
33,991.8
Segment liabilities
Retail funds
Total liabilities
18,160.0
26,595.2
22,198.8
(15,920.3)
18,160.0
32,873.7
6.2
7.6
1.6
0.9
Other segment items
Depreciation
Amortisation
42 of 120
-
7.8
8.5
16. Segmental information (continued)
United
Kingdom
£m
Geographical analysis
External revenue:
Secured mortgage products
Treasury
Insurance and Life commissions
Investment income
Mortgage fee income
Rental income
Sundry income
Non current assets:
Goodwill
Intangible assets
Member
Business
£m
Interest margin
Hedge ineffectiveness
Other income
Total income
Management expenses
Loan losses
Profit before impairment losses on counterparties and
provision for additional compensation scheme levies
Provision for additional compensation scheme levies
(Loss)/profit before Britannia Membership Reward
and tax
Share of post-tax profits from joint ventures
paid to Society
paid to members
(Loss)/profit before tax
Taxation
(Loss)/profit after tax
43 of 120
All other
countries
£m
Total
£m
536.7
78.8
10.5
12.1
11.3
2.7
14.5
2.9
-
539.6
78.8
10.5
12.1
11.3
2.7
14.5
23,609.1
194.8
36.4
131.1
72.6
143.8
-
23,752.9
194.8
36.4
131.1
72.6
BCIG
£m
Intercompany
items
£m
Total
£m
198.1
1.7
25.3
41.9
267.0
109.4
1.6
21.2
132.2
-
307.5
3.3
25.3
63.1
399.2
(193.7)
(1.0)
(47.3)
(56.8)
-
(241.0)
(57.8)
72.3
28.1
-
100.4
(57.4)
(19.8)
-
-
(57.4)
(19.8)
(4.9)
28.1
-
23.2
0.6
-
-
0.6
18.4
(18.4)
(4.3)
(18.4)
9.7
-
(18.4)
5.4
0.2
(4.1)
(0.4)
9.3
-
(0.2)
5.2
16. Segmental information (continued)
Member
Business
£m
BCIG
£m
Intercompany
items
£m
Total
£m
Segment assets
Mortgages
Total assets
10,898.9
26,702.6
13,349.7
20,898.2
(10,384.1)
24,248.6
37,216.7
Segment liabilities
Retail funds
Total liabilities
18,647.7
26,031.7
20,496.6
(10,384.1)
18,647.7
36,144.2
11.9
15.0
2.7
1.5
Other segment items
Depreciation
Amortisation
United
Kingdom
£m
Geographical analysis
All other
countries
£m
14.6
16.5
Total
£m
External revenue:
Secured mortgage products
Treasury
Insurance and Life commissions
Investment income
Mortgage fee income
Rental income
Sundry income
2,074.2
34.2
19.5
22.9
3.5
2.2
10.8
7.7
-
2,081.9
34.2
19.5
22.9
3.5
2.2
10.8
Non current assets:
Goodwill
Intangible assets
24,088.7
194.8
39.7
105.5
78.2
159.9
-
24,248.6
194.8
39.7
105.5
78.2
During the 7 month period to 31 July 2009 and the 12 month period to 31 December 2008 the Group had no reliance on
any single external customer for more than 10% of its revenue.
44 of 120
17. Cash and balances with the Bank of England
Group
Group
31 July 31 December
2009
2008
£m
£m
Cash in hand
Balances with the Bank of England other than mandatory
reserve deposits
Included in cash and cash equivalents (Note 59)
Mandatory reserve deposits with the Bank of England
Society
Society
31 July 31 December
2009
2008
£m
£m
8.3
0.2
8.3
0.2
560.8
569.1
22.7
591.8
252.8
253.0
22.0
275.0
560.8
569.1
22.7
591.8
252.8
253.0
22.0
275.0
Mandatory reserve deposits are not available for use in the Group’s day-to-day operations. Cash in hand and mandatory
reserve deposits with the Bank of England are non-interest bearing.
18. Loans and advances to banks
Group
Group
31 July 31 December
2009
2008
£m
£m
Placements with other banks included in cash equivalents
(Note 59)
Loans and advances to other banks
Less allowance for losses on loans and advances to banks
(Note 24)
Society
Society
31 July 31 December
2009
2008
£m
£m
293.8
683.3
977.1
798.2
992.7
1,790.9
287.4
43.7
331.1
785.5
505.2
1,290.7
(4.6)
972.5
(1.1)
1,789.8
(4.6)
326.5
(1.1)
1,289.6
Loans and advances to banks have remaining maturities as follows:
Group
Group
31 July 31 December
2009
2008
£m
£m
Accrued interest
In not more than three months
In more than three months but not more than one year
Less allowance for losses on loans and advances to banks
(Note 24)
45 of 120
Society
Society
31 July 31 December
2009
2008
£m
£m
0.6
932.8
43.7
977.1
1.5
1,284.2
505.2
1,790.9
0.3
287.1
43.7
331.1
1.2
784.3
505.2
1,290.7
(4.6)
972.5
(1.1)
1,789.8
(4.6)
326.5
(1.1)
1,289.6
19. Loans and advances to customers
Group
Group
31 July 31 December
2009
2008
£m
£m
Loans fully secured on residential property
Other loans
loans fully secured on land
other loans
Gross loans and advances
Less allowance for losses on loans and advances to
customers (Note 23)
Society
Society
31 July 31 December
2009
2008
£m
£m
21,593.1
22,056.6
11,434.2
11,623.6
2,148.3
87.9
23,829.3
2,179.5
91.9
24,328.0
662.9
59.9
12,157.0
676.5
60.4
12,360.5
(76.4)
23,752.9
(79.4)
24,248.6
(6.0)
12,151.0
(11.9)
12,348.6
Other loans fully secured on land for Group and Society include £56.0 million (31 December 2008 : £54.5 million) of
loans which are fully secured on residential property and which were made to corporate bodies, such as Housing
Associations, prior to 1 October 1998, the date the Society adopted the powers of the Building Societies Act 1997. The
classification of these assets is not consistent with the treatment of similar loans made after 1 October 1998, which are
included in ‘loans fully secured on residential property’ but is necessary to comply with the requirements of the
Building Societies Act 1997.
Maturity analysis
It is probable that loans and advances to customers will be repaid before their contractual maturity date. The remaining
contractual maturity of loans and advances to customers from the date of the balance sheet is as follows:
Group
Group
31 July 31 December
2009
2008
£m
£m
Repayable on demand
Other loans and advances by residual maturity repayable
in not more than three months
in more than three months but not more than one year
in more than one year but not more than five years
in more than five years
98.4
Effective interest rate adjustment
Less allowance for losses on loans and advances to
customers (Note 23)
83.6
Society
Society
31 July 31 December
2009
2008
£m
£m
19.4
19.7
271.1
731.3
5,108.7
17,623.6
23,833.1
(3.8)
268.1
770.9
5,134.3
18,075.8
24,332.7
(4.7)
180.6
541.4
3,271.1
8,131.4
12,143.9
13.1
185.8
580.4
3,237.3
8,316.3
12,339.5
21.0
(76.4)
23,752.9
(79.4)
24,248.6
(6.0)
12,151.0
(11.9)
12,348.6
The Group has entered into interest-rate swaps that protect it from changes in interest rates on the floating-rate liabilities
that fund its portfolio of fixed-rate mortgages. Changes in the fair values of these swaps are offset by changes in the fair
values of the fixed-rate mortgages. The changes in fair value of fixed-rate mortgages are disclosed on the balance sheet
as fair-value adjustments for hedged risk immediately below the loans and advances to customers.
Fair-value adjustments to loans and advances to customers attributable to portfolio-hedged risk in the Group are £370.2
million (31 December 2008 : £538.8 million) and in the Society are £284.6 million (31 December 2008 : £408.8
million).
46 of 120
20. Maximum exposure to credit risk (by class), collateral held and the credit quality of assets
The classes of financial instrument to which the Group is most exposed are loans and advances to customers, loans and
advances to banks, investment securities – available-for-sale and derivative financial instruments.
The table below represents a worst-case scenario of credit-risk exposure of the Group at 31 July 2009 and 31 December
2008, without taking into account any collateral held or other credit enhancements attached. These exposures are based
on net carrying amounts as reported in the balance sheet. Management is confident in its ability to maintain a minimal
group credit-risk exposure resulting from both its loan and advances portfolio and liquid assets portfolio.
Group
Category
(as defined by IAS 39)
Class
(as determined by the Group)
Financial assets at fair value
through income or expense
Maximum exposure to
credit risk before collateral
held
31 July 31 December
2009
2008
£m
£m
1,086.6
1,583.7
981.7
1,811.1
10,716.4
3,686.2
10,897.9
3,720.9
9,350.3
9,629.8
23,752.9
24,248.6
Listed
Unlisted
5,178.0
28.5
29,941.1
6,109.8
23.8
32,193.3
Listed
Unlisted
1,079.2
302.4
303.2
1,730.2
1,381.6
32,409.3
2,033.4
35,810.4
Member Business
Commercial
BCIG residential
mortgages
Total loans and advances to
customers
Investment securities –
loans and receivables
Total loans and receivables
Available-for-sale financial
assets
available-for-sale
Total available-for-sale
financial assets
47 of 120
20. Maximum exposure to credit risk (by class), collateral held and the credit quality of assets (continued)
Society
Maximum exposure to
credit risk before collateral
held
31 July 31 December
2009
2008
£m
£m
Category
(as defined by IAS 39)
Class
through income or expense
733.1
904.6
335.7
1,310.9
10,716.4
1,434.6
10,908.2
1,440.4
12,151.0
12,348.6
Listed
Unlisted
5,256.1
28.5
17,771.3
6,109.8
23.8
19,793.1
Listed
Unlisted
1,079.2
302.4
251.2
1,728.4
1,381.6
19,886.0
1,979.6
22,677.3
Member Business
Commercial
Total loans and advances to
customers
loans and receivables
Total loans and receivables
Available-for-sale financial
assets
available-for-sale
Total available-for-sale
financial assets
Loans and advances to banks include undrawn irrevocable commitments amounting to £9.2 million (31 December 2008
: £21.3 million). These are treasury standby facilities offered by the Society to banks and building societies which can
be drawn down at their request. The facilities are part of the overall credit exposure the Group approves for each
treasury borrower.
The Group employs a range of policies and practices to mitigate credit risk . All loans and advances to customers are
secured by mortgage on the underlying land and property. It should be noted that the overall value of collateral will
normally be in excess of the value of the loans, due to the Group’s lending policy.
The credit quality of the residential loans and advances to customers is demonstrated in the table below, which shows
the weighted-average loan-to-value (LTV) of customer lending as at 31 July 2009 and 31 December 2008.
Weighted
Weighted
average of
Weighted
average of
Weighted
new lending
average of new lending
average of
whole book during period
whole book during period
31 July 31 December 31 December
31 July
2009
2008
2008
2009
%
%
%
%
Member Business
BCIG residential mortgages
38.4
79.9
48 of 120
53.5
60.0
36.8
77.8
55.4
78.1
20. Maximum exposure to credit risk (by class), collateral held and the credit quality of assets (continued)
The weighted-average LTV of the commercial loans and advances to customers portfolio at 31 July 2009 was 81.2%
(31 December 2008 : 75.6%). There were no new loans during the 7 month period to 31 July 2009 (12 months ended 31
December 2008 : 18), due to the current economic climate and in line with the Group's appetite to risk. The average
LTV of new commercial lending during the 12 months ended 31 December 2008 based on valuations at the time of
lending was 76.9%. As at 31 December 2008 the weighted average LTV of the new lending in 2008 was 102.8%,
reflecting the significant fall in commercial property values in the last two months of the period.
The percentages are calculated using valuations adjusted by reference to movements in the house-price index.
The Group operates guidelines on the acceptability of specific classes of collateral or credit risk mitigation. Collateral
held as security for treasury assets is determined by the nature of the instrument. Loans and debt securities are generally
unsecured with the exception of asset-backed securities (ABS) and mortgage-backed securities (MBS) which are
secured by pools of financial assets. The International Swaps and Derivatives Association (ISDA) Master Agreement is
used by the Group for documenting derivative activity. A Credit Support Annex (CSA) is used in conjunction with the
ISDA Master Agreement if requested by the treasury counterparty. Under a CSA, collateral is passed between parties to
mitigate the market contingent counterparty risk inherent in the outstanding positions.
Netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are
usually settled on a gross basis. The Group’s legal documentation for derivative transactions grants legal rights of setoff for those transactions. Accordingly, the credit risk associated with such contracts is reduced to the extent that
negative mark-to-market values on derivatives will offset positive mark-to-market values in the calculation of credit
risk, subject to an absolute exposure of zero.
The principal collateral types are:
Category (as defined by IAS 39)
Class (as determined by the Group) Type of collateral
See comment above
See comment above
Loans and advances
to customers
Member
Business
Mortgages over residential properties
Commercial
Mortgages over residential properties and
land
Charges over commercial properties such
as offices and warehouses
BCIG
residential
mortgages
Charges over financial instruments such as
debt securities
Available-for-sale financial assets
Mortgages over residential properties
Investment securities Listed
– loans and
receivables
Unlisted
Unsecured apart from MBS and ABS - see
comment above
Investment securities Listed
– available-for-sale
Unsecured apart from MBS and ABS - see
comment above
Unlisted
49 of 120
Unsecured
Unsecured
21. Loans and advances neither past due nor impaired
The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by
reference to the probability of default, ie the likelihood of accounts reaching six months in arrears or entering litigation
once they have entered arrears.
For management purposes, the Group applies an internal-ratings-based (IRB) approach, to the majority of its assets, as
laid out and approved by the Financial Services Authority (FSA). The IRB percentages represent the risk-weightings
applied to each asset class. With the exception of commercial where ratings are prescribed by the FSA, these
percentages are based on the probability of default and loss given default as measured by the outputs of the Group’s
rating system. These therefore give an indication of the credit quality of the Group’s loan portfolio.
The probability of default percentages disclosed in the table below, derived from the Group’s rating system,
demonstrate the quality of the Group’s asset portfolio. All loans are graded according to whether they are lower,
medium or higher risk.
Class (as determined
by the Group)
Risk grade
Loans and advances to
banks
Loans and advances to
customers
Risk grade category as a
percentage of total balance
neither past due nor
impaired
31 July 31 December
2009
2008
%
%
Probability of default
31 July 31 December
2009
2008
%
%
Lower
Medium
Higher
87.4
7.1
5.5
79.2
17.2
3.6
0.02
0.05
0.13
0.03
0.07
0.13
Member Business
Lower
Medium
Higher
97.9
1.6
0.5
98.0
1.6
0.4
0.09
1.44
4.52
0.09
1.42
4.40
Commercial
Lower
Medium
Higher
90.0
8.2
1.8
91.0
7.6
1.4
Lower
Medium
Higher
21.0
45.1
33.9
30.1
41.9
28.0
0.46
1.47
8.61
0.47
1.57
6.66
BCIG residential
mortgages
50 of 120
22. Loans and advances either impaired, or past due but not impaired
The tables below analyse loans and advances to customers and other financial instruments as either current, past due,
impaired or in possession. The outstanding balance is classified as past due if any part of that balance has passed the
due date for its payment.
Once a loan or an advance is past due by more than three months it is assessed to determine whether or not it is
impaired. The whole balance is considered to be impaired if any part of that balance is assessed as being irrecoverable.
Group
31 July 2009
Commercial
£m
BCIG
residential
mortgages
£m
10,604.2
3,317.1
7,334.4
21,255.7
71.3
13.7
7.8
3.7
96.5
162.1
33.6
124.6
10.3
330.6
649.9
64.7
63.8
123.0
901.4
883.3
112.0
196.2
137.0
1,328.5
7.5
4.5
1.8
13.8
31.8
31.8
397.8
406.6
241.6
1,046.0
405.3
442.9
243.4
1,091.6
3.1
34.1
116.3
153.5
10,717.6
3,713.6
9,398.1
23,829.3
247.3
15.2
4.7
365.2
27.2
28.4
1,065.7
1,028.5
109.4
1,678.2
1,070.9
142.5
Member
Business
£m
Loans neither past due nor impaired
Past due but not impaired
past due up to 3 months
past due 3 to 6 months
past due over 12 months
Impaired
Possessions
Total loans and advances (Note 19)
Fair value of collateral
past due but not impaired
impaired
possessions
51 of 120
Total
£m
22. Loans and advances either impaired, or past due but not impaired (continued)
Group
31 December 2008
Commercial
£m
BCIG
residential
mortgages
£m
10,795.5
3,616.6
7,318.4
21,730.5
64.6
17.3
8.6
1.9
92.4
83.2
10.0
93.2
1,234.1
110.9
98.4
93.3
1,536.7
1,381.9
138.2
107.0
95.2
1,722.3
5.5
2.6
0.7
8.8
5.4
20.0
25.4
402.4
246.1
39.7
688.2
413.3
268.7
40.4
722.4
2.2
10.5
140.1
152.8
10,898.9
3,745.7
9,683.4
24,328.0
244.5
10.1
2.5
129.7
25.9
11.1
1,819.3
685.5
136.8
2,193.5
721.5
150.4
Member
Business
£m
Impaired
Possessions
impaired
possessions
Total
£m
Society
Member
Business
£m
31 July 2009
Impaired
Possessions
impaired
possessions
52 of 120
Commercial
Total
£m
£m
10,604.2
1,388.7
11,992.9
71.3
13.7
7.8
3.7
96.5
3.2
34.2
37.4
74.5
13.7
42.0
3.7
133.9
7.5
4.5
1.8
13.8
13.3
13.3
7.5
17.8
1.8
27.1
3.1
-
3.1
10,717.6
1,439.4
12,157.0
247.3
15.2
4.7
33.8
13.3
-
281.1
28.5
4.7
Society
Member
Business
£m
31 December 2008
Impaired
Possessions
impaired
possessions
Total
Commercial
£m
£m
10,795.5
1,426.4
12,221.9
64.6
17.3
8.6
1.9
92.4
35.2
35.2
99.8
17.3
8.6
1.9
127.6
5.5
2.6
0.7
8.8
-
5.5
2.6
0.7
8.8
2.2
-
2.2
10,898.9
1,461.6
12,360.5
244.5
10.1
2.5
61.4
-
305.9
10.1
2.5
During the 7 month period to 31 July 2009 183 loans to customers in Member Business (12 months ended 31
December 2008: 25) and 808 BCIG residential mortgages (12 months ended 31 December 2008 : 115) were
renegotiated. The balance on these loans as at 31 July 2009 was £12.0 million (31 December 2008 : £0.8 million) and
£100.3 million (31 December 2008 : £15.1 million) respectively. These are classified as loans neither past due nor
impaired, for so long as the mortgagors comply with the terms of their renegotiated contracts. During the 7 month
period to 31 July 2009 one loan within Commercial (12 month period to 31 December 2008 : nil) was renegotiated. The
balance on this loan as at 31 July 2009 was £15.1 million (31 December 2008 : nil).
