Interim Results
Coventry Building Society
20 September 2005
Embargoed until 0730 hours
20 September 2005
Outstanding performance from the Coventry
Coventry Building Society, the UK's fifth largest building society, has today
announced results which reflect an outstanding performance for the first half of
2005.
Highlights
• Assets exceed £10.5 billion - growth of 11.78% in the six months, 16.93%
in the full year
• Record gross lending of £1,631 million (2004 £1,132 million)
• Record net lending of £944 million (2004 £205 million)
• Mortgage balances grew by 12.48% in the half year (2004 2.78%)
• Increase in savings' balances of £291 million (2004 £112 million)
• Profit before tax up to £25.6 million (2004 £23.4 million)
• Net interest rate margin 0.92% (2004 0.96%)
• Management expenses ratio reduced to 0.59% (2004 0.62%)
• Mortgage arrears 0.20% of balances - less than half the industry average
These results have been prepared, for the first time, under International
Financial Reporting
Standards and comparative figures for 2004 have been re-stated accordingly.
Commenting upon the results, Martin Ritchley, Chief Executive said: 'Despite
the slowdown in the housing market, Coventry Building Society has enjoyed an
outstanding six months in which we have substantially exceeded our 'natural'
market share for mortgages. Our gross lending was a record £1,631 million, 44%
up on the first half of 2004. Lower levels of mortgage redemptions enabled net
lending to reach £944 million in the half year, also a record and 360% up on
2004.
'This exceptional performance enabled our assets to pass the £10.5 billion mark,
representing growth of 11.78% in the six months and 16.93% in the full year.
'The increase in savings' balances more than doubled to £291 million, reflecting
the success of our innovative Family 1st and Sixty-Plus range of accounts,
resulting in record balances of £6.85 billion.
'Our strong results reflect the benefits which, as a building society, we are
able to deliver to members. With no dividends to pay to outside shareholders,
we have been able to narrow our interest margin yet again to 0.92% of average
assets. Even so, our profit was up by £2.2 million to £25.6 million - an
increase of 9.4%. In part, this reflected our success in continuing to improve
efficiency. Our management expenses to average assets ratio reduced from 0.62%
to 0.59%, maintaining our position as the most cost efficient UK building
society.
'The Coventry has consistently maintained prudent lending terms and policies,
reflected in the fact that our mortgage arrears, at just 0.20% of balances,
continue to be less than half the industry average.
'In a highly competitively financial services market, our results are truly
outstanding. They reflect the advantages of our building society status and
provide further evidence of our ability to compete successfully and to deliver
ongoing benefits to our members.'
Unaudited Society Results
For the half year ended 30 June 2005
Key Results Half Year Year Half Year
Ended Ended Ended
30.06.05 31.12.04 30.06.04
£m £m £m
(as restated) (as restated)
(1) (1)
Pre tax profits 25.6 51.3 23.4
Mortgage (2.5) 0.4 2.1
provisioning
Gross lending 1,631 2,198 1,132
Net lending 944 409 205
Net receipts from 291 101 112
shares (2)
Total assets 10,555 9,443 9,027
Key Ratios Half Year Year Half Year
Ended Ended Ended
30.06.05 31.12.04 30.06.04
% % %
(as restated) (as restated)
Asset growth 11.78 5.67 1.01
Commercial asset growth 12.48 5.56 2.78
Gross capital (3) 5.60 6.10 6.16
Free capital (3) 5.43 6.03 6.18
Net interest margin (4) 0.92 0.95 0.96
Management expenses to 0.59 0.59 0.62
mean assets (4)
Profit before tax to mean 0.52 0.56 0.52
assets (4)
Income and Expenditure
Account Half Year Year Half Year
Ended Ended Ended
30.06.05 31.12.04 30.06.04
£m £m £m
(as restated) (as restated)
Net interest receivable 45.4 87.0 43.1
Gains less losses on (2.0) - -
financial instruments
Other income and 8.9 19.1 10.0
charges
Total income 52.3 106.1 53.1
Management expenses (29.2) (54.4) (27.6)
Provisions 2.5 (0.4) (2.1)
Profit before tax 25.6 51.3 23.4
Tax (8.0) (15.9) (7.5)
Profit after tax 17.6 35.4 15.9
Statement of
