Paragon Grp Of Co's PAG Final Results
Paragon Grp Of Co's (PAG) - Final Results
RNS Number : 5012R
Paragon Group Of Companies PLC
20 November 2012
Under embargo until Stock Exchange announcement: 7am, Tuesday 20 November 2012
PARAGON PRELIMINARY RESULTS
The Paragon Group of Companies PLC ("Paragon"), the specialist buy-to-let and
consumer finance group, today announces its results for the year ended
30 September 2012.
Highlights
Financial Performance
· Profit before tax of £95.5 million (2011: £80.8 million)
· Underlying profit increased by 16.2% to £94.2 million (2011: £81.1
million)
· Strong cash position and cash flow
· Step change in dividend policy with final dividend at 4.50p per share
(2011: 2.65p per share). New policy of targeting 3.0 - 3.5 times cover over
the medium term
· Shareholders' funds £803.5 million (2011: £742.0 million)
· Net asset value 269p per share (2011: 250p per share)
Strategic development
· Three consumer loan portfolio investments, total £115.4 million,
completed during the year
· Buy-to-let origination franchise well established, £184.3 million
advanced (2011: £127.0 million)
· Two securitisations of buy-to-let loans completed
· Warehouse funding capacity increased by 125%
Commenting on the results, Nigel Terrington, Chief Executive of Paragon, said:
"The buy-to-let and portfolio purchase businesses have grown strongly and
contributed to record profits. The developments in funding capacity in the
last fifteen months leave the Group well funded to support the further
development of the buy-to-let business, while the strong operational cashflows
generated put the Group in a good position to continue to benefit from future
portfolio acquisitions and servicing opportunities arising out of bank
de-leveraging."
For further information, please contact:
The Paragon Group of Companies PLC Fishburn Hedges
Nigel Terrington, Chief Executive Paul Farrow
Nick Keen, Finance Director Tel: 020 7544 3040
Tel: 0121 712 2327 Mobile: 07530 269946
The Paragon Group of Companies PLC
MANAGEMENT REPORT
During the year ended 30 September 2012 the Group has pursued its strategic
objectives successfully and achieved strong growth, resulting in the highest
profits in our history. We have invested significantly in portfolio
acquisitions, increased buy-to-let lending, entered into new servicing
contracts and completed our first securitisation since 2007, with a further
securitisation, on materially better terms, being completed after the
year-end. In addition, to facilitate the future development of our buy-to-let
franchise, new and enlarged funding lines have been agreed with our bankers.
The buy-to-let warehouse facility from Macquarie Bank has been increased and
extended by a further two years and an additional warehouse facility agreement
has been signed with Lloyds Bank, more than doubling the Group's warehouse
capacity to £450.0 million. The Group is well placed for future growth.
During the year ended 30 September 2012 the Group's profit before taxation
increased by 18.2% to £95.5 million (2011: £80.8 million). Underlying profit,
before exceptional and fair value items, increased by 16.2% to £94.2 million
for the year (2011: £81.1 million).
Earnings per share were 24.2p (2011: 20.2p), the increase of 19.8% from last
year reflecting the improved profits earned by the Group and a reduction in
the tax rate. The increase in profit has also improved the Group's return on
equity (note 22) to 9.3% from 8.3% for the previous year.
The Group's strategic focus has remained unchanged; to generate growth through
our buy-to-let origination franchise, through investment in loan portfolios
and by exploiting new opportunities; and to maintain close management of the
existing loan portfolio, which continued to perform well in the year.
Idem Capital, our dedicated investment subsidiary, has successfully built on
the five portfolios purchased in prior years with further investments during
the financial year totalling £115.4 million. Paragon Mortgages and Mortgage
Trust, our buy-to-let origination brands, now fully re-established following
the recommencement of new lending in 2010, advanced new loans of £184.3
million (2011: £127.0 million) and a strong pipeline of business was in place
at the end of the year, which, combined with the 125% increase in warehouse
capacity, augurs well for lending volumes in the new financial year.
In view of the results achieved and the Board's confidence in the prospects
for the business, the Company's dividend policy has been amended. In line with
the new policy, outlined under Capital Management below, the Board has
proposed a final dividend of 4.50p per share (2011: 2.65p) which, when added
to the interim dividend of 1.50p, gives a total dividend of 6.00p per share
for the year (2011: 4.00p), an increase of 50.0%. Subject to approval at the
Annual General Meeting on 7 February 2013, the dividend will be paid on
11 February 2013, by reference to a record date of 11 January 2013.
FINANCIAL REVIEW
CONSOLIDATED RESULTS
For the year ended 30 September 2012
2012 2011
£m £m
Interest receivable 293.8 258.0
Interest payable and similar charges (136.0) (122.2)
Net interest income 157.8 135.8
Other operating income 12.4 15.1
Total operating income 170.2 150.9
Operating expenses (51.9) (45.4)
Provisions for losses (24.1) (24.4)
Underlying profit 94.2 81.1
Fair value net gains / (losses) 1.3 (0.3)
Operating profit being profit on ordinary activities before
taxation
95.5 80.8
Tax charge on profit on ordinary activities (23.3) (21.2)
Profit on ordinary activities after taxation 72.2 59.6
Dividend - Rate per share for the year 6.0p 4.0p
Basic earnings per share 24.2p 20.2p
Diluted earnings per share 23.5p 19.6p
The Group is organised into two major operating divisions: First Mortgages,
which includes the buy-to-let and owner-occupied first mortgage assets and
other sources of income derived from first charge mortgages; and Consumer
Finance, which includes secured lending, car, retail finance and unsecured
loan books and other sources of income derived from consumer loans. Both
divisions include internally originated and acquired assets. These divisions
are the basis on which the Group reports primary segmental information.
The underlying operating profits of these business segments are detailed fully
in note 20.
2012 2011
£m £m
Underlying operating profit
First Mortgages 61.6 67.3
Consumer Finance 32.6 13.8
94.2 81.1
Net interest income increased by 16.2% to £157.8 million (2011: £135.8
million), reflecting the impact of new loan assets, both acquired and
originated, on interest income and margins, partially offset by a 0.3%
reduction in the size of the loan book during the year.