It is not meaningful to calculate the provision for each class by simply deducting the fair value of the collateral on the
impaired loans from the value of the impaired loans themselves, due to a number of adjustments being applied. These
include:
- a forced-sale discount on the repossessed properties;
- expected costs to be incurred on sale;
- probability of default; and
- repossession propensity (the likelihood of repossession given default).
The nature of the collateral held as security is explained in Note 20.
53 of 120
Other financial instruments
Once a financial instrument, other than loans and advances to customers, is past due it is assumed to be impaired. The
whole balance is considered to be impaired if any part of that balance is assessed as being irrecoverable. All assets are
unsecured.
Group
Loans and
advances to
banks
£m
Investment
securities loans and
receivables
£m
Impaired
951.2
5,176.0
6,127.2
25.9
25.9
9.2
71.1
80.3
9.2
97.0
106.2
Total
977.1
5,256.3
6,233.4
Impaired
1,763.9
6,108.8
7,872.7
25.9
25.9
30.6
50.8
81.4
56.5
50.8
107.3
Total
1,789.8
6,190.2
7,980.0
Loans and
advances to
banks
£m
Investment
receivables
£m
Impaired
305.2
5,254.1
5,559.3
25.9
25.9
9.2
71.1
80.3
9.2
97.0
106.2
Total
331.1
5,334.4
5,665.5
Impaired
1,263.7
6,108.8
7,372.5
25.9
25.9
30.6
50.8
81.4
56.5
50.8
107.3
Total
1,289.6
6,190.2
7,479.8
31 July 2009
Total
£m
31 December 2008
Society
31 July 2009
Total
£m
31 December 2008
54 of 120
23. Impairment losses on loans and advances to customers
Member
Business Commercial
£m
£m
Group
BCIG
residential
mortgages
£m
Total
£m
At 1 January 2009
Charge for the period
Amounts utilised
At 31 July 2009
1.0
0.8
(0.6)
1.2
24.8
7.8
(5.2)
27.4
53.6
37.9
(43.7)
47.8
79.4
46.5
(49.5)
76.4
At 1 January 2008
Amounts utilised
At 31 December 2008
0.9
1.5
(1.4)
1.0
7.4
18.7
(1.3)
24.8
40.7
56.6
(43.7)
53.6
49.0
76.8
(46.4)
79.4
Member
Business Commercial
£m
£m
Total
£m
Society
At 1 January 2009
Charge/(release) for the period
Amounts utilised
At 31 July 2009
0.3
1.5
(0.7)
1.1
11.6
(6.7)
4.9
11.9
(5.2)
(0.7)
6.0
At 1 January 2008
Amounts utilised
At 31 December 2008
0.9
0.8
(1.4)
0.3
2.0
11.2
(1.6)
11.6
2.9
12.0
(3.0)
11.9
Loans fully
secured on
residential
property
£m
Loans fully
secured on
land
£m
Total
£m
Group
At 1 January 2009
Amounts utilised
At 31 July 2009
66.2
46.2
(49.5)
62.9
13.2
0.3
13.5
79.4
46.5
(49.5)
76.4
At 1 January 2008
Amounts utilised
At 31 December 2008
45.6
67.0
(46.4)
66.2
3.4
9.8
13.2
49.0
76.8
(46.4)
79.4
55 of 120
23. Impairment losses on loans and advances to customers (continued)
Loans fully
secured on
residential
property
£m
Loans fully
secured on
land
£m
Total
£m
At 1 January 2009
Amounts utilised
At 31 July 2009
0.3
1.5
(0.7)
1.1
11.6
(6.7)
4.9
11.9
(5.2)
(0.7)
6.0
At 1 January 2008
Amounts utilised
At 31 December 2008
0.9
0.8
(1.4)
0.3
2.0
11.2
(1.6)
11.6
2.9
12.0
(3.0)
11.9
Society
Included within the above for the Group is £1.9 million (31 December 2008 : £13.7 million) and for the Society is £0.2
million (31 December 2008 : £10.2 million) which is deemed to be collectively impaired.
The net impairment charge/release in the Group and Society income statements for the 7 month period to 31 July 2009
are a charge of £45.3 million (12 months ended 31 December 2008 : charge of £57.8 million) and a release of £5.2
million (12 months ended 31 December 2008 : charge of £9.7 million) respectively. These include amounts recovered
during the 7 month period by the Group of £1.2 million (12 months ended 31 December 2008 : £19.0 million) and by
the Society of nil (12 months ended 31 December 2008 : £2.3 million) against amounts previously written off. The
recoveries have been made from the mortgagors and from other parties involved in the origination or acquisition of the
mortgages.
Portfolios of mortgages that are acquired by the Group from third parties are purchased at a price that includes a
discount based on all of the future losses that those mortgages are expected to incur. At 31 July 2009 these additional
balance sheet loss provisions amounted to £35.2 million (31 December 2008 : £48.7 million) and are included within
the carrying value of gross loans and advances to customers in Note 19.
24. Impairment losses on counterparties
Group and Society
Loans and
advances to
banks
£m
Investment
receivables
£m
Total
£m
At 1 January 2009
Amounts utilised
At 31 July 2009
1.1
3.5
4.6
56.3
(6.5)
49.8
57.4
(3.0)
54.4
At 1 January 2008
Amounts utilised
At 31 December 2008
1.1
1.1
56.3
56.3
57.4
57.4
Impairment losses on counterparties represent provisions to cover for possible losses arising from the Group's exposure
to the Lehman and Kaupthing groups.
56 of 120
25. Investment securities - loans and receivables
Group
Group
31 July 31 December
2009
2008
£m
£m
Investment securities
listed
unlisted
5,178.0
28.5
5,206.5
6,109.8
23.8
6,133.6
Society
Society
31 July 31 December
2009
2008
£m
£m
6,109.8
23.8
6,133.6
5,256.1
28.5
5,284.6
During the period to 31 December 2008, the Group made an election under the amendment to IAS 39 to reclassify the
majority of floating-rate notes and ABS assets with a carrying value of £5,729.4 million from investment securities available-for-sale, measured at fair value, to investment securities - loans and receivables, measured at amortised cost.
The Group purchased these assets with the intention of holding them until they mature, whilst retaining the option of
selling them earlier if preferred, and so classified them as available-for-sale carrying them at fair value (Note 26). The
Group considered that fair value was no longer appropriate in an inactive market. These assets are now carried at
amortised cost, being their fair value at the effective date of reclassification.
During 2008, in the period up to the effective date of reclassification on 1 July 2008, the fair value of these assets had
been reduced by £101.9 million which was recognised through the available-for-sale reserve. After reclassification these
assets are carried at amortised cost. If the reclassification had not been made and these assets were still being carried at
fair value, their fair value at 31 July 2009 would have been approximately £4.8 billion (31 December 2008 : £5.5
billion).
There were no realised gains less losses from investment securities - loans and receivables during the period (31
December 2008 : nil). During the 12 month period to 31 December 2008, realised gains less losses from investment
securities - available-for-sale include an impairment loss of £0.7 million on assets that were subsequently reclassified to
investment securities - loans and receivables. No assets were reclassified during the 7 month period to 31 July 2009.
The movement in investment securities - loans and receivables excluding interest amounts may be summarised as
follows:
Group
Society
£m
£m
At 1 January 2009
Net exchange rate movements
Additions
Redemptions and capital repayments
Release of impairment losses on counterparties (Note 24)
At 31 July 2009
6,048.2
(288.6)
1,083.3
(1,728.3)
6.5
5,121.1
6,048.2
(288.6)
1,083.3
(1,650.2)
6.5
5,199.2
In the periods from the acquisition of each of the investment securities until the date of reclassification, movements in
their fair values were recognised in the available-for-sale reserve. After reclassification, no further fair value movements
are recognised. The fair value movements that have been recognised through the available-for-sale reserve are amortised
back to the income and expenditure account using an individual EIR calculation for each investment security. The range
of EIRs calculated varies between -0.09% and 3.9%.
The Group expects that the carrying amount of investment securities - loans and receivables is fully recoverable.
57 of 120
25. Investment securities - loans and receivables (continued)
Investment securities - loans and receivables have remaining maturities as follows:
Group
Group
31 July 31 December
2009
2008
£m
£m
Accrued interest
In more than one year
Impaired assets
85.4
140.7
630.8
4,319.1
30.5
5,206.5
85.4
224.1
576.8
5,222.5
24.8
6,133.6
Society
Society
31 July 31 December
2009
2008
£m
£m
85.4
140.7
630.8
4,397.2
30.5
5,284.6
85.4
224.1
576.8
5,222.5
24.8
6,133.6
26. Investment securities - available-for-sale
Group
Group
31 July 31 December
2009
2008
£m
£m
listed
unlisted
1,079.2
302.4
1,381.6
303.2
1,730.2
2,033.4
Society
Society
31 July 31 December
2009
2008
£m
£m
1,079.2
302.4
1,381.6
251.2
1,728.4
1,979.6
During the period the Group has not reclassified any financial assets measured at amortised cost (31 December 2008 :
nil).
Gains less losses from investment securities - available-for-sale comprise:
Group
Group
31 July 31 December
2009
2008
£m
£m
Impairment provision on investment securities
Realised gains less losses
6.2
6.2
(2.5)
17.1
14.6
Society
Society
31 July 31 December
2009
2008
£m
£m
5.0
5.0
(2.5)
17.4
14.9
The movement in investment securities - available-for-sale excluding interest amounts may be summarised as follows:
At 1 January 2009
Additions
Disposals (sale and redemption)
Net movements from changes in fair value (Note 49)
At 31 July 2009
58 of 120
Group
£m
Society
£m
2,022.3
5,979.8
(6,617.2)
(16.6)
1,368.3
1,969.4
5,950.1
(6,534.8)
(16.4)
1,368.3
26. Investment securities - available-for-sale (continued)
Investment securities - available-for-sale have remaining maturities as follows:
Group
Group
31 July 31 December
2009
2008
£m
£m
Accrued interest
13.3
301.9
52.2
1,014.2
1,381.6
11.1
1,727.0
13.6
281.7
2,033.4
Society
Society
31 July 31 December
2009
2008
£m
£m
13.3
301.9
52.2
1,014.2
1,381.6
10.2
1,718.2
251.2
1,979.6
27. Derivative financial instruments
A description of the derivative financial instruments used by the Group for hedging purposes is given in Note 55. The
fair values of derivative instruments held for matching are set out below:
Contract/nominal amount
31 July 31 December
2009
2008
£m
£m
Group
Interest-rate swaps
designated as fair-value
hedges
designated as cashflow
hedges
at fair value through
income or expense
Cross-currency interestdesignated as fair-value
hedges
Total derivative assets/
(liabilities) held for
matching
Society
Interest-rate swaps
designated as fair-value
hedges
designated as cashflow
hedges
income or expense
Cross-currency interestdesignated as fair-value
hedges
Credit default swap
income or expense
Total derivative assets/
(liabilities) held for
matching
Fair-value assets
31 July 31 December
2009
2008
£m
£m
Fair-value liabilities
31 July 31 December
2009
2008
£m
£m
17,150.9
25,002.6
269.4
177.2
(508.2)
(569.7)
4,384.4
3,463.8
162.3
68.8
(188.6)
(102.3)
5,061.7
2,373.9
33.5
44.6
(45.3)
(41.5)
3,839.9
4,608.6
621.4
1,293.1
21.0
(2.2)
30,436.9
35,448.9
1,086.6
1,583.7
(721.1)
(715.7)
14,711.2
18,243.7
269.2
191.3
(427.0)
(448.4)
4,315.2
3,254.7
162.6
68.8
(185.0)
(99.2)
1,546.4
1,770.3
22.5
44.6
(22.6)
(30.7)
1,984.4
1,892.9
265.0
599.9
21.0
(2.2)
79.4
87.8
13.8
-
-
-
22,636.6
25,249.4
733.1
904.6
(613.6)
(580.5)
59 of 120
28. Investments
Investments in equity shares of subsidiary undertakings are financial assets.
31 July 31 December
2009
2008
£m
£m
Society
Shares in subsidiary and associated undertakings
70.1
65.2
Subsidiary undertakings
The Society has a direct interest in the ordinary share capital of the following principal subsidiary undertakings trading
in the businesses indicated. All subsidiary undertakings are included in the consolidation.
Principal subsidiary undertakings which are wholly owned, registered in England and operating in the United Kingdom:
Britannia Treasury Services Limited
Britannia Development and Management Company
Britannia Asset Management Limited
Illius Properties Limited
Holding company
Property investment
Holding company
Property investment
During the 7 month period to 31 July 2009, the Society's investment in Illius Properties Limited was increased by £10.0
million.
Britannia Treasury Services Limited has the following wholly owned subsidiary undertakings, registered in England,
operating in the United Kingdom and trading in the businesses indicated:
Mortgage Agency Services Number One Limited
Mortgage Agency Services Number Two Limited
Mortgage Agency Services Number Three Limited
Mortgage Agency Services Number Four Limited
Mortgage Agency Services Number Five Limited
Mortgage Agency Services Number Six Limited
Mortgage Agency Services Number Seven Limited
Western Mortgage Services Limited
Platform Group Holdings Limited
Mortgage and syndicated lending
Mortgage lending
Bank account custodian
Mortgage lending
Mortgage lending
Mortgage lending
Mortgage lending
Mortgage book administration
Holding company
Platform Group Holdings Limited has the following wholly owned subsidiary undertakings, registered in England,
operating in the United Kingdom and trading in the businesses indicated:
Platform Consumer Services Limited
Platform Funding Limited
Platform Funding No. 2 Limited
Platform Home Loans Limited
Mortgage lending
Mortgage origination
Finance company
Finance company
Finance company
Mortgage origination and servicing
Platform Consumer Services Limited is the only direct subsidiary of Platform Group Holdings Limited.
During the 7 month period to 31 July 2009, the Society obtained an interest in the following principal entity, which
gives rise to the risks and rewards that are in substance no different than if it were a subsidiary undertaking. As a
consequence this entity is consolidated in the Group accounts. The undertaking is registered in England, operating in the
United Kingdom and trading in the business indicated:
Britannia Covered Bonds LLP
Mortgage acquisition and guarantor of covered bonds
60 of 120
28. Investments (continued)
Registered in the Isle of Man and operating overseas:
Britannia International Limited
Deposit taking
Registered in Guernsey and operating overseas:
Britsafe Insurance Services (Guernsey) Limited
Mortgage insurance company
During the 7 month period to 31 July 2009, the Society's investment in Britsafe Insurance Services (Guernsey) Limited
of £5.1 million was repaid.
Registered in Scotland and operating in the United Kingdom:
Direct sales of financial services
Britannia Life Direct Limited
Subsidiary undertaking, registered in Scotland and operating in the United Kingdom, where the Society owns half the
share capital represented by its holding of all the ‘A’ class ordinary shares and the majority of voting rights:
Property development
Britannia New Homes (Scotland) Limited
Joint ventures
The Group’s investment in joint ventures is £2.1 million (31 December 2008 : £2.2 million).