Recognised Income Half Year Year Half Year
& Expense Ended Ended Ended
30.06.05 31.12.04 30.06.04
£m £m £m
Profit for the financial period 17.6 35.4 15.9
Fair value movements taken to (2.3) - -
reserves
Prior year adjustment (5) - (1.9) (1.9)
15.3 33.5 14.0
As at As at As at
30.06.05 31.12.04 30.06.04
Balance Sheet £m £m £m
(as restated) (as restated)
Assets
Liquid assets 1,769.7 1,622.8 1,411.7
Loans and advances to 8,720.6 7,753.2 7,549.1
customers
Derivative financial 8.6 - -
instruments
Fixed assets 29.0 30.4 29.5
Other assets 27.0 36.5 36.7
Total assets 10,554.9 9,442.9 9,027.0
Liabilities
Shares 6,849.1 6,558.3 6,569.4
Borrowings 3,093.7 2,314.9 1,907.1
Derivative financial 15.4 - -
instruments
Other liabilities 39.7 28.0 28.3
Subordinated liabilities 64.8 64.8 64.8
Subscribed capital 40.0 40.0 40.0
Reserves 452.2 436.9 417.4
Total liabilities 10,544.9 9,442.9 9,027.0
Cash Flow Statement Half Year Year Half Year
Ended Ended Ended
30.06.05 31.12.04 30.06.04
£m £m £m
Net cash inflow from operating 113.3 251.9 (148.1)
activities
Returns on investments and (4.0) (8.3) (3.9)
servicing of finance
Taxation (7.8) (15.8) (7.8)
Capital expenditure and
financial investment:
Purchase of investment (1,767.6) (3,532.3) (1,929.3)
securities
Sale and maturity of 1,730.3 3,306.3 2,095.8
investment securities
Purchase of fixed assets (2.5) (7.5) (5.6)
Finance lease payments (0.2) (0.3) (0.2)
Financing
Issue of subordinated - 29.8 29.8
liabilities
Increase in cash 61.5 23.8 30.7
Notes to the accounts.
(1) On 1st January 2005 the Society adopted International Financial Reporting
Standards. The effect of IFRS on the current and prior period results is
explained in the transitional disclosure accompanying this announcement.
(2) Includes interest added to the accounts.
(3) Gross and free capital are measured as a percentage of shares and
borrowings.
(4) Net interest margin, management expenses as a percentage of mean assets and
profit before tax as a percentage of mean assets have been calculated on an
annualised basis taking into account the number of days in the six month
period.
(5) Prior year adjustment on the adoption of IAS 19 Employee Benefits.
For more information or additional comment please contact
John Thomson FCMA, Deputy Chief Executive
On (0845) 7665522
www.coventrybuildingsociety.co.uk
Telephone calls may be monitored or recorded for your protection or for training
purposes.
Coventry Building Society introduces only to Norwich Union Marketing Group,
members of which are regulated by the Financial Services Authority, for life
assurance, pensions and investments.
International Financial Reporting Standards
Introduction
In common with other listed institutions, Coventry Building Society adopted
International Financial Reporting Standards (IFRS) for the preparation of its
report and accounts for accounting periods beginning after 1 January 2005.
Consequently, these half year results are the first published under IFRS and the
newly adopted standards have been used in the preparation of the financial
information for the half year. In addition, the comparative information for the
half year to 30 June 2004 and for the year to 31 December 2004 have been
re-stated so that they also comply with the new standards. The effect of the
transition to IFRS on the comparative information is explained in the appendices
to this document.
Basis of preparation
The half year results are prepared on the basis of the recognition and
measurement requirements of those IFRSs in issue that have either been endorsed
by the EU and are effective, or are reasonably expected to be endorsed and
effective at 31 December 2005. Based on these adopted IFRSs, the Directors have
made assumptions about the accounting policies expected to be applied, which are
summarised below.
The adopted IFRS that will be effective in the annual financial statements for
the year ended 31 December 2005 are still subject to change and to additional
interpretations and therefore cannot be determined with certainty. Accordingly,
the accounting policies for that annual period will only finally be determined
when the annual report and accounts are prepared for the year ended 31 December
2005.
