Half-year Report

RNS Number : 1121H

Coventry Building Society

30 July 2019

 

30 July 2019 COVENTRY BUILDING SOCIETY REPORTS 2019 INTERIM FINANCIAL RESULTS Coventry Building Society performed strongly against its strategic goals in the first half of 2019, continuing its track record of savings and mortgage growth whilst taking forward its strategic investment programmes for the benefit of existing and future members. The Society's performance across the measures aligned to its strategic goals is detailed below. ·      Strong mortgage growth: Gross lending of £4.1 billion and net lending of £1.3 billion for the first half of 2019 (30 June 2018: gross lending of £4.6 billion, net lending of £1.5 billion). The Society's mortgage balances are expected to have grown by more than two and a half times the rate of the market for the 12 months to 30 June 20191.  ·      Savings growth outperforms market: Savings balances increased by £1.9 billion in the first half of 2019 (30 June 2018: £0.4 billion) taking total deposits to over £35 billion. In the 12 months to 30 June 2019, the Society's savings are expected to have grown by three times the rate of the market1. ·      Giving value to members: The average weighted savings rate paid to members was 1.52%, 0.69% higher than the average paid in the market (31 December 2018: 1.50%, 0.72% higher than the market)2. ·      Delivering the right member outcomes: The Society's overall Net Promoter Score has been maintained at a very strong +753 (31 December 2018: +75), supported by one of the lowest complaint overturn rates at the Financial Ombudsman Service4. ·      Leading cost efficiency: At 0.48%5 (30 June 2018: 0.46%) the Society continues to report the lowest cost to mean asset ratio of any UK building society6, whilst continuing to invest significantly in its technology infrastructure and branch network.  ·      Low risk: Loans where arrears were greater than 2.5% of the balance fell further to 0.09% compared to the market average of 0.72%7 (31 December 2018: 0.10% compared to the market average of 0.74%). ·      Continued capital and liquidity strength: Common Equity Tier 1 (CET 1) ratio remained strong at 34.2% (31 December 2018: 35.5%), one of the highest reported by any top 20 UK lender8 whilst the Society's leverage ratio on a UK modified basis has been broadly maintained at 4.5% (31 December 2018: 4.6%).  The Liquidity Coverage Ratio (LCR) of 232%9 (31 December 2018: 202%) remains considerably above the regulatory minimum requirement. ·      Leading employee engagement: The Society was rated 'Outstanding' for employee engagement and as one of the 100 Best Companies to Work For in the UK10. ·      Supporting communities: 75% of colleagues (31 December 2018: 79%) have been actively involved in the Society's community programmes over the last 12 months. Commenting, Mark Parsons, Coventry Building Society Chief Executive said: This performance was achieved in what continues to be a challenging environment. While demand for cash savings has strengthened, economic and political uncertainty is affecting the UK's overall growth rate with reduced activity in the housing market, lower overall house price inflation and even some areas of house price decline. This, and the depth of competition in both mortgages and savings, has resulted in strong price competition. In this context, our continued success in attracting and retaining borrowers and savers demonstrates the strength of the Society's business model and our ability to deliver tangible member value. In the first six months of 2019 we grew savings balances by £1.9 billion (30 June 2018: £0.4 billion) helped by an average savings rate of 1.52% compared with a market average of 0.83%2. The strong demand we have experienced reflects both the value offered by our savings products and the excellent service we deliver. Throughout the first half of 2019 Net Promoter Scores3 in our branches averaged +90 (31 December 2018: +90), in our savings contact centre they were +83 (31 December 2018: +83), and contact with our mortgage intermediary partners averaged +86 (31 December 2018: +81), representing outstanding levels of customer service. As a result, we estimate that in the 12 months to 30 June 2019 we have grown savings balances by three times the market rate of growth1. Independent recognition of this performance came from our continued status as a Which? recommended savings provider and a Moneyfacts award for being the Best Building Society Savings Provider, as well as being the most highly rated savings provider by Fairer Finance. The growth was supported by our partnership with Hargreaves Lansdown, through which we were the first provider of an instant access savings account on its Active Savings platform. We also delivered robust mortgage growth of £1.3 billion in the six months to 30 June 2019 (30 June 2018: £1.5 billion), a rate of growth that we estimate is more than two and a half times that of the market1. This has been achieved without losing sight of the Society's low risk approach to lending, which is evident in the further reduction in arrears with mortgages 2.5% or more in arrears reducing to 0.09% (31 December 2018: 0.10%) or one eighth of the industry average (31 December 2018: one seventh)7. We will continue to adapt our lending in a changing market, but always with a low risk approach which protects individual members and the Society as a whole. Equally, it is in the interest of both current and future members that we invest in developing our service capability and resilience and we have made good progress in the last six months in pursuing our three key strategic programmes. Most visible amongst these is the branch redesign programme. We view our branches differently from those of high street banks - they are a successful channel for savings growth and an important means of delivering our service to members and supporting local communities. We are redesigning and updating our branches to better fit this purpose and we have now delivered 15 new style branches to much appreciation from members and colleagues alike, with the programme continuing at a good pace. Our plan to update our data centres is also progressing well. Having started to migrate services in 2018, we expect to deliver the majority of those remaining this year, enhancing resilience, service functionality and flexibility. The most complex element of our strategic investment is focussed on our core technology platform. At the end of 2018 I reported that we needed to re-plan this activity to reduce execution risks. This re-planning