Other operating income was £12.4 million for the year, compared with £15.1
million in 2011, the reduction reflecting, principally, a lower level of third
party fee income as a result of the purchase of accounts previously
administered by the Group, early in the year.
Operating expenses during the year were 14.3% higher at £51.9 million (2011:
£45.4 million). The increase is primarily due to employment costs, following
the recruitment of additional staff, during the year and in the second half of
2011, to administer purchased and third party loan portfolios. The cost:income
ratio was in line with our expectations at 30.5% for the year (note 19), a
similar level to last year, and remains significantly below the industry
average. The Board remains focused on controlling operating costs through the
application of rigorous budgeting, management reporting and monitoring
procedures.
The charge for impairment provisions of £24.1 million was 1.2% lower than the
charge of £24.4 million for 2011, an increase in the charge within the First
Mortgages division, to more normal levels from the low level of charge in
2011, being more than offset by a reduction in the impairment charge within
the Consumer Finance division. As a percentage of loans to customers (note 8)
the charge has remained at 0.28%, the figure recorded in 2011. Low interest
rates have increased affordability for customers, reducing the incidence of
new arrears and assisting the correction of past arrears. The loan books
continue to be carefully managed and credit performance remains in line with
our expectations.
Yield curve movements during the year resulted in hedging instrument fair
value net gains of £1.3m (2011: losses of £0.3 million), which do not affect
cash flow. As the fair value movements of hedged assets or liabilities are
expected to trend to zero over time, this item is merely a timing difference.
The Group remains economically and appropriately hedged.
Cash generation has remained strong over the period. Free cash balances stood
at £127.7 million at 30 September 2012 (2011: £195.0 million), after investing
significantly in both asset purchases and in the development of our buy-to-let
lending business, detailed below.
Corporation tax has been charged at an effective tax rate of 24.4%, compared
to 26.2% in 2011, the decrease being attributable to the reduction in the
standard rate of corporation tax in the UK.
Profits after taxation of £72.2 million (2011: £59.6 million) have been
transferred to shareholders' funds, which totalled £803.5 million at the
year-end (2011: £742.0 million), representing 269p per share (2011: 250p per
share) (note 21).
BUSINESS REVIEW
OPERATING SEGMENTS
First Mortgages
Buy-to-let loans advanced under the Group's new lending products were £184.3
million for the year (2011: £127.0 million) and a further £4.6 million (2011:
£5.8 million) of loans were made to existing borrowers in respect of further
advances. This brings the total value of completions under the Group's new
products since the recommencement of new lending in October 2010 to £311.3
million. Application levels continued to increase over the year, with the
pipeline of applications and offers outstanding totalling £129.9 million at 30
September 2012 (2011: £67.5 million). The credit quality of the new lending
business written in the year has been excellent, with an average loan to value
ratio of 70.1% (2011: 69.2%) and no arrears on loans advanced since the
recommencement of lending in October 2010.
The Group has continued to focus mainly on the higher margin professional
landlord business under the Paragon Mortgages brand. Paragon's professional
landlord business is widely sourced from a large number of mortgage and
commercial finance introducers, giving us the capacity to support materially
higher business volumes in due course.
At 30 September 2012, the buy-to-let portfolio was £8,196.4 million, compared
with £8,231.7 million a year earlier. The redemption rate on the back book
remained low at 2.2% for the year (2011: 2.2%) with landlords continuing to
display a long-term commitment to property investment, whilst alternative
offerings from other lenders remain unattractive as a result of generally
higher funding and capital costs.
The credit performance of the portfolio over the year has again been
exemplary, with the percentage of loans three months or more in arrears
(including acquired loans and receivership cases but excluding possession and
receivership cases held for sale) standing at 0.48% at 30 September 2012 (30
September 2011: 0.63%) and remains considerably better than the comparable
market average of 1.51% as recorded by the Council of Mortgage Lenders ('CML')
at that date (30 September 2011: 1.90%). Despite an improved arrears
performance over the year, the impairment charge attributable to First
Mortgages increased to £12.4 million for the year from £5.6 million for 2011,
a return to normal levels of provisioning after a low level of charge last
year and following an increase in receiver of rent activity, where a charge
for impairments may be made for accounts that are less than three months in
arrears. At 30 September 2012 there were 1,504 properties across all
portfolios where a receiver had been appointed (30 September 2011: 1,483). Of
those available for letting, 94.2% were let (30 September 2011: 93.9%).
The latest Royal Institution of Chartered Surveyors ('RICS') UK Residential
Lettings Survey again confirms that tenant demand has continued to grow whilst
landlord supply of property new to the lettings market has stabilised. As a
consequence of the high level of demand, the RICS survey indicates that rents
are expected to continue to increase. The latest survey data from the
Association of Residential Letting Agents confirms a similar picture with
agents on balance noting an increase in achievable rents over the six months
to June 2012. Whilst volumes remain low by historical standards, buy-to-let
remains the only growth sector of the mortgage market, with the CML reporting
that the value of buy-to-let advances increased by 25.6% to £15.7 billion in
the course of the financial year (2011: £12.5 billion) whilst credit quality
in the sector continues to improve with industry-wide buy-to-let arrears once
again lower than in the owner-occupied market.
The owner-occupied book reduced to £99.2 million from £128.7 million during
the year ended 30 September 2012 and performed in line with the Group's
expectations. Save for the management of this book in run-off, there has been
little activity in recent years in this area as the Group has focused on other
lending markets, portfolio acquisitions and other sources of revenue
generation.
Consumer Finance
At 30 September 2012, the total loans outstanding on the Consumer Finance
books were £399.0 million, compared with £363.8 million at 30 September 2011,
this increase being due to portfolio purchases (covered fully below) and the
continuing low level of redemptions across the portfolios. The performance of
the Consumer Finance book, including the acquired assets, remains satisfactory
and in line with our expectations.
