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Tesco Personal Fin (TSC5)

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Wednesday 07 October, 2020

Tesco Personal Fin

Tesco Personal Finance Interims

RNS Number : 3021B
Tesco Personal Finance PLC
07 October 2020
 

 

Tesco Personal Finance plc

Publication of Interim Financial Report for the six months ended 31 August 2020

 

 

In accordance with Listing Rule 17.3.1, a copy of the above document for Tesco Personal Finance plc has been submitted to the UKLA document viewing facility and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism

 

The document is also available on the Company's website at:   https://bank.tescoplc.com/

 

This announcement also contains additional information for the purposes of compliance with the Disclosure and Transparency Rules, including principal risks and uncertainties, details of related party transactions and a responsibility statement.

 

Reference to pages and numbers refer to page numbers and notes to the interim accounts in the Interim Financial Report for the six months ended 31 August 2020.

 

 

Enquiries:

Investors

Chris Griffith (Tesco Plc)

01707 940 900

Media

Simon Rew (Tesco Plc)

0330 678 0639


Barry Cameron (Tesco Bank)

07841 192 899

 

 

7 October 2020

 

TESCO PERSONAL FINANCE PLC

INTERIM FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 31 AUGUST 2020

COMPANY NUMBER SC173199

 

Interim Management Report

1

Interim Condensed Consolidated Income Statement (Unaudited)

9

Interim Condensed Consolidated Statement of Comprehensive Income (Unaudited)

10

Interim Condensed Consolidated Statement of Financial Position (Unaudited)

11

Interim Condensed Consolidated Statement of Changes in Equity (Unaudited)

12

Interim Condensed Consolidated Statement of Cash Flows (Unaudited)

13

Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

14

Responsibility Statement

49

Independent Review Report to Tesco Personal Finance Plc

50

Abbreviations

51

Glossary of Terms

52

 

TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT

This Interim Financial Report comprises the Interim Management Report and the Interim Condensed Consolidated Financial Statements and accompanying notes. In the Interim Financial Report, unless specified otherwise, the 'Company' means Tesco Personal Finance Plc and the 'Group' means the Company and its subsidiaries and joint venture included in the Interim Condensed Consolidated Financial Statements. The Group operates using the trading name of Tesco Bank.

Tesco Personal Finance Plc is a wholly owned subsidiary of Tesco Personal Finance Group PLC (TPFG), the share capital of which is wholly owned by Tesco PLC. A reconciliation of the results contained within these Interim Condensed Consolidated Financial Statements to the Tesco Bank results presented in the Tesco PLC Interim Results 2020/21 can be found on the Tesco PLC internet page: https://www.tescoplc.com/media/756354/brokerpack_2020_09.pdf  

Cautionary Statement Regarding Forward-Looking Information

Where this document contains forward-looking statements, these are made by the Directors in good faith based on the information available to them at the time of their approval of this report. These statements should be treated with caution due to the inherent risks and uncertainties underpinning any such forward-looking information. The Group cautions users of these Interim Condensed Consolidated Financial Statements that a number of factors, including matters referred to in this document, could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those discussed under 'Principal risks and uncertainties' on pages 6 to 8 of this Interim Management Report.

Business Model

The Group provides financial services and products to personal customers in the United Kingdom (UK). The Company is incorporated and registered in Scotland. The Company owns 49.9% of Tesco Underwriting Limited (TU), an authorised insurance company. TU is accounted for as a joint venture of the Group.

Strategic Review

Covid-19

During the six months to 31 August 2020, significant economic and social disruption has arisen from the Covid-19 pandemic. The Group has invoked business continuity plans as it seeks to serve and support its customers throughout the pandemic while maintaining the safety and well-being of staff. The Group is providing support to those customers who are experiencing financial difficulty as a result of Covid-19. It is also closely monitoring to ensure critical functions remain resilient and as part of this is engaging with suppliers to ensure that service levels can continue to be maintained throughout a prolonged pandemic.

During the period, the Group granted temporary payment holidays to a number of Credit Card and Personal Loan customers. These were for an initial period of up to three months and have in some cases been extended by a further three months.

1

Strategic Review (continued)

Covid-19 (continued)

The following table shows the outstanding balances at 31st August of all accounts where a payment holiday was granted during the period, including their IFRS 9 staging and the percentage of the overall lending portfolio these balances represent :

Gross balances at 31 August 2020

Volume

Stage 1

Stage 2

Stage 3

% Gross balance



£m

£m

£m


Total

125,344

553.9

320.0

19.7

12%

Of the payment holidays granted, 82,604 have matured, with 83% of customers returning to normal payment schedules.

As a result of the pandemic, the Group has been impacted in the period by a reduction in income from all banking activities, including Credit Cards, Loans, ATMs and Travel Money. Refer to page 3 for further details of the impact of the pandemic on the Group's income for the period. Given the unprecedented fall in demand for Travel Money during the Covid-19 pandemic, the Group suspended its in-store and online Travel Money service from 24 March 2020. The service has subsequently re-opened but at significantly reduced volumes as overseas travel begins to increase again.

There has also been a significant impact on expected credit losses (ECLs) for potential bad debts in the period. The day 1 impact of Covid-19 on the ECL charge for the six months to 31 August 2020 was £194.9m, increasing the total charge for the period to £256.6m (2019: £113.4m).

The impact of the pandemic on income and ECLs has resulted in a loss for the Group in the period to 31 August 2020. The Group also expects to make a loss in the year ended 28 February 2021. Notwithstanding this, the Group's capital and liquidity ratios, which are set out on page 6, are expected to remain above regulatory requirements over the periods used by Management to monitor these ratios. The impact of the current economic outlook on ECLs is set out at note 14.

The Board considered in depth the impact of Covid-19 on the Group's going concern status. The relevant disclosures are set out on page 8.

In response to the Covid-19 pandemic and lockdown conditions, the Group introduced a number of benefits to help Tesco customers manage their money a little better every day. These include an increase in the contactless limit from £30 to £45; the removal of insurance policy change fees, providing customers with flexibility to make changes to their policies; the suspension of overdraft interest on overdrawn Personal Current Account balances up to £500 for three months; and utilising Tesco gift cards to provide school lunches across the UK. Additionally, the Group launched e-gift cards during the period, which allowed friends or relatives to assist vulnerable customers with their shopping.

Sale of the Group's Mortgage Business

The Group completed the sale of the majority of its Mortgage business to Bank of Scotland PLC (part of the Lloyds Banking Group) on 27 September 2019. As is customary in such a transaction, the Group continued to recognise a small element of the Mortgage business, representing new advances to existing Mortgage customers, until migration of all Mortgage accounts to the purchaser, which took place on 30 March 2020. The Group received cash consideration of £50.8m in respect of this element of the Mortgage business, resulting in an after-tax gain on sale of £0.4m. In accordance with the requirements of International Financial Reporting Standard (IFRS) 5 'Non-current assets held for sale and discontinued operations', the Group classified its Mortgage business as a discontinued operation in the period to 31 August 2020.

2

Sale of the Group's Mortgage Business (continued)

Amounts recognised in the Interim Condensed Consolidated Income Statement in respect of the Mortgage business are presented as a single line item after profit after tax from continuing operations. In the prior period, interest expense of £29.0m in respect of the Group's cost of funding the Mortgage business continued to be presented within net interest income of continuing operations. As this cost could not be directly attributed to liabilities of the Group entered into specifically to fund the Group's Mortgage business, as required by IFRS 5, it was not possible to present this cost within statutory profit for the year after tax from discontinued operations for the prior period. There was no such charge in the current period.

Further information on the Group's discontinued operations is set out at note 9.

Headlines

Income Statement

· Loss before tax from continuing operations is £143.5m (August 2019: profit of £16.8m).

· Underlying loss before tax from continuing operations, which excludes items which are not reflective of ongoing trading performance, is £142.2m (August 2019: profit of £98.5m). A reconciliation of statutory to underlying (loss)/profit for the current and prior periods is set out at note 3.

· Profit after tax from discontinued operations has decreased to £0.3m (August 2019: £17.4m).

· Loss before tax from continuing operations

The key drivers of the loss before tax from continuing operations are:

a 0.9% decrease in net interest income to £237.9m (August 2019: £240.1m), reflecting lower interest earnings on the back of a significant decrease in lending due to Covid-19. Net interest margin has increased to 5.0% (August 2019: 4.2%), predominantly reflecting an improved credit card margin and lower funding costs following the sale of the Group's Mortgage business. In the prior period, interest expense of £29.0m in respect of the Group's cost of funding the Mortgage business continued to be presented within net interest income of continuing operations. As this cost could not be directly attributed to liabilities of the Group entered into specifically to fund the Group's Mortgage business, as required by IFRS 5, it was not possible to present this cost within statutory profit for the year after tax from discontinued operations for the prior period. There was no such charge in the current period;

a 44.8% decrease in fee and commission income to £102.3m (August 2019: £185.2m). Fee and commission income has reduced significantly in the period due to reduced activity as a result of the Covid-19 pandemic. Credit card fees have been impacted by a large reduction in credit card transactions by customers during the lockdown period. The Group's Travel Money offering was suspended from March until June and ATM income has also decreased as a result of falling transaction volumes. Insurance income has fallen due to a reduction in prices in a highly competitive market;

a loss on financial instruments at fair value through profit or loss of £1.3m (August 2019: loss of £3.2m);

a gain on disposal of investment securities of £nil (August 2019: gain of £0.1m);

a 22.4% decrease in operating expenses to £220.2m (August 2019: £283.8m). This includes, in the prior period, an additional payment protection insurance charge of £45.0m. There was no such charge in the current period. In the prior period, there were restructuring charges of £8.2m relating to the Group's strategic review. There were no such charges in the current period; 

a 126.3% increase in charges for expected credit loss on financial assets to £256.6m (August 2019: £113.4m). The increase is driven by the economic deterioration resulting from the Covid-19 pandemic and includes the day 1 increase to expected credit losses of £194.9m as set out on page 2. The bad debt:asset ratio in respect of continuing operations increased to 6.7% (August 2019: 2.6%); and

3

Income Statement (continued)

a 25.0% increase in the Group's share of profit from its joint venture, TU to £9.0m (August 2019: £7.2m). This includes, in the prior period, a credit of £3.7m, representing the Group's share of credits recognised by TU during the prior period relating to the impact on TU's insurance reserves of a change to the Ogden tables, which are used to calculate future losses in personal injury and fatal accident cases. There was no such credit in the current period. The increase in profit is predominantly driven by a reduction in motor insurance claims as a result of the Covid-19 pandemic.

· Income tax credit on loss from continuing operations

Income tax on the Group's loss from continuing operations for the period is a credit of £46.6m (August 2019: charge of £15.5m). This predominantly reflects the impact of Covid-19 on the Group's results for the period and the expected relief of the loss for the period against prior year profits.

· Profit after tax from discontinued operations

Profit after tax from discontinued operations predominantly reflects a decrease in net interest income to £nil (August 2019: £41.3m), other income of £(0.6)m (August 2019: £(6.6)m), a reduction in operating expenses to a credit of £0.4m (August 2019: expense of £11.8m) and a reduction in tax to a credit of £0.1m (August 2019: charge of £6.5m). As the remaining Mortgage business was migrated to the purchaser on 30 March 2020, the current period profit after tax from discontinued operations reflects only one month of trading.

Balance Sheet

· Loans and advances to customers have decreased by 13.8% to £7.3bn (February 2020: £8.5bn). Credit Card balances have reduced by 18% due to lower overall consumer spend in the period, while Personal Loans have reduced by 10%, reflecting lower new business volumes during the period.

· Customer deposits, which continue to be the Group's main source of funding, have decreased by 13.9% to £6.6bn (February 2020: £7.7bn) as the Group has continued to reduce its Savings balances in response to the reduced activity in loans and advances to customers as a result of Covid-19 and the sale of the Mortgage business. At the period end, the Group had accessed £500.0m of funds from the Bank of England's Term Funding Scheme (February 2020: £500.0m).