The Society owns 49% of the ordinary shares in Britannia Personal Lending Limited and 50% of the ordinary shares in
MutualPlus Limited, which are registered in England and operate in the United Kingdom. The companies trade in the
businesses indicated:
Unsecured personal lending
Provision of branch-sharing services
Britannia Personal Lending Limited
MutualPlus Limited
The Group’s interest in Britannia Personal Lending Limited is as follows:
31 July 31 December
2009
2008
£m
£m
Current assets
Long-term assets
15.4
61.3
76.7
40.0
56.3
96.3
Current liabilities
Long-term liabilities
42.0
34.7
76.7
52.7
43.6
96.3
Income
Expenses
(Loss)/profit before tax
Taxation
(Loss)/profit after tax
2.3
(2.4)
(0.1)
(0.1)
3.8
(3.2)
0.6
(0.2)
0.4
The results of Britannia Personal Lending Limited are included in the Group results together with consolidation
adjustments of nil (31 December 2008 : £0.2 million).
The directors do not consider the results of MutualPlus Limited to be significant to the Group.
Joint ventures are accounted for using the equity method.
61 of 120
Other directly held associated bodies
The Society has membership rights in VocaLink Holdings Limited (VocaLink), a private limited company registered
in England, and Funds Transfer Sharing Limited (FTS), a private company registered in England limited by guarantee.
VocaLink provides the Society and others with automated-teller-machine facilities operating throughout the United
Kingdom. Both FTS and VocaLink are directly held associated bodies of the Society. Their results have been excluded
from the accounts as, in the opinion of the directors, they are not material.
Securitisation vehicles
The results of the following securitisation vehicles are consolidated into the results of the Group under IAS 27
Consolidated and Separate Financial Statements:
Leek Finance Holdings Limited
Leek Finance Number One plc
Leek Finance Holdings Number Two Limited
Leek Finance Number Two plc
Leek Finance Holdings Number Three Limited
Leek Finance Number Three plc
Leek Finance Holdings Number Four Limited
Leek Finance Number Four Limited
Leek Finance Holdings Number Five Limited
Leek Finance Number Five Limited
Leek Finance Holdings Number Six Limited
Leek Finance Number Six Limited
Leek Finance Holdings Number Seven Limited
Leek Finance Number Seven plc
Leek Finance Holdings Number Eight Limited
Leek Finance Number Eight Limited
Leek Finance Holdings Number Nine Limited
Leek Finance Number Nine Limited
Leek Finance Holdings Number Ten Limited
Leek Finance Number Ten plc
Leek Finance Holdings Number Eleven Limited
Leek Finance Number Eleven plc
Leek Finance Holdings Number Twelve Limited
Leek Finance Number Twelve plc
Leek Finance Holdings Number Fourteen Limited
Leek Finance Number Fourteen plc
Leek Finance Holdings Number Fifteen Limited
Leek Finance Number Fifteen plc
Leek Finance Holdings Number Sixteen Limited
Leek Finance Number Sixteen plc
Leek Finance Holdings Number Seventeen Limited
Leek Finance Number Seventeen plc
Leek Finance Holdings Number Eighteen Limited
Leek Finance Number Eighteen plc
Leek Finance Holdings Number Nineteen Limited
Leek Finance Number Nineteen plc
Leek Finance Holdings Number Twenty Limited
Leek Finance Number Twenty plc
Leek Finance Holdings Number Twenty One Limited
Leek Finance Number Twenty One plc
62 of 120
Holding company
Securitisation company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Leek Finance Holdings Number Twenty Two Limited
Leek Finance Number Twenty Two plc
Meerbrook Finance Holdings Number One Limited
Meerbrook Finance Number One Limited
Meerbrook Finance Holdings Number Two Limited
Meerbrook Finance Number Two Limited
Meerbrook Finance Holdings Number Three Limited
Meerbrook Finance Number Three Limited
Meerbrook Finance Holdings Number Four Limited
Meerbrook Finance Number Four Limited
Meerbrook Finance Holdings Number Five Limited
Meerbrook Finance Number Five Limited
Meerbrook Finance Holdings Number Six Limited
Meerbrook Finance Number Six Limited
Rudyard Finance Holdings Number One Limited
Rudyard Finance Number One plc
Dovedale Finance Number One plc
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
The Society holds one non-voting share in Leek Finance Holdings Limited, representing 12.5% of the issued share
capital.
All securitisation vehicles are registered in England and operate in the United Kingdom, with the exception of
Dovedale Finance Number One plc, which is registered and operates in the Republic of Ireland.
All of the above companies are related parties to the Group. See Note 60 for the related party disclosures.
63 of 120
29. Goodwill
31 July 31 December
2009
2008
£m
£m
Group
Net book amount
At beginning and end of period
194.8
194.8
Society
Net book amount
At beginning and end of period
157.9
157.9
The Society's goodwill at 31 July 2009 and 31 December 2008 relates to the acquisition of the branch network and retail
savings business of Bristol & West of £157.9 million. The goodwill in the Group additionally relates to its holding in
Platform Group Holdings Limited of £36.9 million.
In accordance with IAS 38 Intangible Assets the goodwill has been assessed as having an indefinite useful life. In
assessing the recoverable amount of the goodwill the Group allocates the goodwill to the lowest cash generating unit
(CGU) within the Group. A CGU is the smallest identifiable group of assets that generates cash inflows which are
largely independent of the cash inflows from other assets of the Group.
The CGU to which the Platform goodwill has been allocated is the Platform Group. Its recoverable amount has been
calculated on a value-in-use basis by reviewing the CGU's pre-tax cash flows. The key assumptions used in the
calculation are shown below. These have been determined using past experience, understanding of the business and its
industry, and recognition of current market events with respect to loans and advances balances:
- a period of greater than five years is considered appropriate because Platform loans and advances and funding are
long term, and ten years allows recognition of the cash flows expected to be generated throughout the whole of an
economic cycle;
- the level of Platform’s loans and advances to customers are as per the budget for 2009. The figures for 2010 - 2012
are as per the budget, after which point the level is constant to 2018;
- Platform’s interest margin remains constant at 0.91%;
- Platform’s cost/asset ratio remains constant at 0.51%; and
- cash flows are discounted using a discount rate of 7.15%.
The CGU to which the Bristol & West goodwill has been allocated is the combined branch networks and retail savings
businesses of the Member Business. Its recoverable amount has been calculated by considering the value in use of the
Member Business as a whole. The key assumptions used in the calculation are shown below. These have been
determined using past experience, understanding of the business and its industry, and recognition of current market
events with respect to retail deposit-taking business:
- the budget for the Member Business for 2009/10 assumes that economic conditions will not improve in the short to
medium term;
- interest rates remain low and Member Business interest margin remains constant at approximately 1%;
- the business makes process improvements and further reduces administrative expenses maintaining a cost/asset
ratio of 0.59%;
- other income remains flat; and
- cash flows are discounted using a discount rate of 5.80%.
The calculations have been flexed to assess the sensitivities to reasonable changes in the already conservative
assumptions. This sensitivity analysis did not indicate any likely impairment of the goodwill.
64 of 120
30. Intangible assets
Internally generated
intangible assets
31 July 31 December
2009
2008
£m
£m
Other intangible assets
31 July 31 December
2009
2008
£m
£m
Total
Total
31 July 31 December
2009
2008
£m
£m
Group
Cost
At beginning of period
Additions
At end of period
207.8
5.2
213.0
194.5
13.3
207.8
3.6
3.6
3.6
3.6
211.4
5.2
216.6
198.1
13.3
211.4
Accumulated amortisation
At end of period
170.5
8.3
178.8
154.4
16.1
170.5
1.2
0.2
1.4
0.8
0.4
1.2
171.7
8.5
180.2
155.2
16.5
171.7
34.2
37.3
2.2
2.4
36.4
39.7
Society
Cost
Additions
At end of period
199.4
4.9
204.3
188.1
11.3
199.4
3.6
3.6
3.6
3.6
203.0
4.9
207.9
191.7
11.3
203.0
Accumulated amortisation
At end of period
165.5
7.4
172.9
150.7
14.8
165.5
1.2
0.2
1.4
0.8
0.4
1.2
166.7
7.6
174.3
151.5
15.2
166.7
31.4
33.9
2.2
2.4
33.6
36.3
Net book amount at end
of period
Net book amount at end
of period
Internally generated intangible assets consist of software development costs.
65 of 120
31. Investment properties
Group
Group
31 July 31 December
2009
2008
£m
£m
Cost
Additions - acquisitions
Additions - subsequent expenditure
Disposals
At end of period
106.6
21.1
5.6
(0.1)
133.2
Accumulated depreciation
Elimination on disposals
At end of period
Net book amount at end of period
106.6
106.6
1.1
1.0
2.1
1.1
1.1
131.1
105.5
No valuation by an independent professionally qualified valuer has been performed. The directors consider that the
amortised cost of the investment properties at 31 July 2009 is a fair approximation of their fair value, based on a
discounted cash flow calculation of the future expected rental income and sale proceeds from the investment properties.
The Group lets investment properties on Assured Shorthold Tenancy agreements most of which are for contract periods
of no more than 12 months. The future minimum lease receipts under non-cancellable operating leases are £3.1 million
(31 December 2008 : £0.2 million). The Group has not recognised any contingent rent in the period (31 December 2008
: nil). None of the lease agreements are individually significant.
Included within investment properties are properties with a carrying value of £21.0 million (31 December 2008 : £103.4
million) obtained during the period by the exercise of collateral held as security. All investment properties are held to
generate rental income until such time that the Group considers it appropriate to realise its investment.
Included in rent receivable for the Group for the 7 month period to 31 July 2009 is £1.5 million (12 months ended 31
December 2008 : £0.1m) of rental income relating to investment properties (Note 8).
The accumulated impairment provision included within the accumulated depreciation as at 31 July 2009 is £1.0 million
(31 December 2008 : £1.0 million).
66 of 120
32. Property, plant and equipment
Group
Cost
Additions
Disposals
At end of period
Land and
buildings
£m
Equipment,
Leasehold fittings, fixtures
improvements
and vehicles
£m
£m
Total
£m
41.3
(0.5)
40.8
97.4
0.2
(0.1)
97.5
117.4
1.4
118.8
256.1
1.6
(0.6)
257.1
5.0
0.2
5.2
69.3
3.6
(0.2)
72.7
103.6
3.0
106.6
177.9
6.8
(0.2)
184.5
35.6
24.8
12.2
72.6
Cost
Additions
Disposals
At end of period
42.1
(0.8)
41.3
92.2
5.2
97.4
113.9
3.5
117.4
248.2
8.7
(0.8)
256.1
4.3
0.7
5.0
63.1
6.2
69.3
97.0
6.6
103.6
164.4
13.5
177.9
36.3
28.1
13.8
78.2
At end of period
At end of period
67 of 120
32. Property, plant and equipment (continued)
Society
Land and
buildings
£m
Cost
Additions
Disposals
At end of period
Equipment,
Leasehold fittings, fixtures
improvements
and vehicles
£m
£m
Total
£m
25.2
(0.4)
24.8
94.8
0.2
(0.1)
94.9
110.7
1.3
112.0
230.7
1.5
(0.5)
231.7
2.5
0.1
2.6
66.8
3.6
(0.2)
70.2
98.5
2.5
101.0
167.8
6.2
(0.2)
173.8
22.2
24.7
11.0
57.9
Cost
Additions
Disposals
At end of period
26.0
(0.8)
25.2
89.6
5.2
94.8
108.0
2.7
110.7
223.6
7.9
(0.8)
230.7
2.1
0.4
2.5
60.8
6.0
66.8
92.7
5.8
98.5
155.6
12.2
167.8
22.7
28.0
12.2
62.9
At end of period
At end of period
Assets held under finance leases consist of one building:
Group and
Society
31 July
2009
£m
Net book amount
0.6
68 of 120
Group and
Society
31 December
2008
£m
0.6
33. Deferred tax
Deferred tax is calculated on all temporary differences under the liability method using an effective tax rate of 28%
(31 December 2008 : 28%).
The movement on the deferred tax account is as follows:
Group
Group
31 July 31 December
2009
2008
£m
£m
(Charge)/credit to reserves
Income statement credit/(charge)
At end of period
53.2
(10.7)
10.0
52.5
7.6
45.9
(0.3)
53.2
Society
Society
31 July 31 December
2009
2008
£m
£m
38.3
(10.5)
(5.4)
22.4
(2.6)
46.5
(5.6)
38.3
Deferred tax assets expected to be recoverable after one year are Group £41.9 million (31 December 2008 : £30.9
million) and Society £11.8 million (31 December 2008 : £15.4 million).
Deferred tax assets are attributable to the following items:
Group
Group
31 July 31 December
2009
2008
£m
£m
Accelerated tax depreciation
Pensions and other post-retirement benefits
Allowance for losses on loans and advances
Capital gains
Tax losses carried forward
Other temporary differences
(3.0)
1.0
(1.8)
19.2
37.1
52.5
(1.5)
7.8
(1.8)
16.3
32.4
53.2
Society
Society
31 July 31 December
2009
2008
£m
£m
(2.4)
(1.6)
16.9
9.5
22.4
(0.9)
7.8
(1.6)
14.0
19.0
38.3
The deferred tax credit/(charge) in the income and expenditure account comprises the following temporary differences:
Group
Group
31 July 31 December
2009
2008
£m
£m
Accelerated tax depreciation
Pensions and other post-retirement benefits
Allowances for losses on loans and advances
Capital gains
Tax losses carried forward
Other temporary differences
(1.5)
(0.8)
1.0
6.6
4.7
10.0
5.0
(0.2)
2.4
(7.5)
(0.3)
Society
Society
31 July 31 December
2009
2008
£m
£m
(1.4)
(0.8)
6.6
(9.7)
(5.3)
4.4
(0.1)
(9.0)
(0.9)
(5.6)
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred taxes relate to the same fiscal authority.
Deferred tax assets are recognised for tax loss carry-forwards only to the extent that realisation of the related tax benefit
is probable.
69 of 120
34. Other assets
Group
Group
31 July 31 December
2009
2008
£m
£m
Amounts recoverable within one year
amounts owed by subsidiary undertakings
other
18.0
18.0
Society
Society
31 July 31 December
2009
2008
£m
£m
10.7
10.7
11,117.5
12.4
11,129.9
9,318.1
6.8
9,324.9
There are no formal repayment terms with subsidiary companies. All balances are repayable on demand.
Included within amounts owed by subsidiary undertakings for the Society is the investment in the covered bond issued
by Britannia Covered Bonds LLP during the period.
35. Prepayments and accrued income
Group
Group
31 July 31 December
2009
2008
£m
£m
Accrued income relating to derivative instruments
Other
93.0
29.2
122.2
Society
Society
31 July 31 December
2009
2008
£m
£m
89.9
39.6
129.5
93.0
27.6
120.6
89.9
37.9
127.8
36. Shares
Group and
Group and
Society
Society
31 July 31 December
2009
2008
£m
£m
Held by individuals
16,631.5
17,234.1
195.0
12,765.3
486.3
13,306.2
1,098.3
1,912.7
660.2
16,631.5
556.6
2,300.7
584.3
17,234.1
Shares are repayable from the balance sheet date in the ordinary course of business as follows:
Accrued interest
Repayable on demand
Other shares by residual maturity repayable
in more than one year
The Group has entered into interest-rate swaps that protect it from changes in interest rates on the floating-rate assets
that are funded by its fixed-rate shares. Changes in the fair values of these swaps are offset by changes in the fair values
of the fixed-rate shares. The changes in the fair value of fixed-rate shares are the fair-value adjustments for hedged risk
disclosed below.
70 of 120
36. Shares (continued)
Included within shares are fixed-rate accounts with a total nominal value of £5,172.0 million (31 December 2008 :
£2,926.7 million) against which there are fair-value adjustments for hedged risk of £22.8 million (31 December 2008 :
£53.3 million), giving a total carrying value of £5,194.8 million (31 December 2008 : £2,980.0 million).
37. Guaranteed equity bonds
Group
Group
31 July 31 December
2009
2008
£m
£m
Shares
Other
1,528.5
64.7
1,593.2
1,413.6
66.8
1,480.4
Society
Society
31 July 31 December
2009
2008
£m
£m
1,528.5
1,528.5
1,413.6
1,413.6
Guaranteed equity bonds are repayable from the balance sheet date in the ordinary course of business as follows:
Guaranteed equity bonds by residual maturity repayable
in more than one year
103.5
239.4
1,250.3
1,593.2
59.4
269.3
1,151.7
1,480.4
102.7
224.0
1,201.8
1,528.5
57.4
267.9
1,088.3
1,413.6
The guaranteed equity bonds (GEBs) have been designated on initial recognition at fair value through profit and loss,
and are carried at their fair value.
The nominal value of the GEBs held as shares is £1,517.8 million (31 December 2008 : £1,389.7 million). The nominal
value of other GEBs is £64.5 million (31 December 2008 : £65.9 million).
The fair value for the GEBs are obtained on a monthly basis from third parties that issue these products. These external
valuations are reviewed independently using valuation software to ensure the fair values are priced on a consistent basis.
None of the change in the fair value of the GEBs is attributable to changes in the liability’s credit risk.
The maximum amount the Group would contractually be required to pay at maturity for all the GEBs is £1,616.9 million
(31 December 2008 : £1,431.7 million).
The Group hedges all of its GEBs with swaps. The gain on GEBs in the income and expenditure account for the 7
month period to 31 July 2009 is £14.0 million (12 months ended 31 December 2008 : £139.6 million, including GEBs
held by Britannia International Limited). However, taking into account changes in fair value of the associated swaps, the
net impact to the income and expenditure account for the 7 month period to 31 July 2009 is a loss of £1.0 million (12
months ended 31 December 2008 : loss of £3.8 million).