The Group's secured loan portfolio at 30 September 2012, including the
acquired assets, was £279.9 million (2011: £340.1 million). The unsecured
loan, retail finance and car finance portfolios, including the acquired
assets, totalled £119.1 million at 30 September 2012 (30 September 2011: £23.7
million).
PORTFOLIO OPPORTUNITIES
A major area of strategic focus has been the acquisition of loan portfolios
through Idem Capital and the servicing of third party loan portfolios as
opportunities are created through the ongoing process of de-leveraging by the
larger banks and financial institutions, which we expect to continue for the
foreseeable future. Idem Capital has firmly established itself as one of the
top consumer debt buyers in the UK, with total investments in the financial
year of £115.4 million (2011: £22.7 million). In addition to assets acquired
in its own right, Idem, through its sister companies, Moorgate Loan Servicing
and Arden Credit Management, has established four new servicing contracts with
co-investment partners during the year. These add volume to the Group's
servicing operations and enhance earnings, with little or no capital
investment. Progress has been excellent and has resulted in an increase in
operating profits from these transactions to £26.3 million (2011: £7.6
million) during the financial year.
Idem Capital
Idem Capital invests in loan portfolios either as principal, where Idem
acquires pools in its own right, or as co-investor alongside other partners
with, typically, Moorgate Loan Servicing appointed to act as servicer.
Co-investing has the potential for higher returns where the Group also derives
income from servicing the loans within the underlying portfolio. Investments
are made only after significant due diligence work on the portfolio and
sensitivity testing of potential returns.
In October 2011 Idem Capital completed the purchase of a portfolio of
unsecured consumer loans, previously serviced by the Group, from The Royal
Bank of Scotland plc ('RBS') for £43.2 million. In addition, under the terms
of a forward flow agreement with RBS, a total of £0.6 million of unsecured
consumer loans were acquired in the year, and further opportunities are
anticipated.
Another significant portfolio purchase was completed in December 2011 when
Idem Capital acquired a portfolio of closed UK credit card receivables from
MBNA Europe Bank Limited, for £55.7 million. The management of these accounts
was transferred to the Group during the second quarter of the year.
The acquisition of a further portfolio of closed UK credit card receivables
from MBNA Europe Bank Limited was announced on 3 September 2012. The
consideration payable on completion was £16.1 million and the management of
these accounts was transferred to the Group before the year end.
By 30 September 2012, total investment in portfolios by Idem Capital since
2009 had reached £161.9 million. A number of potential portfolio investments
are currently under review and the Group's track record in loan servicing,
risk management and portfolio investment positions it well to exploit similar
opportunities as they arise in future.
Moorgate Loan Servicing
The Group's third party loan servicing business operates through Moorgate Loan
Servicing and its division, Arden Credit Management, utilising our core
administration and collections skills. Our experience in loan management
established over many years has enabled us to extend this service to our third
party clients, providing significant added value to the performance of their
loan portfolios.
During the year Moorgate Loan Servicing has assumed the servicing of four
further portfolios, comprising 149,000 accounts, on behalf of third parties
(2011: 50,000 accounts) with the result that 49.9% of accounts under
management by the Group at 30 September 2012 were managed on behalf of third
parties (2011: 58.6%).
Moorgate is well placed to take advantage of other opportunities that may
arise over the coming years, particularly as portfolio disposals take place as
part of the wider financial sector de-leveraging process.
REGULATION
Regulation is undergoing material change across the financial services sector.
Some aspects will affect the current operations of the Group, although the
impact is unlikely to be significant.
The Financial Services Authority ('FSA') has concluded, through its Mortgage
Market Review, that there will be enhanced prudential supervision of
non-deposit takers engaged in regulated lending. Regulation of second charge
mortgages will transfer from the Office of Fair Trading to the FSA's successor
bodies in 2014. Separately, it is proposed that those successor bodies will,
in due course, assume responsibility for the regulation of consumer credit.
Certain of the Group's operations are already authorised by the FSA in respect
of residential mortgage and insurance activity and we expect to be well placed
to comply with the proposed changes in the regulatory framework.
The European Commission's proposed directive on credit agreements relating to
residential property, which may impose additional disclosure and other
requirements for all mortgage lending to consumers secured on residential
property, has yet to be concluded. It remains unclear to what extent these
obligations will apply to buy-to-let lending.
We will continue to maintain an active dialogue with the UK and European
regulatory authorities as these proposals develop.
CAPITAL MANAGEMENT
The Group has continued to enjoy strong cash generation during the year. Free
cash balances were £127.7 million at the year-end (30 September 2011: £195.0
million) after investments to support new buy-to-let originations and
significant acquisitions by Idem Capital. The Company sees opportunities going
forward to deploy capital for new lending activities, which should continue to
increase, and to invest further amounts in loan portfolios through Idem
Capital as banks and other financial institutions continue to de-leverage.
These cash balances, together with future operational cashflow, will support
the Group's growth through investment in these areas as well as providing
returns to shareholders through dividends.
The Group's current progressive dividend policy has applied since 2008, the
dividend increasing from 3.0p per share in respect of the year ended 30
September 2008 to 4.0p per share in respect of the year ended 30 September
2011. Since that policy was established, the Group has re-commenced its
buy-to-let mortgage business, demonstrated that it can access warehouse
funding and the securitised funding markets and established a strong asset
purchase franchise which has contributed substantially to Group profit growth.
The Board keeps under review the appropriate level of capital for the business
to meet its operational requirements and strategic development objectives and
has determined that in view of the strong position of the Group and its
confidence in the prospects for the business, a higher level of dividend
payment is now appropriate.
Consequently, the Board proposes, subject to approval at the Annual General
Meeting on 7 February 2013, a final dividend of 4.5p per share which, when
added to the interim dividend of 1.5p, gives a dividend of 6.0p per share for
the year, an increase of 50.0% from 2011. The Board intends to pursue a
progressive dividend policy so that, by 2016 and thereafter, dividend cover
will be maintained in the range 3.0 to 3.5 times.
