Final Results

RNS Number : 5012R

Paragon Group Of Companies PLC

20 November 2012

 



Under embargo until Stock Exchange announcement: 7am, Tuesday 20 November 2012

PARAGON PRELIMINARY RESULTS

The Paragon Group of Companies PLC ("Paragon"), the specialist buy-to-let and consumer finance group, today announces its results for the year ended 30 September 2012.

Highlights

Financial Performance

·    Profit before tax of £95.5 million (2011: £80.8 million)

·    Underlying profit increased by 16.2% to £94.2 million (2011: £81.1 million)

·    Strong cash position and cash flow

·    Step change in dividend policy with final dividend at 4.50p per share (2011: 2.65p per share). New policy of targeting 3.0 - 3.5 times cover over the medium term

·    Shareholders' funds £803.5 million (2011: £742.0 million)

·    Net asset value 269p per share (2011: 250p per share)

Strategic development

·    Three consumer loan portfolio investments, total £115.4 million, completed during the year

·    Buy-to-let origination franchise well established, £184.3 million advanced (2011: £127.0 million)

·    Two securitisations of buy-to-let loans completed

·    Warehouse funding capacity increased by 125%

Commenting on the results, Nigel Terrington, Chief Executive of Paragon, said:

"The buy-to-let and portfolio purchase businesses have grown strongly and contributed to record profits. The developments in funding capacity in the last fifteen months leave the Group well funded to support the further development of the buy-to-let business, while the strong operational cashflows generated put the Group in a good position to continue to benefit from future portfolio acquisitions and servicing opportunities arising out of bank de-leveraging."

For further information, please contact:

The Paragon Group of Companies PLC	Fishburn Hedges
Nigel Terrington, Chief Executive	Paul Farrow
Nick Keen, Finance Director	Tel: [phone]
Tel: [phone]	Mobile: [phone]

The Paragon Group of Companies PLC

MANAGEMENT REPORT

During the year ended 30 September 2012 the Group has pursued its strategic objectives successfully and achieved strong growth, resulting in the highest profits in our history.  We have invested significantly in portfolio acquisitions, increased buy-to-let lending, entered into new servicing contracts and completed our first securitisation since 2007, with a further securitisation, on materially better terms, being completed after the year-end. In addition, to facilitate the future development of our buy-to-let franchise, new and enlarged funding lines have been agreed with our bankers.  The buy-to-let warehouse facility from Macquarie Bank has been increased and extended by a further two years and an additional warehouse facility agreement has been signed with Lloyds Bank, more than doubling the Group's warehouse capacity to £450.0 million. The Group is well placed for future growth.

During the year ended 30 September 2012 the Group's profit before taxation increased by 18.2% to £95.5 million (2011: £80.8 million). Underlying profit, before exceptional and fair value items, increased by 16.2% to £94.2 million for the year (2011: £81.1 million).

Earnings per share were 24.2p (2011: 20.2p), the increase of 19.8% from last year reflecting the improved profits earned by the Group and a reduction in the tax rate. The increase in profit has also improved the Group's return on equity (note 22) to 9.3% from 8.3% for the previous year.

The Group's strategic focus has remained unchanged; to generate growth through our buy-to-let origination franchise, through investment in loan portfolios and by exploiting new opportunities; and to maintain close management of the existing loan portfolio, which continued to perform well in the year.

Idem Capital, our dedicated investment subsidiary, has successfully built on the five portfolios purchased in prior years with further investments during the financial year totalling £115.4 million. Paragon Mortgages and Mortgage Trust, our buy-to-let origination brands, now fully re-established following the recommencement of new lending in 2010, advanced new loans of £184.3 million (2011: £127.0 million) and a strong pipeline of business was in place at the end of the year, which, combined with the 125% increase in warehouse capacity, augurs well for lending volumes in the new financial year.

In view of the results achieved and the Board's confidence in the prospects for the business, the Company's dividend policy has been amended. In line with the new policy, outlined under Capital Management below, the Board has proposed a final dividend of 4.50p per share (2011: 2.65p) which, when added to the interim dividend of 1.50p, gives a total dividend of 6.00p per share for the year (2011: 4.00p), an increase of 50.0%. Subject to approval at the Annual General Meeting on 7 February 2013, the dividend will be paid on 11 February 2013, by reference to a record date of 11 January 2013.

FINANCIAL REVIEW

CONSOLIDATED RESULTS

For the year ended 30 September 2012

		2012	2011
		£m	£m
Interest receivable		293.8	258.0
Interest payable and similar charges		(136.0)	(122.2)
Net interest income		157.8	135.8
Other operating income		12.4	15.1
Total operating income		170.2	150.9
Operating expenses		(51.9)	(45.4)
Provisions for losses		(24.1)	(24.4)
Underlying profit		94.2	81.1
Fair value net gains / (losses)		1.3	(0.3)
Operating profit being profit on ordinary activities before taxation		95.5	80.8
Tax charge on profit on ordinary activities		(23.3)	(21.2)
Profit on ordinary activities after taxation		72.2	59.6
Dividend - Rate per share for the year		6.0p	4.0p
Basic earnings per share		24.2p	20.2p
Diluted earnings per share		23.5p	19.6p

The Group is organised into two major operating divisions: First Mortgages, which includes the buy-to-let and owner-occupied first mortgage assets and other sources of income derived from first charge mortgages; and Consumer Finance, which includes secured lending, car, retail finance and unsecured loan books and other sources of income derived from consumer loans. Both divisions include internally originated and acquired assets. These divisions are the basis on which the Group reports primary segmental information.

The underlying operating profits of these business segments are detailed fully in note 20.

		2012	2011
		£m	£m
Underlying operating profit
First Mortgages		61.6	67.3
Consumer Finance		32.6	13.8
		94.2	81.1

Net interest income increased by 16.2% to £157.8 million (2011: £135.8 million), reflecting the impact of new loan assets, both acquired and originated, on interest income and margins, partially offset by a 0.3% reduction in the size of the loan book during the year.

Other operating income was £12.4 million for the year, compared with £15.1 million in 2011, the reduction reflecting, principally, a lower level of third party fee income as a result of the purchase of accounts previously administered by the Group, early in the year.