· The balance sheet remains well positioned to support future lending growth from both a liquidity and capital standpoint. At 31 August 2020, the total capital ratio was 24.3% (February 2020: 23.1%) and net stable funding ratio (NSFR) was 122.8% (February 2020: 129.1%).

Regulatory Developments

The Group continues to monitor and prepare for a number of regulatory changes taking effect over the next few years.

Open Banking, which is supported by a secure technology standard, is a change for the whole UK banking sector and is designed to give customers more control over their financial data and money. Customers will also be able to more easily compare accounts from different providers, understand features, service quality and pricing, and be able to select which offers best value. Using Open Banking, the Group's customers can choose to connect their Personal Current Accounts, Credit Cards, Instant Access Savings Accounts or Internet Saver accounts to third-party providers (TPPs). TPPs will provide a range of different Apps and websites offering new ways for customers to manage money and make payments.

During the period, the Group enabled credit card customers to more easily manage and pay their balances. A 'Pay by Bank' facility allows Mobile and Online credit card customers to make payments directly from their Personal Current Account via electronic payment devices and in doing so, Tesco Bank became the first UK Bank to introduce this functionality.

4

Regulatory Developments (continued)

Amendments to the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) were published in the Official Journal of the European Union (EU) on 7 June 2019. The majority of the CRR amendments will apply from 28 June 2021 and the CRD amendments from 28 December 2020. The impact of these amendments on the Group continues to be assessed. Uncertainty remains around the implementation and impact of further regulatory developments arising from the finalisation of Basel III, which will be subject to EU and UK implementation. It was announced in March 2020 that the implementation date of Basel III has been delayed by one year to 1 January 2023.

In addition, the Group became subject to the minimum requirements for own funds and eligible liabilities (MREL) on an interim basis from 1 January 2020, with full implementation applicable from 1 January 2022. The requirements are factored into the Group's funding and capital plans. TPFG undertook an initial £250.0m issuance of MREL-compliant debt in July 2019 in support of these requirements and subsequently invested the proceeds in the Company via an intercompany subordinated loan. Further issuances may be required to support end-state requirements. Refer to page 47 for details of the Group's compliance with MREL requirements as at 31 August 2020.

MREL will, on full implementation, be set on a bank-specific basis and calculated as the sum of two components: a loss absorption amount, being the amount needed to absorb losses up to and in resolution; and a recapitalisation amount, which reflects the capital that a firm is likely to need post-resolution.

The Financial Policy Committee of the Bank of England is responsible for setting the UK countercyclical capital buffer rate (CCyB), being the rate that applies to UK exposures of banks, building societies and large investment firms incorporated in the UK. The UK CCyB is currently set at 0.0% (2019: 1.0%). In response to the economic shock from COVID-19 the Financial Policy Committee reduced the UK CCyB rate to 0.0% on 11 March 2020, with immediate effect, to support further the ability of banks to supply the credit needed to bridge a potentially challenging period.

5

Key Performance Indicators

The Directors consider the following to be Key Performance Indicators (KPIs) for the Consolidated Income Statement and are quoted in respect of the Group's continuing operations. The methodology applied in calculating the Group's KPIs is set out in the Glossary of Terms:


31 August

2020

31 August

2019

Underlying net interest margin

5.0%

4.5%

Net interest margin

5.0%

4.2%

Underlying cost:income ratio

67.6%

52.5%

Cost:income ratio

67.9%

69.8%

Bad debt:asset ratio

6.7%

2.6%

Capital and Liquidity Ratios

The Directors consider the following to be KPIs for capital and liquidity reporting:


31 August

 2020

29 February 2020

31 August

 2019

Common equity tier 1 ratio

21.5%

20.6%

16.2%

Total capital ratio

24.3%

23.1%

18.4%

MREL ratio

27.6%

26.1%

n/a

Net stable funding ratio

122.8%

129.1%

121.4%

Underlying loan to deposit ratio

109.6%

110.1%

123.2%

Loan to deposit ratio

109.6%

109.5%

87.6%

The Group's total capital ratio remains above regulatory requirements at 24.3% (February 2020: 23.1%) and leaves the Group well placed to support future growth.

On 1 March 2018, IFRS 9 came into force and a transitional period was introduced, allowing the Company (being the regulated entity) to phase in the IFRS 9 impact on capital over a period of 5 years. On 27 June 2020, the CRR was further amended to accelerate specific CRR2 measures and implement a new IFRS 9 transitional relief calculation. The Group's total capital ratio remains above regulatory requirements at 24.3% (February 2020: 23.1%) on a transitional basis.  On an end-point basis, the Group's total capital ratio is 21.6% (February 2020: 21.5%), which is also above regulatory requirements. Refer to note 16 for full details of the impact of these amendments on the Group.

The NSFR, a measure of the Group's liquidity position, is within appetite at 122.8% as at 31 August 2020 (February 2020: 129.1%). The Group maintains a liquid asset portfolio of high quality securities of £2.5bn (February 2020: £2.5bn).

Principal risks and uncertainties

The Board of Directors has overall responsibility for determining the Group's strategy and related Risk Appetite. The Board's Risk Appetite comprises a suite of Risk Appetite statements, underpinned by corresponding measures with agreed triggers and limits. The Risk Appetite framework defines the type and amount of risk that the Group is prepared to accept to achieve its objectives and forms a key link between the day-to-day risk management of the business, its strategic objectives, long-term plan, capital plan and stress testing. The Risk Appetite is formally reviewed by the Board on at least an annual basis.

The Board is also responsible for overall corporate governance, which includes overseeing an effective system of risk management and that the level of capital and liquidity held is adequate and consistent with the risk profile of the business.

6

Principal risks and uncertainties (continued)

To support this, a Risk Management Framework (RMF) has been embedded across the Group, creating an integrated approach to managing risk. The RMF brings together governance, Risk Appetite, the three lines of defence, the Policy Framework and risk management tools to support the business in managing risk as part of day-to-day activity, and is underpinned by governance, controls, processes, systems and policies within the first line business areas and those of the second line Risk Management Function.

The Chief Risk Officer (CRO) performs a strategic risk management role and is responsible for managing and enhancing the RMF. The CRO is independent from any commercial function, reports directly to the Chief Executive Officer and can only be removed from his position with the approval of the Board.

The principal risks and uncertainties faced by the Group remain unchanged from the Annual Report and Financial Statements as at 29 February 2020 (pages 9 to 13). See below for further details.

Credit risk

The risk that a borrower will default on a debt or obligation by failing to make contractually obligated payments, or that the Group will incur losses due to any other counterparty failing to meet their financial obligations.

Operational risk

The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Liquidity and Funding risk

Liquidity risk is the risk that the Group is not able to meet its obligations as they fall due. This includes the risk that a given security cannot be traded quickly enough in the market to prevent a loss if a credit rating falls.

Funding risk is the risk that the Group does not have sufficiently stable and diverse sources of funding.

Market risk

The risk that movements in market prices (such as interest rates, foreign exchange rates and the market value of financial instruments) lead to a reduction in either the Group's earnings or capital.

Insurance risk

The risks accepted through the provision of insurance products in return for a premium. These risks may or may not occur as expected and the amount and timing of these risks are uncertain and determined by events outside of the Group's control.

Regulatory risk

The risk of reputational damage, liability or material loss from failure to comply with the requirements of the financial services regulators or related codes of best practice applicable to the business areas within which the Group operates.

Capital risk

The risk that the Group holds regulatory capital which is of insufficient quality and quantity to enable it to absorb losses.

Covid-19

During the current financial year the Covid-19 pandemic has caused significant economic and social disruption. The Group could continue to be materially impacted by higher ECLs and lower revenues as a result of the economic impact.

Brexit

On 31 January 2020 the UK ceased to be a member of the EU and entered into an 11 month transition period with the EU while the future trading relationship is negotiated. As a result, there remains economic uncertainty in the UK and Europe in relation to Brexit. The Group will continue to monitor the wider economic environment, particularly to assess the impact on credit risk to the Group. The largest impact on the Group relates to the economic impact on the Group's ECL provision, sensitivities in respect of which are set out at note 14.

7

Principal risks and uncertainties (continued)

LIBOR rate replacement

On 27 July 2017 the Financial Conduct Authority announced that the London Interbank Offered Rate (LIBOR) would be phased out and replaced with an alternative reference rate by the end of 2021. The Group has transitioned the majority of its LIBOR exposures to Sterling Overnight Index Average (SONIA) and expects to complete its transition programme by 28 February 2021.

Going Concern

The Directors have made an assessment of going concern, taking into account both current performance and the Group's outlook, which considered the impact of the Covid-19 pandemic, and including consideration of projections incorporating the impact of the Covid-19 pandemic for the Group's capital and funding position.

As part of this assessment the Board considered:

· The impact on the Group's profits from a further expected reduction in income on Credit Cards, Loans, Travel Money and ATMs combined with further increases in ECL charges. As part of this, the Board considered revised macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 14;

· The sufficiency of the Group's capital base throughout the pandemic;

· The adequacy of the Group's liquidity as the Group supports customers through a period of financial stress;

· The operational resilience of the Group's critical functions including call centres, mobile and online channels and the Group's ability to provide continuity of service to its customers throughout a prolonged stress;

· The resilience of the Group's IT systems;

· A detailed assessment of the Group's supplier base, considering any single points of failure and focussing on suppliers experiencing financial stress. This included consideration of contingency plans should suppliers be deemed at risk;

· The regulatory and legal environment and any potential conduct risks which could arise;

· Any potential valuation concerns in respect of the Group's assets as set out in the Interim Condensed Consolidated Statement of Financial Position;

· The impact of the pandemic on TU, the Group's joint venture insurance company; and

· The structural protections of the Group's securitisation vehicles.

The Board also considered the results of stress testing which is performed as an integral part of both the Internal Capital Adequacy Assessment Process and Individual Liquidity Adequacy Assessment Process, with the Group having sufficient capital and liquidity to fund the balance sheet in each scenario.

As a result of this assessment, the Directors consider that it is appropriate to adopt the going concern basis of accounting in preparing the Interim Condensed Consolidated Financial Statements.

8

TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2020



6 months ended 31 August

6 months ended 31 August



2020

2019


Note

£m

£m

Continuing operations




Interest and similar income

4

300.3

346.0

Interest expense and similar charges

4

(62.4)

(105.9)





Net interest income


237.9

240.1





Fees and commissions income

5

102.3

185.2

Fees and commissions expense

5

(14.6)

(15.4)





Net fees and commissions income


87.7

169.8





Net loss on financial instruments at fair value through profit or loss (FVPL)


(1.3)

(3.2)

Net gain on investment securities


0.1





Net other income


(1.3)

(3.1)





Total income


324.3





Administrative expenses


(190.4)

(201.2)

Depreciation and amortisation


(29.8)

(37.6)

Provision for customer redress

12

(45.0)





Operating expenses


(220.2)

(283.8)





Expected credit loss on financial assets

6

(256.6)

(113.4)





Operating (loss)/profit


(152.5)

9.6





Share of profit of joint venture


9.0

7.2





(Loss)/profit before tax


(143.5)

16.8





Analysed as:




Underlying (loss)/profit before tax

3

(142.2)

98.5

Non-underlying items

3

(1.3)

(81.7)



(143.5)

16.8





Income tax credit/(charge)

7

46.6

(15.5)





(Loss)/profit for the period from continuing operations


(96.9)

1.3





Discontinued operations




Profit for the period after tax from discontinued operations

9

0.3

17.4





(Loss)/profit for the period attributable to owners of the parent


(96.6)

 

9

TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2020



6 months ended 31 August

6 months ended 31 August



2020

2019



£m

£m





(Loss)/profit for the period


(96.6)

18.7





Items that may be reclassified subsequently to the income statement








Debt securities at fair value through other comprehensive income (FVOCI)1




Fair value movements


(3.1)

0.4

Net gains transferred to the income statement on disposal


(0.1)

Taxation


0.8

(0.1)



(2.3)





Cash flow hedges




Fair value movements


(0.5)

1.1

Taxation


0.1

(0.1)



(0.4)





Currency basis reserve




Foreign currency movements


0.1

(0.2)



0.1





Share of other comprehensive income of joint venture


0.8

5.6



0.8





Items that will not be reclassified subsequently to the income statement








Equity securities at FVOCI




Fair value movements


0.3

0.8

Taxation


(0.1)

(0.2)



0.2





Other comprehensive (expense)/income for the period, net of tax

(1.6)





Total comprehensive (expense)/income for the period

(98.2)




Total comprehensive (expense)/income attributable to owners of the parent arising from:



Continuing operations

(98.5)

8.5

Discontinued operations

0.3

17.4

1 On 1 March 2020 the Group's portfolio of debt investment securities held at FVOCI was reclassified to amortised cost following a change in business model.