work has now completed and a roadmap of initiatives is in place to deliver the changes, albeit over a longer time frame than originally expected and without the need to replace our core technology platform. The first wave of initiatives will mobilise in the second half of this year. Our strong capital base, supported by our low cost, low risk business model, allows us to take a long term view when investing. Our capital ratios remain strong with a Common Equity Tier 1 ratio of 34.2% (31 December 2018: 35.5%) expected to be among the highest of any top 20 UK lender8. The impact of increasing strategic investment can be seen in the increase to our management expense ratio to 0.48% (30 June 2018: 0.46%)5. We anticipate this will remain the lowest reported by any UK building society, and the ratio excluding exceptional strategic investment of 0.39%11 (30 June 2018: 0.41%) demonstrates our continued focus on running an efficient business. Higher investment costs, together with reduced margins arising from the competitive pricing environment and with our continuing focus on returning value to members, contributed to profit before tax for the first half of 2019 being £38 million lower than the same period last year at £75 million (30 June 2018: £113 million). Profit was also impacted by fair value volatility and non-repeat of the asset sale from 2018. At the same time we have maintained the value we provide to our members through above market average savings rates at £117 million (30 June 2018: £117 million)2. As a building society, delivering member value is clearly an important measure of success but it is not the only one. I have mentioned the Net Promoter Scores as a measure of our members' satisfaction with the service we provide and we continue to work hard to meet their expectations. Central to this is the professionalism and commitment of all those who work here. I was delighted to improve our standing amongst the UK's 100 Best Companies to Work For earlier this year and more recently to win Employer of the Year for Equality and Inclusion12. It is by providing colleagues with the support and opportunities they need that we deliver on our promise to members. In turn our colleagues are supported and guided by a strong board and this year we have welcomed Shamira Mohammed, who joined the Board as a Non-Executive Director bringing extensive financial and executive experience from her work with Aviva plc and the Phoenix Group. Coventry Building Society is built on strong foundations and through its long history has demonstrated its ability to thrive through challenging market conditions. It has a long and successful record of operating in the best interests of its members to earn the trust of all those it serves. I am confident that the principles which have sustained us in the past remain just as relevant as we continue to grow and invest in our future.
1. Source: Bank of England - latest published data as at 31 May 2019. 2. Based on the Society's average month end savings rate compared to the Bank of England average rate for household interest-bearing deposits for the first five months of the year on the Society's mix of products. 3. A measure of customer advocacy that ranges between -100 and +100 which represents how likely a customer is to recommend our products and services. The overall Net Promoter Score of +75 is a calculated average from 6 surveys, branch survey of 16,500 customers, savings contact centre survey of 18,803 callers, mortgage contact centre survey of 2,050 callers, online survey of 4,051 users, opening a savings account survey of 5,872 customers and a survey of 1,824 brokers. 4. Source: Financial Ombudsman Service - latest published information: 1 July 2018 to 31 December 2018. 5. Administrative expenses, depreciation and amortisation/Average total assets. 6. As at 29 July 2019. 7. Source: Prudential Regulation Authority - latest available information as at 31 March 2019. 8. Source: UK Finance, 2018 top 20 mortgage lender (balance outstanding) latest published CET 1 data as at 29 July 2019. 9. In 2019 the Society rebased certain stress assumption in the LCR calculations which has the effect of reducing reported LCR. Had these assumptions been in place at 31 December 2018, the reported ratio would have been c. 175%. 10. Source: Best Companies Limited as at 31 December 2018. 11. Administrative expenses, depreciation excluding IFRS 16 and amortisation less increase in strategic investment costs compared to 2017/Average total assets. 12. Source: Employees network for equality & inclusion awards 2019.
Financial Review The Society is committed to providing long-term sustainable value to members through competitively priced savings and mortgage products. Each year we retain only the profit we need to maintain capital ratios, whilst investing to improve services and providing favourable pricing for members. Profits have fallen in the first half of the year, reflecting continued price competition in the market and our commitment to investing for the future whilst maintaining superior savings rates for as long as possible coupled with a number of one-off items. During the six months to 30 June 2019 we maintained the value provided to members through superior savings rates compared with the market average1 at £117 million (30 June 2018: £117 million). Whilst member value was maintained, profit before tax decreased by £38 million to £75 million. This was as a result of continued spending on strategic investment programmes (£12 million) and volatility in the financial markets impacting the fair value of financial instruments used to manage interest risk exposures (£12 million). In addition, profits in the first half of 2018 included a one-off gain of £15 million relating to the sale of a £351 million buy to let loan portfolio.  