The restated comparative figures for the year ended 31 December 2004 are not the
Society's statutory accounts for that financial year. Those statutory accounts,
which were prepared under UK Generally Accepted Accounting Practices, have been
reported on by the Society's auditors, whose report was unqualified.
Transitional arrangements
On transition the Society is required to apply IFRS retrospectively to prior
accounting periods, except where an exemption from this requirement is available
under IFRS 1 - First Time Adoption of International Financial Reporting
Standards. The Society adopted the exemption in IFRS 1 not to prepare
comparative information in relation to IAS 32 - Financial Instruments:
Disclosure and Presentation and IAS 39 - Financial Instruments: Recognition and
Measurement. Consequently, IAS 32 and 39 have been applied from 1 January 2005
and the comparative information does not reflect these standards.
Accounting policies
Set out below is a summary of the Society's accounting policies that have
changed as a result of the transition to IFRS. As a result of the Society's
decision to adopt the exemption from IFRS 1 not to apply IAS 32 and IAS 39 to
comparative information, certain of the accounting policies apply from 1 January
2005 only and not to the comparative information. The policies to which this
exemption applies are indicated below.
1. Pension costs
The Society operates both a defined contribution and a defined benefit pension
scheme for members of staff.
Contributions to the defined contribution pension scheme are recognised as an
expense in the income and expenditure account as incurred, on an accruals basis.
The Society's net obligations under the defined benefit pension scheme are
assessed annually by an independent qualified actuary. The net obligation is
calculated as the difference between the fair value of the scheme's assets and
the amount of future obligations earned by scheme members from service in the
current and prior periods, discounted back to present values using a rate based
on an index of long dated AA rated corporate bonds. This calculation allows the
scheme's net obligations to be expressed as either a surplus or deficit. The
surplus or deficit is recognised as respectively either an asset or liability in
the Society's accounts at the balance sheet date.
Pension costs for service in the period are assessed in accordance with advice
from a qualified actuary and are recognised in the income and expenditure
account.
On 1 January 2004, the date of adoption of IFRS, the net deficit within the
pension scheme was recognised as a liability within the accounts. A
corresponding adjustment, net of the associated deferred tax asset, was taken to
reserves.
2. Debt securities (from 1 January 2005 only)
The Society uses various debt securities (certificates of deposit, gilts, etc)
to maintain its liquidity position. These debt securities are classified as
available for sale under the terms of IAS 39 and as such are recorded in the
accounts at fair value, with changes in fair value taken to reserves.
3. Loans and advances to customers (from 1 January 2005 only)
The balance outstanding on loans and advances to customers is stated at
amortised cost using the effective interest rate method. The effective interest
rate spreads the effect of various incentives, fees and charges both paid and
received by the Society across the expected life of the loan account. Items
spread in this way include:
- Initial interest rate discounts
- Cashbacks and other customer incentives
- Certain fees and charges paid and received by the Society
- Charges paid by customers on early redemption
The expected life of the loan is assessed as being the difference between the
inception of the loan and the earlier of a market based re-pricing event (such
as a maturity from a fixed to a variable rate of interest) and the loan's
expected redemption (using assumed redemption profiles that are based on
historic performance and planning assumptions).
Interest income recognised in the income and expenditure account is similarly
calculated using the effective interest rate method.
The purpose of using the effective interest rate method is to recognise interest
income at a more level yield across the expected life of the product than would
be obtained by recognising income as it is received.
4. Financial liabilities (from 1 January 2005 only)
Financial liabilities, including shares, borrowings, subordinated liabilities
and permanent interest bearing shares are stated at amortised cost using the
effective interest method.
Premiums and discounts, together with commissions and other costs incurred in
the raising of wholesale borrowings and subordinated liabilities, are amortised
over the period to maturity on a straight line basis which approximates the
amortisation profile of the effective interest method.
5. Derivative financial instruments (from 1 January 2005 only)
The Society holds derivative financial instruments for the purposes of managing
the risks associated with its various fixed and capped rate assets and
liabilities and its foreign currency transactions. In accordance with
legislation and its treasury policy, the Society only holds derivatives for risk
management and not for speculative or trading purposes.