10

TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

AS AT 31 AUGUST 2020



31 August

29 February

31 August



2020

2020

2019




(audited)



Note

£m

£m

£m

Assets





Cash and balances with central banks


1,604.5

1,393.9

723.2

Loans and advances to banks


-

459.1

Loans and advances to customers

10

7,285.2

8,451.3

8,688.7

Derivative financial instruments


6.8

5.7

40.0

Investment securities


875.9

1,081.6

1,060.0

Prepayments and accrued income


46.1

55.6

64.2

Current income tax asset


25.2

Other assets


430.2

243.3

274.7

Investment in joint venture


95.9

86.0

83.5

Deferred income tax asset


74.1

69.4

60.6

Intangible assets


130.1

138.2

205.0

Property, plant and equipment


75.7

73.4

72.6

Assets of the disposal group

9

45.1

3,690.1

Total assets


10,649.7

11,643.5

15,421.7






Liabilities





Deposits from banks


500.0

500.0

1,998.1

Deposits from customers


6,648.4

7,718.0

9,914.5

Debt securities in issue

11

762.1

774.1

861.1

Derivative financial instruments


72.3

50.7

63.0

Provisions for liabilities and charges

12

50.2

58.7

81.6

Accruals and deferred income


156.3

100.1

88.8

Current income tax liability


26.3

22.6

Other liabilities


335.6

199.0

206.6

Subordinated liabilities and notes

13

489.4

485.6

486.2

Liabilities of the disposal group

9

-

4.2

Total liabilities


9,014.3

9,912.5

13,726.7






Equity and reserves attributable to owners of parent





Share capital


122.0

122.0

122.0

Share premium account


1,097.9

1,097.9

1,097.9

Retained earnings


377.5

474.1

439.3

Other reserves


38.0

37.0

35.8

Total equity


1,635.4

1,731.0

1,695.0

Total liabilities and equity


10,649.7

11,643.5

15,421.7

11

TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2020


Share

capital

Share premium

Retained earnings

FV/AFS reserve

Cash flow hedge reserve

Currency basis reserve

Share based payment reserve

Total

equity


£m

£m

£m

£m

£m

£m

£m

£m










Balance at 1 March 2020

122.0

1,097.9

474.1

12.3

(0.3)

(0.1)

25.1

1,731.0










Comprehensive income









Loss for the period

(96.6)

(96.6)

Net fair value movement on investment securities held at FVOCI

(2.1)

(2.1)

Net movement on cash flow hedges

(0.4)

0.1

(0.3)

Share of other comprehensive income of joint venture

0.8

0.8

Total comprehensive income

(96.6)

(1.3)

(0.4)

0.1

(98.2)










Transactions with owners









Dividends to ordinary shareholders

Share based payments

2.6

2.6










Total transactions with owners

2.6

2.6










Balance at 31 August 2020

122.0

1,097.9

377.5

11.0

(0.7)

27.7

1,635.4

 

Balance at 1 March 2019

122.0

1,097.9

420.6

4.6

(1.0)

(0.3)

24.1

1,667.9










Comprehensive income









Profit for the period

18.7

18.7

Net fair value movement on equity investment securities held at FVOCI

0.8

0.8

Net movement on cash flow hedges

1.0

(0.2)

0.8

Share of other comprehensive income of joint venture

5.6

5.6

Total comprehensive income

18.7

6.4

1.0

(0.2)

25.9










Transactions with owners









Share based payments

1.2

1.2










Total transactions with owners

1.2

1.2










Balance at 31 August 2019

122.0

1,097.9

439.3

11.0

(0.5)

25.3

1,695.0

12

TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2020



6 months ended 31 August 2020

6 months ended 31 August 2019


Note

£m

£m

Operating Activities








(Loss)/profit before tax from continuing operations


(143.5)

16.8

Profit before tax from discontinued operations

9

0.4

23.9

Total (loss)/profit before tax


(143.1)

40.7

Adjusted for:




Non-cash items included in operating (loss)/profit before taxation and other adjustments


303.9

179.0

Changes in operating assets and liabilities


(84.0)

(447.1)

Income taxes paid


(8.8)

(31.9)





Cash flows generated from/(used in) operating activities


68.0

(259.3)





Investing Activities




Purchase of intangible assets and property, plant and equipment


(35.1)

(19.0)

Purchase of debt investment securities


(81.0)

Sale of debt investment securities


201.8

95.4

Redemption of subordinated debt issued by joint venture


7.8

Repayment of joint venture share capital


15.6





Cash flows generated from investing activities


166.7

18.8





Financing Activities




Proceeds from issue of subordinated liabilities


250.0

Principal repayments on debt securities in issue


(350.0)

Interest paid on debt securities in issue


(8.2)

(10.5)

Interest (paid)/received on assets held to hedge debt securities in issue


(1.6)

4.1

Interest paid on subordinated liabilities and notes


(6.5)

(2.5)

Principal repayments on lease liabilities


(0.9)

(0.9)

Interest paid on lease liabilities


(1.8)

(1.0)





Cash flows used in financing activities


(19.0)

(110.8)





Net increase/(decrease) in cash and cash equivalents


215.7

(351.3)





Cash and cash equivalents1 at beginning of period


1,362.3

1,043.4





Cash and cash equivalents1 at end of period


1,578.0

692.1

1 Cash and cash equivalents comprise cash and balances with central banks, excluding mandatory reserve deposits of £26.5m (August 2019: £31.1m).

13

TESCO PERSONAL FINANCE PLC

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED )

The Interim Condensed Consolidated Financial Statements for the six months ended 31 August 2020 were approved by the Board of Directors on 5 October 2020.

1 .  Basis of Preparation

The Interim Condensed Consolidated Financial Statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (FCA) and with International Accounting Standard (IAS) 34 'Interim Financial Reporting' as endorsed by the European Union (EU).

Unless otherwise stated, the accounting policies applied, and the judgements, estimates and assumptions made in applying those policies, are consistent with those described in the Consolidated Financial Statements of the Group for the year ended 29 February 2020. The Interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Group for the year ended 29 February 2020, which have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the International Financial Reporting Interpretations Committee of the International Accounting Standards Board (IASB) as endorsed by the EU.

These Interim Condensed Consolidated Financial Statements have been reviewed, not audited, and do not constitute Statutory Financial Statements as defined in section 434 of the Companies Act 2006. The Consolidated Financial Statements for the year ended 29 February 2020 were approved by the Board of Directors on 7 April 2020 and have been filed with the Registrar of Companies. The report of the auditors on those Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

Going concern

The Directors have made an assessment of going concern, taking into account both current performance and the Group's outlook, which considered the impact of the Covid-19 pandemic, and including consideration of projections incorporating the impact of the Covid-19 pandemic for the Group's capital and funding position. As part of this assessment the Board considered:

· The impact on the Group's profits from a further expected reduction in income on Credit Cards, Loans, Travel Money and ATMs combined with further increases in expected credit loss (ECL) charges. As part of this, the Board considered revised macro-economic scenarios which were received from the Group's third-party supplier. These are discussed in note 14;

· The sufficiency of the Group's capital base throughout the pandemic;

· The adequacy of the Group's liquidity as the Group supports customers through a period of financial stress;

· The operational resilience of the Group's critical functions including call centres, mobile and online channels and the Group's ability to provide continuity of service to its customers throughout a prolonged stress;

· The resilience of the Group's IT systems;

· A detailed assessment of the Group's supplier base, considering any single points of failure and focussing on suppliers experiencing financial stress. This included consideration of contingency plans should suppliers be deemed at risk;

· The regulatory and legal environment and any potential conduct risks which could arise;

· Any potential valuation concerns in respect of the Group's assets as set out in the Interim Condensed Consolidated Statement of Financial Position;

· The impact of the pandemic on Tesco Underwriting Limited (TU), the Group's joint venture insurance company; and

· The structural protections of the Group's securitisation vehicles.

14

Going concern (continued)

The Board also considered the results of stress testing which is performed as an integral part of both the Individual Capital Adequacy Assessment Process (ICAAP) and Individual Liquidity Adequacy Assessment Process, with the Group having sufficient capital and liquidity to fund the balance sheet in each scenario.

As a result of this assessment, the Directors consider that it is appropriate to adopt the going concern basis of accounting in preparing the Interim Condensed Consolidated Financial Statements.

Adoption of new and amended IFRS

Details of new accounting standards and amendments to standards which will impact the Group in future reporting periods are included in the Consolidated Financial Statements of the Group for the year ended 29 February 2020.

During the period to 31 August 2020, the Group did not adopt any new accounting standards or amendments to standards which had any impact on the Group.

Change in classification

On 1 March 2020, the Group's portfolio of debt investment securities measured at fair value through other comprehensive income (FVOCI) was reclassified to amortised cost, measured using the effective interest rate (EIR) method less allowance for ECLs. This was following a change in business model to hold these debt investments for the collection of contractual cash flows only. In the prior period, gains and losses arising from changes in fair value were recognised directly in other comprehensive income, except for impairment gains or losses, interest income and foreign exchange gains and losses, which were recognised in the Consolidated Income Statement.

15

2 .  Segmental Reporting

Following the measurement approach of IFRS 8 'Operating segments', the Group's operating segments are reported in accordance with the internal reporting provided to the Board of Directors, which is responsible for allocating resources to the operating segments and assessing their performance.

The Group's two operating segments are as follows:

· Banking - incorporating Credit Cards, Personal Loans, Savings, Personal Current Accounts, ATMs and Travel Money; and

· Insurance - incorporating Motor, Home and Pet Insurance.

There are no transactions between the operating segments.

Segmental assets and liabilities comprise operating assets and liabilities, being the majority of the Interim Condensed Consolidated Statement of Financial Position, but exclude unallocated reconciling items such as taxation.

Segmental results of continuing operations and a reconciliation of segmental results of continuing operations to the total results of continuing operations are presented below.

 

Banking

Insurance

Central costs

Total management reporting

Total consolidated

Continuing operations

£m

£m

£m

£m

£m

6 months ended 31 August 2020






Total income

285.0

39.3

324.3

324.3

Profit/(loss) before tax from continuing operations1

(24.1)

29.6

(149.0)

(143.5)

(143.5)







6 months ended 31 August 2019






Total income

347.3

59.5

406.8

406.8

Profit/(loss) before tax from continuing operations1

121.7

53.3

(158.2)

16.8

16.8

1 The Banking and Insurance segments include only directly attributable administrative costs such as marketing and operational costs. Central overhead costs, which reflect the overhead of operating both the Insurance and Banking businesses, are not allocated against an operating segment for internal reporting purposes.

16

2.  Segmental Reporting (continued)


Banking

Insurance

Total management reporting

Consolidation and other adjustments

Total consolidated

31 August 2020

£m

£m

£m


£m

Total assets1

10,390.0

160.4

10,550.4

99.3

10,649.7

Total liabilities

8,995.3

19.0

9,014.3

9,014.3







29 February 2020






Total assets1,2

11,410.5

163.6

11,574.1

69.4

11,643.5

Total liabilities

9,866.0

20.2

9,886.2

26.3

9,912.5







31 August 2019






Total assets1,2

15,222.7

138.4

15,361.1

60.6

15,421.7

Total liabilities

13,682.3

21.8

13,704.1

22.6

13,726.7

1 The investment of £95.9m (February 2020: £86.0m, August 2019: £83.5m) in TU, a joint venture company accounted for using the equity method, is shown within the total assets of the Insurance segment.