Without the impacts of these items, profit before tax is broadly in line with June 2018. We added £33 million2 (30 June 2018: £77 million) to General reserves to support growth and investment, and broadly maintained our leverage ratio3 at 4.5% on a UK modified basis (31 December 2018: 4.6%). Income Statement summary Period to 30 Jun 2019 (Unaudited) £m Period to 30 Jun 2018 (Unaudited) £m Year ended 31 Dec 2018 (Audited) £m Net interest income 201.1 213.7 425.8 Fees and commissions (1.1) (1.3) (2.3) Other income 2.2 0.3 1.1 Losses on derivatives and hedge accounting (12.4) (0.6) (0.3) Total income 189.8 212.1 424.3 Management expenses (113.3) (99.6) (221.7) Impairment (charge)/credit (1.2) 1.0 0.4 Provisions - 0.4 - Charitable donation to Poppy Appeal (0.6) (0.8) (1.4) Profit before tax 74.7 113.1 201.6 Net interest: Net interest income for the period was £201 million (30 June 2018: £214 million). In 2018, net interest income included a £15 million gain on sale of a £351 million buy to let loan portfolio. Excluding the portfolio sale, Net Interest Income increased by £2 million reflecting balance sheet growth offset by falling new business margins as a result of continued price competition in mortgages and savings acquisition and maintaining superior average savings rates compared to the market. Net interest margin was 0.86% (30 June 2018: 1.00%) which, for 30 June 2018, included 7 basis points as a result of the gain on sale of a £351 million buy to let loan portfolio. Other operating income: Other income for the period of £2.2 million (30 June 2018: £0.3 million) relates to income from a small number of equity investments and included £1.4 million of deferred contingent consideration received in the period following the sale of our investment in VocaLink Holdings Limited in 2017. Net losses from derivative financial instruments: The Society uses derivative financial instruments to manage interest rate and currency risk arising from its mortgage and savings activity and from non-sterling wholesale funding. During the first half of 2019 there has been considerable market volatility impacting swap valuations. Whilst the Society's derivative financial instruments have remained effective in economically hedging risks as they were designed to do, hedge accounting relief has not been fully obtained creating accounting volatility and, as a result, losses of £12 million have been recognised (30 June 2018: £0.6 million loss). These losses represent timing differences and are expected to reverse over the remaining life of the derivatives although further volatility may also be experienced. Management expenses and depreciation: Management expenses including depreciation and amortisation for the period were £113 million (30 June 2018: £100 million). Substantially all of the increase relates to the Society's strategic investment programmes, with a £12 million increase in strategic investment costs4  in addition to a £1 million increase in the ongoing costs of running the business. The costs of the strategic investment programmes are substantial and represent a £22 million increase in change activity since 20175 which we continue to regard as a reasonable benchmark level of spend for change investment. The Society's strategic investment reflects three key investment projects: ·    Branch redesign: Eight branches have been remodelled as planned during the first half of the year, bringing the total to 15, with a similar number planned to be remodelled during the second half of the year. ·    Enhanced data infrastructure: Good progress has been made with migrations continuing. We expect to complete the majority of migrations by the end of this year as reported previously. ·    Core technology platform upgrade: As I said in our year-end report, we experienced a number of challenges with this activity in 2018 and identified that progressing as planned was likely to be more complicated and expensive than originally envisaged. As a result we reported this as a risk event and set up a review of options to meet our objectives while reducing the risk of the upgrade. This review has now finished and the activity has been re-planned as a number of individual initiatives, giving us a roadmap of change projects. This more modular approach is designed to reduce execution risk and allow more flexibility in scheduling both activity and cost. We will start a number of these initiatives in the second half of the year including a multi-year programme to implement new mortgage origination tools to improve our service to intermediaries and borrowing members. The roadmap extends across the Strategic Planning period and as a result, we expect costs to remain elevated for a number of years. We are not planning to progress the replacement of our core technology platform within our planning horizon. The level of strategic change investment we are making makes it even more important that we focus on spending members' money wisely. The cost to mean asset ratio of 0.48%6 is expected to remain the lowest reported of all UK building societies7 (30 June 2018: 0.46%). Without the strategic investment costs incurred in the period the Society's 'run cost' ratio is 0.39%8 (30 June 2018: 0.41%) reflecting the continued efficiency of our core operations. Arrears and impairment: The impairment charge during the period was £1.2 million (30 June 2018: credit of £1.0 million). The key measures of arrears and possessions have both improved in the first half of 2019 with balances three or more months in arrears falling to £60.1 million (31 December 2018: £67.6 million) and only 27 cases in possession (31 December 2018: 34). Despite this underlying improvement, we have increased impairment provisions reflecting a management view of the market and economic uncertainty driven by Brexit and a weakening macroeconomic backdrop. Impairment provisions as a percentage of balances classified as being in Stage 3 (default) under IFRS 9 remains low reflecting our underlying low loss experience. Provisions as a percentage of Stage 3 balances have increased to 6.1% (31 December 2018: 5.6%) with coverage for Stage 3 loans in arrears higher at 9.8% (31 December 2018: 8.9%). Provisions continue to reflect 5.5 years coverage of the losses we have seen over the last 12 months (31 December 2018: 5.5 years). Provisions for liabilities and charges: Provisions now relate almost exclusively to Payment Protection Insurance (PPI) with no provision being held for Financial Services Compensation Scheme (FSCS) charges given the repayment of the FSCS loans to HM Treasury in 2018. Although we have seen some increase in the number of PPI claims ahead of the August claims deadline, these have been within provision estimates and no charge has been made in the first six months of the year (30 June 2018: £0.4 million credit). Charitable donation: The Society donated £0.6 million to The Royal British Legion's Poppy Appeal during the period (30 June 2018: £0.8 million). Tax: The corporation tax charge represented an effective rate of tax of 18.9%. Following the amendments to      IAS 12, the tax relief on distributions to holders of our Additional Tier 1 (AT 1) capital instruments are now shown in the tax charge rather than netted off from the distribution. The effective rate at 30 June 2018, after restating for the impact of this change, was 20.6%.