71 of 120
38. Deposits from banks
Group
Group
31 July 31 December
2009
2008
£m
£m
Overdraft
Deposits from other banks
43.7
6,073.9
6,117.6
3.7
6,933.1
6,936.8
Society
Society
31 July 31 December
2009
2008
£m
£m
41.8
5,587.6
5,629.4
6,282.8
6,282.8
Deposits from banks are repayable from the balance sheet date in the ordinary course of business as follows:
Accrued interest
In more than three months but less than one year
27.1
4,708.4
665.7
716.4
6,117.6
66.0
5,627.3
588.5
655.0
6,936.8
25.0
4,631.6
664.8
308.0
5,629.4
63.4
5,622.1
588.4
8.9
6,282.8
39. Other deposits
Other deposits are contractually repayable from the balance sheet date in the ordinary course of business as follows:
Group
Group
31 July 31 December
2009
2008
£m
£m
Accrued interest
19.1
1,399.3
221.4
38.2
1,678.0
72 of 120
58.4
1,497.3
465.4
33.4
2,054.5
Society
Society
31 July 31 December
2009
2008
£m
£m
3.4
287.4
100.0
14.7
405.5
14.5
560.4
220.6
32.7
828.2
40. Debt securities in issue
Group
Group
31 July 31 December
2009
2008
£m
£m
Certificates of deposit
Fixed and floating rate notes
42.0
4,287.4
4,329.4
398.4
4,835.1
5,233.5
Society
Society
31 July 31 December
2009
2008
£m
£m
42.1
1,681.4
1,723.5
398.4
1,895.9
2,294.3
For the purpose of the maturity analysis below, it has been assumed that debt securities will be repaid on the next
interest step-up date of each security, where applicable. Otherwise the contractual maturity has been assumed. Debt
securities in issue are repayable from the balance sheet date in the ordinary course of business as follows:
Group
Group
31 July 31 December
2009
2008
£m
£m
Accrued interest
0.8
130.9
930.4
3,267.3
4,329.4
22.8
644.9
483.0
4,082.8
5,233.5
Society
Society
31 July 31 December
2009
2008
£m
£m
2.8
63.7
883.5
773.5
1,723.5
16.2
568.3
471.5
1,238.3
2,294.3
Foreign-exchange gains less losses on debt securities in issue are included in Note 6.
The Group has entered into cross-currency interest-rate swaps that protect it from changes in exchange rates and interest
rates on its debt securities in issue. Changes in the fair values of these swaps are offset by changes in the fair values of
the debt securities in issue. The changes in fair value of the debt securities in issue are disclosed on the balance sheet as
fair-value adjustments for hedged risk.
Fair-value adjustments to debt securities in issue attributable to hedged risk in the Group are £632.9 million (31
December 2008 : £1,193.8 million) and in the Society are £269.9 million (31 December 2008 : £496.4 million).
Taking into account changes in the fair values of associated swaps, the net impact of fair-value movements on debt
securities in issue to the income and expenditure account for the 7 month period to 31 July 2009 is nil (12 months ended
31 December 2008 : nil). The Group fair-value movements on debt securities in issue in the income and expenditure
account for the 7 month period to 31 July 2009 were gains of £560.9 million (12 months ended 31 December 2008 : loss
of £1,207.6 million). The gains for the Society for the 7 month period to 31 July 2009 were £224.5 million (12 months
ended 31 December 2008 : losses of £531.2 million).
73 of 120
41. Other liabilities
Group
Group
31 July 31 December
2009
2008
£m
£m
Amounts falling due within one year
amounts owed to subsidiary undertakings
other creditors
Amounts falling due after one year
other creditors
Society
Society
31 July 31 December
2009
2008
£m
£m
53.4
53.4
55.2
55.2
3,501.4
42.5
3,543.9
1,904.7
50.2
1,954.9
0.7
54.1
0.7
55.9
0.6
3,544.5
0.6
1,955.5
Other creditors for the Group and Society include £18.9 million (31 December 2008 : £18.4 million) in respect of the
Britannia Membership Reward for the period (Note 14).
There are no formal repayment terms with subsidiary companies. All balances are repayable on demand.
Other creditors for the Group and Society include finance lease obligations as follows:
Present value of lease
payments
31 July 31 December
2009
2008
£m
£m
Due within one year
Due between one year and five years
Due after five years
0.1
0.5
0.6
0.1
0.5
0.6
Future minimum lease
payments
31 July 31 December
2009
2008
£m
£m
0.1
1.8
1.9
0.1
1.8
1.9
The future minimum lease payments have been discounted at Libor over the term of the lease to give the present value
of these payments.
74 of 120
42. Provisions for liabilities and charges
Compensation
schemes' levies
£m
Group
At 1 January 2009
Income statement movements:
Provided in the period
Released during the period
Utilised during the period
At 31 July 2009
Society
At 1 January 2009
Income statement movements:
Provided in the period
Released during the period
Utilised during the period
At 31 July 2009
Vacant
property
£m
Regulatory
£m
Total
£m
19.8
4.1
0.4
24.3
0.3
(2.1)
(7.9)
10.1
0.2
(0.2)
(0.1)
4.0
(0.3)
0.1
0.5
(2.3)
(8.3)
14.2
19.8
2.7
0.4
22.9
(2.1)
(7.6)
10.1
0.2
(0.1)
(0.1)
2.7
(0.3)
0.1
0.2
(2.2)
(8.0)
12.9
Provisions were analysed as follows:
Group
Group
31 July 31 December
2009
2008
£m
£m
11.6
2.6
14.2
10.0
14.3
24.3
Society
Society
31 July 31 December
2009
2008
£m
£m
11.1
1.8
12.9
9.5
13.4
22.9
Compensation schemes' levies
In common with other financial institutions authorised by the Financial Services Authority (FSA), the Society
contributes to the Financial Services Compensation Scheme (FSCS). The FSCS covers financial institutions authorised
by the FSA to do business in the United Kingdom. When an FSA-authorised institution goes out of business its
customers, including retail depositors, may be able to claim compensation from the FSCS. The FSCS raises funds to
meet known compensation claims through levies on other FSA-authorised institutions.
Following the recent failures of FSA-authorised retail deposit-taking institutions, the Society has been notified by the
FSCS that it will be making levies against the Society. The FSCS has provided the Society with a provisional estimate
of the total levy that it expects to make for the year to 31 March 2010 against all FSA-authorised institutions that take
retail deposits. At the date of signing of these accounts these amounts and the Society's share of them remained
uncertain. Based on the information available, the Society has estimated that its total liability for the year to 31 March
2010 will be £10.1 million and has provided for this amount in full.
The Financial Services Commission (FSC) in the Isle of Man operates a similar scheme. The FSC has raised a levy of
£0.3 million on Britannia International Limited which has been paid during the 7 month period to 31 July 2009.
Vacant property
The Group has a number of leasehold properties available for rent. Provisions are made when either the sub-lease
income does not cover the rental expense or the property is vacant. The provision is based on the expected outflows
during the remaining periods of the leases using the Member Business discount rate of 5.8%.
75 of 120
42. Provisions for liabilities and charges (continued)
Regulatory
Provisions have been made in respect of various potential customer-compensation claims. Claims are investigated on an
individual basis and, in some cases, compensation payments are made.
43. Accruals and deferred income
Group
Group
31 July 31 December
2009
2008
£m
£m
accruals relating to derivative financial instruments
interest accrued on subordinated liabilities
interest accrued on subscribed capital
other
other
Society
Society
31 July 31 December
2009
2008
£m
£m
97.5
11.1
1.5
82.5
192.6
97.5
4.3
6.5
45.1
153.4
97.5
11.1
1.5
53.8
163.9
97.5
4.3
6.5
27.3
135.6
15.2
207.8
19.6
173.0
9.6
173.5
9.3
144.9
44. Subordinated liabilities
Interest rate Interest rate
31 July 31 December
2009
2008
%
%
Floating-rate subordinated notes 2016
Fixed-rate subordinated notes 2024
Fixed-rate subordinated notes 2033
1.546
5.750
5.875
4.460
5.750
5.875
Group and
Group and
Society
Society
31 July 31 December
2009
2008
£m
£m
157.3
212.6
161.0
530.9
285.7
227.9
178.1
691.7
On a winding-up, the claims of the subordinated noteholders are subordinated in right of payment to depositors and
other creditors, and those holding shares where the Society remains a building society. The notes are repayable at the
Society’s option and with the prior consent of the FSA on any interest date within five years of the maturity date.
Included within subordinated liabilities are:
- notes with a total value of £300.0 million (31 December 2008 : £300.4 million), against which there are fair-value
adjustments for hedged interest-rate risk of £25.3 million (31 December 2008 : £57.4 million) giving a total carrying
value of £325.3 million (31 December 2008 : £357.8 million); and
- notes with a total nominal value of €184.2 million (31 December 2008 : €300.0 million), with a sterling equivalent
of £126.4 million (31 December 2008 : £206.0 million) against which there are fair-value adjustments for hedged
currency risk of £30.9 million (31 December 2008 : £79.7 million) giving a total carrying value of £157.3 million
(31 December 2008 : £285.7 million). The buy-back of subordinated liabilities during the period is explained in
Note 58.
76 of 120
45. Subscribed capital
Group and
Group and
Society
Society
31 July 31 December
2009
2008
£m
£m
Permanent interest bearing shares issued in 1992
Permanent interest bearing shares issued in 2005
113.1
205.6
318.7
113.1
213.4
326.5
Interest is paid on the £110.0 million permanent interest bearing shares (PIBS) issued in 1992, in arrears at the rate of
13% per annum in half-yearly instalments. The shares are repayable only in the event of a winding-up of the Society or
otherwise with the consent of the FSA. Interest may not be paid or credited under certain circumstances.
Interest is paid on the £200.0 million PIBS issued in 2005 at a fixed rate at 5.5555% subject to the discretion of the
Society. If interest is not paid the Britannia Membership Reward cannot be paid.
The Group has entered into interest-rate swaps that protect it from changes in interest rates on the floating-rate assets
that are funded by these fixed-rate PIBS. Changes in the fair values of the swaps are offset by changes in the fair values
of the fixed-rate PIBS. The changes in the fair value of fixed-rate PIBS are the fair-value adjustments for hedged risk
disclosed below.
In a winding-up or dissolution of the Society, the claims of the holders of PIBS would rank behind all other creditors of
the Society and the claims of members holding shares as to principal and interest. The holders of PIBS are not entitled
to any share in any final surplus upon winding-up or final dissolution of the Society.
The Group and Society balances comprise PIBS of £310.0 million (31 December 2008 : £310.0 million), the share
premium thereon of £3.1 million (31 December 2008 : £3.1 million) and a fair-value adjustment for hedged risk of £5.6
million (31 December 2008 : £13.4 million). The PIBS issued prior to 2005 are stated at nominal value. The carrying
value of the PIBS issued in 2005 includes the fair-value adjustments for hedged risk.
The movements in the PIBS in the income and expenditure account for the 7 month period to 31 July 2009 were gains of
£7.9 million (12 months ended 31 December 2008 : losses of £22.2 million).
46. Retirement benefit asset
Amounts recognised in the balance sheet:
Group and Society
31 July 31 December 31 December 31 December 31 December
2009
2008
2007
2006
2005
£m
£m
£m
£m
£m
Britannia Building Society pension plan
surplus/(obligation)
-
-
45.0
(44.3)
(73.0)
The Society operates a funded defined-benefit pension plan, that pays out pensions at retirement based on service and
final pay, for employees of the Society (and for certain employees of subsidiary undertakings) who commenced
employment prior to 1 September 2001, and an unfunded no charge supplementary plan for certain directors (Note 11).
A full actuarial valuation was carried out at 5 April 2008 and updated to 31 July 2009 by a qualified independent
actuary. Plan assets are stated at their bid value at 31 July 2009. The service cost for the defined-benefit section has
been calculated using the projected-unit method. As a result of the defined-benefit section being closed to new entrants,
its service cost as a percentage of members’ salaries will increase as the members approach retirement (but applied to a
pensionable payroll which is expected to decrease over time).
77 of 120
46. Retirement benefit asset (continued)
The assumptions that have the most significant effect on the results of the valuation are those relating to the long-term
return on plan assets, salary increases, inflation and mortality rates. These are shown on page 80 . In addition,
allowances have been made for the age-related promotional salary scale and increases in post-retirement benefits.
For those eligible employees who commenced employment after 1 September 2001, the Society operates a definedcontribution plan. In addition, the Group operates defined-contribution plans for other Group employees. During the 7
month period to 31 July 2009 the Group paid contributions of £3.7 million (12 months ended 31 December 2008 : £4.2
million) and Society £3.1 million (12 months ended 31 December 2008 : £3.1 million).
The amounts recognised in the balance sheet are determined as follows:
Group and Society
2009
2008
2007
2006
2005
£m
£m
£m
£m
£m
Fair value of plan assets
Present value of funded obligations
Funded status
Amount of pension surplus not recognised
under IAS 19
Present value of unfunded obligations
Asset/(liability) in the balance sheet
Related deferred tax (liability)/asset
(Note 33)
411.9
(402.6)
9.3
413.0
(309.6)
103.4
407.5
(349.5)
58.0
364.8
(404.6)
(39.8)
331.5
(399.2)
(67.7)
(4.7)
(4.6)
-
(99.8)
(3.6)
-
(9.0)
(4.0)
45.0
(4.5)
(44.3)
(5.3)
(73.0)
-
(12.6)
32.4
13.3
(31.0)
21.9
(51.1)
-
Where the present value of the Group's defined-benefit obligation less the fair value of plan assets results in a surplus, to
the extent that it is not recoverable the surplus is not recognised and is available for offset against any future actuarial
losses which may arise in the plan. The recoverability of the surplus is tested, in accordance with IAS 19 and IFRIC 14,
by reference to future service costs, expected investment returns on pension plan assets and interest cost on liabilities.
Group and Society
2009
2008
2007
2006
2005
£m
£m
£m
£m
£m
Change in benefit obligation
Benefit obligation at beginning of period
Current service cost
Interest cost
Plan members’ contributions
Actuarial losses/(gains)
Benefits paid
Benefit obligation at end of period
Analysis of defined-benefit obligation
Plans that are wholly or partly funded
Plans that are wholly unfunded
313.2
4.4
11.9
83.1
(5.4)
407.2
353.5
6.2
20.5
2.7
(61.7)
(8.0)
313.2
409.1
7.7
21.0
2.7
(81.4)
(5.6)
353.5
404.5
7.7
19.3
2.7
(18.9)
(6.2)
409.1
272.4
4.3
14.5
2.7
115.3
(4.7)
404.5
402.6
4.6
407.2
309.6
3.6
313.2
349.5
4.0
353.5
404.6
4.5
409.1
399.2
5.3
404.5
From 1 January 2009 the Society introduced a salary-sacrifice arrangement. The members that participate in this
arrangement are not required to contribute to the pension plan, instead the Society pays an additional amount equal to
the member contribution that the member would have paid had they opted out of the salary-sacrifice arrangement.
78 of 120
Group and Society
2009
2008
2007
2006
2005
£m
£m
£m
£m
£m
Change in plan assets
Fair value of plan assets at beginning of
period
Expected return on plan assets
Actuarial (losses)/gains
Society contribution (includes benefits
paid and reimbursed)
Member contributions
Benefits paid (by fund and Society)
Fair value of plan assets at end of period
413.0
13.0
(14.8)
407.5
24.5
(48.9)
364.8
23.4
15.2
331.5
20.3
9.0
252.0
16.5
29.5
6.1
(5.4)
411.9
35.2
2.7
(8.0)
413.0
7.0
2.7
(5.6)
407.5
7.5
2.7
(6.2)
364.8
35.5
2.7
(4.7)
331.5
7 months
ended
31 July
2009
£m
Components of pension cost
Current service cost
Interest cost
Expected return on plan assets
Total pension cost recognised in the
income and expenditure account
Actuarial gains/(losses) immediately
recognised
Total pension gains/(losses) recognised in
the statement of other comprehensive
income
Amount of pension surplus not recognised
under IAS 19
Group and Society
12 months
12 months
12 months
12 months
ended
ended
ended
ended
31 December 31 December 31 December 31 December
2008
2007
2006
2005
£m
£m
£m
£m
4.4
11.9
(13.0)
6.2
20.5
(24.5)
7.7
21.0
(23.4)
7.7
19.3
(20.3)
4.3
14.5
(16.5)
3.3
2.2
5.3
6.7
2.3
1.9
21.8
96.6
27.9
(87.1)
1.9
21.8
96.6
27.9
(87.1)
(4.7)
(99.8)
(9.0)
-
-
Plan assets
The weighted average asset allocations at the period end were as follows:
Group and Society
2009
2008
2007
2006
2005
%
%
%
%
%
Equities
Bonds and gilts
Other
28
55
17
41
58
1
46
53
1
69
30
1
66
31
3
The Society holds derivative contracts as part of its investment portfolio. These assets have been included within the
categories above relating to the nature of the portfolio held.
The plan's assets include no assets from the Society's own financial instruments and include no property occupied by, or
other assets used by, the Society.