In accordance with our usual practice, we will be proposing at the forthcoming
Annual General Meeting a special resolution seeking authority from
shareholders for the Company to purchase up to 30.1 million of its own shares
(10% of the issued share capital). It is customary for companies to seek such
authority but we would not expect to utilise the authority unless, in the
light of market conditions prevailing at the time, we consider that to do so
would enhance earnings per share and would be in the best interests of
shareholders generally. Given the operational and strategic opportunities
described above and the enhanced dividend policy, the Board has no current
intention of using this authority.
FUNDING
On 10 November 2011 the Group completed a £163.8 million securitisation of
buy-to-let loans, through Paragon Mortgages (No. 16) PLC. This securitisation,
the Group's first since 2007, released warehouse capacity to accommodate
further lending growth. Notes totalling £131.7 million, rated Aaa by Moody's
Investors Service and AAA by Fitch Ratings, were sold to investors with the
Group retaining the remaining, unrated, notes. This was an important landmark
for the Group, being the first buy-to-let securitisation by any issuer in the
UK since the credit crunch. The notes were priced at LIBOR plus 275 basis
points, reflecting the poor bond market conditions at that time. Whilst the
notes match-fund the collateralised loans to maturity, we have the ability to
call the notes after three years.
After the year end, on 25 October 2012, the Group completed a £200.0 million
securitisation of buy-to-let loans, through Paragon Mortgages (No. 17) PLC
('PM 17'). PM 17 comprises £175.0 million of AAA rated notes, £10.5 million of
AA rated notes and £10.0 million of A rated notes at margins of 135, 190 and
290 basis points over three month LIBOR respectively. £4.5 million of
subordinated notes were retained by the Group, which also invested £6.0
million in the first loss fund, bringing the Group's total investment in PM 17
to £10.5 million, or 5.25% of the issue amount.
The pricing of the PM 17 transaction reflected the strong credit profile of
the Group's buy-to-let assets and our experience as an issuer of high quality
bonds in the mortgage backed securities market. This was only the second
securitisation of buy-to-let loans since the credit crunch, the first to issue
junior, single A rated, bonds since 2008 and was the Group's 55th
securitisation since pioneering the methodology in 1987.
The Group funded its mortgage originations during the year through a £200.0
million revolving warehouse provided by Macquarie Bank. This facility was
renewed and extended for a further two years after the year end and the amount
available for drawing increased to £250.0 million.
On 27 September 2012, the Group signed an additional £200.0 million revolving
warehouse facility provided by the wholesale division of Lloyds Bank. The
facility, rated by Fitch Ratings, will be available to Paragon Fifth Funding
Limited, an orphan special purpose vehicle company, and interest will be
charged on the amount drawn at three month LIBOR plus 275 basis points. The
facility is structured with a three-year term to permit drawings and
re-drawings in its first eighteen months, or up to 24 months, subject to a
capital markets refinancing of part of the facility in the first twelve
months.
The Group uses the warehouse facilities to originate mortgage loans prior to
arranging term funding in the securitisation markets and, following the
successful completion of the issuances by Paragon Mortgages (No.16) and
Paragon Mortgages (No. 17), we plan to return to the securitisation markets
regularly as business volumes increase. Dependant on volume and market
conditions, additional warehousing capacity may be sought in due course.
BOARD OF DIRECTORS
On 9 February 2012 Richard Woodman was appointed to the Board as Director -
Corporate Development. He was also appointed Managing Director of Idem Capital
Limited. Mr Woodman joined the Group in 1989 and he has held various senior
strategic and financial roles, latterly as Director of Business Analysis and
Planning. More recently he has taken a lead role in the Group's strategic
development and, in particular, in the portfolio acquisition programme through
Idem Capital.
On 12 September 2012 Fiona Clutterbuck was appointed as a non-executive
director. She is currently the Head of Strategy and Corporate Development at
the Phoenix Group and is also a non-executive director of WS Atkins plc. Ms
Clutterbuck brings to the Board a substantial level of corporate finance
experience, having previously held the positions of Managing Director and Head
of Financial Institutions Advisory at ABN AMRO Investment Bank, Managing
Director and Global Co-Head of Financial Institutions Group at HSBC Investment
Bank and Director at Hill Samuel Bank Limited.
On 31 March 2012 Terry Eccles resigned from the Board of Directors owing to
health reasons. Mr Eccles was appointed to the Board in February 2007 and
served as Chairman of the Remuneration Committee until February 2009 and as
Senior Independent Director from February 2009 until July 2011. His experience
and wisdom have been invaluable and his presence on the Board will be sadly
missed. The Board wishes to thank Mr Eccles for his enormous contribution over
the past five years and wish him well for the future.
On 31 October 2011 Christopher Newell resigned from the Board of Directors
after ten years of service and having been Chairman of the Audit and
Compliance Committee from March 2003 until July 2011. The Board would like to
record its gratitude for his considerable support over the years and for his
able and professional chairmanship of the Audit and Compliance Committee.
CONCLUSION
The year ended 30 September 2012 has been a very successful period for the
Group. The buy-to-let and portfolio purchase businesses have grown strongly
and contributed to record profits for the Group for the year. The
developments in funding capacity during the year, and in the period
immediately after, with the completion of two public securitisation
transactions and a more than doubling of our buy-to-let warehouse facilities,
leave the Group well funded to support the further development of the
buy-to-let business. Alongside this, the strong operational cashflows
generated in the year put the Group in a good position to continue to benefit
from future portfolio acquisitions and servicing opportunities arising out of
the de-leveraging of banks and other financial institutions.
The strong trading position of the Group and the Board's confidence as to the
future prospects of the business have led to a substantial increase in this
year's proposed dividend and the adoption of a new policy aimed at moving the
Group's dividend towards 3.0 to 3.5 times coverage over the medium term. The
Group enters the new financial year with confidence.