Operating expenses during the year were 14.3% higher at £51.9 million (2011: £45.4 million). The increase is primarily due to employment costs, following the recruitment of additional staff, during the year and in the second half of 2011, to administer purchased and third party loan portfolios. The cost:income ratio was in line with our expectations at 30.5% for the year (note 19), a similar level to last year, and remains significantly below the industry average. The Board remains focused on controlling operating costs through the application of rigorous budgeting, management reporting and monitoring procedures.

The charge for impairment provisions of £24.1 million was 1.2% lower than the charge of £24.4 million for 2011, an increase in the charge within the First Mortgages division, to more normal levels from the low level of charge in 2011, being more than offset by a reduction in the impairment charge within the Consumer Finance division. As a percentage of loans to customers (note 8) the charge has remained at 0.28%, the figure recorded in 2011. Low interest rates have increased affordability for customers, reducing the incidence of new arrears and assisting the correction of past arrears. The loan books continue to be carefully managed and credit performance remains in line with our expectations.

Yield curve movements during the year resulted in hedging instrument fair value net gains of £1.3m (2011: losses of £0.3 million), which do not affect cash flow. As the fair value movements of hedged assets or liabilities are expected to trend to zero over time, this item is merely a timing difference. The Group remains economically and appropriately hedged.

Cash generation has remained strong over the period. Free cash balances stood at £127.7 million at 30 September 2012 (2011: £195.0 million), after investing significantly in both asset purchases and in the development of our buy-to-let lending business, detailed below.

Corporation tax has been charged at an effective tax rate of 24.4%, compared to 26.2% in 2011, the decrease being attributable to the reduction in the standard rate of corporation tax in the UK. 

Profits after taxation of £72.2 million (2011: £59.6 million) have been transferred to shareholders' funds, which totalled £803.5 million at the year-end (2011: £742.0 million), representing 269p per share (2011: 250p per share) (note 21).

BUSINESS REVIEW

OPERATING SEGMENTS

First Mortgages

Buy-to-let loans advanced under the Group's new lending products were £184.3 million for the year (2011: £127.0 million) and a further £4.6 million (2011: £5.8 million) of loans were made to existing borrowers in respect of further advances. This brings the total value of completions under the Group's new products since the recommencement of new lending in October 2010 to £311.3 million. Application levels continued to increase over the year, with the pipeline of applications and offers outstanding totalling £129.9 million at 30 September 2012 (2011: £67.5 million). The credit quality of the new lending business written in the year has been excellent, with an average loan to value ratio of 70.1% (2011: 69.2%) and no arrears on loans advanced since the recommencement of lending in October 2010.

The Group has continued to focus mainly on the higher margin professional landlord business under the Paragon Mortgages brand. Paragon's professional landlord business is widely sourced from a large number of mortgage and commercial finance introducers, giving us the capacity to support materially higher business volumes in due course.

At 30 September 2012, the buy-to-let portfolio was £8,196.4 million, compared with £8,231.7 million a year earlier. The redemption rate on the back book remained low at 2.2% for the year (2011: 2.2%) with landlords continuing to display a long-term commitment to property investment, whilst alternative offerings from other lenders remain unattractive as a result of generally higher funding and capital costs.  

The credit performance of the portfolio over the year has again been exemplary, with the percentage of loans three months or more in arrears (including acquired loans and receivership cases but excluding possession and receivership cases held for sale) standing at 0.48% at 30 September 2012 (30 September 2011: 0.63%) and remains considerably better than the comparable market average of 1.51% as recorded by the Council of Mortgage Lenders ('CML') at that date (30 September 2011: 1.90%). Despite an improved arrears performance over the year, the impairment charge attributable to First Mortgages increased to £12.4 million for the year from £5.6 million for 2011, a return to normal levels of provisioning after a low level of charge last year and following an increase in receiver of rent activity, where a charge for impairments may be made for accounts that are less than three months in arrears. At 30 September 2012 there were 1,504 properties across all portfolios where a receiver had been appointed (30 September 2011: 1,483). Of those available for letting, 94.2% were let (30 September 2011: 93.9%).

The latest Royal Institution of Chartered Surveyors ('RICS') UK Residential Lettings Survey again confirms that tenant demand has continued to grow whilst landlord supply of property new to the lettings market has stabilised. As a consequence of the high level of demand, the RICS survey indicates that rents are expected to continue to increase. The latest survey data from the Association of Residential Letting Agents confirms a similar picture with agents on balance noting an increase in achievable rents over the six months to June 2012. Whilst volumes remain low by historical standards, buy-to-let remains the only growth sector of the mortgage market, with the CML reporting that the value of buy-to-let advances increased by 25.6% to £15.7 billion in the course of the financial year (2011: £12.5 billion) whilst credit quality in the sector continues to improve with industry-wide buy-to-let arrears once again lower than in the owner-occupied market.

The owner-occupied book reduced to £99.2 million from £128.7 million during the year ended 30 September 2012 and performed in line with the Group's expectations. Save for the management of this book in run-off, there has been little activity in recent years in this area as the Group has focused on other lending markets, portfolio acquisitions and other sources of revenue generation.

Consumer Finance

At 30 September 2012, the total loans outstanding on the Consumer Finance books were £399.0 million, compared with £363.8 million at 30 September 2011, this increase being due to portfolio purchases (covered fully below) and the continuing low level of redemptions across the portfolios. The performance of the Consumer Finance book, including the acquired assets, remains satisfactory and in line with our expectations.

The Group's secured loan portfolio at 30 September 2012, including the acquired assets, was £279.9 million (2011: £340.1 million). The unsecured loan, retail finance and car finance portfolios, including the acquired assets, totalled £119.1 million at 30 September 2012 (30 September 2011: £23.7 million).

 

PORTFOLIO OPPORTUNITIES

A major area of strategic focus has been the acquisition of loan portfolios through Idem Capital and the servicing of third party loan portfolios as opportunities are created through the ongoing process of de-leveraging by the larger banks and financial institutions, which we expect to continue for the foreseeable future. Idem Capital has firmly established itself as one of the top consumer debt buyers in the UK, with total investments in the financial year of £115.4 million (2011: £22.7 million). In addition to assets acquired in its own right, Idem, through its sister companies, Moorgate Loan Servicing and Arden Credit Management, has established four new servicing contracts with co-investment partners during the year. These add volume to the Group's servicing operations and enhance earnings, with little or no capital investment. Progress has been excellent and has resulted in an increase in operating profits from these transactions to £26.3 million (2011: £7.6 million) during the financial year.