2 Assets and liabilities of the disposal group in respect of the Group's Mortgage business are included within the Banking segment.

17

3 .  Underlying (Loss)/Profit

The Group's financial performance is presented in the Interim Condensed Consolidated Income Statement on page 9 . A summary of the Group's financial performance in respect of its continuing operations on an underlying basis, excluding items which are not reflective of ongoing trading performance, is presented below.


Statutory basis

Restructuring activity1

Customer redress2

Ogden rate changes3

Financial instruments4

Underlying basis

 


£m

£m

£m

£m

£m

£m

 

6 months ended 31 August 2020







 

Net interest income

237.9

237.9

 

Other income

86.4

1.3

87.7

 

Total income

324.3

1.3

325.6

 

Total operating expenses

(220.2)

(220.2)

 

Expected credit losses

(256.6)

(256.6)

 

Operating loss

(152.5)

1.3

(151.2)

 

Share of profit of joint venture

9.0

9.0

 

Loss before tax

(143.5)

1.3

(142.2)

 


Statutory basis

Restructuring activity1

Customer redress2

Ogden rate changes3

Financial instruments4

Underlying basis

 


£m

£m

£m

£m

£m

£m

 

6 months ended 31 August 2019







 

Net interest income

240.1

29.0

269.1

 

Other income

166.7

3.2

169.9

 

Total income

406.8

29.0

3.2

439.0

 

Total operating expenses

(283.8)

8.2

45.0

(230.6)

 

Expected credit losses

(113.4)

(113.4)

 

Operating profit

9.6

37.2

45.0

3.2

95.0

 

Share of profit of joint venture

7.2

(3.7)

3.5

 

Profit before tax

16.8

37.2

45.0

(3.7)

3.2

98.5

 

1 Comprising:

· in the prior period, interest expense of £29.0m in respect of the discontinued operations' cost of funding, presented within net interest income on page 9. As this cost could not be directly attributed to liabilities of the Group entered into specifically to fund the Group's Mortgage business, as required by IFRS 5, it was not possible to present this cost within statutory profit for the period after tax from discontinued operations for the prior period. These costs were in respect of business restructuring and are considered part of the Mortgage business' results on a managed basis. There was no such charge in the current period; and

· in the prior period, a restructuring charge of £8.2m in respect of costs related to the Group's strategic review, presented within administrative expenses on page 9. These charges were in respect of business restructuring and are not considered part of the Group's underlying results. There was no such charge in the current period.

2 Comprising:

· in the prior period, a payment protection insurance (PPI) provision charge of £45.0m presented within operating expenses on page 9. These costs relate to historic sales of PPI and are not reflective of the Group's underlying trading performance. There was no such charge in the current period.

3 Comprising:

· in the prior period, a credit of £3.7m representing the Group's share of credits recognised by TU relating to the impact on TU's insurance reserves of a change in the Ogden tables, presented within share of profit of joint venture on page 9. The Ogden tables were last changed in March 2017, when the discount rate was changed from 2.5% to -0.75%, resulting in the Group recognising a charge of £22.8m for the year ended 28 February 2017 in respect of this rate change, which was excluded from underlying profit at that date. The credit recognised in the prior period reflects the change to the current discount rate of -0.25%. This rate change was implemented following Government consultation and is not reflective of the ongoing underlying performance of TU. There was no such credit in the current period.

4 Comprising:

· Losses on financial instruments at FVPL of £1.3m (August 2019: losses of £3.2m) presented within total income on page 9. Fair value movements on financial instruments reflect hedge ineffectiveness arising from hedge accounting and fair value movements on derivatives in economic hedges that do not meet the criteria for hedge accounting. Where these derivatives are held to maturity, fair value movements represent timing differences that will reverse over the life of the derivatives. Therefore, excluding these movements from underlying (loss)/profit more accurately represents the underlying performance of the Group. Where derivatives are terminated prior to maturity, this may give rise to fair value movements that do not reverse.

18

4 .   Net Interest Income


6 months ended

31 August 2020

6 months ended

31 August 2019


£m

£m

Continuing operations



Interest and similar income



On financial assets measured at amortised cost



Loans and advances to customers

291.9

332.5

Cash and balances with central banks

1.0

3.8

Investment securities1

7.4

0.5


300.3

336.8




On financial assets measured at fair value



Investment securities1

9.2


9.2




Total interest and similar income

300.3

346.0




Interest expense and similar charges



On financial liabilities measured at amortised cost



Deposits from customers

(40.0)

(75.1)

Deposits from banks

(0.6)

(8.0)

Debt securities in issue

(8.2)

(11.6)

Lease liabilities

(1.2)

(1.3)

Subordinated liabilities and notes

(6.3)

(2.6)


(56.3)

(98.6)




On financial liabilities measured at fair value



Derivative financial liabilities - FVPL

(6.1)

(7.3)


(6.1)

(7.3)




Total interest and similar charges

(62.4)

(105.9)




Net interest income

237.9

240.1

1 On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.

19

5 .  Net Fees and Commissions Income


6 months ended 31 August 2020

6 months ended 31 August 2019


£m

£m

Continuing operations



Fees and commissions income



Banking revenue from contracts with customers

74.3

122.0

Insurance revenue from contracts with customers

27.4

46.5

Other revenue from contracts with customers

0.6

16.7

Total fees and commissions income

102.3

185.2




Fees and commissions expense



Banking expense

(14.6)

(15.4)

Total fees and commissions expense

(14.6)

(15.4)




Net fees and commissions income

87.7

169.8

With the exception of other revenue from contracts with customers, all of the above fees and commissions relate to financial assets and financial liabilities measured at amortised cost. These figures exclude amounts incorporated in determining the EIR on such financial assets and financial liabilities.

6 .  Expected Credit Loss on Financial Assets


6 months ended

31 August 2020

6 months ended

31 August 2019


£m

£m

Continuing operations



Expected credit loss on loans and advances to customers1

256.6

113.8

Expected credit loss on investment securities at FVOCI2

(0.4)

Total expected credit loss on financial assets

256.6

113.4

Refer to note 14 for further detail on factors impacting expected credit loss charges.

1 Included within the expected credit loss on loans and advances to customers is an amount of £nil (August 2019: £0.8m) received through the sale of debt to third parties.

2 On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.

7 .  Income Tax

The tax charge in the Interim Condensed Consolidated Income Statement is based on Management's best estimate of the full year effective tax rate based on expected full year losses to 28 February 2021.

The standard rate of corporation tax in the United Kingdom (UK) was changed from 20% to 19% with effect from 1 April 2017. The March 2016 Budget Statement included an announcement that the standard rate of corporation tax in the UK would be further reduced to 17% from 1 April 2020. Subsequently, at the March 2020 Budget Statement, the Chancellor announced that this reduction to 17% would no longer take place, with the standard rate of corporation tax instead being maintained at 19%. The cancellation of the rate reduction resulted in the Group's deferred tax asset increasing by £5.5m during the period.

The Group's blended corporation tax rate is 19.0% (August 2019: 19.0%). In addition, a banking surcharge of 8.0% (August 2019: 8.0%) is applied to the Group's results.

Income tax on the Group's loss from continuing operations for the period is a credit of £46.6m (August 2019: charge of £15.5m). This is due to losses driven predominantly by increased ECL charges due to Covid-19.

Income tax on the Group's discontinued operations is a charge of £0.1m (August 2019: charge of £6.5m).

20

8 .  Capital Expenditure and Commitments

In the six months ended 31 August 2020 there were additions to property, plant and equipment and intangible assets of £25.0m (August 2019: £18.7m). Commitments for capital expenditure contracted for but not provided at 31 August 2020 were £0.8m (February 2020: £1.2m) on property, plant and equipment and £1.1m (February 2020: £5.7m) on intangible assets. The Group's Management are confident that future net revenues and funding will be sufficient to cover these commitments.

9 .  Assets/Liabilities of the Disposal Group and Discontinued Operations

Assets/Liabilities of the disposal group


31 August 2020

29 February 2020

31 August 2019


£m

£m

£m

Assets and liabilities of the disposal group




Secured Mortgage lending - gross

44.7

3,660.1

Fair value hedge adjustment

32.2

Less: Allowance for impairment

(3.2)

Secured Mortgage lending - net

44.7

3,689.1





Other assets

0.4

1.0





Assets of the disposal group

45.1

3,690.1





Other liabilities

4.2





Liabilities of the disposal group

4.2

During the prior period, secured Mortgage lending balances were reclassified from loans and advances to customers set out at note 10 to assets of the disposal group following the Group's decision to sell its Mortgage business. Cash in transit balances in relation to Mortgages were also reclassified from other assets and other liabilities to assets and liabilities of the disposal group respectively as these balances related to amounts to be applied to Mortgage accounts and therefore formed part of the Mortgage business being sold. The remaining secured Mortgage lending balances included in the above table at 29 February 2020 related to a small element of the Mortgage business, representing new advances to existing Mortgage customers, which continued to be recognised by the Group until the completion of the migration of all Mortgage accounts to the purchaser, which took place on 30 March 2020.

At 31 August 2020, the Group had contractual lending commitments of £nil (29 February 2020: £17.3m) in respect of the assets of the disposal group.

21

9.  Assets/Liabilities of the Disposal Group and Discontinued Operations (continued)

Discontinued operations - income statement

The table below shows the results of discontinued operations in relation to the Group's Mortgage business which are included in the Interim Condensed Consolidated Income Statement and Interim Condensed Consolidated Statement of Cash Flows for the period to 31 August 2020.


Statutory basis

Funding

costs1

Managed basis


£m

£m

£m

6 months ended 31 August 2020




Other income

(0.6)

(0.6)

Total income

(0.6)

(0.6)





Total operating expenses

0.4

0.4

Loss before tax

(0.2)

(0.2)





Income tax credit

0.1

0.1





Loss after tax from discontinued operations

(0.1)

(0.1)





Gain on sale of discontinued operations

0.4

0.4





Profit after tax for the period attributable to owners of the parent arising from discontinued operations

0.3

0.3






Statutory

basis

Funding costs1

Managed basis


£m

£m

£m

6 months ended 31 August 2019




Net interest income

41.3

(29.0)

12.3

Net fees and commissions income

1.0

1.0

Other income

(6.6)

(6.6)

Total income

35.7

(29.0)

6.7





Total operating expenses

(11.8)

(11.8)

Impairment loss on financial assets

Profit/(loss) before tax

23.9

(29.0)

(5.1)





Income tax (charge)/credit

(6.5)

7.8

1.3





Profit after tax for the period attributable to owners of the parent arising from discontinued operations

17.4

(21.2)

(3.8)

1 Comprising:

· in the prior period, interest expense of £29.0m in respect of the discontinued operations' cost of funding, presented within net interest income on page 9. As this cost could not be directly attributed to liabilities of the Group entered into specifically to fund the Group's Mortgage business, as required by IFRS 5, it was not possible to present this cost within statutory profit for the period after tax from discontinued operations for the prior period. These costs were in respect of business restructuring and are considered part of the Mortgage business' results on a managed basis. There was no such charge in the current period.

 

 

22

9.  Assets/Liabilities of the Disposal Group and Discontinued Operations (continued)

Discontinued operations - details of the sale of the Mortgage business


6 months ended 31 August 2020

6 months ended 31 August 2019


£m

£m

Total cash consideration received

50.8

Carrying amount of net assets sold

(50.2)

Gain on sale before income tax

0.6

Income tax charge on gain

(0.2)

Gain on sale after income tax

0.4




Comprising:



Gain on disposal

0.4

Gain on sale after income tax

0.4

Discontinued operations - statement of cash flows


6 months ended 31 August 2020

6 months ended 31 August 2019

Statement of Cash Flows

£m

£m




Net cash flows from operating activities

44.8

111.0

Net cash flows from investing activities

Net cash flows from financing activities




Net cash flows from discontinued operations

44.8

111.0

10 .  Loans and Advances to Customers


31 August

2020

29 February 2020

31 August

2019


£m

£m

£m

Unsecured lending

7,918.1

8,930.0

9,190.8

Total secured and unsecured lending

7,918.1

8,930.0

9,190.8





Fair value hedge adjustment

16.9

9.7

9.3

Gross loans and advances to customers

7,935.0

8,939.7

9,200.1





Less: ECL allowance (Refer to note 14)

(649.8)

(488.4)

(511.4)





Net loans and advances to customers

7,285.2

8,451.3

8,688.7

Contractual lending commitments and ECL provision

At 31 August 2020, the Group had contractual lending commitments of £12,324.9m (February 2020: £11,872.0m). An additional ECL provision of £15.7m was also recognised at 31 August 2020 (February 2020: £7.7m). This represents the excess of total ECLs for both drawn and undrawn balances over the gross carrying balances as above. Refer to notes 12 and 14 for further details.