Balance Sheet summary 30 Jun 2019  (Unaudited) £m 30 Jun 2018 (Unaudited) £m 31 Dec 2018 (Audited)    £m Assets Loans and advances to customers 40,586.5 37,409.3 39,264.6 Liquidity 7,575.6 5,973.2 6,401.9 Other 572.0 384.0 404.4 Total assets 48,734.1 43,766.5 46,070.9 Liabilities Retail funding 35,158.7 31,442.5 33,281.6 Wholesale funding 10,906.0 9,900.9 10,313.7 Subordinated liabilities and subscribed capital 67.1 67.1 67.1 Other 420.1 299.9 288.1 Total liabilities 46,551.9 41,710.4 43,950.5 Equity General reserve 1,725.4 1,631.2 1,693.5 Other equity instruments 429.9 396.9 396.9 Other 26.9 28.0 30.0 Total equity 2,182.2 2,056.1 2,120.4 Total liabilities and equity 48,734.1 43,766.5 46,070.9 Loans and advances to customers: The Society's business model remains focused on high quality, low loan to value owner-occupier and buy to let lending within the prime residential market, distributed mainly through mortgage intermediaries. During the period, the Society advanced £4.1 billion of mortgages (30 June 2018: £4.6 billion), with net mortgage lending of £1.3 billion (30 June 2018: £1.5 billion). We continue to focus on low risk lending and the average loan to value (balance weighted average) of loans originated in the six months to 30 June 2019 has remained unchanged at 54.6% (31 December 2018: 54.6%), despite a house price inflation environment which has been flatter and has notably seen falls in some locations. This reflects the low risk nature of the Society's lending activities. Liquidity: On-balance sheet liquid assets have increased to £7.6 billion (31 December 2018: £6.4 billion) and the Liquidity Coverage Ratio (LCR) at 30 June 2018 was 232% (31 December 2018: 202%), significantly in excess of the regulatory minimum. During the period the Society revised a number of the stress outflow assumptions used in calculating the LCR to better reflect expected customer behaviour and regulatory guidelines. Had these been used at December 2018, LCR would have been reported at c. 175%. The increase in LCR despite this change reflects an increase in liquid assets held, partly to mitigate any Brexit risks. The cost of this extra liquidity of c. £5 million is absorbed within Net Interest Income in the period. Retail savings: The Society continues to be predominantly funded by retail savings, with balances of £35.2 billion at 30 June 2019 (31 December 2018: £33.3 billion) and has achieved particularly strong growth of £1.9 billion     (30 June 2018: £0.4 billion) during the first six months of the year. Wholesale funding: The Society uses wholesale funding to provide diversification by source and term and also to provide value to members through lowering the overall cost of funding. During the period, wholesale funding9 has increased to £10.9 billion (31 December 2018: £10.3 billion) reflecting a Covered Bond issuance and £525 million of Bi-lateral funding, offset by maturities during the year. Pension benefit surplus (included in Other assets): During the period the Society has taken steps to transfer its Defined Benefit pension scheme to a new provider. The transfer was undertaken to improve the long term sustainability of the fund by ensuring continued governance and providing access to improved investment opportunities at lower cost in line with the Society's aim of achieving self sufficiency for the pension scheme. In line with this aim, the Society made a one-off contribution to the fund of £6 million bringing total contributions in the period to £6.6 million (six months to 30 June 2018: £0.7 million). This contribution fully covers the deficit reported in the last triennial valuation and therefore the Society expects to make no further contributions until the next valuation. Despite this contribution, the Pension surplus has remained stable at £22.9 million (31 December 2018: £22.9 million) as volatility in the financial markets impacted the valuation of the schemes assets by less than the movement in its obligations.
General reserves: The growth in General reserves of £33 million2 (30 June 2018: £77 million) reflects retained profit for the period of £61 million (30 June 2018: £90 million), offset by a number of items. Volatility in the financial markets has impacted the valuation of the Defined Benefit pension scheme reducing General reserves by £5.1 million (30 June 2018: nil). During the first half of the year, the Society successfully tendered to repurchase the    Additional Tier 1 (AT 1) instrument issued in 2014 ahead of its November 2019 call date and issued new AT 1. The costs of the tender and reissue totalling £11.8 million are deducted from General reserves (31 December 2018: nil) along with distributions to holders of the AT 1 instruments of £11 million (30 June 2018: £12.7 million). Other Equity Instruments: The tender for the 2014 Additional Tier 1 instruments (AT1) resulted in the repurchase of £385 million of the £400 million AT1 capital instruments and the issue of a further £415 million of new instruments, with a first call date in 2024, were issued bringing total AT1 to £430 million (December 2018: £397 million). This transaction maintains the level of Tier 1 capital whilst de-risking the potential effect of Brexit on the wholesale markets.
Capital Ratios
The table below provides a summary of the Society's capital resources and CRD IV ratios on an end-point basis (i.e. assuming all CRD IV requirements were in force in full with no transitional provisions permitted).