Idem Capital

Idem Capital invests in loan portfolios either as principal, where Idem acquires pools in its own right, or as co-investor alongside other partners with, typically, Moorgate Loan Servicing appointed to act as servicer. Co-investing has the potential for higher returns where the Group also derives income from servicing the loans within the underlying portfolio. Investments are made only after significant due diligence work on the portfolio and sensitivity testing of potential returns.

In October 2011 Idem Capital completed the purchase of a portfolio of unsecured consumer loans, previously serviced by the Group, from The Royal Bank of Scotland plc ('RBS') for £43.2 million. In addition, under the terms of a forward flow agreement with RBS, a total of £0.6 million of unsecured consumer loans were acquired in the year, and further opportunities are anticipated.

Another significant portfolio purchase was completed in December 2011 when Idem Capital acquired a portfolio of closed UK credit card receivables from MBNA Europe Bank Limited, for £55.7 million. The management of these accounts was transferred to the Group during the second quarter of the year.

The acquisition of a further portfolio of closed UK credit card receivables from MBNA Europe Bank Limited was announced on 3 September 2012. The consideration payable on completion was £16.1 million and the management of these accounts was transferred to the Group before the year end.

By 30 September 2012, total investment in portfolios by Idem Capital since 2009 had reached £161.9 million. A number of potential portfolio investments are currently under review and the Group's track record in loan servicing, risk management and portfolio investment positions it well to exploit similar opportunities as they arise in future.

Moorgate Loan Servicing

The Group's third party loan servicing business operates through Moorgate Loan Servicing and its division, Arden Credit Management, utilising our core administration and collections skills. Our experience in loan management established over many years has enabled us to extend this service to our third party clients, providing significant added value to the performance of their loan portfolios.

During the year Moorgate Loan Servicing has assumed the servicing of four further portfolios, comprising 149,000 accounts, on behalf of third parties (2011: 50,000 accounts) with the result that 49.9% of accounts under management by the Group at 30 September 2012 were managed on behalf of third parties (2011: 58.6%).

Moorgate is well placed to take advantage of other opportunities that may arise over the coming years, particularly as portfolio disposals take place as part of the wider financial sector de-leveraging process.

REGULATION

Regulation is undergoing material change across the financial services sector. Some aspects will affect the current operations of the Group, although the impact is unlikely to be significant.

The Financial Services Authority ('FSA') has concluded, through its Mortgage Market Review, that there will be enhanced prudential supervision of non-deposit takers engaged in regulated lending. Regulation of second charge mortgages will transfer from the Office of Fair Trading to the FSA's successor bodies in 2014. Separately, it is proposed that those successor bodies will, in due course, assume responsibility for the regulation of consumer credit. Certain of the Group's operations are already authorised by the FSA in respect of residential mortgage and insurance activity and we expect to be well placed to comply with the proposed changes in the regulatory framework.

The European Commission's proposed directive on credit agreements relating to residential property, which may impose additional disclosure and other requirements for all mortgage lending to consumers secured on residential property, has yet to be concluded. It remains unclear to what extent these obligations will apply to buy-to-let lending.

We will continue to maintain an active dialogue with the UK and European regulatory authorities as these proposals develop.

CAPITAL MANAGEMENT

The Group has continued to enjoy strong cash generation during the year. Free cash balances were £127.7 million at the year-end (30 September 2011: £195.0 million) after investments to support new buy-to-let originations and significant acquisitions by Idem Capital. The Company sees opportunities going forward to deploy capital for new lending activities, which should continue to increase, and to invest further amounts in loan portfolios through Idem Capital as banks and other financial institutions continue to de-leverage. These cash balances, together with future operational cashflow, will support the Group's growth through investment in these areas as well as providing returns to shareholders through dividends.

The Group's current progressive dividend policy has applied since 2008, the dividend increasing from 3.0p per share in respect of the year ended 30 September 2008 to 4.0p per share in respect of the year ended 30 September 2011. Since that policy was established, the Group has re-commenced its buy-to-let mortgage business, demonstrated that it can access warehouse funding and the securitised funding markets and established a strong asset purchase franchise which has contributed substantially to Group profit growth. The Board keeps under review the appropriate level of capital for the business to meet its operational requirements and strategic development objectives and has determined that in view of the strong position of the Group and its confidence in the prospects for the business, a higher level of dividend payment is now appropriate.

Consequently, the Board proposes, subject to approval at the Annual General Meeting on 7 February 2013, a final dividend of 4.5p per share which, when added to the interim dividend of 1.5p, gives a dividend of 6.0p per share for the year, an increase of 50.0% from 2011. The Board intends to pursue a progressive dividend policy so that, by 2016 and thereafter, dividend cover will be maintained in the range 3.0 to 3.5 times.

In accordance with our usual practice, we will be proposing at the forthcoming Annual General Meeting a special resolution seeking authority from shareholders for the Company to purchase up to 30.1 million of its own shares (10% of the issued share capital). It is customary for companies to seek such authority but we would not expect to utilise the authority unless, in the light of market conditions prevailing at the time, we consider that to do so would enhance earnings per share and would be in the best interests of shareholders generally. Given the operational and strategic opportunities described above and the enhanced dividend policy, the Board has no current intention of using this authority.

FUNDING

On 10 November 2011 the Group completed a £163.8 million securitisation of buy-to-let loans, through Paragon Mortgages (No. 16) PLC. This securitisation, the Group's first since 2007, released warehouse capacity to accommodate further lending growth. Notes totalling £131.7 million, rated Aaa by Moody's Investors Service and AAA by Fitch Ratings, were sold to investors with the Group retaining the remaining, unrated, notes. This was an important landmark for the Group, being the first buy-to-let securitisation by any issuer in the UK since the credit crunch. The notes were priced at LIBOR plus 275 basis points, reflecting the poor bond market conditions at that time. Whilst the notes match-fund the collateralised loans to maturity, we have the ability to call the notes after three years.

After the year end, on 25 October 2012, the Group completed a £200.0 million securitisation of buy-to-let loans, through Paragon Mortgages (No. 17) PLC ('PM 17'). PM 17 comprises £175.0 million of AAA rated notes, £10.5 million of AA rated notes and £10.0 million of A rated notes at margins of 135, 190 and 290 basis points over three month LIBOR respectively. £4.5 million of subordinated notes were retained by the Group, which also invested £6.0 million in the first loss fund, bringing the Group's total investment in PM 17 to £10.5 million, or 5.25% of the issue amount.