The Paragon Group of Companies PLC
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2012
2012 2011
Note £m £m
Interest receivable 293.8 258.0
Interest payable and similar charges (136.0) (122.2)
Net interest income 157.8 135.8
Other operating income 4 12.4 15.1
Total operating income 170.2 150.9
Operating expenses (51.9) (45.4)
Provisions for losses (24.1) (24.4)
Operating profit before gains and fair value items
94.2 81.1
Fair value net gains / (losses) 5 1.3 (0.3)
Operating profit being profit on ordinary activities
before taxation
95.5 80.8
Tax charge on profit on ordinary activities
(23.3) (21.2)
Profit on ordinary activities after taxation for the
financial year
72.2 59.6
2012 2011
Note
Earnings per share
- basic 6 24.2p 20.2p
- diluted 6 23.5p 19.6p
The results for the current and preceding years relate entirely to continuing
operations.
The Paragon Group of Companies PLC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2012
2012 2011
£m £m £m £m
Profit for the year 72.2 59.6
Other comprehensive income
Actuarial (loss) on pension scheme (0.5) (0.3)
Cash flow hedge (losses) / gains taken to equity
(1.5) 0.4
Tax on items taken directly to equity
0.2 (0.3)
Other comprehensive income for the year net of tax
(1.8) (0.2)
Total comprehensive income for the year
70.4 59.4
The Paragon Group of Companies PLC
CONSOLIDATED BALANCE SHEET
30 September 2012
2012 2011 2010
Note £m £m £m
Assets employed
Non-current assets
Intangible assets 7 9.1 9.3 9.2
Property, plant and equipment 10.7 11.4 12.2
Financial assets 8 9,505.2 9,891.2 10,080.1
Deferred tax asset - - 1.5
9,525.0 9,911.9 10,103.0
Current assets
Other receivables 7.3 4.7 5.9
Cash and cash equivalents 10 504.8 571.6 536.7
512.1 576.3 542.6
Total assets 10,037.1 10,488.2 10,645.6
Financed by
Equity shareholders' funds
Called-up share capital 11 301.8 299.7 299.4
Reserves 12 550.2 490.7 445.8
Share capital and reserves 852.0 790.4 745.2
Own shares (48.5) (48.4) (53.2)
Total equity 803.5 742.0 692.0
Current liabilities
Financial liabilities 14 2.0 1.8 1.2
Current tax liabilities 13.3 10.7 16.2
Other liabilities 36.7 38.3 32.4
52.0 50.8 49.8
Non-current liabilities
Financial liabilities 14 9,159.0 9,674.5 9,885.7
Retirement benefit obligations 13.9 14.4 16.5
Deferred tax 7.6 5.0 -
Other liabilities 1.1 1.5 1.6
9,181.6 9,695.4 9,903.8
Total liabilities 9,233.6 9,746.2 9,953.6
10,037.1 10,488.2 10,645.6
Approved by the Board of Directors on 20 November 2012.
Signed on behalf of the Board of Directors
N S Terrington N
Keen
Chief Executive
Finance Director
The Paragon Group of Companies PLC
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2012
2012 2011
Note £m £m
Net cash generated by operating activities 16 117.3 246.1
Net cash (utilised) by investing activities 17 (2.2) (2.1)
Net cash (utilised) by financing activities 18 (181.9) (209.6)
Net increase in cash and cash equivalents (66.8) 34.4
Opening cash and cash equivalents 571.0 536.6
Closing cash and cash equivalents 504.2 571.0
Represented by balances within:
Cash and cash equivalents 504.8 571.6
Financial liabilities (0.6) (0.6)
504.2 571.0
The Paragon Group of Companies PLC
STATEMENT OF MOVEMENTS IN EQUITY
For the year ended 30 September 2012
2012 2011
Note £m £m
Total comprehensive income for the year
70.4 59.4
Dividends paid 13 (12.3) (11.1)
Net movement in own shares (0.1) 4.8
(Deficit) on transactions in own shares (0.2) (5.2)
Charge for share based remuneration 2.8 2.0
Tax on share based remuneration 0.9 0.1
Net movement in equity in the year 61.5 50.0
Equity at 30 September 2011 742.0 692.0
Equity at 30 September 2012 803.5 742.0
The Paragon Group of Companies PLC
NOTES TO THE FINANCIAL INFORMATION
For the year ended 30 September 2012
1. GENERAL INFORMATION
The financial information set out in the announcement does not constitute the
Company's statutory accounts for the years ended 30 September 2010, 30
September 2011 or 30 September 2012, but is derived from those statutory
accounts, which have been reported on by the Company's auditors. Statutory
accounts for the years ended 30 September 2010 and 30 September 2011 have been
delivered to the Registrar of Companies and those for the year ended 30
September 2012 will be delivered to the Registrar following the Company's
Annual General Meeting. The reports of the auditors in each case were
unqualified, did not draw attention to any matters by way of emphasis and did
not contain an adverse statement under sections 498(2) or 498(3) of the
Companies Act 2006.
This document may contain forward-looking statements with respect to certain
of the plans and current goals and expectations relating to the future
financial condition, business performance and results of the Group. By their
nature, all forward-looking statements involve risk and uncertainty because
they relate to future events and circumstances that are beyond the control of
the Group including, amongst other things, UK domestic and global economic and
business conditions, market related risk such as fluctuation in interest rates
and exchange rates, inflation, deflation, the impact of competition, changes
in customer preferences, risks concerning borrower credit quality, delays in
implementing proposals, the timing, impact and other uncertainties of future
acquisitions or other combinations within relevant industries, the policies
and actions of regulatory authorities, the impact of tax or other legislation
and other regulations in the jurisdictions in which the Group and its
affiliates operate. As a result, the Group's actual future financial
condition, business performance and results may differ materially from the
plans, goals and expectations expressed or implied in these forward-looking
statements. Nothing in this document should be construed as a profit forecast.
A copy of the Annual Report and Accounts for the year ended 30 September 2012
will be posted to shareholders in due course. Copies of this announcement can
be obtained from the Group Company Secretary, The Paragon Group of Companies
PLC at St. Catherine's Court, Herbert Road, Solihull, West Midlands, B91 3QE,
until 3 December 2012 and at 51 Homer Road Solihull, West Midlands B91 3QJ
thereafter.