				End-point 30 Jun 2019 £m	End-point 30 Jun 2018 £m	End-point 31 Dec 2018 £m
Capital resources:
Common Equity Tier 1 (CET 1) capital				1,643.6	1,537.6	1,614.8
Total Tier 1 capital				2,058.6	1,934.5	2,011.7
Total capital				2,058.6	1,974.5	2,011.7
Risk weighted assets				4,811.8	4,336.9	4,548.5
CRD IV ratios:				%	%	%
Common Equity Tier 1 (CET 1) ratio				34.2	35.5	35.5
CRR Leverage ratio10				4.1	4.1	4.2
UK Leverage ratio3				4.5	4.6	4.6

In line with its strategy of maintaining capital ratios, the leverage ratio, which the Society regards as its binding constraint, on both a CRR and UK modified basis has been broadly maintained at 4.1% and 4.5% (31 December 2018: 4.2% and 4.6%) The CET 1 ratio has fallen to 34.2% (31 December 2018: 35.5%). Risk weighted Assets grew by 6% in the period in line with balance sheet growth. Capital resources have been impacted by the volatility in the financial markets which led to fair value adjustments in addition to the costs of tendering for and reissuing the Additional Tier 1 capital instruments. These factors taken together accounted for c. 60 bps of the reduction in CET 1 capital. The remaining reduction reflects the lower profits as a result of tightening margins and continuing strategic investment spend. In 2018, the Society was issued with a Total Capital Requirement by the PRA equal to 11.2% of risk weighted assets or £539 million. This sets the minimum capital which the Society must hold under Pillar 1 and Pillar 2A and is driven by both balance sheet growth factors and risk factors determined by the PRA. With a CET 1 ratio of 34.2%, the Society significantly exceeds this requirement with CET 1 capital alone. The capital disclosures above are on a Group basis, including all subsidiary entities.  For regulatory purposes the Group also reports on an Individual Consolidated basis, which only includes those subsidiaries meeting particular criteria contained within CRD IV. The Individual Consolidated CET 1 ratio on an end-point basis at 30 June 2019 is 1.1% higher than the Group ratio due to assets held by entities that sit outside of the Individual Consolidation, primarily those held by the Group's securitisation and covered bond entities.
1. Based on the Society's average month end savings rate compared to the Bank of England average rate for household interest-bearing deposits for the first five months of the year on the Society's mix of products. 2. Movement in General reserves after restating for the changes on initial application of IFRS 16. 3. Leverage ratio modified under the UK regulatory regime by excluding central bank reserves from the calculation of leverage exposures. 4. Includes the increase in depreciation and amortisation net of the adoption of IFRS 16. 5. Increase in H1 2019 compared to H1 2017 after indexation. 6. Administrative expenses, depreciation and amortisation/Average total assets. 7. As at 29 July 2019. 8. Administrative expenses, depreciation excluding IFRS 16 and amortisation less increase in strategic investment costs compared to 2017/Average total assets. 9. Deposits from banks, Other deposits, Amounts owed to other customers and Debt securities in issue. 10. The CRR leverage ratio is calculated in accordance with the definitions of CRD IV as amended by the European Commission delegated regulation. The calculation reflects constraints on the inclusion of Additional Tier 1 capital, in accordance with the Financial Policy Committee's leverage ratio regime.
Top and Emerging Risks The Society's risk philosophy is to be a below median risk mutual, taking risks within appetite where those risks are understood and can be managed. A description of the Top and Emerging risks is given as an update to those set out at 31 December 2018 on page 26 of the 2018 Annual Report & Accounts. The Society's principal risk categories are described on page 12 of the 2018 Annual Report & Accounts, with more detail provided on pages 30 to 61, and the Society's view of these has not materially changed during 2019. UK political and economic uncertainty During 2019, there has been continued uncertainty around both Brexit and the wider UK political environment. As a result, there is ongoing potential for this uncertainty to reduce confidence in the UK economy and therefore impact the wholesale funding market, house prices and employment. There is also a risk that the very low interest rate environment will continue in the medium term. Alongside this, global macro-economic risks have also increased and may spill-over into the UK economy. Whilst the Society's UK focus means that it is protected from direct impacts of Brexit outside of wholesale funding, the Society could be impacted by a wider UK economic downturn. The UK mortgage and savings market fundamentals are expected to remain strong over the medium to long term. This, coupled with the Society's simple business model, focussed on straightforward, low-risk mortgages and retail savings products means that the Society expects to remain resilient to these economic challenges. The Society's mortgage book is geographically spread which mitigates the risk from a fall in London house prices and its low risk lending policy means that its mortgage book is expected to continue to perform well in a downturn. The Society has continued to attract both retail savings and well-priced wholesale funding in 2019, and this performance is set to continue, allowing it to manage risks in this area. Market environment The market environment has remained competitive during 2019 and there has been a further decrease in Net Interest Margin. This competition continues to reflect new entrants particularly in the savings market, and continuing competition in the mortgage market impacted both by the UK retail banks and the absence of notable growth in the housing market. The Society's simple business model means that we continue to focus on simple, low risk mortgage products and are able to leverage our deep experience and effective partnerships with intermediaries. These strong business fundamentals mean that we can respond to market pressures effectively. In addition, our focus on low risk lending, combined with our cost-efficient business model allows us to remain financially strong whist continuing to offer superior value to members. At the same time our strong retail franchise ensures ongoing access to retail funding. Change and execution risk The Society is undertaking a number of strategic investment programmes which are more wide reaching than any that the Society has completed previously. This activity increases cost and execution risk. The change programmes will deliver additional resilience and flexibility and therefore reduce risk once implemented. In particular, the programmes are focussed on enhancing the Society's data centre capability and upgrading our core technology platform. The Society believes that it is putting the necessary risk management processes for change management programmes in place which will ensure change is delivered safely, without disruption to core operations, and within expectations. These control processes include detailed feasibility work and testing before change is made and a focus on looking for options which reduce execution and cost risk. In addition, following the re-planning of the core technology platform upgrade the more modular approach we are taking to this activity is designed to reduce execution risk and allow more flexibility on scheduling. The Society is satisfied that it has set appropriate investment budgets within its Strategic Plan.