The pricing of the PM 17 transaction reflected the strong credit profile of the Group's buy-to-let assets and our experience as an issuer of high quality bonds in the mortgage backed securities market. This was only the second securitisation of buy-to-let loans since the credit crunch, the first to issue junior, single A rated, bonds since 2008 and was the Group's 55th securitisation since pioneering the methodology in 1987.

The Group funded its mortgage originations during the year through a £200.0 million revolving warehouse provided by Macquarie Bank.  This facility was renewed and extended for a further two years after the year end and the amount available for drawing increased to £250.0 million.

On 27 September 2012, the Group signed an additional £200.0 million revolving warehouse facility provided by the wholesale division of Lloyds Bank. The facility, rated by Fitch Ratings, will be available to Paragon Fifth Funding Limited, an orphan special purpose vehicle company, and interest will be charged on the amount drawn at three month LIBOR plus 275 basis points. The facility is structured with a three-year term to permit drawings and re-drawings in its first eighteen months, or up to 24 months, subject to a capital markets refinancing of part of the facility in the first twelve months.

The Group uses the warehouse facilities to originate mortgage loans prior to arranging term funding in the securitisation markets and, following the successful completion of the issuances by Paragon Mortgages (No.16) and Paragon Mortgages (No. 17), we plan to return to the securitisation markets regularly as business volumes increase. Dependant on volume and market conditions, additional warehousing capacity may be sought in due course.

BOARD OF DIRECTORS

On 9 February 2012 Richard Woodman was appointed to the Board as Director - Corporate Development. He was also appointed Managing Director of Idem Capital Limited. Mr Woodman joined the Group in 1989 and he has held various senior strategic and financial roles, latterly as Director of Business Analysis and Planning. More recently he has taken a lead role in the Group's strategic development and, in particular, in the portfolio acquisition programme through Idem Capital.

On 12 September 2012 Fiona Clutterbuck was appointed as a non-executive director. She is currently the Head of Strategy and Corporate Development at the Phoenix Group and is also a non-executive director of WS Atkins plc. Ms Clutterbuck brings to the Board a substantial level of corporate finance experience, having previously held the positions of Managing Director and Head of Financial Institutions Advisory at ABN AMRO Investment Bank, Managing Director and Global Co-Head of Financial Institutions Group at HSBC Investment Bank and Director at Hill Samuel Bank Limited.

On 31 March 2012 Terry Eccles resigned from the Board of Directors owing to health reasons. Mr Eccles was appointed to the Board in February 2007 and served as Chairman of the Remuneration Committee until February 2009 and as Senior Independent Director from February 2009 until July 2011. His experience and wisdom have been invaluable and his presence on the Board will be sadly missed. The Board wishes to thank Mr Eccles for his enormous contribution over the past five years and wish him well for the future.

On 31 October 2011 Christopher Newell resigned from the Board of Directors after ten years of service and having been Chairman of the Audit and Compliance Committee from March 2003 until July 2011. The Board would like to record its gratitude for his considerable support over the years and for his able and professional chairmanship of the Audit and Compliance Committee.

CONCLUSION

The year ended 30 September 2012 has been a very successful period for the Group. The buy-to-let and portfolio purchase businesses have grown strongly and contributed to record profits for the Group for the year.  The developments in funding capacity during the year, and in the period immediately after, with the completion of two public securitisation transactions and a more than doubling of our buy-to-let warehouse facilities, leave the Group well funded to support the further development of the buy-to-let business. Alongside this, the strong operational cashflows generated in the year put the Group in a good position to continue to benefit from future portfolio acquisitions and servicing opportunities arising out of the de-leveraging of banks and other financial institutions.

The strong trading position of the Group and the Board's confidence as to the future prospects of the business have led to a substantial increase in this year's proposed dividend and the adoption of a new policy aimed at moving the Group's dividend towards 3.0 to 3.5 times coverage over the medium term. The Group enters the new financial year with confidence.

The Paragon Group of Companies PLC

 

CONSOLIDATED INCOME STATEMENT

For the year ended 30 September 2012

			2012		2011
	Note		£m		£m
Interest receivable			293.8		258.0
Interest payable and similar charges			(136.0)		(122.2)
Net interest income			157.8		135.8
Other operating income	4		12.4		15.1
Total operating income			170.2		150.9
Operating expenses			(51.9)		(45.4)
Provisions for losses			(24.1)		(24.4)
Operating profit before gains and fair value items			94.2		81.1
Fair value net gains / (losses)	5		1.3		(0.3)
Operating profit being profit on ordinary activities before taxation			95.5		80.8
Tax charge on profit on ordinary activities			(23.3)		(21.2)
Profit on ordinary activities after taxation for the financial year			72.2		59.6
			2012		2011
	Note
Earnings per share
- basic	6		24.2p		20.2p
- diluted	6		23.5p		19.6p

The results for the current and preceding years relate entirely to continuing operations.

The Paragon Group of Companies PLC

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2012

		2012		2011
		£m	£m	£m	£m
Profit for the year			72.2		59.6
Other comprehensive income
Actuarial (loss) on pension scheme		(0.5)		(0.3)
Cash flow hedge (losses) / gains taken to equity		(1.5)		0.4
Tax on items taken directly to equity		0.2		(0.3)
Other comprehensive income for the year net of tax			(1.8)		(0.2)
Total comprehensive income for the year			70.4		59.4

 

 

The Paragon Group of Companies PLC

 

CONSOLIDATED BALANCE SHEET

30 September 2012

			2012	2011	2010
	Note		£m	£m	£m
Assets employed
Non-current assets
Intangible assets	7		9.1	9.3	9.2
Property, plant and equipment			10.7	11.4	12.2
Financial assets	8		9,505.2	9,891.2	10,080.1
Deferred tax asset			-	-	1.5
			9,525.0	9,911.9	10,103.0
Current assets
Other receivables			7.3	4.7	5.9
Cash and cash equivalents	10		504.8	571.6	536.7
			512.1	576.3	542.6
Total assets			10,037.1	10,488.2	10,645.6
Financed by
Equity shareholders' funds
Called-up share capital	11		301.8	299.7	299.4
Reserves	12		550.2	490.7	445.8
Share capital and reserves			852.0	790.4	745.2
Own shares			(48.5)	(48.4)	(53.2)
Total equity			803.5	742.0	692.0
Current liabilities
Financial liabilities	14		2.0	1.8	1.2
Current tax liabilities			13.3	10.7	16.2
Other liabilities			36.7	38.3	32.4
			52.0	50.8	49.8
Non-current liabilities
Financial liabilities	14		9,159.0	9,674.5	9,885.7
Retirement benefit obligations			13.9	14.4	16.5
Deferred tax			7.6	5.0	-
Other liabilities			1.1	1.5	1.6
			9,181.6	9,695.4	9,903.8
Total liabilities			9,233.6	9,746.2	9,953.6
			10,037.1	10,488.2	10,645.6

Approved by the Board of Directors on 20 November 2012.