Fair value hedge adjustments

Fair value hedge adjustments amounting to £16.9m (February 2020: £9.7m) are in respect of fixed rate Loans. These adjustments are largely offset by derivatives, which are used to manage interest rate risk and are designated as fair value hedges within loans and advances to customers.

23

11 .   Debt Securities in Issue


Interest rate

Par value

£m

Term

(years)

Maturity

date

31 August

2020

29 February

2020

31 August

2019






£m

£m

£m

RPI bond1

1.0%

73.2

8

2019

73.2

Fixed rate retail bond2

5.0%

200.0

8.5

2020

200.8

201.8

202.9

Floating rate AAA bond (A1)3

1M LIBOR + 0.53%

300.0

5

2022

300.0

299.2

299.0

Floating rate AAA bond (A1)4

1M USD LIBOR + 0.84%

272.2

7

2020

261.3

273.1

286.0






762.1

774.1

861.1

All Floating Rate Bonds were issued by Delamare Cards MTN Issuer plc and are listed on the Irish Stock Exchange. All retail bonds are listed on the London Stock Exchange.

1 This bond was issued on 16 December 2011 and redeemed on its scheduled redemption date in December 2019.

2 This bond was issued on 21 May 2012. The scheduled redemption date of this bond is November 2020.

3 This Bond was issued on 7 November 2017. The scheduled redemption date of this Bond is October 2020.

4 This bond was issued on 27 November 2018. The scheduled redemption date of this bond is November 2020.

12 .  Provisions for Liabilities and Charges


Customer redress provision

Other

 provisions

Total


£m

£m

£m

£m

£m

6 months to 31 August 2020






At beginning of period

41.6

1.2

7.7

8.2

58.7

Utilised during the period

(14.1)

(0.1)

(2.3)

(16.5)

Released during the period

Transfer from ECL

8.0

8.0

At end of period

27.5

1.1

15.7

5.9

50.2

Customer redress provision - Payment protection insurance

Of the total customer redress provision balance at 31 August 2020, £27.2m (February 2020: £41.1m) has been provided for customer redress in respect of potential customer claims arising from historic sales of PPI.

In March 2017, the FCA issued a Policy Statement (PS17/3, 'Payment protection insurance complaints: feedback on CP16/20 and final rules and guidance') which confirmed a deadline for PPI claims of August 2019, supported by an FCA led communications campaign.

The policy statement also set out rules and guidance on the handling of PPI claims in light of the Supreme Court's decision in Plevin v Paragon Personal Finance Limited (Plevin), confirming that both up-front commission arrangements and profit share arrangements should also be considered in the calculation of total commission for Plevin claims.

The general claims deadline passed on 29 August 2019, albeit legal claims continue to be received. In response to the high level of claims received by the Group during the period in advance of the PPI complaint deadline, the Group increased its PPI provision by £45.0m during the period ended 31 August 2019 to reflect an updated assessment of the claim rate and average redress.

Although a significant degree of uncertainty remains with regard to the ultimate cost of settling PPI claims, the provision balance represents Management's best estimate at the reporting date of that cost and is based on historical uphold rates, average redress and the associated administrative expenses. The PPI provision and the impact of regulatory changes will continue to be monitored as Management finalise their assessment of the significant level of claims received in advance of the claims deadline, ongoing legal claims and levels of redress thereon.

24

12.  Provisions for Liabilities and Charges (continued)

Customer redress provision - Payment protection insurance (continued)

The table below details, for each key assumption, actual data to 31 August 2020 and a sensitivity assessment demonstrating the impact on the provision of a variation in the key assumptions. The key sensitivity in relation to PPI claims received is the conversion rate into an upheld complaint.




Sensitivity

Assumption

Cumulative

actual

Outstanding claims

Change in

assumption

Consequential

change in provision





£m

Valid general PPI claims settled

167,502

1,894

+/- 100 successful claims

+/- 0.2

Average redress per valid general PPI claim

£1,771

£1,821

+/- £100

+/- 0.2

Valid legal PPI claims settled

45

627

+/- 100 successful claims

+/- 0.3

Average redress per valid legal PPI claim

£2,842

£2,842

+/- £100

+/- 0.3

Customer redress provision - Consumer credit act (CCA)

The Group holds a provision of £0.3m (February 2020: £0.5m) in respect of customer redress relating to instances where certain requirements of the CCA for post-contract documentation were not fully complied with.

In arriving at the provision required, the Group has considered the legal and regulatory position with respect to these matters and has sought legal advice which it took into account when making its judgement. The provision represents Management's best estimate at the reporting date of the cost of concluding the redress programme for Loan and Credit Card customers, and in making the estimate Management have exercised judgement as to both the timescale for completing the redress campaign and the final scope of any amounts payable. Management expect to utilise the provision over the remainder of the year ending 28 February 2021.

Restructuring provision

The restructuring provision is in respect of costs related to the Group's strategic review. Management expect to utilise the provision over the remainder of the year ending 28 February 2021.

Expected Credit Loss provision

The ECL provision represents the amount of ECL allowance recognised under IFRS 9 which exceeds the gross carrying amount of the financial asset as set out at note 14.

Other provisions

Other provisions predominantly reflect:

· a dilapidations provision related to the anticipated costs of restoring leased assets to their original condition. Management expect that the provision will be utilised at the end of the lease terms, the longest of which is due to end in 2029;

· a warranty provision in respect of debt sales. This represents post-determination date customer receipts payable to debt purchasers and provision for any accounts which may need to be bought back under the terms of the debt sale agreements; and

· a provision in respect of the potential cost of refunding fees to customers.

25

13 .  Subordinated Liabilities and Notes


31 August 2020

29 February 2020

31 August 2019


£m

£m

£m

Amortised cost:




Fixed rate subordinated loan

254.4

250.6

251.2

Floating rate subordinated loans

190.0

190.0

190.0

Undated floating rate notes

45.0

45.0

45.0

Total subordinated liabilities and notes

489.4

485.6

486.2

Subordinated liabilities and notes comprise loan capital issued to Tesco Personal Finance Group PLC (TPFG). This includes £250.0m notional (February 2020: £250.0m notional) of subordinated loans maturing in 2025, £190.0m (February 2020: £190.0m) of subordinated loans maturing in 2030 and £45.0m (February 2020: £45.0m) of undated notes with no fixed maturity date.

Interest payable on the fixed rate intercompany subordinated loan is 3.5%. Interest payable on the floating rate subordinated loans and notes is based on three month SONIA plus a margin of 67 to 227 basis points (February 2020: three month SONIA plus a margin of 67 to 227 basis points).

26

14 .  Credit risk management

Full details of the Group's risk management are included in the Group's Consolidated Financial Statements for the year ended 29 February 2020. Updates on key areas of credit risk management and ECL measurement are included below.

· Credit risk: ECL measurement

Incorporation of forward-looking information

The ECL calculation and the measurement of significant deterioration in credit risk both incorporate forward-looking information using a range of macro-economic scenarios. The key economic variables are based on historical patterns observed over a range of economic cycles.

The Group has engaged a third-party supplier to provide relevant economic data for this purpose which, prior to incorporation into the ECL calculation, is subject to internal review and challenge with reference to other publicly available market data and benchmarks.

At 31 August 2019, a three-scenario model was adopted. The Base case represented an estimate at that date of the most-likely outcome whilst the other scenarios represented more optimistic (Upside) and more pessimistic (Downside) outcomes. The Downside scenario represented, at that date, the Group's view of the economy if the UK exited the EU without both a withdrawal agreement and framework for a future relationship with the EU. The scenarios were assigned weightings of 40%, 25% and 35% respectively.

At 29 February 2020, the Group used five economic scenarios. These included a Base scenario, an Upside scenario and three Downside scenarios. Downside 1 was an unfavourable EU trade deal, Downside 2 was a more severe recession and in addition, to reflect the increased risk at that date of an adverse economic impact from the Covid-19 pandemic, a fifth scenario which used Downside 2 as a proxy was introduced. The scenarios were assigned weightings of 40%, 20%, 30%, 5% and 5% respectively.

At 31 August 2020, the Group commissioned four new scenarios from its third-party provider, all of which were based on an economic outlook that sought to take account of the potential ramifications of the Covid-19 outbreak. These scenarios include a Base scenario, an Upside scenario and two different Downside scenarios.  The Base scenario anticipates a delayed economic recovery, with consumer confidence remaining weak in the near term and unemployment peaking in Q4 2020. The Upside scenario involves a sharper economic recovery while Downside 1 assumes a longer delay until the economy recovers. Downside 2 is a prolonged and sustained recession with a slow economic recovery thereafter. In selecting the Downside scenarios, the Group explored the extremities of potential economic impacts and, as a result, these Downside scenarios have been given a lesser weighting due to the context of the Base and Upside scenarios also taking into account the deep negative impact of the pandemic on the UK economy.  The Base, Upside, Downside 1 and Downside 2 scenarios have been assigned weightings of 50%, 34%, 15% and 1% respectively.

The tables below show the key macro-economic variables in each scenario at each reporting date, across a five calendar year period. The 2020 variables represent a full calendar year forecast containing six months of actual figures. Following the sale of the majority of the Group's Mortgage business in September 2019, house price index is no longer considered a key variable for the Group and has therefore been excluded from the current year table and the comparative as at 29 February 2020.

27

14.  Credit risk management (continued)

The economic scenarios used include the following ranges of key indicators:

As at 31 August 2020








Scenario

Weighting

Sensitivity (100% weighted)

Economic measure

2020

2021

2022

2023

2024



£m


%

%

%

%

%

Base

50%

24.4

Bank of England base rate1

0.3

0.1

0.1

0.1

0.1




Gross domestic product2

(9.6)

9.2

2.6

1.6

1.6




Unemployment rate1

6.8

8.4

6.4

5.2

4.5




Unemployment rate peak in year

9.4

9.2

7.0

5.5

4.7










Upside

34%

(82.9)

Bank of England base rate1

0.3

0.1

0.1

0.1

0.1




Gross domestic product2

0.4

2.5

1.8

1.8

1.8




Unemployment rate1

5.6

5.3

4.6

4.3

4.2




Unemployment rate peak in year

6.2

5.8

4.8

4.3

4.2










Downside 1

15%

99.0

Bank of England base rate1

0.3

0.1

0.1

0.1

0.1




Gross domestic product2

(11.8)

8.1

2.1

1.8

1.8




Unemployment rate1

7.5

10.8

10.3

9.1

7.9




Unemployment rate peak in year

11.0

11.0

10.6

9.7

8.3










Downside 2

1%

180.8

Bank of England base rate1

0.3

0.1

0.1

0.1

0.1




Gross domestic product2

(13.3)

7.2

2.7

2.0

1.8




Unemployment rate1

8.4

13.2

13.1

12.7

11.4




Unemployment rate peak in year

13.3

13.3

13.2

13.0

12.1










Weighted scenarios3


Bank of England base rate1

0.3

0.1

0.1

0.1

0.1




Gross domestic product2

(6.5)

6.7

2.2

1.7

1.7




Unemployment rate1

6.5

7.8

6.4

5.5

5.0




Unemployment rate peak in year

8.6

8.3

6.8

5.8

5.2

1 Simple average

2 Annual growth rates

3 Represents the impact on ECL provision if 100% weighting applied to each macro-economic scenario.

28

14.  Credit risk management (continued)

As at 29 February 2020








Scenario

Weighting

Sensitivity (100% weighted)