Condensed Consolidated Income Statement For the period ended 30 June 2019		Notes	Period to 30 Jun 2019 (Unaudited) £m	Period to 30 Jun 2018 (Unaudited) Restated2 £m	Year ended 31 Dec 2018 (Audited) Restated2 £m
Interest receivable and similar income1		3	501.7	480.5	976.3
Interest payable and similar charges		4	(300.6)	(266.8)	(550.5)
Net interest income			201.1	213.7	425.8
Fees and commissions receivable			3.9	4.1	8.1
Fees and commissions payable			(5.0)	(5.4)	(10.4)
Other operating income		5	2.2	0.3	1.1
Net losses from derivative financial instruments		6	(12.4)	(0.6)	(0.3)
Total income			189.8	212.1	424.3
Administrative expenses		7	(99.3)	(89.2)	(200.2)
Amortisation of intangible assets			(7.1)	(6.7)	(13.7)
Depreciation of property, plant and equipment			(6.9)	(3.7)	(7.8)
Impairment (charge)/credit on loans and advances to customers		8	(1.2)	1.0	0.4
Provisions for liabilities and charges		9	-	0.4	-
Charitable donation to Poppy Appeal			(0.6)	(0.8)	(1.4)
Profit before tax			74.7	113.1	201.6
Taxation			(14.1)	(23.3)	(38.6)
Profit for the financial period			60.6	89.8	163.0