Signed on behalf of the Board of Directors

N S Terrington                                                             N Keen

Chief Executive                                                             Finance Director

The Paragon Group of Companies PLC

 

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 30 September 2012

			2012	2011
	Note		£m	£m
Net cash generated by operating activities	16		117.3	246.1
Net cash (utilised) by investing activities	17		(2.2)	(2.1)
Net cash (utilised) by financing activities	18		(181.9)	(209.6)
Net increase in cash and cash equivalents			(66.8)	34.4
Opening cash and cash equivalents			571.0	536.6
Closing cash and cash equivalents			504.2	571.0
Represented by balances within:
Cash and cash equivalents			504.8	571.6
Financial liabilities			(0.6)	(0.6)
			504.2	571.0

The Paragon Group of Companies PLC

 

STATEMENT OF MOVEMENTS IN EQUITY

For the year ended 30 September 2012

				2012	2011
	Note			£m	£m
Total comprehensive income for the year				70.4	59.4
Dividends paid	13			(12.3)	(11.1)
Net movement in own shares				(0.1)	4.8
(Deficit) on transactions in own shares				(0.2)	(5.2)
Charge for share based remuneration				2.8	2.0
Tax on share based remuneration				0.9	0.1
Net movement in equity in the year				61.5	50.0
Equity at 30 September 2011				742.0	692.0
Equity at 30 September 2012				803.5	742.0

The Paragon Group of Companies PLC

NOTES TO THE FINANCIAL INFORMATION

For the year ended 30 September 2012

1.   GENERAL INFORMATION

The financial information set out in the announcement does not constitute the Company's statutory accounts for the years ended 30 September 2010, 30 September 2011 or 30 September 2012, but is derived from those statutory accounts, which have been reported on by the Company's auditors. Statutory accounts for the years ended 30 September 2010 and 30 September 2011 have been delivered to the Registrar of Companies and those for the year ended 30 September 2012 will be delivered to the Registrar following the Company's Annual General Meeting. The reports of the auditors in each case were unqualified, did not draw attention to any matters by way of emphasis and did not contain an adverse statement under sections 498(2) or 498(3) of the Companies Act 2006.

This document may contain forward-looking statements with respect to certain of the plans and current goals and expectations relating to the future financial condition, business performance and results of the Group. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of the Group including, amongst other things, UK domestic and global economic and business conditions, market related risk such as fluctuation in interest rates and exchange rates, inflation, deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. Nothing in this document should be construed as a profit forecast.

A copy of the Annual Report and Accounts for the year ended 30 September 2012 will be posted to shareholders in due course. Copies of this announcement can be obtained from the Group Company Secretary, The Paragon Group of Companies PLC at St. Catherine's Court, Herbert Road, Solihull, West Midlands, B91 3QE, until 3 December 2012 and at 51 Homer Road Solihull, West Midlands B91 3QJ thereafter.

2.   ACCOUNTING POLICIES

The annual financial statements of the Group for the year ended 30 September 2012 have been prepared in accordance with International Financial Reporting Standards as adopted for use in the European Union. Accordingly, the preliminary financial information has been prepared in accordance with the recognition and measurement criteria of IFRS. The particular accounting policies adopted are those described in the Annual Report and Accounts of the Group for the year ended 30 September 2011.

Going concern basis

The business activities of the Group, its current operations and those factors likely to affect its future results and development, together with a description of its financial position and funding position, are described in this preliminary announcement. The principal risks and uncertainties affecting the Group, and the steps taken to mitigate these risks are described on pages 33 to 34.

Note 5 to the accounts for the year ended 30 September 2011 includes an analysis of the Group's working capital position and policies, while note 6 includes a detailed description of its funding structures, its use of financial instruments, its financial risk management objectives and policies and its exposure to credit, interest rate and liquidity risk. Critical accounting estimates affecting the results and financial position disclosed in this annual report are discussed in note 4. The position and policies described in these notes remain materially unchanged to the date of this preliminary announcement, except as disclosed in note 15. The Group has a formalised process of budgeting, reporting and review, which provides information to the directors which is used to ensure the adequacy of resources available for the Group to meet its business objectives.

The securitisation funding structures described in note 6 ensure that a substantial proportion of the Group's originated loan portfolio is match-funded to maturity. Repayment of the securitisation borrowings is restricted to funds generated by the underlying assets and there is limited recourse to the Group's general funds. Recent and current loan originations utilising the Group's available warehouse facilities described in note 6 are refinanced through securitisation from time to time. The Group's only working capital debt is the £110.0 million corporate bond which does not mature until 2017. As a consequence the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

After making enquiries, the directors have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the annual report and accounts.

3.   SEGMENTAL INFORMATION

For internal reporting purposes the Group is organised into two major operating divisions, First Mortgages and Consumer Finance. These divisions are the basis on which the Group reports segmental information.

The revenue generated by the First Mortgages segment includes interest and fees generated by the buy-to-let and owner-occupied mortgage assets and other income derived from first charge mortgages. Consumer Finance revenue includes interest and fees generated by second charge loans, the residual car, retail finance and unsecured loan assets, and other sources of income derived from consumer loans. Both of these divisions include assets originated internally and assets acquired from third parties.

All of the Group's operations are conducted in the United Kingdom, all revenues arise from external customers and there are no inter-segment revenues. No customer contributes more than 10% of the revenue of the Group.

Financial information about these business segments is shown below.