79 of 120
To develop the expected long-term rate of return on assets assumption, the Society considered the current level of
expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium
associated with the other asset classes in which the portfolio is invested and the expectations for the future returns on
each asset class. The expected return for each asset class was then weighted, based on the target asset allocation, to
develop the expected long-term rate of return on assets assumption for the portfolio. This resulted in the selection of the
5.4% assumption which was used in the 7 month period to 31 July 2009.
Group and Society
2009
2008
2007
2006
2005
%
%
%
%
%
Actual return on plan assets
(0.4)
(5.3)
11.1
9.1
17.9
Weighted average assumptions used to determine benefit obligations
Group and Society
2009
2008
2007
2006
2005
%
%
%
%
%
Discount rate
Rate of inflation
Salary increases
6.5
3.0
3.0
5.9
3.6
3.6
5.8
3.3
3.3
5.1
3.1
4.6
4.8
2.8
4.3
In addition to the salary increases shown above, an allowance for annual promotional salary increases is also made.
Weighted average assumptions used to determine net pension cost
Group and Society
2009
2008
2007
2006
2005
%
%
%
%
%
Discount rate
Rate of inflation
Expected long-term return on plan assets
Salary increases
6.5
3.0
6.0
3.0
5.8
3.3
6.0
3.3
5.1
3.1
6.0
4.6
4.8
2.8
6.1
4.3
5.3
6.5
4.0
Assumptions on mortality used to determine benefit obligations
Male
Life expectancy
a member aged 65 has a current life
expectancy of
a member aged 40 has a life expectancy
at 60 of
Female
Life expectancy
a member aged 65 has a current life
expectancy of
a member aged 40 has a life expectancy
at 60 of
Group and Society
2009
2008
2007
2006
2005
Years
Years
Years
Years
Years
23.0
23.0
21.3
21.3
21.3
29.0
29.0
27.8
27.8
27.8
26.4
26.4
24.3
24.3
24.3
31.6
31.6
30.7
30.7
30.7
The assumptions on mortality are determined by actuarial tables, known as PCA00 medium cohort tables, applicable to
each member's year of birth with a 1% underpin to future improvements.
80 of 120
History of experience gains and losses
Group and Society
2009
2008
2007
2006
2005
Experience (losses)/gains on plan assets
amount (£m)
percentage of plan assets (%)
(14.8)
(4)
(48.9)
(12)
15.2
4
9.0
2
29.5
9
-
(0.3)
-
(7.6)
2
-
(8.6)
2
(Losses)/gains due to changes in
assumptions
amount (£m)
percentage of plan liabilities (%)
(83.1)
(21)
62.0
20
89.0
25
18.9
5
(108.0)
27
Total gains and losses
amount (£m)
recognised
unrecognised
(102.6)
4.7
-
(87.0)
99.8
7
87.6
9.0
28
27.9
7
(87.1)
22
Experience losses on plan liabilities
amount (£m)
Sensitivity of results to changes in key assumptions
Assumption
Change in assumption
Discount rate
Rate of inflation
Real rate of increase in salaries
Longevity
Cash commutation
Increase/decrease by 0.1%
Increase/decrease by 2 years
Removal of allowance for 85% cash
commutation
Indicative effect on
scheme's liabilities
+/- £8.0m
+/- £6.7m
+/- £2.2m
+/- £16.3m
+ £12.1m
Contributions
The Society expects to contribute to its pension plan from 31 July 2009 at the rate of 23% of the total pensionable
salaries of its defined-benefit section members including the cost of the levy payable to the Pension Protection Fund. In
addition, as disclosed above, from 1 January 2009 the Society introduced a salary-sacrifice arrangement. The expected
additional level of Society contribution as a result of the salary sacrifice arrangment is 7.9% of pensionable salaries.
81 of 120
47. Commitments and contingent liabilities
Group
Group
31 July 31 December
2009
2008
£m
£m
Commitments
Irrevocable undrawn loan facilities
Undrawn formal standby facilities, credit lines and other
commitments to lend greater than one year
Society
Society
31 July 31 December
2009
2008
£m
£m
103.2
239.1
72.7
87.6
9.2
112.4
21.3
260.4
9.2
81.9
21.3
108.9
All of the undrawn commitments are at typical market rates and terms and, therefore, no liability has been recorded in
the accounts in respect of these.
Capital commitments for which no provision has been made in the accounts
Group and
Group and
Society
Society
31 July 31 December
2009
2008
£m
£m
Capital expenditure contracted for:
intangible assets
investment properties
0.2
0.2
-
Commitments under operating leases
The Group leases various properties and equipment under non-cancellable operating lease arrangements. The leases
have various terms, ranging from 6 months to 999 years. None of these leases are individually material and none have
any material clauses. The table below discloses the minimum operating lease payments the Group and the Society will
be required to make over the remaining lives of the leases.
Land and
Land and
buildings
buildings
31 July 31 December
2009
2008
£m
£m
Group
Leases which expire
in not more than one year
Society
Leases which expire
in not more than one year
Equipment
Equipment
31 July 31 December
2009
2008
£m
£m
0.7
8.6
132.0
141.3
0.3
5.9
102.7
108.9
1.1
0.8
1.9
0.1
0.7
0.8
0.7
3.9
96.2
100.8
0.3
4.6
102.7
107.6
1.1
0.8
1.9
0.1
0.7
0.8
The total value of future minimum sub-lease payments expected to be received under non-cancellable sub-leases for the
Group was £5.4 million and for the Society was £4.4 million (31 December 2008 : Group: £3.0 million, Society £3.0
million).
82 of 120
47. Commitments and contingent liabilities (continued)
FSCS levy commitments
In common with other FSA-authorised financial institutions, the Society has a commitment to pay contributions to the
FSCS when required. The Society has provided in full for its estimate of its share of the claims against the scheme for
2009/10 of which it has been notified (Note 42). The FSCS has also indicated that there will be claims against the
scheme for 2010/11 and 2011/12 that will be of similar magnitude. Claims will continue after these dates but it is too
soon to be able to estimate the size of the Society's commitment for these years with any great accuracy. The claims
will depend on a number of unknown variables, including future interest rate movements, recoveries made by the
FSCS, other bank failures and the level of the Society's retail deposits compared with the industry as a whole.
Contingent liabilities
The Society has an obligation under section 22 of the Building Societies Act 1986 to discharge the liabilities of its
subsidiary undertakings incurred prior to 11 June 1996 in so far as those subsidiaries are unable to discharge the
liabilities out of their own assets.
Pledged assets
Assets are pledged as collateral under repurchase agreements with other banks. Mandatory reserve deposits are also
held with the Bank of England in accordance with statutory requirements. These deposits are not available to finance
the Group’s day-to-day operations.
At 31 July 2009, the mandatory reserve deposits held with the Bank of England were £22.7 million (31 December 2008
: £22.0 million).
Investment securities with a carrying value of £3,829.5 million (31 December 2008 : £4,723.5 million) have been sold
under sale and repurchase agreements. These assets have not been derecognised as the Group has retained substantially
all the risks and rewards of ownership. Included within deposits from banks are the related liabilities of £3,130.3
million (31 December 2008 : £4,133.9 million).
The Group and Society have loans and advances to banks of nil (31 December 2008 : £199.0 million) under reverse
sale and repurchase agreements and against which it holds gilts with a fair value of nil (31 December 2008 : £200.0
million). These transactions are conducted under terms that are usual and customary to standard stock lending,
securities borrowing and reverse purchase agreements. The Group is permitted to sell or repledge the assets received as
collateral in the absence of their default. The Group is obliged to return equivalent securities. At 31 July 2009 the fair
value of collateral repledged amounted to nil (31 December 2008 : £50.0 million). The Group and Society do not adjust
for the fair value of securities received under reverse sale and repurchase agreements.
83 of 120
48. General reserve
Movements in general reserves were as follows:
Group
Balance at beginning of period
Profit for the financial period
Actuarial losses on retirement benefit plan
At end of period
31 July 31 December
2009
2008
£m
£m
1,203.5
1,254.5
18.2
5.2
(2.1)
(56.2)
1,219.6
1,203.5
Society
Profit for the financial period
Actuarial losses on retirement benefit plan
At end of period
1,010.9
50.1
(2.1)
1,058.9
General reserves comprise accumulated retained profits and acturarial gains and losses.
84 of 120
1,057.2
9.9
(56.2)
1,010.9
49. Available-for-sale reserve
The available-for-sale reserve comprises unrealised gains and losses on available-for-sale investment securities.
Movements in the reserve were as follows:
Group
Net movements in fair value
Deferred tax
Amortisation of reserve relating to investment securities reclassified as loans and
receivables
Deferred tax
Net gains transferred to gains less losses from investment securities
Deferred tax
At end of period
Society
Net movements in fair value
Deferred tax
Amortisation of reserve relating to investment securities reclassified as loans and
receivables
Deferred tax
Net gains transferred to gains less losses from investment securities
Deferred tax
At end of period
31 July 31 December
2009
2008
£m
£m
(97.4)
(68.0)
(16.6)
(68.3)
4.6
19.2
34.8
(9.7)
(6.2)
1.7
(88.8)
42.8
(12.0)
(15.3)
4.2
(97.4)
(98.5)
(16.4)
4.6
(67.7)
(69.9)
19.6
34.8
(9.7)
(5.0)
1.4
(88.8)
42.8
(12.0)
(15.6)
4.3
(98.5)
The net movements in fair value for the period ended 31 December 2008 include fair value losses up to 1 July 2008, the
date of reclassification, on assets that were reclassified as loans and receivables of £101.9 million.
As explained in Note 25, the assets that were reclassified as loans and receivables during the period ended 31 December
2008 were transferred because the markets in which they are traded are no longer active. The Group has no intention of
selling these assets before they mature. Other than assets of £9.4 million (31 December 2008 : £8.6 million) against
which there are loss provisions of £3.9 million (31 December 2008 : £4.1 million), the assets are fully performing and
the Group expects to receive payment in full at maturity. The Group has no need to sell these assets in the foreseeable
future. Consequently the market prices of the reclassified assets are not relevant. Additionally, in an inactive market
such prices will not reflect actual trades. However, based on the available market data, if the reclassified assets were
still being carried at fair value, additional movements in fair value would have been recognised of approximately £0.2
billion (31 December 2008 : £0.6 billion).
85 of 120
50. Cashflow hedging reserve
Group
Group
31 July 31 December
2009
2008
£m
£m
Net changes in fair value recognised directly in equity
Net losses transferred from equity to gains less losses
from derivative financial instruments
Deferred taxes
At end of period
Society
Society
31 July 31 December
2009
2008
£m
£m
(33.6)
31.3
0.7
(48.2)
(30.7)
29.3
1.7
(44.2)
(2.3)
(8.1)
(12.7)
0.5
13.4
(33.6)
(2.5)
(7.5)
(11.4)
(0.8)
12.6
(30.7)
The cashflow hedging reserve comprises fair value movements on derivatives that are protecting the Group from future
changes in expected cash flows. Approximately £2.7 million of these fair value movements will be reported in income
in the period from 1 August 2009 to 31 December 2009, with the remaining movements being reported in periods up to
2014. The cash flows to which they relate will occur during the same periods.
51. Financial instruments strategy
A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability of another
entity. The Group is a retailer of financial instruments, mainly in the form of mortgages, savings and insurance products.
The Group raises wholesale funding using a variety of financial instruments (including, where appropriate, derivative
financial instruments) to invest in liquid asset balances and manage the risks arising from its operations.
Instruments used for risk management purposes include derivative financial instruments (derivatives), which are
contracts or agreements whose value is derived from one or more underlying price, rate or index inherent in the contract
or agreement, such as interest rates, exchange rates or stock market indices. The Group uses derivatives principally to
reduce market risk in its daily activities. Derivatives are not used in trading activity or for speculative purposes (Note
55).
The Group accepts deposits from customers at both fixed and floating rates, and for various periods, and seeks to earn
above-average interest margins by investing these funds in highly rated assets. The Group normally seeks to increase
these margins by consolidating short-term funds and lending for longer periods at higher rates, while maintaining
sufficient liquidity to meet all claims that might fall due. In a response to current economic conditions, the Group
continually seeks to borrow longer term funds to reduce its exposure to risk from maturity mismatches.
52. Credit risk
Credit risk is the risk that customers or treasury counterparties cannot meet their obligations to the Group as they
become due. Credit risk arises from loans provided to retail and commercial customers and from the liquid and
investment assets held by the Group. The Group has a broad exposure to credit risk with no particular concentrations of
geography, product type or borrower type, except as disclosed below. Limits on the level of credit risk by product,
industry sector and country are approved by the Board. The exposure to any borrower, including banks and brokers, is
further restricted by limits covering all balance sheet exposures.
86 of 120
52. Credit risk (continued)
Residential and commercial lending
The group credit committee limits the amount of risk accepted in relation to types of mortgage for both residential and
commercial lending. This includes exposure to buy-to-let, self-certified lending, new builds and levels of loan-to-value
across a number of different categories for both new lending and the portfolio overall.
The group credit committee is responsible for:
- reviewing the type and quality of mortgage business accepted at both individual business line and Group level;
- evaluating actual arrears and repossession levels against trends and industry averages;
- setting exposure limits for the business and monitoring performance against them; and
- approving changes to lending policy or credit scoring mechanisms.
Lending policies and procedures are in place to limit and control the type and amount of lending that is underwritten.
Member Business
The Member Business mortgage portfolio consists of large numbers of lower value mortgages within the United
Kingdom. As at 31 July 2009 there were 143,507 Member Business mortgages (31 December 2008 : 147,014), with 9
over £1 million (31 December 2008 : 10) .
The Group has a very low risk-appetite for Member Business mortgages. The residential lending policy includes criteria
such as loan amount, loan purpose, loan-to-value (LTV) ratio and affordability. All applications are assessed against this
policy and credit-scored and offers are made only to cases that meet the criteria. All other cases are referred to a team of
underwriters. Each underwriter has a mandate level based on their experience.
BCIG residential mortgage business
BCIG’s residential mortgage business consists of:
- Platform’s intermediary-introduced business; and
- the acquired mortgage portfolios of Britannia Treasury Services (BTS).
As at 31 July 2009 there were 79,684 BCIG residential mortgages (31 December 2008 : 81,056), with 7 over £1 million
(31 December 2008 : 6).
When compared to other lenders operating in similar parts of the market, the Group has a low-to-medium risk approach
to such non-member residential lending. The management team is responsible for considering lending portfolios from
both a risk and a commercial viewpoint and is independently overseen by the group credit risk team.
The servicing of most of the BCIG residential mortgages is undertaken by Western Mortgage Services (WMS), a wholly
owned subsidiary of the Group. A small portfolio of mortgages is administered under a servicing agreement with
Homeloans Management Limited (a subsidiary of Skipton Building Society). It is planned that the servicing of these
loans will be transferred to WMS in 2010.
87 of 120
Britannia Commercial Lending
Britannia Commercial Lending (BCL) is responsible for all commercial lending activities and the management of
commercial lending credit risk.
The Group’s commercial loans are secured on income-producing property; the main risks arise from tenant failure or
high levels of vacancy. The Group has a low risk-appetite for commercial lending credit risk and avoids speculative,
unsecured, owner-occupied and development-type funding. Commercial investment lending is predominantly
undertaken where cash flow is very strong, properties are of a high value and leases are to creditworthy tenants.
BCL underwrites all new loans and monitors existing ones. Higher value loans require approval from the group credit
committee or the Board. The group credit risk team independently monitors policy in respect of commercial credit risk
and compliance with the limits, providing reports to group credit committee on the performance of the commercial
portfolios.
Exposures to the commercial lending market are mitigated by the levels of interest cover on the deals and the range of
high quality tenants and locations. The make-up of the commercial lending book at 31 July 2009 is as follows:
31 July
2009
£m
Loans secured on commercial property
retail
offices
leisure
storage and distribution
other
Loans to Registered Social Landlords (RSLs)
Loans secured on residential property
2009
2008
2008
%
£m
%
858.3
627.6
256.3
257.3
166.7
2,166.2
23.3
17.0
7.0
7.0
4.5
58.8
881.3
627.1
258.4
258.9
177.3
2,203.0
23.6
16.9
6.9
7.0
4.8
59.2
849.1
670.9
3,686.2
23.0
18.2
100.0
844.6
673.2
3,720.8
22.7
18.1
100.0
The retail loans are diversified across shopping centres and various single and multiple retail units. As at 31 July 2009
there were 257 (31 December 2008 : 262) commercial investment loans with the risk spread across more than 900
tenants. The largest single borrower represents 4.5% (31 December 2008 : 4.5%) of the total commercial book; 40.6%
(31 December 2008 : 40.6%) of commercial lending is within London and the South East.
Loans to RSLs, ie housing associations, are spread fairly evenly on a geographical basis. In terms of counterparty
concentration, the largest single borrower, including undrawn commitments, represents 2.3% (31 December 2008 :
2.4%) of the total commercial book. As at 31 July 2009 there were 54 (31 December 2008 : 56) RSL loans.
For loans secured on residential property, as at 31 July 2009, there were 67 (31 December 2008 : 70) loans spread
across more than 700 properties (31 December 2008 : 700).