Economic measure

2020

2021

2022

2023

2024



£m


%

%

%

%

%

Base

40%

(27.7)

Bank of England base rate1

0.5

0.5

0.6

0.7

0.7




Gross domestic product2

1.1

1.6

1.7

1.8

1.8




Unemployment rate

4.0

3.9

3.8

3.8

3.8




Unemployment rate peak in year

4.0

3.9

3.9

3.8

3.8










Upside

20%

(41.1)

Bank of England base rate1

0.2

0.2

0.2

0.3

0.3




Gross domestic product2

1.2

2.0

2.1

2.3

2.2




Unemployment rate

3.9

3.9

3.8

3.8

3.8




Unemployment rate peak in year

4.0

3.9

3.8

3.8

3.8










Downside 1

30%

39.6

Bank of England base rate1

0.5

0.7

1.6

2.3

2.3




Gross domestic product2

1.1

1.0

0.6

1.0

1.1




Unemployment rate

4.1

4.8

5.9

5.8

5.8




Unemployment rate peak in year

4.2

5.4

6.0

5.9

5.8










Downside 2

5%

102.9

Bank of England base rate1

0.6

2.0

3.0

3.0

3.0




Gross domestic product2

1.1

(2.4)

1.3

1.7

1.7




Unemployment rate

4.2

6.0

7.0

6.8

6.4




Unemployment rate peak in year

4.5

6.7

7.0

6.9

6.6










Covid-19

5%

102.9

Bank of England base rate1

0.6

2.0

3.0

3.0

3.0




Gross domestic product2

1.1

(2.4)

1.3

1.7

1.7




Unemployment rate

4.2

6.0

7.0

6.8

6.4




Unemployment rate peak in year

4.5

6.7

7.0

6.9

6.6










Weighted scenarios3


Bank of England base rate1

0.4

0.6

1.1

1.3

1.3




Gross domestic product

1.1

1.1

1.4

1.6

1.7




Unemployment rate

4.0

4.4

4.8

4.7

4.7




Unemployment rate peak in year

4.0

4.3

4.5

4.6

4.7

1 Simple average

2 Annual growth rates

3 Represents the impact on ECL provision if 100% weighting applied to each macro-economic scenario.

29

14.  Credit risk management (continued)

As at 31 August 2019








Scenario

Weighting

Sensitivity (100% weighted)

Economic measure

2019

2020

2021

2022

2023



£m


%

%

%

%

%

Base

40%

(33.1)

Bank of England base rate1

0.5

0.5

0.5

0.6

0.6




Gross domestic product2

1.3

1.7

1.7

1.8

1.9




Unemployment rate

3.8

3.9

3.8

3.7

3.7




House price index

2.9

3.4

3.9

4.3

3.9




Unemployment rate peak in year

3.8

3.9

3.9

3.8

3.7










Upside

25%

(42.8)

Bank of England base rate1

0.4

0.2

0.1

0.2

0.3




Gross domestic product2

1.7

2.0

2.1

2.2

2.4




Unemployment rate

3.8

3.8

3.7

3.7

3.7




House price index

4.3

4.7

5.4

6.3

5.6




Unemployment rate peak in year

3.8

3.9

3.8

3.7

3.7










Downside

35%

79.4

Bank of England base rate1

1.0

2.1

2.5

2.4

2.0




Gross domestic product2

0.8

(0.2)

1.2

1.6

1.7




Unemployment rate

4.4

5.2

5.8

6.3

6.7




House price index

(2.1)

(4.1)

0.2

3.2

4.1




Unemployment rate peak in year

4.3

5.1

5.7

6.2

6.6










Weighted scenarios3


Bank of England base rate1

0.7

1.0

1.1

1.1

1.0




Gross domestic product2

1.2

1.1

1.6

1.9

2.0




Unemployment rate

4.0

4.3

4.5

4.6

4.8




House price index

1.5

1.1

3.0

4.4

4.4




Unemployment rate peak in year

3.9

4.3

4.5

4.4

4.4

1 Simple average

2 Annual growth rates

3 Represents the impact on ECL provision if 100% weighting applied to each macro-economic scenario.

30

14.  Credit risk management (continued)

Sensitivity analysis

As the calculation of ECLs is complex and involves use of judgement, sensitivity analysis has been performed to illustrate the impact on ECLs of any changes to the main components of the calculation. The impact on ECLs as a result of changes in loss given default (LGD), staging, probability of default (PD) and expected lifetime, have been assessed.

Most of the sensitivities have been calculated as single-factor sensitivities and any impact on ECL reflects the sensitivity of the estimate to each key component in isolation. However, the PD also includes a rebasing of the staging allocation and thresholds. The impact of these is therefore incorporated within the impact disclosed for these sensitivities.

The most significant assumptions affecting the ECL calculation are as follows:

· PD;

· LGD;

· Macro-economic scenarios;

· PD threshold (staging); and

· Expected lifetime of revolving credit facilities.

For further details on each of these assumptions refer to the Consolidated Financial Statements for the Group for the year ended 29 February 2020.

Set out below are changes in the ECL allowance that would arise from reasonably possible changes in these assumptions from those used in the Group's calculations at 31 August 2020:



Impact on the loss allowance



31 August 2020

29 February 2020

31 August 2019



£m

£m

£m

Closing ECL allowance


649.8

488.4

511.4






PD

Increase of 2.5%

13.1

11.1

9.6


Decrease of 2.5%

(13.2)

(10.9)

(9.4)






LGD

Increase of 2.5%

14.9

12.1

12.4


Decrease of 2.5%

(15.0)

(12.3)

(12.6)






Staging - change in threshold

Increase of 20%

(18.6)

(17.3)

(13.3)


Decrease of 20%

20.6

21.4

19.9






Expected lifetime (revolving credit facilities)

Increase of 1 year

3.8

2.1

2.5


Decrease of 1 year

(4.0)

(2.1)

(2.5)

31

14.  Credit risk management (continued)

· Credit risk: credit risk exposure

Maximum exposure to credit risk

The table below represents the Group's maximum exposure to credit risk, by IFRS 9 stages at the reporting date, in respect of financial assets held.

For financial assets, the balances are based on gross carrying amounts as reported in the Consolidated Statement of Financial Position. For loan commitments, the amounts in the table represent the amounts for which the Group is contractually committed.

As at 31 August 2020

Stage 1

Stage 2

Stage 3

Total



Not past due

<30 days past due

>30 days past due

Total




£m

£m

£m

£m

£m

£m

£m

Gross Exposure








Loans and advances to customers

6,396.8

1,176.8

25.8

14.9

1,217.5

303.8

7,918.1

Investment securities at FVOCI1

3.6

3.6

Investment securities at amortised cost1

873.3

873.3

Loan commitments - Loans and advances to customers2

12,080.5

243.2


243.2

1.2

12,324.9

Total gross exposure

19,354.2

1,420.0

25.8

14.9

1,460.7

305.0

21,119.9









Loss allowance








Loans and advances to customers2

109.1

302.3

15.4

11.3

329.0

211.7

649.8

Investment securities at FVOCI3

Investment securities at amortised cost1

1.0

1.0

Total loss allowance

110.1

302.3

15.4

11.3

329.0

211.7

650.8









Net exposure








Loans and advances to customers

6,287.7

874.5

10.4

3.6

888.5

92.1

7,268.3

Investment securities at FVOCI

3.6

3.6

Investment securities at amortised cost

872.3

872.3

Total net exposure

7,163.6

874.5

10.4

3.6

888.5

92.1

8,144.2









Coverage








Loans and advances to customers

1.7%

25.7%

59.7%

75.8%

27.0%

69.7%

8.2%

1 On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.

2 The loss allowance in respect of loan commitments is included within the total loss allowance for loans and advances to customers as above to the extent that it is below the gross carrying amount of loans and advances to customers. Where the loss allowance exceeds the gross carrying amount, any excess is included within provisions as set out at note 12.

 3 The loss allowance for investment securities at FVOCI is not recognised in the carrying amount of investment securities as the carrying amount is their fair value.

32

14.  Credit risk management (continued)

As at 29 February 2020

Stage 1

Stage 2

Stage 3

Total



Not past due

<30 days past due

>30 days past due

Total




£m

£m

£m

£m

£m

£m

£m

Gross Exposure








Loans and advances to customers

7,687.9

869.4

51.8

32.1

953.3

288.8

8,930.0

Investment securities at FVOCI

1,060.6

1,060.6

Investment securities at amortised cost

21.1

21.1

Loan commitments - Loans and advances to customers1

11,754.7

116.3

116.3

1.0

11,872.0

Total gross exposure

20,524.3

985.7

51.8

32.1

1,069.6

289.8

21,883.7









Loss allowance








Loans and advances to customers

84.1

177.5

21.5

19.6

218.6

185.7

488.4

Investment securities at FVOCI2

0.9

0.9

Investment securities at amortised cost

0.1

0.1

Total loss allowance

85.1

177.5

21.5

19.6

218.6

185.7

489.4









Net exposure








Loans and advances to customers

7,603.8

691.9

30.3

12.5

734.7

103.1

8,441.6

Investment securities at FVOCI

1,059.7

1,059.7

Investment securities at amortised cost

21.0

21.0

Total net exposure

8,684.5

691.9

30.3

12.5

734.7

103.1

9,522.3









Coverage








Loans and advances to customers

1.1%

20.4%

41.5%

61.1%

22.9%

64.3%

5.5%

1 The loss allowance in respect of loan commitments is included within the total loss allowance for loans and advances to customers and assets of the disposal group as above to the extent that it is below the gross carrying amount of loans and advances to customers or assets of the disposal group. Where the loss allowance exceeds the gross carrying amount, any excess is included within provisions as set out at note 12.

2 The loss allowance for investment securities at FVOCI is not recognised in the carrying amount of investment securities as the carrying amount is their fair value.

33

14.  Credit risk management (continued)

As at 31 August 2019

Stage 1

Stage 2

Stage 3

Total



Not past due

<30 days past due

>30 days past due

Total




£m

£m

£m

£m

£m

£m

£m

Gross Exposure








Loans and advances to customers

7,977.3

825.9

49.2

31.1

906.2

307.3

9,190.8

Investment securities at FVOCI

1,039.0

1,039.0

Investment securities at amortised cost

21.1

21.1

Assets of the disposal group

3,534.9

120.5

2.4

1.2

124.1

1.1

3,660.1

Loan commitments - loans and advances to customers1

11,713.9

102.3

2.9

0.2

105.4

1.2

11,820.5

Loan commitments - assets of the disposal group

53.9

53.9

Total gross exposure

24,340.1

1,048.7

54.5

32.5

1,135.7

309.6

25,785.4









Loss allowance








Loans and advances to customers

100.0

175.2

22.2

18.1

215.5

195.9

511.4

Investment securities at FVOCI2

(0.2)

(0.2)

Investment securities at amortised cost

0.1

0.1

Assets of the disposal group

1.5

1.6

1.6

0.1

3.2

Total loss allowance

101.4

176.8

22.2

18.1

217.1

196.0

514.5









Net exposure








Loans and advances to customers

7,877.3

650.7

27.0

13.0

690.7

111.4

8,679.4

Investment securities at FVOCI

1,039.2

1,039.2

Investment securities at amortised cost

21.0

21.0

Assets of the disposal group

3,533.4

118.9

2.4

1.2

122.5

1.0

3,656.9

Total net exposure

12,470.9

769.6

29.4

14.2

813.2

112.4

13,396.5









Coverage








Loans and advances to customers

1.3%

21.2%

45.1%

58.2%

23.8%

63.7%

5.6%

1 The loss allowance in respect of loan commitments is included within the total loss allowance for loans and advances to customers and assets of the disposal group as above to the extent that it is below the gross carrying amount of loans and advances to customers or assets of the disposal group. Where the loss allowance exceeds the gross carrying amount, any excess is included within provisions as set out at note 12.

2 The loss allowance for investment securities at FVOCI is not recognised in the carrying amount of investment securities as the carrying amount is their fair value.