All derivative financial instruments are stated in the accounts at fair value,
with movements in fair value taken through the income and expenditure account in
the period in which the movement occurred. However, to the extent that the
derivative qualifies as an effective hedge under the terms of IAS 39, the
Society is able to apply the hedge accounting rules of that standard and
recognise the corresponding movement in the fair value of the underlying asset
or liability to which the derivative instrument relates. This has the effect of
mitigating the volatility in earnings that could potentially arise from
movements in the fair value of derivative financial instruments.
The Society regards all of its derivatives as fair value hedges because they are
used to hedge movements in the fair value of an underlying asset or liability.
Under the requirements of IAS 39, effective fair value hedge relationships
result in movements in the fair value of the underlying asset or liability also
being recognised in the income and expenditure account, thereby offsetting a
proportion of the fair value movements on derivative financial instruments.
6. Impairment of financial assets (from 1 January 2005 only)
The Society assesses its financial assets or groups of financial assets for
objective evidence of impairment at each balance sheet date. An impairment loss
is recognised if, and only if, there is a loss event (or events) that has
occurred after initial recognition and before the balance sheet date and has a
reliably measurable impact on the estimated future cash flows of the financial
assets or groups of financial assets.
If there is objective evidence that an impairment loss on loans and receivables
has been incurred, the amount of the loss is measured as the difference between
the asset's carrying amount and the present value of the estimated future cash
flows (excluding future credit losses that have not been incurred) discounted at
the financial asset's original effective interest rate. The carrying amount of
the asset is reduced through the use of an impairment allowance and the amount
of the loss is recognised in the income and expenditure account.
When a loan is uncollectible, it is written off against the related provision
for loan impairment. Such loans are written off after all the necessary
procedures have been completed and the amount of the loss has been determined.
Subsequent recoveries of amounts previously written off decrease the amount of
the provision for loan impairment in the income and expenditure account.
If, in a subsequent period, the amount of the impairment loss decreases and the
decrease can be related objectively to an event occurring after the impairment
was recognised (such as an improvement in the customer's credit rating), the
previously recognised impairment loss is reversed by adjusting the impairment
allowance. The amount of the reversal is recognised in the income and
expenditure account.
7. Intangible assets
Software development costs and purchased software that is not an integral part
of a related hardware purchase is recognised as an intangible fixed asset.
Amortisation of such assets is charged to the income and expenditure account on
a straight line basis over the useful life of the asset. Computer software is
deemed to have a useful life of between 3 and 8 years, depending on the nature
of the asset.
Appendices
A. Effect of adoption of IFRS on the Society income and expenditure account
Half year ended 30 June 2004 Year ended 31 December 2004
£ Notes As pre- IFRS effect As restated As pre- IFRS effect As restated
million viously viously
stated stated
Net 43.1 43.1 87.0 87.0
interest
income
Other 10.0 10.0 19.1 19.1
income and ------- ------- -------- ------- ------- --------
charges
Total 53.1 53.1 106.1 106.1
income
Management 1 (27.9) 0.3 (27.6) (55.0) 0.6 (54.4)
expenses
Provisions (2.1) (2.1) (0.4) (0.4)
for bad ------- ------- -------- ------- ------- --------
and
doubtful
debts
Profit 23.1 0.3 23.4 50.7 0.6 51.3
before
tax
Tax (7.4) (0.1) (7.5) (15.7) (0.2) (15.9)
------- ------- -------- ------- ------- --------
Profit 15.7 0.2 15.9 35.0 0.4 35.4
after ------- ------- -------- ------- ------- --------
tax
B. Effect of adoption of IFRS on the Society balance sheet
At 1 January 2004 At 30 June 2004 At 31 December 2004 At 1 January 2005
(date of transition to IFRS) (date of adoption
of IAS 32 & 39)