Treasury
The Group holds treasury assets to manage liquidity risk and interest-rate risk. It invests in a range of financial
instruments, such as government bonds, bank and building society deposits, gilts, floating-rate notes, commercial paper
and certificates of deposit, to provide the greatest flexibility regarding risk and return.
88 of 120
The Group has a low risk-appetite for treasury counterparty credit risk, which is managed through the use of credit
limits based on rating grades. Exposures against group treasury limits are monitored daily. Reports on treasury
counterparties are presented to the treasury credit and operations group for detailed review and debate. Internal ratings
are compared with those of external rating agencies and commentaries are provided on any differences. A summary of
these reports is submitted to the monthly meeting of the assets and liabilities committee (ALCO) for challenge and
approval and to the Board for ratification.
The Group is also exposed to credit risk as a result of its use of derivatives and where it has taken on credit-related
commitments such as guarantees and standby facilities. The Group maintains strict limits on the exposure of derivatives
with banks. The credit-risk exposure is managed as part of the overall lending limits. Collateral or other security is not
usually obtained for credit-risk exposures on these instruments, except where the Group requires margin deposits from
counterparties.
On some derivative counterparty transactions, the Group employs netting agreements to allow the reduction of overall
exposure to risk. Netting agreements between lender and borrower where there are asset and liability exposures on both
sides allow exposures to be treated as a net position in the event of a default by either party.
The Group has historically used securitisation to increase the diversification of funding sources available, whilst
mitigating liquidity risk by managing maturity-mismatch risk and also assisting overall credit-risk management. BTS has
twelve years’ experience issuing securitisations in the “Leek” programme, and has built up a depth of knowledge,
processes and management information to deal effectively with these funding vehicles. The Group has used Fitch,
Moody’s and Standard & Poor’s as external credit-assessment institutions on all its outstanding Leek securitisations.
The Group’s appetite for securitisation risk is low, only acting as mortgage originator and servicing agent. The Group
does not provide liquidity facilities, bridging loans or repackaging and does not act as underwriter or dealer in its
securitisations. All transactions have full accounting and legal advice to ensure compliance with regulatory/statutory
rules and are also approved at Board level. Group exposure is restricted to the subordinated loans (and start-up loans
where applicable) provided at the start of each transaction. Such loans are also limited in amount and duration with no
additional recourse to the Group. Protection against exposure to the subordinated loans for Leek 12 - 17 has also been
acquired through a synthetic securitisation, Dovedale Finance Number One plc.
The treasury portfolio at 31 July 2009 comprises the cash and balances with the Bank of England, loans and advances to
banks, investment securities and derivatives split into the following sub-portfolios:
31 July
2009
£m
Group
Cash
asset-backed/mortgage-backed securities
floating-rate notes
certificates of deposit
gilts
equity investments
Derivatives
89 of 120
2009
2008
2008
%
£m
%
591.8
972.5
6.4
10.5
275.0
1,789.8
2.3
15.1
2,814.9
2,367.1
329.1
1,075.2
1.8
1,086.6
9,239.0
30.5
25.6
3.6
11.6
11.8
100.0
3,095.0
3,085.0
1,756.4
228.8
1.8
1,583.7
11,815.5
26.2
26.1
14.9
1.9
13.5
100.0
31 July
2009
£m
Society
Cash
asset-backed/mortgage-backed securities
floating-rate notes
certificates of deposit
gilts
equity investments
Derivatives
2009
2008
2008
%
£m
%
591.8
326.5
7.1
3.9
275.0
1,289.6
2.6
12.2
2,893.0
2,367.1
329.1
1,075.2
1.8
733.1
8,317.6
34.8
28.5
4.0
12.9
8.8
100.0
3,094.9
3,048.0
1,751.2
217.3
1.8
904.6
10,582.4
29.2
28.9
16.5
2.1
8.5
100.0
For treasury counterparties, individual exposures (under one year) are all capped at £450 million (31 December 2008 :
£450 million). The treasury function uses mostly international counterparties who themselves are well capitalised,
diversified and closely regulated by national supervisors. The Group, therefore, does not require further capital cover for
concentration risks of treasury counterparties. The same approach applies for the holdings of mortgage-backed securities
(MBS) collateralised by pools of UK mortgages, and asset-backed securities (ABS) collateralised by other types of UK
assets such as loans, leases and receivables.
53. Liquidity risk
Liquidity risk is the risk of having insufficient liquid assets to fulfil obligations or liabilities as they become due, or the
cost of raising liquid funds is too expensive. The Group has a low liquidity-risk appetite; its policy is to maintain
sufficient liquid resources to cover cashflow imbalances and fluctuations in funding to retain confidence in the solvency
of the Group and to enable the Group to meet its financial obligations.
Treasury assets are held with counterparties to manage liquidity risk and interest-rate risk. The Group invests in a range
of financial instruments to provide the greatest flexibility regarding risk and return. Liquidity ratios are monitored
against Board-approved limits daily.
Historically the Group also used securitisations to increase the diversification of funding sources available, whilst
mitigating liquidity risk by managing maturity-mismatch risk and also assisting overall credit-risk management.
Although the securitisation markets remain closed, on 21 April 2008, the Bank of England launched its Special
Liquidity Scheme (SLS), which allows banks to swap their high quality mortgage-backed and other securities for UK
treasury bills for a defined period. As part of its liquidity management, the Group is using repos and the SLS as a
funding tool to borrow longer term monies in a cost-effective manner. During the 7 month period to 31 July 2009 the
Society launched a £1.4 billion covered bond to enable it to access the SLS scheme.
In response to changing market conditions, daily and weekly market valuations are produced on repoed bonds and swaps
with Credit Support Annexes (CSAs). Margin calls are then exchanged as appropriate.
The Group has never experienced a significant shortage of liquidity. As a result of the credit crunch triggered by
problems in the US sub-prime mortgage market in 2007, a committee of senior managers meets at least weekly to assess
the impact on liquid assets. It has restricted investments to short maturities and reduced credit limits in respect of
counterparties on the Group's watch list.
90 of 120
53. Liquidity risk (continued)
The Group has a diversified funding programme, enabling us to place monies in high levels of well rated liquid
investments. While overseas markets have remained illiquid, the Group has funded wholesale maturities through
relationships within the UK market. The high quality investment portfolio has enabled us to access substantial funds
through sale and repurchase agreements, thereby maintaining liquidity levels. Short-term liquidity remains significantly
above the minimum set by the FSA.
The Group has a contingency funding plan, agreed at Board level and reviewed annually.
As additional support the Group maintains committed standby facilities. As at 31 July 2009, the Group and Society
maintained £26.6 million of committed standby facilities (31 December 2008 : £181.0 million), which are all due to
mature by August 2010 (31 December 2008 : £150.0 million were due to mature within one year). The Group also
maintains standby lines of warehouse finance facilities, which are bank lines secured on mortgage collateral. As at 31
July 2009, the Group and Society maintained £1.1 billion (31 December 2008 : £1.2 billion) of committed warehouse
lines.
The gross undiscounted contractual cash flows payable under the financial liabilities of the Group and Society are
provided below. Customer deposits (shares) are normally repaid later than the earliest date on which a repayment can be
made.
Group
Repayable
on demand
£m
Up to 3
months
£m
3 – 12
months
£m
1,193.1
98.2
4,675.1
1,431.9
112.5
4.9
3.9
-
3,786.6
227.6
673.9
182.2
1,199.1
17.5
21.5
-
1,093.0
1,207.9
315.3
57.7
3,447.0
89.7
101.6
-
6.7
48.5
408.0
0.2
42.4
775.8
437.1
-
16,841.6
1,582.3
6,072.3
1,672.0
4,801.0
887.9
564.1
103.2
25.3
171.4
277.6
11.7
486.0
432.5
52.6
5,657.5
1,576.6
666.3
6.7
3.9
-
4,543.7
251.4
609.4
417.5
917.3
22.8
19.4
-
656.0
1,081.0
85.7
70.3
4,050.4
118.0
93.1
-
70.6
572.9
1.8
61.4
877.3
426.4
-
17,430.4
1,455.6
6,925.5
2,066.2
5,695.4
1,024.8
542.8
239.1
11.4
100.2
367.1
237.0
715.7
1 – 5 years
£m
More than 5
years
£m
Total
£m
As at 31 July 2009
Gross contractual cash flows
Shares
Deposits from banks
Other deposits
Subscribed capital
Loan commitments
10,762.2
0.1
103.2
-
As at 31 December 2008
Shares
Deposits from banks
Other deposits
Subscribed capital
Loan commitments
11,798.2
239.1
-
91 of 120
53. Liquidity risk (continued)
Society
Repayable
on demand
£m
Up to 3
months
£m
3 – 12
months
£m
More than 5
1 – 5 years
years
£m
£m
1,193.1
97.5
4,598.8
288.3
63.7
4.9
3.9
-
3,786.6
213.8
673.1
101.1
886.6
17.5
21.5
-
1,093.0
1,159.1
314.9
15.7
783.9
89.7
101.6
-
6.7
47.4
42.4
775.8
437.1
-
16,841.6
1,517.8
5,586.8
405.1
1,776.6
887.9
564.1
72.7
17.9
111.8
262.2
11.7
403.6
432.5
50.6
5,652.7
584.7
626.3
6.7
3.9
-
4,543.7
250.0
609.3
215.8
481.1
22.8
19.4
-
656.0
1,024.7
9.9
35.0
1,200.2
118.0
93.1
-
64.4
61.4
877.3
426.3
-
17,430.4
1,389.7
6,271.9
835.5
2,369.0
1,024.8
542.7
87.6
7.8
52.6
283.1
237.0
580.5
Total
£m
As at 31 July 2009
Shares
Deposits from banks
Other deposits
Subscribed capital
Loan commitments
10,762.2
72.7
-
Shares
Deposits from banks
Other deposits
Subscribed capital
Loan commitments
11,798.2
87.6
-
The subscribed capital consists of PIBS, which have no fixed maturity. For the purposes of the above table, it has been
assumed that they will mature in ten years. The subordinated liabilities have also been assumed to have a maturity of ten
years.
It has been assumed that interest will be paid at the applicable rates as at 31 July 2009 and 31 December 2008
respectively.
Typically, loan commitments may be drawn down at any time during the commitment period which can be one year or
more. As it is not possible to predict when drawdowns will occur, loan commitments have been included in the
‘repayable on demand’ category.
92 of 120
54. Market risk
Market risk is the risk that the value of, or income or costs arising from, the Group’s assets and liabilities change as a
result of changes in interest rates, exchange rates or FTSE indices. Group treasury is responsible for managing our
exposure to all aspects of market risk within the operational limits set out in the Group’s policies. Oversight is provided
by ALCO, which approves treasury policy and receives regular reports on all aspects of market risk, including interestrate risk, foreign-currency risk and equity risk. Group treasury uses derivative instruments to manage various aspects of
market risk.
Interest-rate risk
The Group has a cautious approach to interest-rate risk, arising from the mortgage, savings and other financial services
products that are offered. The varying interest rate features and maturities on these products, and the need to raise
wholesale funds to fund them, create interest-rate risk due to the imperfect matching of interest rates between different
financial instruments and to timing differences on the repricing of assets and liabilities. Management of interest-rate risk
within the Group sits within treasury.
The Group’s preferred method of managing these risks is via repricing gap analysis and the four-book approach,
whereby the assets and liabilities of the balance sheet are identified according to their interest rate attributes and four
books are derived: administered, basis, Libor and fixed. This enables the Group to focus on any structural risk, delivers
transparency of each risk and permits effective management of the Group balance sheet.
In line with Basel guidelines, a +/- 2% stress test has been used. However, in the day-to-day management of the Group
balance sheet, in board reports and in strategic planning, additional stress tests and scenarios are used, including
different interest rate views and changes in customer behaviour arising from different market conditions.
The following table describes those significant Group activities sensitive to interest rate changes, together with how
such risks are managed, and the extent of risk to the Group. The Group monitors risk daily using a risk management
system and operates within limits set down by ALCO.
Activity
Management of the investment
of reserves and other net noninterest bearing liabilities
Fixed-rate savings products and
fixed-rate funding
Fixed-rate mortgage lending and
fixed-rate investments
Libor rate fixed-term funding
Libor rate fixed-term
investments
Risk
Sensitivity to changes in
interest rates
Sensitivity to falls in
interest rates
Sensitivity to increases in
interest rates
Cashflow sensitivity to
movement in interest rates
Cashflow sensitivity to
movement in interest rates
Type of hedge
Interest-rate swaps, fixed-rate
bonds eg gilts, and fixed-rate
mortgages
Receive fixed-interest-rate swaps
Extent of risk
The Group has never
experienced significant
financial losses as a
result of movements in
interest rates. In order
to avoid any adverse
Pay fixed-interest-rate swaps
effects in the future,
effective hedges will
Pay fixed-interest-rate swaps
continue to be
Receive fixed-interest-rate swaps maintained.
93 of 120
54. Market risk (continued)
Interest-rate risk sensitivity analysis
The Group has used a sensitivity analysis technique that measures the estimated change to the 31 July 2009 income
statement and the capital balance of the balance sheet of either an instantaneous increase or decrease of 1%, from the
market rates applicable at 31 December 2008, for each class of financial instrument with all other variables remaining
constant. The sensitivity analysis excludes the impact of market risks on net post-employment benefit obligations. This
analysis is for illustrative purposes only, as in practice market rates rarely change in isolation and it is likely that
corrective management action would be taken prior to losses reaching this point.
The interest rate sensitivity analysis is based on the following assumptions:
- changes in market interest rates affect the interest income or expense of variable-interest financial instruments;
- changes in market interest rates only affect interest income or expense in relation to financial instruments with fixed
interest rates if these are recognised at their fair value;
- changes in market interest rates affect the fair value of derivatives designated as hedging instruments. All interestrate hedges are expected to be highly effective;
- changes in the fair values of derivatives and other financial assets and liabilities are estimated by discounting the
future cash flows to net present values using appropriate market rates prevailing at the period end;
- the Group's reserves are assumed to have a maturity of 5 1/2 years, being the estimated average life of the mortgage
book; and
- repricing is assumed to happen mid-period.
Under these assumptions, a 1% increase or decrease in market interest rates for all currencies in which the Group had
borrowings and derivatives at 31 December 2008 would have decreased or increased profit before tax in the 7 month
period to 31 July 2009 by approximately £21.5 million and equity by £15.3 million.
Foreign-currency-exchange risk
Foreign-exchange risk arises as a result of activities undertaken by the Group when raising and investing funds in
currencies other than sterling, which is done in order to manage wholesale funding costs and the returns on liquid assets
and to provide diversity in funding and investment markets. Currency risk is managed primarily through the use of
currency swaps and forward foreign-exchange contracts. The risk is also managed, where appropriate, by foreign
exchange currency liabilities being matched with assets denominated in the same foreign currency.
94 of 120
The table below summarises the Group’s exposure to foreign-currency-exchange risk. The table includes the Group and
Society’s assets and liabilities at carrying amounts, categorised by currency. The net balance sheet position represents
the difference between the notional amounts of foreign currency derivatives, which are principally used to reduce the
Group’s exposure to currency movements, and their fair values.
£m equivalent denominated in:
US$
€
CAD
AUD
£
Total
Group
As at 31 July 2009
Assets
Investments in joint ventures
Goodwill
Intangible assets
Deferred tax assets
Other assets
Total assets
591.8
939.3
23,646.2
370.2
2,485.7
1,381.6
1,086.6
2.1
194.8
36.4
131.1
72.6
52.5
18.0
112.1
31,121.0
11.1
10.3
718.4
739.8
19.5
96.4
1,519.5
10.1
1,645.5
1.4
207.8
209.2
1.2
275.1
276.3
591.8
972.5
23,752.9
370.2
5,206.5
1,381.6
1,086.6
2.1
194.8
36.4
131.1
72.6
52.5
18.0
122.2
33,991.8
Liabilities
Shares
Deposits from banks
Other deposits
Other liabilities
Current taxes
Subscribed capital
Total liabilities
General reserve
Net balance sheet position
16,631.5
1,593.2
3,234.2
1,678.0
721.1
4,329.4
632.9
54.1
14.2
207.5
44.3
530.9
318.7
29,990.0
1,232.5
(88.8)
(12.7)
31,121.0
-
750.2
0.1
750.3
(10.5)
739.8
-
1,648.1
1,648.1
(2.6)
1,645.5
-
209.4
0.2
209.6
(0.4)
209.2
-
275.7
275.7
0.6
276.3
-
16,631.5
1,593.2
6,117.6
1,678.0
721.1
4,329.4
632.9
54.1
14.2
207.8
44.3
530.9
318.7
32,873.7
1,219.6
(88.8)
(12.7)
33,991.8
-
Total assets
33,300.2
33,312.5
(12.3)
2,308.2
2,295.0
13.2
237.0
239.9
(2.9)
316.0
315.0
1.0
37,216.7
37,216.7
-
1,055.3
1,054.3
1.0
95 of 120
£m equivalent denominated in:
US$
€
CAD
AUD
£
Total
Society
As at 31 July 2009
Assets
Loan and advances to customers
Investments
Goodwill
Intangible assets
Deferred tax assets
Other assets
Total assets
591.8
293.3
12,044.3
284.6
2,563.8
1,381.6
733.1
70.1
157.9
33.6
57.9
22.4
11,129.9
110.5
29,474.8
11.1
10.3
718.4
739.8
19.5
96.4
1,519.5
10.1
1,645.5
1.4
207.8
209.2
1.2
275.1
276.3
591.8
326.5
12,151.0
284.6
5,284.6
1,381.6
733.1
70.1
157.9
33.6
57.9
22.4
11,129.9
120.6
32,345.6
Liabilities
Shares
Deposits from banks
Other deposits
Other liabilities
Current taxes
Subscribed capital
Total liabilities
General reserve
16,631.5
1,528.5
2,746.0
405.5
613.6
1,723.5
269.9
3,544.5
12.9
173.2
4.5
530.9
318.7
28,503.2
1,071.8
(88.8)
(11.4)
29,474.8
-
750.2
0.1
750.3
(10.5)
739.8
-
1,648.1
1,648.1
(2.6)
1,645.5
-
209.4
0.2
209.6
(0.4)
209.2
-
275.7
275.7
0.6
276.3
-
16,631.5
1,528.5
5,629.4
405.5
613.6
1,723.5
269.9
3,544.5
12.9
173.5
4.5
530.9
318.7
31,386.9
1,058.9
(88.8)
(11.4)
32,345.6
-
Total assets
29,236.6
29,248.9
(12.3)
2,308.2
2,295.0
13.2
237.0
239.9
(2.9)
316.0
315.0
1.0
33,153.1
33,153.1
-
1,055.3
1,054.3
1.0
96 of 120
Foreign-currency-exchange risk sensitivity analysis
The Group operates a policy of matching all non-sterling assets with equivalent liabilities, using cross-currency swaps,
in order to remove currency risk from the balance sheet. Any mismatches are negligible in size, with the maximum
amount allowed under Group policy being the equivalent of 2% of ‘own funds’.