2. ACCOUNTING POLICIES
The annual financial statements of the Group for the year ended 30 September
2012 have been prepared in accordance with International Financial Reporting
Standards as adopted for use in the European Union. Accordingly, the
preliminary financial information has been prepared in accordance with the
recognition and measurement criteria of IFRS. The particular accounting
policies adopted are those described in the Annual Report and Accounts of the
Group for the year ended 30 September 2011.
Going concern basis
The business activities of the Group, its current operations and those factors
likely to affect its future results and development, together with a
description of its financial position and funding position, are described in
this preliminary announcement. The principal risks and uncertainties affecting
the Group, and the steps taken to mitigate these risks are described on pages
33 to 34.
Note 5 to the accounts for the year ended 30 September 2011 includes an
analysis of the Group's working capital position and policies, while note 6
includes a detailed description of its funding structures, its use of
financial instruments, its financial risk management objectives and policies
and its exposure to credit, interest rate and liquidity risk. Critical
accounting estimates affecting the results and financial position disclosed in
this annual report are discussed in note 4. The position and policies
described in these notes remain materially unchanged to the date of this
preliminary announcement, except as disclosed in note 15. The Group has a
formalised process of budgeting, reporting and review, which provides
information to the directors which is used to ensure the adequacy of resources
available for the Group to meet its business objectives.
The securitisation funding structures described in note 6 ensure that a
substantial proportion of the Group's originated loan portfolio is
match-funded to maturity. Repayment of the securitisation borrowings is
restricted to funds generated by the underlying assets and there is limited
recourse to the Group's general funds. Recent and current loan originations
utilising the Group's available warehouse facilities described in note 6 are
refinanced through securitisation from time to time. The Group's only working
capital debt is the £110.0 million corporate bond which does not mature until
2017. As a consequence the directors believe that the Group is well placed to
manage its business risks successfully despite the current uncertain economic
outlook.
After making enquiries, the directors have a reasonable expectation that the
Group will have adequate resources to continue in operational existence for
the foreseeable future. For this reason, they continue to adopt the going
concern basis in preparing the annual report and accounts.
3. SEGMENTAL INFORMATION
For internal reporting purposes the Group is organised into two major
operating divisions, First Mortgages and Consumer Finance. These divisions are
the basis on which the Group reports segmental information.
The revenue generated by the First Mortgages segment includes interest and
fees generated by the buy-to-let and owner-occupied mortgage assets and other
income derived from first charge mortgages. Consumer Finance revenue includes
interest and fees generated by second charge loans, the residual car, retail
finance and unsecured loan assets, and other sources of income derived from
consumer loans. Both of these divisions include assets originated internally
and assets acquired from third parties.
All of the Group's operations are conducted in the United Kingdom, all
revenues arise from external customers and there are no inter-segment
revenues. No customer contributes more than 10% of the revenue of the Group.
Financial information about these business segments is shown below.
Year ended 30 September 2012
First Mortgages Consumer Finance Total
£m £m £m
Interest receivable 231.1 62.7 293.8
Interest payable (128.1) (7.9) (136.0)
Net interest income 103.0 54.8 157.8
Other operating income 6.2 6.2 12.4
Total operating income 109.2 61.0 170.2
Operating expenses (35.2) (16.7) (51.9)
Provisions for losses (12.4) (11.7) (24.1)
61.6 32.6 94.2
Fair value net gains / (losses)
1.6 (0.3) 1.3
Operating profit 63.2 32.3 95.5
Tax charge (23.3)
Profit after tax 72.2
Year ended 30 September 2011
First Mortgages Consumer Finance Total
£m £m £m
Interest receivable 214.7 43.3 258.0
Interest payable (114.0) (8.2) (122.2)
Net interest income 100.7 35.1 135.8
Other operating income 7.0 8.1 15.1
Total operating income 107.7 43.2 150.9
Operating expenses (34.8) (10.6) (45.4)
Provisions for losses (5.6) (18.8) (24.4)
67.3 13.8 81.1
Fair value net (losses) / gains
(0.2) (0.1) (0.3)
Operating profit 67.1 13.7 80.8
Tax charge (21.2)
Profit after tax 59.6
The assets and liabilities attributable to each of the segments at 30
September 2012, 30 September 2011 and 30 September 2010 were:
First Mortgages Consumer Finance Total
£m £m £m
30 September 2012
Segment assets 9,541.3 495.8 10,037.1
Segment liabilities (8,862.4) (371.2) (9,233.6)
678.9 124.6 803.5
30 September 2011
Segment assets 10,009.3 478.9 10,488.2
Segment liabilities (9,400.2) (346.0) (9,746.2)
609.1 132.9 742.0
30 September 2010
Segment assets 10,083.0 562.6 10,645.6
Segment liabilities (9,531.6) (422.0) (9,953.6)
551.4 140.6 692.0
All of the assets shown above were located in the United Kingdom.
4. OTHER OPERATING INCOME
2012 2011
£m £m
Loan account fee income 5.0 5.7
Insurance income 2.5 1.9
Third party servicing 3.9 5.8
Other income 1.0 1.7
12.4 15.1
5. FAIR VALUE NET GAINS / (LOSSES)
The fair value net gain / (loss) represents the accounting volatility on
derivative instruments which are matching risk exposure on an economic basis
generated by the requirements of IAS 39. Some accounting volatility arises on
these items due to accounting ineffectiveness on designated hedges, or because
hedge accounting has not been adopted or is not achievable on certain items.
The losses and gains are primarily due to timing differences in income
recognition between the derivative instruments and the economically hedged
assets and liabilities. Such differences will reverse over time and have no
impact on the cash flows of the Group.