1.  Interest receivable and similar income within the comparative periods includes £14.9 million gain on derecognition of financial assets held at amortised cost.   2.  Taxation and Profit for the financial period have been restated in the comparative periods following amendments to IAS 12. Profit for the financial period arises from continuing operations and is attributable to the members of the Society.
Condensed Consolidated Statement of Comprehensive Income
For the period ended 30 June 2019
Profit for the financial period (restated)1			60.6	89.8	163.0
Other comprehensive income
Items that will not be transferred to the Income Statement:
Remeasurement of defined benefit plan			(6.9)	-	2.5
Taxation			1.9	-	(0.6)
Effect of change in corporation tax rate			(0.1)	-	0.1
Items that may be transferred to the Income Statement:
Fair value through other comprehensive income investments:
Fair value movements taken to reserves			6.4	(10.6)	(12.4)
Amount transferred to Income Statement		16	(9.6)	9.7	13.4
Taxation			0.9	0.2	(0.2)
Effect of change in corporation tax rate			(0.1)	-	-
Cash flow hedges:
Fair value movements taken to reserves			4.7	5.0	24.4
Amount transferred to Income Statement			(5.6)	(0.2)	(18.9)
Taxation			0.3	(1.3)	(1.5)
Effect of change in corporation tax rate			(0.1)	0.1	0.1
Other comprehensive (expense)/income for the period, net of tax			(8.2)	2.9	6.9
Total comprehensive income for the period, net of tax (restated)1			52.4	92.7	169.9

1.  Taxation and Profit for the financial period have been restated in the comparative periods following amendments to IAS 12.

Condensed Consolidated Balance Sheet As at 30 June 2019		Notes	30 Jun 2019 (Unaudited) £m	30 Jun 2018 (Unaudited) £m	31 Dec 2018 (Audited) £m
Assets
Cash and balances with the Bank of England			6,044.2	4,799.9	5,219.4
Loans and advances to credit institutions			380.7	215.4	231.3
Debt securities			1,150.7	957.9	951.2
Loans and advances to customers		10	40,586.5	37,409.3	39,264.6
Hedge accounting adjustment			175.8	(12.6)	6.5
Derivative financial instruments			242.0	275.8	268.9
Investment in equity shares			4.0	2.8	3.1
Intangible assets			35.1	48.9	37.2
Property, plant and equipment			76.8	37.1	48.8
Pension benefit surplus			22.9	19.4	22.9
Prepayments and accrued income			15.4	12.6	17.0
Total assets			48,734.1	43,766.5	46,070.9
Liabilities
Shares			35,158.7	31,442.5	33,281.6
Deposits from banks			5,320.7	5,239.4	5,453.8
Other deposits			12.5	3.0	9.5
Amounts owed to other customers			677.6	763.6	496.5
Debt securities in issue		12	4,895.2	3,894.9	4,353.9
Hedge accounting adjustment			58.8	45.4	36.5
Derivative financial instruments			255.2	167.2	167.4
Current tax liabilities			10.1	26.7	15.4
Deferred tax liabilities			14.7	11.4	17.2
Accruals and deferred income			38.0	32.4	38.1
Other liabilities			41.5	12.3	10.5
Provisions for liabilities and charges		9	1.8	4.5	3.0
Subordinated liabilities		13	25.5	25.5	25.5
Subscribed capital		14	41.6	41.6	41.6
Total liabilities			46,551.9	41,710.4	43,950.5
Equity
General reserve			1,725.4	1,631.2	1,693.5
Other equity instruments		15	429.9	396.9	396.9
Fair value through other comprehensive income reserve			3.2	4.1	5.6
Cash flow hedge reserve			23.7	23.9	24.4
Total members' interests and equity			2,182.2	2,056.1	2,120.4
Total members' interests, liabilities and equity			48,734.1	43,766.5	46,070.9

Condensed Consolidated Statement of Changes in Members' Interests and Equity For the period ended 30 June 2019
Period to 30 June 2019	Notes	General reserve £m	Other equity instruments £m	Fair value through other comprehensive income reserve £m	Cash flow hedge reserve   £m	Total £m
As at 1 January 2019 (Audited)		1,693.5	396.9	5.6	24.4	2,120.4
Changes on initial application of IFRS 16		(0.8)	-	-	-	(0.8)
Restated balance at 1 January 2019		1,692.7	396.9	5.6	24.4	2,119.6
Profit for the financial period	2	60.6	-	-	-	60.6
Net remeasurement of defined benefit plan		(5.1)	-	-	-	(5.1)
Net movement in Fair value through other comprehensive income reserve		-	-	(2.4)	-	(2.4)
Net movement in Cash flow hedge reserve		-	-	-	(0.7)	(0.7)
Additional Tier 1 Capital repurchased (net of tax)	15	(9.3)	(382.0)	-	-	(391.3)
Additional Tier 1 Capital issued (net of tax)	15	(2.5)	415.0	-	-	412.5
Total comprehensive income		43.7	33.0	(2.4)	(0.7)	73.6
Distribution to Additional Tier 1 capital holders	2,15	(11.0)	-	-	-	(11.0)
As at 30 June 2019 (Unaudited)		1,725.4	429.9	3.2	23.7	2,182.2