Under this assumption, with a 10% strengthening or weakening of sterling against all exchange rates, the maximum that
profit before tax would have decreased or increased by for the 7 month period is £5.5 million (12 months ended 31
December 2008 : £5.6 million) respectively and that equity would have decreased or increased by is £3.9 million (31
December 2008 : £4.0 million) respectively.
Equity risk
Equity risk arises from the guaranteed equity bond products sold and is managed through the use of derivative contracts.
Equity risk is monitored by the treasury risk committee and ALCO. Since all equity exposures are fully hedged, there is
no significant net exposure to equity risk.
Equity risk sensitivity analysis
In its normal course of business, the Group offers retail products whose returns are linked to underlying equity indices.
It is the Group’s policy to hedge these on a one-to-one basis, thus eliminating any exposure to movements in such
indices. Differences in balances between product and hedge are minimal and not considered material.
Retail Price Index (RPI) risk
In its normal course of business, the Group offers retail products whose returns reset each month in line with the RPI.
These products tend to allow access to funds subject to a 90 day notice period.
It is the Group's policy to hedge these retail products on a one-to-one basis, thus eliminating any exposure to movements
in the index. All hedging is done using derivative instruments that pay the Group an RPI-linked return that matches the
underlying product in exchange for it paying three month Libor. Differences in balances between product and hedge are
minimal and not considered material as they are reviewed monthly and adjusted accordingly.
Insurance risk
The Group uses insurance to mitigate credit and operational risks.
Credit risks for most high LTV retail mortgage lending are mitigated through the use of mortgage insurance. This
insurance was provided by Britsafe Insurance Services (Guernsey) Limited until July 2009 when its operations were
transferred to the Society. Currently, the Society is managing the risk through self insurance.
Operational risks are mitigated through insurance for aspects such as fraud, business continuity and professional
indemnities.
Accordingly, insurance risk is defined as the residual risk which may arise because risks are ineffectively insured, action
or inaction by the Group invalidates insurance policies affected or insurers default on pay-out of valid claims through
bankruptcy. The Group has a very low appetite for insurance risk as it is a key mitigant of other risks.
97 of 120
55. Derivative financial instruments and hedging
The Group has a formal structure for managing risk, including established risk limits, reporting lines, mandates and
other controls. The Board reviews this structure regularly in line with new requirements from regulators. ALCO
monitors compliance and performance against the structure and manages and controls the balance sheet exposures of the
Group.
The Board has authorised the use of derivatives under Section 9a of the Building Societies Act 1986. The FSA agrees an
overall limit on the derivatives outstanding at any one time. The Board sets all other limits over the use of derivative
products on the recommendation of the ALCO.
From 1 January 2009, the group has decided to apply the hedge accounting criteria of the "carve out" version of IAS 39
which was adopted by the EU in 2005 when determining the composition of certain portfolios for hedge accounting
purposes. This has been done in order to simplify the procedures required in order to achieve hedge accounting and
more closely align the accounting approach with the Group's economic basis of hedging. The Group's accounting policy
for hedging remains unchanged as a result of this new approach.
Types of derivatives
In addition to making loans and accepting deposits, the Group utilises a range of financial instruments to provide the
greatest flexibility regarding risk and return. Financial instruments constitute the vast majority of the Group and
Society's assets and liabilities. The principal derivatives used in balance sheet risk management are interest-rate swaps,
interest-rate options, cross-currency interest-rate swaps, foreign-exchange contracts and FTSE swaps, which are used to
hedge Group balance sheet exposures arising from fixed-rate mortgage lending and savings products, and funding and
investment activities.
Currency and interest-rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an
economic exchange of currencies or interest rates (eg fixed rate for floating rate) or a combination of these (ie crosscurrency interest-rate swaps). No exchange of principal takes place, except for certain currency swaps. The Group’s
credit risk represents the potential cost to replace the swap contracts if counterparties fail to perform their obligation.
This risk is monitored on an ongoing basis with reference to the current fair value, the notional amount of the contracts
and the liquidity of the market. To control the level of credit risk taken, the Group assesses counterparties using the
same techniques as for its lending activities.
The notional amounts of certain types of financial instruments provide a basis for comparison with instruments
recognised on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current
fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or price risks. The derivative
instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market interest rates or
foreign-exchange rates relative to their terms. The aggregate contractual or notional amount of derivative financial
instruments on hand, the extent to which instruments are favourable or unfavourable, and thus the aggregate fair values
of derivative financial assets and liabilities, can fluctuate significantly from time to time.
Derivative products which are combinations of more basic derivatives are used only in circumstances where the
underlying position being hedged contains the same risk features. For example, GEBs issued by the Group may be
hedged with a single contract incorporating both the underlying interest-rate and equity-index risk. In such cases the
derivatives used will be designed to match exactly the risks of the underlying asset or liability. Exposure to market risk
on such contracts is therefore fully hedged. As at 31 July 2009 the total market value adjustment for the GEBs issued by
the Group was £10.9 million (31 December 2008 : £24.9 million).
98 of 120
55. Derivative financial instruments and hedging (continued)
Fair value hedges
The Group hedges part of its existing interest-rate risk resulting from any potential decrease in the fair value of fixedrate assets or increase in fair value of term deposits from customers using interest-rate swaps. The net fair value of these
swaps at 31 July 2009 was £(238.8) million (31 December 2008 : £(392.5) million). The gains on the hedging
instruments in the 7 month period to 31 July 2009 were £153.7 million (12 months ended 31 December 2008 : losses
£476.4 million). The losses on the hedged item attributable to the hedged risk for the 7 month period were £122.8
million (12 months ended 31 December 2008 : gains £505.4 million).
The Group also hedges a proportion of its existing foreign-exchange risk in its financial assets and financial liabilities
by fair value hedges in the form of cross-currency swaps. The net fair value of the Group’s cross-currency swaps at 31
July 2009 was £642.4 million (31 December 2008 : £1,290.9 million). Further details are given in Note 27. The losses
on the hedging instruments in the 7 month period to 31 July 2009 were £648.5 million (12 months ended 31 December
2008 : gains £1,271.5 million). The gains on the hedged item attributable to the hedged risk for the 7 month period were
£648.5 million (12 months ended 31 December 2008 : losses £1,271.5 million).
Portfolio hedging
As part of its risk management process the Group identifies a portfolio of items whose interest-rate risk it wishes to
hedge. The portfolio may comprise only assets, only liabilities or both assets and liabilities. Any hedging ineffectiveness
within these portfolios will be recognised in the income and expenditure account. The net fair value of the swaps within
these portfolios at 31 July 2009 was £(11.8) million (31 December 2008 : £3.1 million).
Cashflow hedging
The Group adopted cashflow hedging for certain of its variable rate funding and investing activities from 1 November
2006. As a result, movements in fair value are recognised through reserves. At 31 July 2009 interest-rate swaps with an
aggregate principal amount of £4,315.2 million (31 December 2008 : £3,463.8 million) and a net fair value of £22.4
million (31 December 2008 : £(47.0) million) were designated as hedges of future cash flows from variable rate funding.
These amounts will be reported in income in the period from 1 August 2009 to 2014, the cashflows to which they relate
will occur during the same periods. There was a nil (31 December 2008 : nil) charge to income and expenditure in
respect of hedging ineffectiveness during the period.
Credit default swap
The Society has hedged part of its credit exposure on subordinated loans made to some of the Group's securitisation
companies, by taking out a credit default swap with another subsidiary, Dovedale Finance Number One plc. The fair
value of the credit default swap at 31 July 2009 was £13.8 million (31 December 2008 : nil). The gain on the credit
default swap in the 7 month period to 31 July 2009 was £13.8 million (12 months ended 31 December 2009 : nil).
99 of 120
56. Fair values of financial instruments
The following table summarises the carrying amounts and fair values of those financial assets and liabilities not
presented on the Group and Society balance sheets at fair value.
Category
Class
(as defined by (as determined by the Group)
IAS 39)
Carrying value
31 July 31 December
2009
2008
£m
£m
Fair value
31 July 31 December
2009
2008
£m
£m
Group
Financial assets
Loans and
receivables
Loans and advances
to banks
Loans and advances
to customers
Member Business
Commercial
BCIG residential
mortgages
972.5
1,789.8
972.5
1,789.8
10,716.4
3,686.2
10,897.9
3,720.9
10,821.5
3,775.3
11,085.1
3,809.9
9,350.3
9,629.8
9,374.7
9,656.7
5,206.5
6,133.6
4,716.5
5,467.6
16,631.5
6,117.6
1,678.0
4,329.4
530.9
318.7
17,300.6
6,936.8
2,057.8
5,233.5
691.7
326.5
16,646.7
6,117.6
1,679.2
3,214.9
459.8
346.2
17,339.1
6,957.3
2,071.5
6,579.4
624.1
372.5
Financial
liabilities at
amortised cost Shares
Deposits from banks
Other deposits
Subscribed capital
100 of 120
56. Fair values of financial instruments (continued)
Class
Category
(as defined by (as determined by the Group)
IAS 39)
Carrying value
31 July 31 December
2009
2008
£m
£m
Society
Financial assets
Loans and
receivables
Loans and advances
to banks
Loans and advances
to customers
Member Business
Commercial
Fair value
31 July 31 December
2009
2008
£m
£m
326.5
1,289.6
326.5
1,289.6
10,716.4
1,434.6
10,908.2
1,440.4
10,821.5
1,468.8
11,095.4
1,483.6
5,284.6
6,133.6
4,794.6
5,467.6
16,631.5
5,629.4
405.5
1,723.5
530.9
318.7
17,300.6
6,282.8
828.2
2,294.3
691.7
326.5
16,646.7
5,629.4
406.5
1,724.6
459.8
346.2
17,339.1
6,303.3
832.6
2,366.3
624.1
372.5
Financial
liabilities at
amortised cost Shares
Deposits from banks
Other deposits
Subscribed capital
Included within the carrying values of financial liabilities are fair-value adjustments for hedged risk that are disclosed in
the relevant notes to the financial statements.
Key considerations in the calculation of fair values are as follows:
a. Loans and advances to banks
Loans and advances to banks include inter-bank placements and items in the course of collection. The fair value of
floating-rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed-interest
bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with
similar credit risk and remaining maturity.
b. Loans and advances to customers
Loans and advances to customers are net of provisions for impairment. The estimated fair value of loans and
advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash
flows are discounted at current market rates to determine fair value.
c. Deposits and borrowings
The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the
amount repayable on demand. The estimated fair value of fixed-interest deposits and other borrowings without
quoted market prices is based on discounted cash flows using interest rates for new debts with similar remaining
maturity.
d. Debt securities in issue
The fair values are calculated based on quoted market prices in an active market. For those notes where quoted
market prices are not available, a discounted cash flow model is used based on a current yield curve appropriate for
the remaining term to maturity.
101 of 120
The following table summarises the financial assets and liabilities which are presented on the Group and
Society balance sheets at fair value based on level 1, 2 and 3.
The levels are as follows:
Level
Fair value based upon
Level 1
Unadjusted quoted prices in an active market for identical financial instruments
Level 2
Inputs other than those in level 1, that are observable either directly (ie prices) or
indirectly (ie derived from prices)
Level 3
Inputs are not based on observable market data
Group
Category
(as defined by IAS
39)
Class
Financial assets
Available-for-sale
financial assets
Derivative financial
instruments
Fair value measurement at end of the
reporting period using:
31 July
2009 Level 1
Level 2
Level 3
£m
£m
£m
£m
- listed
- unlisted
Total available-for-sale financial assets
Interest rate swaps
- designated as fair value hedges
- designated as cash flow hedges
- at fair value through income & expense
Cross currency interest rate swaps
Total derivative financial instruments
1,079.2
302.4
1,381.6
1,079.2
1,079.2
302.4
302.4
-
269.4
162.3
33.5
-
269.4
162.3
33.5
-
621.4
1,086.6
-
621.4
1,086.6
-
1,389.0
-
Total assets
2,468.2
Financial liabilities at
amortised cost
1,593.2
-
1,593.2
508.2
188.6
45.3
-
508.2
188.6
45.3
-
(21.0)
721.1
-
(21.0)
721.1
-
instruments
Interest rate swaps
Total liabilities
2,314.3
102 of 120
1,079.2
-
2,314.3
-
Society
Category
(as defined by IAS
39)
Financial assets
Available-for-sale
financial assets
instruments
Fair value measurement at end of the
reporting period using:
31 July
2009 Level 1
Level 2
Level 3
£m
£m
£m
£m
Class
- listed
- unlisted
Total available-for-sale financial assets
Interest rate swaps
Credit default swap
1,079.2
302.4
1,381.6
1,079.2
1,079.2
302.4
302.4
-
269.2
162.6
22.5
-
269.2
162.6
22.5
-
265.0
-
265.0
-
13.8
733.1
-
13.8
733.1
-
1,035.5
-
Total assets
2,114.7
Financial liabilities at
amortised cost
1,528.5
-
1,528.5
-
427.0
185.0
22.6
-
427.0
185.0
22.6
-
(21.0)
613.6
-
(21.0)
613.6
-
instruments
Interest rate swaps
Total liabilities
2,142.1
103 of 120
1,079.2
-
2,142.1
-
57. Operational risk
Operational risk is the risk of loss arising from poor or failed processes or systems, human error or external events. The
Group’s approach requires a culture of risk awareness that supports the organisation’s strategy. The Board requires all
operational risks of the business to be identified, assessed and mitigated to appropriate residual levels. Senior managers
are responsible for understanding how operational risk impacts on their business areas and for putting in place
appropriate controls or other mitigating actions.
The Group’s operational risk management policy is approved by the Board through the group audit committee, which
receives a quarterly report on the Group’s operational risk profile.
The Group operates a ‘three lines of defence’ model, with operational risks managed within business areas. A central
group operational risk department provides the operational risk management framework and consistency across the
Group. Oversight of the framework is the responsibility of the business risk committee which reports to the group
executive board and group audit committee.
The Group considers the Basel II standardised approach for operational risk to be appropriate to its size, complexity and
risk exposure. The Group identifies and assesses significant risks within its business areas on a quarterly basis, and
makes an assessment of the level of capital required by the Group for operational risk. Each of these risks is allocated an
owner, all of whom are members of the group executive board.
58. Capital management
The Group’s objectives when managing capital are to ensure appropriate levels of capital to safeguard the Group’s
ability to continue as a going concern and to maintain a strong capital base to support development of the business.
Capital adequacy and the use of regulatory capital are monitored daily using techniques based on the guidelines
developed by the Basel Committee (Basel II) and the European Union Directives, as implemented by the FSA for
supervisory purposes.
During the period, the Group recognised that there was an opportunity to buy-back a proportion of its subordinated
liabilities on favourable terms. The Group bought back £99.5 million of subordinated liabilities with the approval of the
FSA, after a detailed review of the impact of the transaction on regulatory capital.
The table below summarises the composition of the Group's capital at 31 July 2009 and 31 December 2008:
31 July 31 December
2009
2008
£m
£m
Subscribed capital
General reserves
530.9
318.7
1,219.6
(88.8)
(12.7)
1,967.7
691.7
326.5
1,203.5
(97.4)
(33.6)
2,090.7
The Group is subject to the Basel II capital requirements, which comprise Pillar I (requirements for regulatory capital
for credit, operational and market risk), Pillar II (other risks) and Pillar III (disclosure). The assumptions used in the
calculations are very prudent, and are intended to ensure that the Group has sufficient capital to remain a going concern
even in a severe market downturn. During the period the Group complied with all the externally imposed capital
requirements to which it is subject and maintained capital above the minimum threshold required by the regulators.