Year ended 30 September 2012

		First Mortgages	Consumer Finance	Total
		£m	£m	£m
Interest receivable		231.1	62.7	293.8
Interest payable		(128.1)	(7.9)	(136.0)
Net interest income		103.0	54.8	157.8
Other operating income		6.2	6.2	12.4
Total operating income		109.2	61.0	170.2
Operating expenses		(35.2)	(16.7)	(51.9)
Provisions for losses		(12.4)	(11.7)	(24.1)
		61.6	32.6	94.2
Fair value net gains / (losses)		1.6	(0.3)	1.3
Operating profit		63.2	32.3	95.5
Tax charge				(23.3)
Profit after tax				72.2

Year ended 30 September 2011

		First Mortgages	Consumer Finance	Total
		£m	£m	£m
Interest receivable		214.7	43.3	258.0
Interest payable		(114.0)	(8.2)	(122.2)
Net interest income		100.7	35.1	135.8
Other operating income		7.0	8.1	15.1
Total operating income		107.7	43.2	150.9
Operating expenses		(34.8)	(10.6)	(45.4)
Provisions for losses		(5.6)	(18.8)	(24.4)
		67.3	13.8	81.1
Fair value net (losses) / gains		(0.2)	(0.1)	(0.3)
Operating profit		67.1	13.7	80.8
Tax charge				(21.2)
Profit after tax				59.6

The assets and liabilities attributable to each of the segments at 30 September 2012, 30 September 2011 and 30 September 2010 were:

		First Mortgages	Consumer Finance	Total
		£m	£m	£m
30 September 2012
Segment assets		9,541.3	495.8	10,037.1
Segment liabilities		(8,862.4)	(371.2)	(9,233.6)
		678.9	124.6	803.5
30 September 2011
Segment assets		10,009.3	478.9	10,488.2
Segment liabilities		(9,400.2)	(346.0)	(9,746.2)
		609.1	132.9	742.0
30 September 2010
Segment assets		10,083.0	562.6	10,645.6
Segment liabilities		(9,531.6)	(422.0)	(9,953.6)
		551.4	140.6	692.0

All of the assets shown above were located in the United Kingdom.

4.   OTHER OPERATING INCOME

			2012	2011
			£m	£m
Loan account fee income			5.0	5.7
Insurance income			2.5	1.9
Third party servicing			3.9	5.8
Other income			1.0	1.7
			12.4	15.1

5.   FAIR VALUE NET GAINS / (LOSSES)

The fair value net gain / (loss) represents the accounting volatility on derivative instruments which are matching risk exposure on an economic basis generated by the requirements of IAS 39. Some accounting volatility arises on these items due to accounting ineffectiveness on designated hedges, or because hedge accounting has not been adopted or is not achievable on certain items. The losses and gains are primarily due to timing differences in income recognition between the derivative instruments and the economically hedged assets and liabilities. Such differences will reverse over time and have no impact on the cash flows of the Group.

6.   Earnings per share

Earnings per ordinary share is calculated as follows:

	2012	2011
Profit for the year (£m)	72.2	59.6
Basic weighted average number of ordinary shares ranking for dividend during the year (million)	297.8	295.3
Dilutive effect of the weighted average number of share options and incentive plans in issue during the year (million)	9.4	8.2
Diluted weighted average number of ordinary shares ranking for dividend during the year (million)	307.2	303.5
Earnings per ordinary share                    - basic	24.2p	20.2p
- diluted	23.5p	19.6p

7.   INTangible assets

		2012	2011	2010
		£m	£m	£m
Goodwill		1.6	1.6	1.6
Computer software		1.4	1.1	0.4
Other intangible assets		6.1	6.6	7.2
		9.1	9.3	9.2

Other intangible assets comprise brands and the benefit of business networks recognised on the acquisition of subsidiary companies.

8.   FInancial Assets

	Note	2012	2011	2010
		£m	£m	£m
Loans to customers		8,694.6	8,724.2	8,911.2
Fair value adjustments from portfolio hedging		1.1	3.4	8.6
Investments in structured entities		9.1	11.8	-
Derivative financial assets	9	800.4	1,151.8	1,160.3
		9,505.2	9,891.2	10,080.1

9.   Derivative Financial Assets and Liabilities

		2012	2011	2010
		£m	£m	£m
Derivative financial assets	8	800.4	1,151.8	1,160.3
Derivative financial liabilities	14	(4.6)	(9.1)	(17.3)
		795.8	1,142.7	1,143.0
Of which:
Foreign exchange basis swaps		799.5	1,145.8	1,148.7
Other derivatives		(3.7)	(3.1)	(5.7)
		795.8	1,142.7	1,143.0

The Group's securitisation borrowings are denominated in sterling, euros and US dollars. All currency borrowings are swapped at inception so that they have the effect of sterling borrowings. These swaps provide an effective hedge against exchange rate movements, but the requirement to carry them at fair value leads, when exchange rates have moved significantly since the issue of the notes, to large balances for the swaps being carried in the balance sheet. This is currently the case with both euro and US dollar swaps, although the debit balance is compensated for by retranslating the borrowings at the current exchange rate.

10. Cash and CASH EQUIVALENTS

Only 'Free Cash' is unrestrictedly available for the Group's general purposes. Cash received in respect of loan assets is not immediately available, due to the terms of the warehouse facilities and the securitisations. 'Cash and Cash Equivalents' also includes balances held by the Trustees of the Paragon Employee Share Ownership Plans which may only be used to invest in the shares of the Company, pursuant to the aims of those plans.

The total consolidated 'Cash and Cash Equivalents' balance may be analysed as shown below:

		2012	2011	2010
		£m	£m	£m
Free cash		127.7	195.0	147.8
Securitisation cash		374.9	374.1	387.2
ESOP cash		2.2	2.5	1.7
		504.8	571.6	536.7

Cash and Cash Equivalents includes current bank balances and fixed rate sterling term deposits with London banks.

11. Called-up share capital

The share capital of the Company consists of a single class of £1 ordinary shares.

Movements in the issued share capital in the year were:

			2012	2011
			Number	Number
Ordinary shares
At 1 October 2011			299,745,445	299,454,078
Shares issued			2,096,169	291,367
At 30 September 2012			301,841,614	299,745,445

During the year the Company issued 2,090,570 shares at par (2011: 291,367) to the trustees of its ESOP Trusts in order that they could fulfil their obligations under the Group's share based award arrangements. It also issued 5,599 shares (2011: nil) to satisfy options granted under sharesave schemes for a consideration of £5,688 (2011: £nil).