Period to 30 June 2019 (restated)1
As at 1 January 2018 (Audited)		1,553.1	396.9	5.7	20.3	1,976.0
Changes on initial application of IFRS 9		1.0	-	(0.9)	-	0.1
Restated balance at 1 January 2018		1,554.1	396.9	4.8	20.3	1,976.1
Profit for the financial period1	2	89.8	-	-	-	89.8
Net movement in Fair value through other comprehensive income reserve		-	-	(0.7)	-	(0.7)
Net movement in Cash flow hedge reserve		-	-	-	3.6	3.6
Total comprehensive income1		89.8	-	(0.7)	3.6	92.7
Distribution to Additional Tier 1 capital holders1	2,15	(12.7)	-	-	-	(12.7)
As at 30 June 2018 (Unaudited)		1,631.2	396.9	4.1	23.9	2,056.1

Year ending 31 December 2018 (restated)1
As at 1 January 2018 (Audited)		1,553.1	396.9	5.7	20.3	1,976.0
Changes on initial application of IFRS 9		1.0	-	(0.9)	-	0.1
Restated balance at 1 January 2018		1,554.1	396.9	4.8	20.3	1,976.1
Profit for the financial year1	2	163.0	-	-	-	163.0
Net remeasurement of defined benefit plan		2.0	-	-	-	2.0
Net movement in Fair value through other comprehensive income reserve		-	-	0.8	-	0.8
Net movement in Cash flow hedge reserve		-	-	-	4.1	4.1
Total comprehensive income1		165.0	-	0.8	4.1	169.9
Distribution to Additional Tier 1 capital holders1	2,15	(25.6)	-	-	-	(25.6)
As at 31 December 2018 (Audited)		1,693.5	396.9	5.6	24.4	2,120.4

1.  Profit for the financial period/year, Total comprehensive income and Distributions to Additional Tier 1 capital holders have been restated in the comparative periods following amendments to IAS 12.

Condensed Consolidated Statement of Cash Flows For the period ended 30 June 2019
		Period to 30 Jun 2019 (Unaudited) £m	Period to 30 Jun 2018 (Unaudited) £m	Year ended 31 Dec 2018 (Audited) £m
Cash flows from operating activities
Profit before tax		74.7	113.1	201.6
Adjustments for:
Impairment provisions and other provisions		1.2	(1.4)	(0.4)
Depreciation and amortisation		14.0	10.4	21.5
Interest on subordinated liabilities and subscribed capital		3.3	3.3	6.7
Changes to fair value adjustment of hedged risk		(42.8)	(2.0)	(19.4)
Other non-cash movements1		1.3	(37.4)	17.1
Non-cash items included in profit before tax		(23.0)	(27.1)	25.5
Loans and advances to credit institutions		(156.4)	(48.3)	(69.8)
Loans and advances to customers		(1,323.1)	(1,477.3)	(3,333.2)
Prepayments, accrued income and other assets		(5.3)	(2.9)	(8.5)
Changes in operating assets		(1,484.8)	(1,528.5)	(3,411.5)
Shares		1,907.6	454.4	2,238.4
Deposits and other borrowings		51.0	1,764.0	1,713.7
Debt securities in issue		3.2	(210.7)	(229.0)
Accruals, deferred income and other liabilities1		(2.4)	7.2	9.2
Changes in operating liabilities		1,959.4	2,014.9	3,732.3
Interest paid on subordinated liabilities and subscribed capital		(3.3)	(3.3)	(6.7)
Interest paid on lease liabilities1		(0.4)	-	-
Taxation		(15.9)	(19.6)	(41.6)
Net cash flows from operating activities		506.7	549.5	499.6
Cash flows from investing activities
Purchase of investment securities		(596.9)	(340.7)	(454.2)
Sale and maturity of investment securities and equities		385.8	358.8	477.1
Purchase of property, plant and equipment and intangible assets		(12.2)	(19.6)	(31.5)
Net cash flows from investing activities		(223.3)	(1.5)	(8.6)
Cash flows from financing activities
Distributions paid to Additional Tier 1 capital holders		(11.0)	(12.8)	(25.6)
Repurchase of Additional Tier 1 capital2		(393.6)	-	-
Issue of Additional Tier 1 capital2		411.6	-	-
Repurchase and repayment of debt securities		(13.9)	(765.4)	(780.7)
Principal elements of lease payments1		(3.2)	-	-
Issue of debt securities		544.6	-	499.0
Net cash flows from financing activities		534.5	(778.2)	(307.3)
Net increase/(decrease) in cash		817.9	(230.2)	183.7
Cash and cash equivalents at start of period		5,122.3	4,938.6	4,938.6
Cash and cash equivalents at end of period		5,940.2	4,708.4	5,122.3
Cash and cash equivalents:
Cash and balances with the Bank of England3		5,940.2	4,708.4	5,122.3

1. Relates to the first time adoption of IFRS 16 from 1 January 2019. 2. Net of transaction fees. 3. Excludes £104.0 million mandatory reserve with the Bank of England (30 June 2018: £91.5 million, 31 December 2018: £97.1 million).

Other Information A copy of the Interim Financial Report is placed on the website of Coventry Building Society, at www.coventrybuildingsociety.co.uk/interim2019. The directors are responsible for the maintenance and integrity of the information on the Society's website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

END

 

 

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