104 of 120
59. Cash flows from operating activities
Group
Group
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
Profit before tax
24.8
Decrease in prepayments and accrued income
Decrease in accruals and deferred income
Impairment losses
Loans and advances written off, net of recoveries
Amortisation
Depreciation
Interest on subscribed capital
Interest on subordinated liabilities
Profit on sale of property, plant and equipment
Profit on buy back of liabilities
(Decrease)/increase in provisions for liabilities and
charges
Movements in derivative financial instruments
Movements in fair-value adjustment for hedged risk
Movements in retirement benefit plan
Cash flows from operating profits before changes in
operating assets and liabilities
Net decrease in loans and advances to customers
Net (decrease)/increase in shares
Net increase in guaranteed equity bonds
Net (decrease)/increase in deposits from banks
Net decrease in other deposits
Net decrease in debt securities in issue
Net decrease/(increase) in loans and advances to banks
Net decrease/(increase) in value of joint ventures
Net increase in other assets
Net (decrease)/increase in other liabilities
Taxation received/(paid)
Net cash flows from operating activities
62.4
2.4
40.8
(357.0)
42.3
(49.5)
8.5
7.8
13.1
12.0
(0.3)
(57.9)
113.1
(24.0)
115.2
(27.4)
16.5
13.6
28.9
35.8
(3.6)
-
(50.4)
39.8
(325.9)
(8.2)
(0.7)
7.6
6.2
13.1
12.0
(0.3)
(36.5)
(28.0)
114.3
(12.0)
67.1
(0.7)
15.2
12.2
28.9
35.8
(3.6)
-
(10.1)
550.9
(525.4)
(2.8)
16.4
(810.2)
813.4
(33.0)
(10.0)
250.8
(234.7)
(2.8)
16.5
(234.2)
257.5
(33.0)
(302.8)
260.1
(277.6)
238.4
499.9
(280.8)
126.7
(780.3)
(337.2)
(860.7)
307.8
0.1
(7.3)
(1.8)
3.6
(1,632.8)
105 of 120
5.4
Society
Society
7 months
12 months
ended
ended
31 July 31 December
2009
2008
£m
£m
1,201.0
1,065.8
120.6
1,847.5
(1,440.9)
(2,724.2)
(980.8)
(0.6)
(2.6)
(26.2)
13.7
(666.6)
203.5
(280.8)
128.1
(615.0)
(411.6)
(557.4)
459.9
(1,805.0)
1,589.0
(2.4)
(1,569.3)
379.8
1,065.8
124.0
2,025.0
(1,128.6)
(1,723.5)
(496.7)
(841.4)
(460.2)
42.9
(774.5)
59. Cash flows from operating activities (continued)
For the purposes of the cashflow statement, cash and cash equivalents comprise the following balances with less than 90
days maturity from date of acquisition.
Cash and cash equivalents
Group
Group
31 July 31 December
2009
2008
£m
£m
Cash and balances with the Bank of England (Note 17)
Loans and advances to banks (Note 18)
569.1
293.8
442.6
1,305.5
253.0
798.2
1,951.1
3,002.3
Society
Society
31 July 31 December
2009
2008
£m
£m
569.1
287.4
442.6
1,299.1
253.0
785.5
1,942.3
2,980.8
Cash equivalents comprise balances of highly liquid investments with a maturity of three months or less from the date of
acquisition. As a result, certain loans and advances to banks and investment securities are included as cash equivalents.
60. Related party transactions
Parent, subsidiary and ultimate controlling party
The Group is controlled by Britannia Building Society. Further details of subsidiary undertakings and joint ventures are
disclosed in Note 28 of these financial statements.
Transactions with directors and their close family members
Directors and their close family members have entered into the following transactions with the Group and the Society in
the normal course of business:
Group
Group
31 July 31 December
2009
2008
£000
£000
Loans outstanding to directors and their close family
members
Loans issued during the period
Loan repayments during the period
At end of period
1,213
(58)
1,155
Interest income paid by directors and their close family
members
2,369
167
(1,323)
1,213
11
Loans made to directors and members of their close families are on the same terms and conditions applicable to other
employees within the Group.
106 of 120
46
60. Related party transactions (continued)
Transactions with Group companies
The Society undertook the following transactions with Group companies during the period:
Interest
paid to
Society
£m
Britannia Development and Management Company Limited
Staff
Interest
recharges
Rent
received
paid to
received
from Society
Society from Society
£m
£m
£m
0.4
19.5
0.6
1.6
3.9
0.1
37.4
0.5
8.1
0.3
23.5
0.6
-
0.1
0.1
0.6
-
0.4
-
3.1
137.2
2.2
20.3
91.9
0.6
143.8
0.4
0.2
0.1
2.6
91.9
4.6
-
0.1
0.2
1.0
0.1
0.2
-
0.6
-
Britannia Development and Management Company Limited
Interest accrues on outstanding balances at a transfer-price rate agreed between the Society and its subsidiaries.
During the 12 month period to 31 December 2008 the Society sold £0.7 million of residential properties to Illius
Properties Limited. No properties were sold by the Society to Illius Properties Limited during the 7 month period to 31
July 2009.
107 of 120
At the period end the following unsecured balances were outstanding:
Loans owed
by Society
31 July
2009
£m
Limited
Mortgage Agency Services Number Seven Limited
Britannia New Homes Limited
Britannia Independent Limited
Britannia Lending Company Limited
Britannia Building Society Land and Development
Company (Midlands) Limited
The Mortgage Agency plc
Verso Limited
Britannia Shield Property Services Limited
Britannia Estate Agents Limited
-
108 of 120
Loans owed Loans owed Loans owed to
to Society
by Society
Society
2009
2008
2008
£m
£m
£m
49.4
-
53.8
1.9
40.8
0.3
1,383.6
83.0
0.1
0.9
-
2,378.8
67.7
193.5
460.8
11.2
1,638.4
-
1.6
40.5
0.3
1,354.1
75.2
0.1
0.9
0.1
2,497.9
73.0
204.2
492.1
11.1
1,998.7
-
0.1
0.2
1,799.5
0.2
0.1
0.1
110.9
1,849.3
0.9
0.1
0.2
-
0.2
0.1
3.0
48.9
0.2
-
-
Transactions with special purpose entities
Britannia Building Society undertook the following transactions with special purpose entities during the period:
Interest
Interest
Interest paid received from Interest paid received from
to Society
Society
to Society
Society
7 months
7 months
12 months
12 months
ended
ended
ended
ended
31 July
2009
2009
2008
2008
£m
£m
£m
£m
0.2
0.6
0.7
0.5
0.8
0.8
0.8
32.5
22.2
7.7
0.8
0.8
5.8
0.2
-
109 of 120
0.4
0.4
2.3
0.7
0.4
0.8
1.7
1.9
1.5
2.3
2.3
2.2
65.7
23.8
1.6
4.7
3.1
11.0
-
0.1
0.4
0.6
1.1
1.7
2.0
2.5
2.4
1.3
0.1
0.1
1.0
3.3
2.2
3.9
5.2
At the period end the following balances were outstanding with special purpose entities:
Loans owed
by Society
31 July
2009
£m
Leek Finance Number One plc
Leek Finance Number Two plc
Leek Finance Number Five Limited
Leek Finance Number Six Limited
Leek Finance Number Seven plc
Leek Finance Number Eight Limited
Leek Finance Number Nine Limited
Meerbrook Finance Number Five Limited
0.1
0.2
0.2
0.1
0.1
6.2
2.9
2.5
2.6
3.3
2.9
3.0
3.4
1.8
1.9
31.0
0.4
3.3
124.7
-
Loans owed Loans owed Loans owed to
to Society
by Society
Society
2009
2008
2008
£m
£m
£m
17.7
19.1
14.9
46.1
42.8
88.1
1,919.3
1,310.5
525.8
41.5
1.3
10.2
405.9
1.0
12.1
-
0.6
0.2
0.1
0.3
0.1
0.6
0.1
0.6
3.4
2.7
2.4
2.5
2.5
2.9
2.5
2.4
2.6
3.2
34.2
0.3
38.6
237.2
0.1
2.4
88.0
9.4
17.6
19.0
14.8
23.7
27.0
25.6
1,963.9
1,355.7
41.5
1.3
44.5
373.7
1.0
15.8
-
The loans owed to the special purpose entities comprise cash balances deposited with the Society.
Britannia Treasury Services Limited is the parent undertaking of Platform Group Holdings Limited, Mortgage Agency
Services Number One to Seven Limited and Western Mortgage Services Limited.
61. Events after the balance sheet date
On 21 January 2009 the Group announced the proposed merger with The Co-operative Financial Services. The proposal
was approved by the members at the Annual General Meeting on 29 April 2009. The merger took place with effect from
1 August 2009. Costs associated with the merger are disclosed in Note 9.
The directors consider that there has been no other event since the period end that has a significant effect on the
Society’s position or that of any of its connected undertakings at the period end.
110 of 120
62. Registered office
Britannia Building Society was a mutual organisation, incorporated and domiciled in the United Kingdom. The address
of its registered office was:
Britannia Building Society
Britannia House
Cheadle Road
Leek
Staffordshire Moorlands
ST13 5RG
111 of 120
Annual business statement
1. Statutory percentages
2009
%
Statutory
limit
%
Proportion of business assets not in the form of loans fully secured on
residential property (the lending limit)
17.0
25.0
Proportion of shares and borrowings not in the form of shares held by
individuals (the funding limit)
35.0
50.0
The above percentages have been calculated in accordance with, and the statutory limits are those
prescribed by, sections 6 and 7 of the Building Societies Act 1986 as amended by the Building Societies Act
1997:
•
business assets are the total assets of the Group as shown in the balance sheet, plus provisions for
impairment losses on loans and advances, less fixed assets and liquid assets;
•
loans fully secured on residential property are the amount of principal owing by borrowers and interest
accrued not yet payable. This is the amount shown in the balance sheet, plus provisions for bad debts,
less unamortised premiums on the acquisition of loans; and
•
shares and borrowings represent the total of shares, amounts owed to credit institutions, amounts owed
to other customers and debt securities in issue.
2. Other percentages
As a percentage of shares and borrowings
gross capital
free capital
liquid assets
2009
%
2008
%
7.0
5.5
29.2
6.9
5.5
33.5
Profit after taxation as a percentage of mean total assets
0.09
0.01
Management expenses as a percentage of mean total assets
(statutory ratio)
0.73
0.70
0.64
0.62
Management expenses (excluding merger costs, impairment losses
on counterparties and compensation scheme levies) as a percentage
of mean total assets under management
The above percentages have been prepared from the Society’s consolidated accounts and in particular:
•
gross capital represents the aggregate of general reserve, subordinated liabilities and subscribed capital;
•
free capital represents the aggregate of gross capital and general loss provisions for bad and doubtful
debts, less tangible and intangible fixed assets;
112 of 120
•
liquid assets represent the total of cash and balances with the Bank of England, loans and advances to
credit institutions and debt securities;
•
mean total assets represent the amount produced by halving the aggregate of total assets at the
beginning and end of the financial period;
•
management expenses represent the aggregate of administrative expenses, depreciation and
amortisation; and
•
total assets under management include assets managed by the Group on behalf of third parties.
113 of 120
3. Directors’ responsibilities
DIRECTORS
Name and date of birth
Business occupation and other directorships
Date of
appointment
as a director
of the Society
Rodney Baker-Bates,
MA, FCA, AIMC, FCIB
25.4.1944
Chartered accountant
19.7.2006
Keith Cameron, BSc
31.3.1947
Assura Group plc
Bedlam Asset Management plc
Dolphin Square Trust Limited
EG Solutions plc
G’s Group Holdings Limited
Stobart Group plc
The Burdett Trust for Nursing Limited
1.8.2007
Company director
Barclays Pension Funds Trustees Limited
Global Air Charter Limited
Nickleby & Co. Limited
TACT UK Limited
Work Group Plc
Tim Franklin, ACIB
24.9.1961
Building society executive director
22.3.2005
MutualPlus Limited
Francis Gugen, FCA
26.2.1949
17.12.2003
Company director
CEOC Limited
Chrysaor Holdings Limited
Echo Petroleum Limited
Fraudscreen Limited
Gugen Consulting Limited
Island Gas Limited
Island Gas Resources Plc
KP Renewables (Operations) Limited
Petroleum Geo-Services ASA
Raft Enterprises Limited
Raft Trustees Limited
See note in directors’ report on page 5.
Peter Harvey,
ACIB, Dip FS
11.11.1955
Company director and consultant
Marshalls Holdings Limited
Surrey Cricket Club Limited
114 of 120
1.10.2008
Chris Jones, LLB
23.2.1953
Solicitor and company director
7.5.2003
Agenda Management Services Limited
CJM Pudsey Limited
The Business Desk Limited
Armitage Jones LLP
LPA Direct LLP
Tourmalet Consulting
Trango Limited
Stephen Kingsley, FCA
1.6.1952
Chartered accountant
1.10.2008
Highfield Resources Limited
Phil Lee, BSc, CA
25.5.1955
Limited
Mortgage Agency Services No. 1 Limited
PCSL Services No. 1 Limited
Verso Limited
115 of 120
1.9.2002
David McCarthy,
BSc, ACA, AMCT
20.5.1965
Neville Richardson,
BA, FCA
2.6.1957
Bridget Rosewell,
MA, MPhil
19.9.1951
Economist
18.6.2008
Limited
Britannia Estate Agents Limited
Britannia Estate Agents (London) Limited
Britannia (Isle of Man) Limited
Britannia LAS Direct Limited
Britannia Motor Insurance Services Limited
Britannia Shield Property Services Limited
Findprior Limited
Meridian Financial Consultants Limited
Plum Sterling No. 1 plc
The Mortgage Agency plc
Verso Limited
28.9.1998
Communicate Mutuality Limited
Trustee of the Britannia Building Society Foundation
28.7.1999
The Environment Business Limited
Volterra Consulting Limited
116 of 120
Tom Sawyer
12.5.1943
Member of the House of Lords
Management and training consultant
28.7.1999
Chancellor of the University of Teesside
Key Homes
Norfolk Lift Limited
Thompsons Solicitors
Union Income Benefit
Documents may be served on the above-named directors at the following address: Howsons, 50 Broad
Street, Leek, Staffordshire Moorlands, ST13 5NS.
117 of 120
OFFICERS
Business occupation and other directorship
Peter Ambrose
Business leader, strategic loss management unit
Mark Beresford, BA
Managing director, Britannia International Limited
Ian Dale, ACA
Director of operations, Britannia Capital Investment Group
Verso Limited
Karen Darby
Strategy manager, customer way
Martin Ellison, BA, MA
Business leader, group strategy and planning
Basil Foulkes, BCom, ACA,
FCIS
Strategy manager, risk capital unit
Louise Fowler, BA, MBA
Business leader, marketing
Mike Gannon
Business leader, group arrears
Phil Garlick, ACIB, BA
Business leader, membership services
Steve Goldstraw
Managing director, Britannia Commercial Lending
Britannia New Homes (Scotland) Limited
Walstat Limited
Ian Graham
Strategy manager, group financial crime and group money
laundering reporting officer
Philip Hewetson, BSc, ACA
Business leader, financial management
Mark Jacot,
BSc, CEng, MIMechE
Business leader, information services
Stephen Jones,
MA (Oxon), ACIB,
FiSMM
Business leader, distribution
118 of 120
Jon Katovsky, BA, MA
Managing director, Britannia Treasury Services Limited
Graham Leftwich, BSc, MA
Business leader, group communications
Trustee of the Britannia Building Society Foundation
Mike Lewis
Managing director, Western Mortgage Services Limited
Peter Mansfield, BA, MA,
FCIPD
Business leader, affinity and group property
Paul Mills, BSc, ACA
Group director of corporate governance and group secretary
Britannia Building Society Land and Development Company
(Midlands) Limited
Britannia (Isle of Man) Limited
Britannia Motor Insurance Services Limited
Trustee of the Britannia Building Society Pension Plan
Karen Moir, BA
Director of organisational development
Will Newby, MBA, ACII
Business leader, regulatory and operational risk
119 of 120
Steve Nichols, ACIB, MCT,
ACIS
Business leader, treasury
Trustee of the Britannia Building Society Pension Plan
Neil Noakes
Business leader, group human resources
Adrian Powell, BA, MSc
Business leader, leadership and people development
Adrian Smith
Business leader, strategy and planning (Member Business)
and Bristol CSC operations
Manor Farm Winterbourne Bassett Limited
MutualPlus Limited
Alison Thompson
Business leader, change management
David Tweedy, BA, MBA
Managing director, Platform Home Loans Limited
Lorna Whiston, BSc, ACA
Strategy manager, internal audit
4. Directors’ service contracts
The following directors have service contracts with the Society, entered into on the dates stated
below:
Tim Franklin
Phil Lee
David McCarthy
Neville Richardson
1 February 2005
1 February 2005
18 June 2008
1 March 2005
All executive director appointments (including promotions) have a rolling one-year contract of
employment.
120 of 120

Britannia Building Society - Co

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