34

14.  Credit risk management (continued)

· Credit risk: Loss allowance

Loss allowance reconciliation

The following table provides a reconciliation of the movements in the loss allowance in the period:

6 months to 31 August 2020

Stage 1

Stage 2

Stage 3

Total


£m

£m

£m

£m

Loans and advances to customers - loss allowance





At 1 March 2020

84.1

218.6

185.7

488.4

Transfers1,3





Transfers from stage 1 to stage 2

(18.8)

18.8

Transfers from stage 2 to stage 1

8.9

(8.9)

Transfers to stage 3

(1.1)

(33.7)

34.8

Transfers from stage 3

0.9

1.7

(2.6)

Income statement charge





Net remeasurement2 following transfer of stage3

(5.9)

35.5

42.4

72.0

New financial assets originated4

4.8

1.0

0.3

6.1

Financial assets derecognised during the period

(3.4)

(4.6)

(2.1)

(10.1)

Changes in risk parameters and other movements3,5

44.2

105.3

40.2

189.7

Other movements





Write-offs and asset disposals6

(1.3)

(87.0)

(88.3)

Transfer to provisions for liabilities and charges7

(4.6)

(3.4)

(8.0)

ECL allowance at 31 August 2020

109.1

329.0

211.7

649.8






Investment securities at FVOCI - loss allowance





At 1 March 2020

0.9

0.9

Other movements





Transfers to investment securities at amortised cost8

(0.9)

(0.9)

ECL allowance at 31 August 2020






Investment securities at amortised cost - loss allowance





At 1 March 2020

0.1

0.1

Income statement charge





Financial assets derecognised during the period

(0.1)

(0.1)

Changes in risk parameters and other movements

0.1

0.1

Other movements





Transfers from investment securities at FVOCI

0.9

0.9

ECL allowance at 31 August 2020

1.0

1.0






Reconciliation to income statement





Net expected credit loss charge

39.7

137.2

80.8

257.7

Recoveries and write-offs

(1.1)

(1.1)

Total income statement charge

39.7

137.2

79.7

256.6

1 Transfers - The opening loss allowance on financial assets in respect of continuing operations which transferred stage during the period.

2 Net remeasurement - The increase/(decrease) in the opening loss allowance as a result of a stage transfer.

3 Includes a charge in stages 1 and 2 of £194.4m due to a change in macro-economic assumptions.

4 New financial assets originated or purchased - The loss allowance on new financial assets originated or purchased during the period, representing their stage at 31 August 2020.

5 Changes in risk parameters and other movements - The change in loss allowance due to changes in macro-economic scenarios, PD, LGD and exposure at default (EAD) changes during the period.

6 Write-offs and asset disposals - The release of the loss allowance following the write off and/or disposal of a financial asset during the period.

7 Transfer from provisions for liabilities and charges - The movement in loss allowance which exceeds the gross carrying amount of the financial asset.

8 On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.

35

14.  Credit risk management (continued)

6 months to 31 August 2019

Stage 1

Stage 2

Stage 3

Total


£m

£m

£m

£m

Loans and advances to customers - loss allowance





At 1 March 2019

84.6

228.7

171.9

485.2

Transfers1,3





Transfers from stage 1 to stage 2

(9.9)

9.9

Transfers from stage 2 to stage 1

58.3

(58.3)

Transfers to stage 3

(1.6)

(37.6)

39.2

Transfers from stage 3

1.2

2.2

(3.4)

Income statement charge





Net remeasurement2 following transfer of stage 3

(34.7)

20.8

49.5

35.6

New financial assets originated4

15.9

6.4

1.1

23.4

Changes in risk parameters and other movements3,5

(12.7)

47.0

18.7

53.0

Other movements





Write-offs and asset disposals6

(1.7)

(81.0)

(82.7)

Transfer from provisions for liabilities and charges7

0.4

(0.3)

0.1

Reclassification of assets of the disposal group8

(1.5)

(1.6)

(0.1)

(3.2)

ECL allowance at 31 August 2019

100.0

215.5

195.9

511.4






Investment securities at FVOCI - loss allowance





At 1 March 2019

0.2

0.2

Income statement charge





New financial assets purchased4

Financial assets derecognised during the period

Changes in risk parameters and other movements5

(0.4)

(0.4)

ECL allowance at 31 August 2019

(0.2)

(0.2)






Investment securities at amortised cost - loss allowance





ECL allowance At 1 March 2018 and 31 August 2019

0.1

0.1






Reconciliation to income statement





Net expected credit loss (release)/charge

(31.9)

74.2

69.3

111.6

Recoveries and write-offs

1.8

1.8

Total income statement (release)/charge

(31.9)

74.2

71.1

113.4






Comprising:





- In respect of continuing operations

(30.7)

73.0

71.1

113.4

- In respect of discontinuing operations

(1.2)

1.2

Total income statement (release)/charge

(31.9)

74.2

71.1

113.4

1 Transfers - The opening loss allowance on financial assets in respect of continuing operations which transferred stage during the period.

2 Net remeasurement - The increase/(decrease) in the opening loss allowance as a result of a stage transfer.

3 Includes a release in stages 1 and 2 of £6.6m due to a change in macro-economic assumptions.

4 New financial assets originated or purchased - The loss allowance on new financial assets originated or purchased during the period, representing their stage at 31 August 2019.

5 Changes in risk parameters and other movements - The change in loss allowance due to changes in macro-economic scenarios, PD, LGD and EAD changes during the period.

6 Write-offs and asset disposals - The release of the loss allowance following the write off and/or disposal of a financial asset during the period.

7 Transfer from provisions for liabilities and charges - The movement in loss allowance which exceeds the gross carrying amount of the financial asset.

8 In the prior period, the Group classified its Mortgage business as a disposal group. Refer to note 9 for further details.

36

14.  Credit risk management (continued)

The following table provides a reconciliation of movements in the gross carrying amounts of financial instruments to help explain their significance to the changes in the loss allowance during the period as set out in the above table:


Stage 1

Stage 2

Stage 3

Total

6 months to 31 August 2020

£m

£m

£m

£m

Loans and advances to customers





Gross carrying amount





At 1 March 2020

7,687.9

953.3

288.8

8,930.0

Transfers1





Transfers from stage 1 to stage 2

(581.1)

581.1

Transfers from stage 2 to stage 1

50.7

(50.7)

Transfers to stage 3

(38.3)

(84.7)

123.0

Transfers from stage 3

2.2

4.6

(6.8)

Other movements





New financial assets originated2

582.5

2.8

0.4

585.7

Net decrease in lending3

(1,301.2)

(188.2)

(9.8)

(1,499.2)

Write-offs and asset disposals4

(0.1)

(1.2)

(97.5)

(98.8)

Changes in interest accrual and other movements

(5.9)

0.5

5.8

0.4

Gross balances at 31 August 2020

6,396.7

1,217.5

303.9

7,918.1






Investment securities at FVOCI





Gross carrying amount





At 1 March 2020

1,060.6

1,060.6

Transfer to investment securities at amortised cost5

(1,057.3)

(1,057.3)

Other movements

0.3

0.3






Gross balances at 31 August 2020

3.6

3.6






Investment securities at amortised cost





Gross carrying amount





At 1 March 2020

21.1

21.1

Transfer from investment securities at FVOCI5

1,057.3

1,057.3

Financial assets derecognised during the period

(201.8)

(201.8)

Other movements

(3.3)

(3.3)






Gross balances at 31 August 2020

873.3

873.3

1 Transfers - The opening gross carrying amount of financial assets held which transferred stage as at period end.

2 New financial assets originated or purchased - The gross carrying amount of financial assets originated or purchased during the period, representing their stage as at 31 August 2020.

3 Net decrease in lending - The changes in gross carrying amount of financial assets after taking account of additional borrowing and/or payments received from customers.

4 Write-offs and asset disposals -The write-off of the gross carrying amount when a financial asset is deemed uncollectible and/or has been disposed of.

5 On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.

37

14.  Credit risk management (continued)


Stage 1

Stage 2

Stage 3

Total

6 months to 31 August 2019

£m

£m

£m

£m

Loans and advances to customers





Gross carrying amount





At 1 March 2019

11,463.6

1,179.1

270.9

12,913.6

Transfers1





Transfers from stage 1 to stage 2

(434.0)

434.0

Transfers from stage 2 to stage 1

435.3

(435.3)

Transfers to stage 3

(48.4)

(101.2)

149.6

Transfers from stage 3

3.2

5.4

(8.6)

Other movements





New financial assets originated2

1,597.1

31.0

1.7

1,629.8

Net decrease in lending3

(1,507.2)

(81.5)

(2.7)

(1,591.4)

Write-offs and asset disposals4

(0.3)

(1.8)

(106.9)

(109.0)

Changes in interest accrual and other movements

2.9

0.6

4.4

7.9






At 31 August 2019

11,512.2

1,030.3

308.4

12,850.9






Comprising:





Loans and advances to customers

7,977.3

906.2

307.3

9,190.8

Assets of the disposal group5

3,534.9

124.1

1.1

3,660.1






Gross balances as at 31 August 2019

11,512.2

1,030.3

308.4

12,850.9






Investment securities at FVOCI





Gross carrying amount





At 1 March 2019

1,042.7

1,042.7

New financial assets purchased

81.0

81.0

Financial assets derecognised during the period

(95.3)

(95.3)

Other movements

10.6

10.6






At 31 August 2019

1,039.0

1,039.0






Investment securities at amortised cost





Gross carrying amount





At 1 March 2019

28.9

28.9

Financial assets derecognised during the period

(7.8)

(7.8)






At 31 August 2019

21.1

21.1

1 Transfers - The opening gross carrying amount of financial assets held which transferred stage as at period end.

2 New financial assets originated or purchased - The gross carrying amount of financial assets originated or purchased during the period, representing their stage as at 31 August 2019.

3 Net decrease) in lending - The changes in gross carrying amount of financial assets after taking account of additional borrowing and/or payments received from customers.

4 Write-offs and asset disposals -The write-off of the gross carrying amount when a financial asset is deemed uncollectible and/or has been disposed of.

5 In the prior period, the Group classified its Mortgage business as a disposal group. Refer to note 9 for further details.

38

14.  Credit risk management (continued)

The following table shows the outstanding balances at 31st August of all accounts where a payment holiday was granted during the period, including their IFRS 9 staging and the percentage of the overall lending portfolio these balances represent :

Gross balances at 31 August 2020

Volume

Stage 1

Stage 2

Stage 3

% Gross balance



£m

£m

£m


Total

125,344

553.9

320.0

19.7

12%

Of the payment holidays granted, 82,604 have matured, with 83% of customers returning to normal payment schedules.

39

15 .  Fair Values

Except as detailed in the following table, the Directors consider that the carrying value amounts of financial assets and financial liabilities recorded in the Interim Condensed Consolidated Statement of Financial Position are approximately equal to their fair values1.


31 August 2020

29 February 2020

31 August 2019


Carrying value

Fair value

Carrying value

Fair value

Carrying value

Fair value


£m

£m

£m

£m

£m

£m








Financial assets:







Loans and advances to customers

7,285.2

7,454.2

8,451.3

8,626.9

8,688.7

8,856.3

Investment securities - amortised cost2

872.3

880.8

21.0

27.6

21.0

26.0

Assets of the disposal group3

3,689.1

3,712.1


8,157.5

8,335.0

8,472.3

8,654.5

12,398.8

12,594.4








Financial liabilities:







Deposits from customers

6,648.4

6,657.8

7,718.0

7,721.8

9,914.5

9,917.6

Debt securities in issue

762.1

763.9

774.1

778.0

861.1

863.5

Subordinated liabilities and notes

489.4

449.9

485.6

449.5

486.2

471.3


7,899.9

7,871.6

8,977.7

8,949.3

11,261.8

11,252.4

The only financial assets and financial liabilities which are carried at fair value in the Interim Condensed Consolidated Statement of Financial Position at period end are cash balances relating to the Group's Travel Money offering, FVOCI equity investment securities and derivative financial instruments. At the prior year end the Group also held debt securities at FVOCI. These were reclassified to amortised cost on 1 March 2020 following a change in business model. The valuation techniques and inputs used to derive fair values at the period end are described below.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where an active market is considered to exist, fair values are based on quoted prices. For instruments which do not have active markets, fair value is calculated using present value models, which take individual cash flows together with assumptions based on market conditions and credit spreads, and are consistent with accepted economic methodologies for pricing financial instruments.