12. RESERVES

		2012	2011	2010
		£m	£m	£m
Share premium account		64.1	64.1	64.1
Merger reserve		(70.2)	(70.2)	(70.2)
Cash flow hedging reserve		0.7	1.8	1.4
Profit and loss account		555.6	495.0	450.5
		550.2	490.7	445.8

13. equity Dividend

Amounts recognised as distributions to equity shareholders in the period:

	2012	2011	2012	2011
	Per share	Per share	£m	£m
Equity dividends on ordinary shares
Final dividend for the year ended 30 September 2011	2.65p	2.40p	7.9	7.1
Interim dividend for the year ended 30 September 2012	1.50p	1.35p	4.4	4.0
	4.15p	3.75p	12.3	11.1

Amounts paid and proposed in respect of the year:

	2012	2011	2012	2011
	Per share	Per share	£m	£m
Interim dividend for the year ended 30 September 2012	1.50p	1.35p	4.4	4.0
Proposed final dividend for the year ended 30 September 2012	4.50p	2.65p	13.4	7.9
	6.00p	4.00p	17.8	11.9

The proposed final dividend for the year ended 30 September 2012 will be paid on 11 February 2013, subject to approval at the Annual General Meeting, with a record date of 11 January 2013. The dividend will be recognised in the accounts when it is paid.

14. FInancial Liabilities

(a)   The Group

	Note	2012	2011	2010
		£m	£m	£m
Current liabilities
Finance lease liability		1.4	1.2	1.1
Bank loans and overdrafts		0.6	0.6	0.1
		2.0	1.8	1.2
Non-current liabilities
Asset backed loan notes		7,580.9	8,049.7	8,336.2
Corporate bond		110.0	112.0	115.8
Finance lease liability		10.2	11.6	12.8
Bank loans and overdrafts		1,453.3	1,492.1	1,403.6
Derivative financial instruments	9	4.6	9.1	17.3
		9,159.0	9,674.5	9,885.7

A maturity analysis of the above borrowings and further details of asset backed loan notes and bank loans are given in note 15.

15. BORROWINGS

All borrowings described in the Group Accounts for the year ended 30 September 2011 remained in place throughout the period.

In November 2011 a Group company, Paragon Mortgages (No. 16) PLC issued £131.7m Class A Senior notes, rated AAA by Fitch and Aaa by Moody's. The Group retained £32.1m Class Z junior notes and advanced a cash fund of £5.4m.

On 25 October 2012 a Group company, Paragon Mortgages (No. 17) PLC, issued £195.5m of sterling mortgage backed floating rate notes at par. £175.0m of the notes were rated AAA, £10.5m rated AA and £10.0m rated A. The average interest margin above LIBOR on the notes was 145.9% and the proceeds were used to pay down existing warehouse debt. The Group retained £4.5m of subordinated notes, which also invested £6.0m in the first loss fund, which brings its total investment to £10.5m, or 5.25% of the issue amount.

To provide further funding for new lending, on 27 September 2012, the Group entered into a £200.0m committed sterling facility provided to Paragon Fifth Funding Limited by the wholesale division of Lloyds Bank. This facility is secured on all the assets of Paragon Fifth Funding Limited and is structured with a three year term to permit drawings and re-drawings in its first eighteen months, or up to 24 months, subject to a capital markets refinancing of the facility in its first twelve months. Loans originated in this warehouse will be refinanced in the mortgage backed securitisation market from time to time when appropriate. Interest on this loan is payable monthly in sterling at 2.75% above three month LIBOR. The facility has a renewal process that allows the Group to agree a new commitment period prior to the expiry of the existing commitment period. As with the other warehouses, repayments on this facility are limited to principal cash received from the funded assets.

Repayments made in respect of the Group's borrowings are shown in note 18.

16. net cash flow from operating activities

	2012	2011
	£m	£m
Profit before tax	95.5	80.8
Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment	2.1	2.0
Amortisation of intangible assets	1.0	0.9
Foreign exchange movement on borrowings	(344.9)	(3.2)
Other non-cash movements on borrowings	(0.7)	(1.2)
Impairment losses on loans to customers	24.1	24.4
Charge for share based remuneration	2.8	2.0
(Profit) / loss on disposal of property, plant and equipment	-	(0.1)
Net decrease / (increase) in operating assets:
Loans to customers	8.2	150.8
Derivative financial instruments	351.4	8.5
Fair value of portfolio hedges	2.3	5.2
Other receivables	-	1.2
Net (decrease) / increase in operating liabilities:
Derivative financial instruments	(4.5)	(8.2)
Other liabilities	(3.0)	3.4
Cash generated by operations	134.3	266.5
Income taxes (paid)	(17.0)	(20.4)
	117.3	246.1

17. net cash flow from investing activities

		2012	2011
		£m	£m
Proceeds on disposal of property, plant and equipment		0.2	0.9
Purchases of property, plant and equipment		(1.6)	(2.0)
Purchases of intangible assets		(0.8)	(1.0)
Net cash (utilised) by investing activities		(2.2)	(2.1)

18. net cash flow from financing activities

		2012	2011
		£m	£m
Dividends paid (note 13)		(12.3)	(11.1)
Issue of asset backed floating rate notes		129.9	-
Repayment of asset backed floating rate notes		(254.9)	(284.1)
Capital element of finance lease payments		(1.2)	(1.1)
Movement on bank facilities		(43.1)	87.1
Purchase of shares		(0.5)	(1.2)
Sale of shares		0.2	0.8
Net cash (utilised) by financing activities		(181.9)	(209.6)

19. COST:INCOME RATIO

Cost:income ratio is derived as follows:

		2012	2011
		£m	£m
Cost - operating expenses		51.9	45.4
Total operating income		170.2	150.9
Cost / Income		30.5%	30.1%

20. UNDERLYING PROFIT

Underlying profit is determined by excluding from the operating result certain costs of a one‑off nature, which do not reflect the underlying business performance of the Group, gains on the repurchase of debt which result from the illiquidity of the credit markets rather than the fair value of the security and fair value accounting adjustments arising from the Group's hedging arrangements.