------------------------------------------------------------------------------------------------------------------------
£ million As As As
pre- IFRS Resta- pre- IFRS Resta- pre- IFRS Resta- IFRS Resta-
Notes viously effect ted viously effect ted viously effect ted effect ted
stated stated stated
------------------------------------------------------------------------------------------------------------------------
Liquid 3 1,534.5 1,534.5 1,411.7 1,411.7 1,622.8 1,622.8 (2.4) 1,620.4
assets
Loans and
advances to
customers 4 7,344.6 7,344.6 7,549.1 7,549.1 7,753.2 7,753.2 16.9 7,770.1
Fixed 29.0 29.0 29.5 29.5 30.4 30.4 30.4
assets
Other 5 28.4 28.4 36.7 36.7 36.5 36.5 (7.2) 29.3
assets ---------------------------------------------------------------------------------------------------
8,936.5 8,936.5 9,027.0 9,027.0 9,442.9 9,442.9 7.3 9,450.2
---------------------------------------------------------------------------------------------------
Shares 6 6,457.0 6,457.0 6,569.4 6,569.4 6,558.3 6,558.3 (1.3) 6,557.0
Borrowings 7 1,978.8 1,978.8 1,907.1 1,907.1 2,314.9 2,314.9 0.7 2,315.6
Other
liabilities 2,5 22.3 1.9 24.2 26.6 1.7 28.3 26.5 1.5 28.0 12.6 40.6
Subordinated
liabilities 35.0 35.0 64.8 64.8 64.8 64.8 64.8
Subscribed
capital 40.0 40.0 40.0 40.0 40.0 40.0 40.0
Reserves 2 403.4 (1.9) 401.5 419.1 (1.7) 417.4 438.4 (1.5) 436.9 (4.7) 432.2
--------------------------------------------------------------------------------------------------
8,936.5 8,936.5 9,027.0 9,027.0 9,442.9 9,442.9 7.3 9,450.2
--------------------------------------------------------------------------------------------------
C. Reconciliation of movement in reserves
-------------------------------------------------------------------------------------------
£ million Notes 1 30 31 1
January 2004 June 2004 December 2004 January 2005
-------------------------------------------------------------------------------------------
As previously 403.4 419.1 438.4 436.9
stated
Pension 2 (2.7) (2.4) (2.1)
liability
Available for 3 (2.4)
sale liquid
assets at
fair value
Loans and 4 3.6
advances at
amortised
cost
Fair value 4 13.3
adjustments
to loans and
advances
Fair value 6 1.3
adjustments
to shares
Fair value 7 (0.7)
adjustments
to
borrowings
Fair value 5 (21.8)
adjustments
to derivative
financial
instruments ----------------------------------------------------------
(2.7) (2.4) (2.1) (6.7)
Tax effects 0.8 0.7 0.6 2.0
of the
above
-----------------------------------------------------------
Total IFRS (1.9) (1.7) (1.5) (4.7)
movement in
reserves
-----------------------------------------------------------
As restated 401.5 417.4 436.9 432.2
-----------------------------------------------------------
D. Notes
1. Management expenses
Reduction in management expenses to reflect ongoing pension costs assessed on
the basis of actuarial advice, in accordance with the requirements of IAS 19.
2. Pension liability
Recognition of the pension liability, net of the associated deferred tax credit,
as follows
--------------------------------------------------------------------------------
£ million 1 January 30 June 31 December
2004 2004 2004
--------------------------------------------------------------------------------
Pension liability 2.7 2.4 2.1
Deferred tax (0.8) (0.7) (0.6)
---------------------------------------------------
1.9 1.7 1.5
---------------------------------------------------
3. Liquid assets
Fair value adjustment at 1 January 2005 on adoption of IAS 39.
4. Loans and advances to customers
Adjustment to loans and advances to customers at 1 January 2005 on adoption of
IAS 39 as follows
£ million
------------------ ------
Restatement of balances at amortised cost 3.6
Fair value adjustments to loans and advances in accordance with hedge 13.3
accounting provisions of IAS 39 and transitional provisions of IFRS 1 ------
16.9
-------
5. Derivative financial instruments
Recognition of the fair value of derivative financial instruments at 1 January
2005 on adoption of IAS 39 as follows
£ million
------------------ ------
Fair value decrease on derivative assets 7.2
Fair value increase on derivative liabilities 14.6
------
21.8
-------
6. Shares
Fair value adjustment to shares at 1 January 2005 in accordance with the
transitional provisions of IFRS 1.
7. Borrowings
Fair value adjustment to borrowings at 1 January in accordance with the hedge
accounting provisions of IAS 39.
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