6. Earnings per share
Earnings per ordinary share is calculated as follows:
2012 2011
Profit for the year (£m) 72.2 59.6
Basic weighted average number of ordinary shares ranking for
dividend during the year (million)
297.8 295.3
Dilutive effect of the weighted average number of share options
and incentive plans in issue during the year (million)
9.4 8.2
Diluted weighted average number of ordinary shares ranking for
dividend during the year (million)
307.2 303.5
Earnings per ordinary share - basic 24.2p 20.2p
- 23.5p 19.6p
diluted
7. INTangible assets
2012 2011 2010
£m £m £m
Goodwill 1.6 1.6 1.6
Computer software 1.4 1.1 0.4
Other intangible assets 6.1 6.6 7.2
9.1 9.3 9.2
Other intangible assets comprise brands and the benefit of business networks
recognised on the acquisition of subsidiary companies.
8. FInancial Assets
Note 2012 2011 2010
£m £m £m
Loans to customers 8,694.6 8,724.2 8,911.2
Fair value adjustments from portfolio hedging
1.1 3.4 8.6
Investments in structured entities 9.1 11.8 -
Derivative financial assets 9 800.4 1,151.8 1,160.3
9,505.2 9,891.2 10,080.1
9. Derivative Financial Assets and Liabilities
2012 2011 2010
£m £m £m
Derivative financial assets 8 800.4 1,151.8 1,160.3
Derivative financial liabilities 14 (4.6) (9.1) (17.3)
795.8 1,142.7 1,143.0
Of which:
Foreign exchange basis swaps 799.5 1,145.8 1,148.7
Other derivatives (3.7) (3.1) (5.7)
795.8 1,142.7 1,143.0
The Group's securitisation borrowings are denominated in sterling, euros and
US dollars. All currency borrowings are swapped at inception so that they have
the effect of sterling borrowings. These swaps provide an effective hedge
against exchange rate movements, but the requirement to carry them at fair
value leads, when exchange rates have moved significantly since the issue of
the notes, to large balances for the swaps being carried in the balance sheet.
This is currently the case with both euro and US dollar swaps, although the
debit balance is compensated for by retranslating the borrowings at the
current exchange rate.
10. Cash and CASH EQUIVALENTS
Only 'Free Cash' is unrestrictedly available for the Group's general purposes.
Cash received in respect of loan assets is not immediately available, due to
the terms of the warehouse facilities and the securitisations. 'Cash and Cash
Equivalents' also includes balances held by the Trustees of the Paragon
Employee Share Ownership Plans which may only be used to invest in the shares
of the Company, pursuant to the aims of those plans.
The total consolidated 'Cash and Cash Equivalents' balance may be analysed as
shown below:
2012 2011 2010
£m £m £m
Free cash 127.7 195.0 147.8
Securitisation cash 374.9 374.1 387.2
ESOP cash 2.2 2.5 1.7
504.8 571.6 536.7
Cash and Cash Equivalents includes current bank balances and fixed rate
sterling term deposits with London banks.
11. Called-up share capital
The share capital of the Company consists of a single class of £1 ordinary
shares.
Movements in the issued share capital in the year were:
2012 2011
Number Number
Ordinary shares
At 1 October 2011 299,745,445 299,454,078
Shares issued 2,096,169 291,367
At 30 September 2012 301,841,614 299,745,445
During the year the Company issued 2,090,570 shares at par (2011: 291,367) to
the trustees of its ESOP Trusts in order that they could fulfil their
obligations under the Group's share based award arrangements. It also issued
5,599 shares (2011: nil) to satisfy options granted under sharesave schemes
for a consideration of £5,688 (2011: £nil).
12. RESERVES
2012 2011 2010
£m £m £m
Share premium account 64.1 64.1 64.1
Merger reserve (70.2) (70.2) (70.2)
Cash flow hedging reserve 0.7 1.8 1.4
Profit and loss account 555.6 495.0 450.5
550.2 490.7 445.8
13. equity Dividend
Amounts recognised as distributions to equity shareholders in the period:
2012 2011 2012 2011
Per share Per share £m £m
Equity dividends on ordinary shares
Final dividend for the year ended 30 September
2011
2.65p 2.40p 7.9 7.1
Interim dividend for the year ended 30 September
2012
1.50p 1.35p 4.4 4.0
4.15p 3.75p 12.3 11.1
Amounts paid and proposed in respect of the year:
2012 2011 2012 2011
Per share Per share £m £m
Interim dividend for the year ended 30 September
2012
1.50p 1.35p 4.4 4.0
Proposed final dividend for the year ended 30
September 2012
4.50p 2.65p 13.4 7.9
6.00p 4.00p 17.8 11.9
The proposed final dividend for the year ended 30 September 2012 will be paid
on 11 February 2013, subject to approval at the Annual General Meeting, with a
record date of 11 January 2013. The dividend will be recognised in the
accounts when it is paid.
14. FInancial Liabilities
(a) The Group
Note 2012 2011 2010
£m £m £m
Current liabilities
Finance lease liability 1.4 1.2 1.1
Bank loans and overdrafts 0.6 0.6 0.1
2.0 1.8 1.2
Non-current liabilities
Asset backed loan notes 7,580.9 8,049.7 8,336.2
Corporate bond 110.0 112.0 115.8
Finance lease liability 10.2 11.6 12.8
Bank loans and overdrafts 1,453.3 1,492.1 1,403.6
Derivative financial instruments 9 4.6 9.1 17.3
9,159.0 9,674.5 9,885.7
A maturity analysis of the above borrowings and further details of asset
backed loan notes and bank loans are given in note 15.
15. BORROWINGS
All borrowings described in the Group Accounts for the year ended 30 September
2011 remained in place throughout the period.
In November 2011 a Group company, Paragon Mortgages (No. 16) PLC issued
£131.7m Class A Senior notes, rated AAA by Fitch and Aaa by Moody's. The Group
retained £32.1m Class Z junior notes and advanced a cash fund of £5.4m.
On 25 October 2012 a Group company, Paragon Mortgages (No. 17) PLC, issued
£195.5m of sterling mortgage backed floating rate notes at par. £175.0m of the
notes were rated AAA, £10.5m rated AA and £10.0m rated A. The average interest
margin above LIBOR on the notes was 145.9% and the proceeds were used to pay
down existing warehouse debt. The Group retained £4.5m of subordinated notes,
which also invested £6.0m in the first loss fund, which brings its total
investment to £10.5m, or 5.25% of the issue amount.