In each case the fair value is calculated by discounting future cash flows using benchmark, observable market interest rates.

1 Fair value disclosures are not required for lease liabilities.

2 On 1 March 2020 the Group's portfolio of debt investment securities measured at FVOCI was reclassified to amortised cost following a change in business model.

3 The sale of the remaining assets of the disposal group was completed on 30 March 2020. The remaining assets of the disposal group at 29 February 2020 were held at fair value at that date and are therefore excluded from this table.

40

15.  Fair Values (continued)

The table below categorises all financial instruments held at fair value (recurring measurement) and the fair value of financial instruments held at amortised cost according to the method used to establish the fair value disclosed.


Level 1

Level 2

Level 3

Total

As at 31 August 2020

£m

£m

£m

£m

Financial assets carried at fair value





Cash in hand1

24.1

24.1

Investment securities - FVOCI

3.6

3.6

Derivative financial instruments:





 - Interest rate swaps

6.8

6.8

Financial assets carried at amortised cost





Loans and advances to customers

7,454.2

7,454.2

Investment securities - amortised cost

853.7

27.1

880.8

Total

853.7

58.0

7,457.8

8,369.5






Financial liabilities carried at fair value





Derivative financial instruments:





 - Interest rate swaps

60.9

60.9

- Forward foreign currency contracts

0.7

0.7

- Cross currency swaps

10.7

10.7

Financial liabilities carried at amortised cost





Deposits from customers

6,657.8

6,657.8

Debt securities in issue

763.9

763.9

Subordinated liabilities

449.9

449.9

Total

763.9

522.2

6,657.8

7,943.9

 


Level 1

Level 2

Level 3

Total


£m

£m

£m

£m

As at 29 February 2020





Financial assets carried at fair value





Cash in hand1

-

26.3

-

26.3

Investment Securities - FVOCI

1,057.4

-

3.2

1,060.6

Derivative financial instruments:





 - Interest rate swaps

-

5.7

-

5.7

Financial assets carried at amortised cost





Loans and advances to customers

-

-

8,626.9

8,626.9

Investment securities - loans and receivables

-

27.6

-

27.6

Total

1,057.4

59.6

8,675.2

9,792.2






Financial liabilities carried at fair value





Derivative financial instruments:





 - Interest rate swaps

-

50.7

-

50.7

Financial liabilities carried at amortised cost





Deposits from customers

-

-

7,721.8

7,721.8

Debt securities in issue

778.0

-

-

778.0

Subordinated liabilities

-

449.5

-

449.5

Total

778.0

500.2

7,721.8

9,000.0

1 Cash balances relating to the Group's Travel Money offering are carried at fair value under IFRS 9.

41

15.  Fair Values (continued)


Level 1

Level 2

Level 3

Total

As at 31 August 2019

£m

£m

£m

£m

Financial assets carried at fair value





Cash in hand1

-

42.0

-

42.0

Investment Securities - FVOCI

1,035.6

-

3.4

1,039.0

Derivative financial instruments:





- Interest rate swaps

-

24.8

-

24.8

- Forward foreign currency contracts

-

0.3

-

0.3

- Cross currency swaps

-

14.9

-

14.9

Financial assets carried at amortised cost





Loans and advances to customers

-

-

8,856.3

8,856.3

Investment securities - amortised cost

-

26.0

-

26.0

Assets of the disposal group

-

-

3,712.1

3,712.1

Total

1,035.6

108.0

12,571.8

13,715.4






Financial liabilities carried at fair value





Derivative financial instruments:





 - Interest rate swaps

-

63.0

-

63.0

Financial liabilities carried at amortised cost





Deposits from customers

-

-

9,917.6

9,917.6

Debt securities in issue

863.5

-

-

863.5

Subordinated liabilities and notes

-

471.3

-

471.3

Total

863.5

534.3

9,917.6

11,315.4

1 Cash balances relating to the Group's Travel Money offering are carried at fair value under IFRS 9.

There are three levels to the hierarchy as follows:

Level 1

Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (for example, as prices) or indirectly (for example, derived from prices).

Fair values of cash balances relating to the Group's Travel Money offering are considered to equate to their carrying value as they are short-term in nature.

Derivative financial instruments which are categorised as Level 2 are those which either:

· Have future cash flows which are on known dates and for which the cash flow amounts are known or calculable by reference to observable interest and foreign currency exchange rates; or

· Have future cash flows which are not pre-defined, but for which the fair value of the instrument has very low sensitivity to changes in estimate of future cash flows.

In each case the fair value is calculated by discounting future cash flows using benchmark, observable market interest rates.

Fair values of investment in subordinated debt classified as amortised cost are calculated using quoted prices, where available, or by using discounted cash flows applying market rates.

The estimated fair value of subordinated liabilities is calculated using a discounted cash flow model based on a current yield curve appropriate for the remaining term to maturity.

42

15.  Fair Values (continued)

Level 3

Inputs for the asset or liability are not based on observable market data (unobservable inputs).

Loans and advances to customers and assets of the disposal group are net of charges for impairment. The estimated fair value of loans and advances to customers represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value.

At the prior year end the fair value of assets of the disposal group was based on the contract price agreed in respect of the sale of the Group's Mortgage business.

The estimated fair value of deposits from customers represents the discounted amount of estimated future cash flows expected to be paid. Expected cash flows are discounted at current market rates to determine fair value.

The estimated fair value of equity investment securities classified as FVOCI, being the Group's interest in VISA Inc. preferred stock, is reflected in the table on page 41. The preferred stock may be convertible into Class A Common Stock of VISA Inc. at certain future dates, starting in June 2020. There were no conversions in the period ended 31 August 2020. Conversion is contingent upon future events, principally related to the outcome of interchange litigation against VISA Europe Limited. As such, the valuation reflects both an illiquidity discount and the risk of a reduction in the conversion rate to VISA Inc. common Stock. The reduction in the conversion rate is the most significant unobservable input to the valuation.

Transfers

There were no transfers between Level 1 and Level 2 during the period (February 2020: no transfers).

There were no transfers between Level 2 and Level 3 during the period (February 2020: no transfers).

43

16 .  Capital Resources

On 1 March 2018, IFRS 9 came into force and a transitional period was introduced, allowing the Company (being the regulated entity) to phase in the IFRS 9 impact on capital over a period of 5 years. On 27 June 2020, the Capital Requirements Regulation (CRR) was further amended to accelerate specific CRR2 measures and implement a new IFRS 9 transitional relief calculation. The IFRS 9 transitional arrangements have been extended by two years and a new modified calculation has been introduced. Full relief will be applied to increases in stage 1 and stage 2 provisions from 1 January 2020 throughout 2020 and 2021, reducing to 75% in 2022, 50% in 2023 and 25% in 2024, with no relief applied from 2025. The phasing out of transitional relief on the 'day 1' impact of IFRS 9 as well as increases in stage 1 and stage 2 provisions between 1 March 2018 and 31 December 2019 under the modified calculation remain unchanged and continue to be subject to 70% transitional relief throughout 2020, 50% for 2021 and 25% for 2022, with no relief applied from 2023.

The following tables analyse the regulatory capital resources of the Company applicable as at the period end on a 'transitional' and 'end point' position for the current period as related to the IFRS 9 transitional period:


Transitional

End Point

Transitional

Transitional


31 August

 2020

31 August

 2020

29 February 2020

31 August

 2019


£m

£m

£m

£m

Common equity tier 1





Shareholders' equity (accounting capital)

1,600.1

1,600.1

1,705.9

1,672.7






Regulatory adjustments





Unrealised gains on cash flow hedge reserve

0.5

0.5

Adjustment to own credit/Additional value adjustments

(1.1)

(1.4)

Foreseeable dividends

(50.0)

(50.0)

(23.0)

Intangible assets

(130.1)

(130.1)

(138.2)

(205.0)

IFRS 9 transitional relief

229.3

141.6

151.7

Common equity tier 1 capital

1,649.8

1,420.5

1,708.2

1,595.0






Tier 2 capital (instruments and provisions)





Undated subordinated notes

45.0

45.0

45.0

45.0

Dated subordinated notes net of regulatory amortisation

190.0

190.0

190.0

190.0

Tier 2 capital (instruments and provisions) before regulatory adjustments

235.0

235.0

235.0

235.0






Regulatory adjustments





Material holdings in financial sector entities

(21.0)

(21.0)

(21.0)

(21.0)

Total regulatory adjustments to tier 2 capital (instruments and provisions)

(21.0)

(21.0)

(21.0)

(21.0)






Total tier 2 capital

(instruments and provisions)

214.0

214.0

214.0

214.0






Total capital

1,863.8

1,634.5

1,922.2

1,809.0






Total risk-weighted assets (unaudited)

7,655.8

7,555.2

8,309.9

9,820.8






Common equity tier 1 ratio (unaudited)

21.5%

18.8%

20.6%

16.2%






Tier 1 ratio (unaudited)

21.5%

18.8%

20.6%

16.2%






Total capital ratio (unaudited)

24.3%

21.6%

23.1%

18.4%






44

16.  Capital Resources (continued)

Total capital requirement (TCR) refers to the amount and quality of capital the Company must maintain to comply with the CRR Pillar 1 and 2A capital requirements. The TCR for TPFG as at 31 August 2020 is 12.1% plus £52.0m as a static add-on for pension obligation risk.

In the absence of a confirmed payout ratio and in line with guidance issued by the European Banking Authority, the Group has included a foreseeable dividend, based on historic actual pay-out levels, within its capital resources disclosure.  No final decision has yet been taken on whether to pay a dividend for the year ending 28 February 2021.

The table below reconciles shareholders' equity of the Group to shareholders' equity of the Company:


31 August

2020

29 February 2020

31 August

2019


£m

£m

£m

Tesco Personal Finance Plc (Group) shareholders' equity

1,635.4

1,731.0

1,695.0

Share of joint venture's retained earnings

(26.9)

(17.9)

(14.8)

Subsidiaries' retained earnings

0.3

0.6

Share of joint venture's AFS reserve

(8.4)

(7.5)

(8.1)

Tesco Personal Finance Plc (Company) shareholders' equity

1,600.1

1,705.9

1,672.7

It is the Group's policy to maintain a strong capital base, to expand it as appropriate and to utilise it efficiently throughout its activities to optimise the return to shareholders while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, the Group has regard to the supervisory requirements of the Prudential Regulatory Authority (PRA).

The Group is required to submit ICAAP reports to the PRA which set out future business plans, the impact on capital availability, capital requirements and the risk to capital adequacy under stress scenarios.

The Group also maintains a Recovery Plan that provides the framework and a series of recovery options which could be deployed in a severe stress event impacting capital or liquidity positions. The Recovery Plan is reviewed and approved by the Board on at least an annual basis.

The Group has met all relevant capital requirements throughout the period.

Leverage ratio (unaudited)

The Basel III reforms include the introduction of a capital leverage measure, defined as the ratio of tier 1 capital to total exposure. This is intended to reinforce the risk-based capital requirements with a simple, non-risk based 'backstop' measure.

45

16.  Capital Resources (continued)

The Group has published the leverage ratio on a Capital Requirements Directive IV basis using the existing exposure approach:

Exposures for leverage ratio (unaudited)

Transitional

End Point

Transitional

Transitional


31 August 2020

31 August 2020

29 February 2020

31 August 2019


£m

£m

£m

£m

Total balance sheet exposures

10,649.7

10,649.7

11,643.5

15,421.7

Adjustments for entities which are consolidated for accounting purposes but outside scope of regulatory consolidation

(35.3)

(35.3)

(25.4)

(23.0)

Removal of accounting value of derivatives and Securities Financing Transactions (SFTs)

(6.8)

(6.8)

(5.7)

(499.1)

Exposure value for derivatives and SFTs

4.4

4.4

9.3

90.3

Off