		2012	2011
		£m	£m
First Mortgages
Profit before tax for the period (note 3)		63.2	67.1
Less:    Fair value losses / (gains)		(1.6)	0.2
		61.6	67.3
Consumer Finance
Profit before tax for the period (note 3)		32.3	13.7
Less:    Fair value losses / (gains)		0.3	0.1
		32.6	13.8
Total
Profit before tax for the period (note 3)		95.5	80.8
Less:    Fair value losses / (gains)		(1.3)	0.3
		94.2	81.1

21. Net asset value per share

Net asset value per share is derived as follows:

	Note	2012	2011
Total equity (£m)		803.5	742.0
Outstanding issued shares (m)	11	301.8	299.7
Treasury shares (m)		(0.7)	(0.7)
Shares held by ESOP schemes (m)		(2.3)	(2.5)
		298.8	296.5
Net asset value per £1 ordinary share		269p	250p

22. Return on Equity

Return on equity is defined by the Group by comparing the profit after tax for the year to the average of the opening and closing equity positions and is derived as follows:

		2012	2011
		£m	£m
Profit for the year		72.2	59.6
Divided by
Opening equity		742.0	692.0
Closing equity		803.5	742.0
Average equity		772.7	717.0
Return on equity		9.3%	8.3%

23. RELATED PARTY TRANSACTIONS

On 27 May 2010, Mr A K Fletcher, an independent non-executive director of the Company, was appointed as a trustee of the Group Pension Plan. In respect of this appointment he was paid £10,000 in the year ended 30 September 2012 by Paragon Finance plc, the sponsoring company of the Plan (2011: £10,000).

The Group Pension Plan is a related party of the Group. Transactions with the plan are of a similar nature to those disclosed in the accounts for the year ended 30 September 2011.

The Group had no other transactions with related parties other than the key management compensation.

The Paragon Group of Companies PLC

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

in relation to financial statements

The responsibility statement below has been prepared in connection with the full annual accounts of the Company for the year ended 30 September 2012. Certain parts of these accounts are not presented within this announcement.

The directors are responsible for preparing the Annual Report and the financial statements. The directors are required to prepare accounts for the Group in accordance with International Financial Reporting Standards ('IFRS') and have also elected to prepare company financial statements in accordance with IFRS. In respect of the financial statements for the year ended 30 September 2012, company law requires the directors to prepare such financial statements in accordance with International Financial Reporting Standards, the Companies Act 2006 and Article 4 of the IAS Regulation. 

International Accounting Standard 1 - 'Presentation of Financial Statements' requires that financial statements present fairly for each financial year the Company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the Preparation and Presentation of Financial Statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. Directors are also required to:

·     properly select and apply accounting policies;

·     present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and

·     provide additional disclosures when compliance with the specific requirements in International Financial Reporting Standards is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a directors' report and directors' remuneration report which comply with the applicable requirements of the Companies Act 2006.

The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions.

The directors confirm that, to the best of their knowledge:

·     the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and of the Group taken as a whole; and

·     the business review, which is incorporated into the Directors' Report, includes a fair review of the development and performance of the business and the position of the Group taken as a whole, together with a description of the principal risks and uncertainties it faces.

Approved by the Board of Directors and signed on behalf of the Board.

JOHN G GEMMELL

Company Secretary

20 November 2012

The Paragon Group of Companies PLC

PRINCIPAL RISKS AND UNCERTAINTIES

For the year ended 30 September 2012

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance and could cause actual results to differ materially from expected and historical results. The Group's system of risk management, which includes risk review and an active internal audit function, is monitored by the Audit and Compliance Committee.

The principal risks to which the Group is exposed include the following:

Economic environment

A further deterioration in the general economy may adversely affect all aspects of the Group's business. Adverse economic conditions might increase the number of borrowers that default on their loans or adversely affect funding structures, which may in turn increase the Group's costs and could result in losses on some of the Group's assets, or restrict the ability of the Group to develop in the future.

The general economic factors affecting the Group in the period going forward, together with the steps taken by the Group's management to address these issues are described in more detail in the management report.

Changes in interest rates may adversely affect the Group's net income and profitability. The steps taken by the Group to mitigate against the long term effects of interest rate movements, through the structuring of its products and the use of hedging procedures are described in note 6 to the accounts.

Credit risk

As a primary lender the Group faces credit risk as an inherent component of its lending activities. Adverse changes in the credit quality of the Group's borrowers, a general deterioration in UK economic conditions or adverse changes arising from systematic risks in UK and global financial systems could reduce the recoverability and value of the Group's assets.

Operational risk

The activities of the Group subject it to operational risks relating to its ability to implement and maintain effective systems to process the high volume of transactions with customers. A significant breakdown of the IT systems of the Group might adversely impact the ability of the Group to operate its business effectively.

To address these risks, the Group's internal audit function carries out targeted reviews of critical systems to ensure that they remain adequate for their purpose. The Group has a business continuity plan, which is kept under regular review and is designed to ensure that any breakdown in systems would not cause significant disruption to the business.

Competitor risk

The Group faces strong competition in all of the core markets in which it operates. There is a danger that its profitability and /or market share may be impaired.

To mitigate this risk the Group maintains relationships with its customers, business introducers and other significant participants in the markets in which it is active, as well as being active in industry-wide organisations and initiatives. This enables market trends to be identified and addressed within the relevant business strategy.

Governmental, legislative and regulatory risk

The market sectors to which the Group supplies products, and the capital markets from which it has historically obtained much of its funding, have been subject to intervention by United Kingdom Government, European Union and other regulatory bodies. Current regulatory developments are discussed in the section of the management report headed 'Regulation'. To the extent that such actions disadvantage the Group, when compared to other market participants, they present a risk to the Group.

In order to mitigate this risk the Group has been active in explaining its position to the authorities in order that it is not inadvertently disadvantaged.

Management

The success of the Group is dependent on recruiting and retaining skilled senior management and personnel.

Working capital

The Group's capital position and its policies in respect of capital management are described in the accounts. These policies and their application are described more fully in the section of the management report headed 'Capital Management'.

Financial risk

The Group's exposure to other financial risks, including liquidity risk and foreign currency risk, and the procedures in place to mitigate those risks are described in detail in the accounts.

 

END

 

 

FR BKCDBOBDDDDD