To provide further funding for new lending, on 27 September 2012, the Group
entered into a £200.0m committed sterling facility provided to Paragon Fifth
Funding Limited by the wholesale division of Lloyds Bank. This facility is
secured on all the assets of Paragon Fifth Funding Limited and is structured
with a three year term to permit drawings and re-drawings in its first
eighteen months, or up to 24 months, subject to a capital markets refinancing
of the facility in its first twelve months. Loans originated in this warehouse
will be refinanced in the mortgage backed securitisation market from time to
time when appropriate. Interest on this loan is payable monthly in sterling at
2.75% above three month LIBOR. The facility has a renewal process that allows
the Group to agree a new commitment period prior to the expiry of the existing
commitment period. As with the other warehouses, repayments on this facility
are limited to principal cash received from the funded assets.
Repayments made in respect of the Group's borrowings are shown in note 18.
16. net cash flow from operating activities
2012 2011
£m £m
Profit before tax 95.5 80.8
Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment 2.1 2.0
Amortisation of intangible assets 1.0 0.9
Foreign exchange movement on borrowings (344.9) (3.2)
Other non-cash movements on borrowings (0.7) (1.2)
Impairment losses on loans to customers 24.1 24.4
Charge for share based remuneration 2.8 2.0
(Profit) / loss on disposal of property, plant and equipment - (0.1)
Net decrease / (increase) in operating assets:
Loans to customers 8.2 150.8
Derivative financial instruments 351.4 8.5
Fair value of portfolio hedges 2.3 5.2
Other receivables - 1.2
Net (decrease) / increase in operating liabilities:
Derivative financial instruments (4.5) (8.2)
Other liabilities (3.0) 3.4
Cash generated by operations 134.3 266.5
Income taxes (paid) (17.0) (20.4)
117.3 246.1
17. net cash flow from investing activities
2012 2011
£m £m
Proceeds on disposal of property, plant and equipment
0.2 0.9
Purchases of property, plant and equipment (1.6) (2.0)
Purchases of intangible assets (0.8) (1.0)
Net cash (utilised) by investing activities (2.2) (2.1)
18. net cash flow from financing activities
2012 2011
£m £m
Dividends paid (note 13) (12.3) (11.1)
Issue of asset backed floating rate notes 129.9 -
Repayment of asset backed floating rate notes (254.9) (284.1)
Capital element of finance lease payments (1.2) (1.1)
Movement on bank facilities (43.1) 87.1
Purchase of shares (0.5) (1.2)
Sale of shares 0.2 0.8
Net cash (utilised) by financing activities (181.9) (209.6)
19. COST:INCOME RATIO
Cost:income ratio is derived as follows:
2012 2011
£m £m
Cost - operating expenses 51.9 45.4
Total operating income 170.2 150.9
Cost / Income 30.5% 30.1%
20. UNDERLYING PROFIT
Underlying profit is determined by excluding from the operating result certain
costs of a one‑off nature, which do not reflect the underlying business
performance of the Group, gains on the repurchase of debt which result from
the illiquidity of the credit markets rather than the fair value of the
security and fair value accounting adjustments arising from the Group's
hedging arrangements.
2012 2011
£m £m
First Mortgages
Profit before tax for the period (note 3) 63.2 67.1
Less: Fair value losses / (gains) (1.6) 0.2
61.6 67.3
Consumer Finance
Profit before tax for the period (note 3) 32.3 13.7
Less: Fair value losses / (gains) 0.3 0.1
32.6 13.8
Total
Profit before tax for the period (note 3) 95.5 80.8
Less: Fair value losses / (gains) (1.3) 0.3
94.2 81.1
21. Net asset value per share
Net asset value per share is derived as follows:
Note 2012 2011
Total equity (£m) 803.5 742.0
Outstanding issued shares (m) 11 301.8 299.7
Treasury shares (m) (0.7) (0.7)
Shares held by ESOP schemes (m) (2.3) (2.5)
298.8 296.5
Net asset value per £1 ordinary share 269p 250p
22. Return on Equity
Return on equity is defined by the Group by comparing the profit after tax for
the year to the average of the opening and closing equity positions and is
derived as follows:
2012 2011
£m £m
Profit for the year 72.2 59.6
Divided by
Opening equity 742.0 692.0
Closing equity 803.5 742.0
Average equity 772.7 717.0
Return on equity 9.3% 8.3%
23. RELATED PARTY TRANSACTIONS
On 27 May 2010, Mr A K Fletcher, an independent non-executive director of the
Company, was appointed as a trustee of the Group Pension Plan. In respect of
this appointment he was paid £10,000 in the year ended 30 September 2012 by
Paragon Finance plc, the sponsoring company of the Plan (2011: £10,000).
The Group Pension Plan is a related party of the Group. Transactions with the
plan are of a similar nature to those disclosed in the accounts for the year
ended 30 September 2011.
The Group had no other transactions with related parties other than the key
management compensation.
The Paragon Group of Companies PLC
STATEMENT OF DIRECTORS' RESPONSIBILITIES
in relation to financial statements
The responsibility statement below has been prepared in connection with the
full annual accounts of the Company for the year ended 30 September 2012.
Certain parts of these accounts are not presented within this announcement.
The directors are responsible for preparing the Annual Report and the
financial statements. The directors are required to prepare accounts for the
Group in accordance with International Financial Reporting Standards ('IFRS')
and have also elected to prepare company financial statements in accordance
with IFRS. In respect of the financial statements for the year ended 30
September 2012, company law requires the directors to prepare such financial
statements in accordance with International Financial Reporting Standards, the
Companies Act 2006 and Article 4 of the IAS Regulation.
International Accounting Standard 1 - 'Presentation of Financial Statements'
requires that financial statements present fairly for each financial year the
Company's financial position, financial performance and cash flows. This
requires the faithful representation of the effects of transactions, other
events and conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out in the
International Accounting Standards Board's 'Framework for the Preparation and
Presentation of Financial Statements'. In virtually all circumstances, a fair
presentation will be achieved by compliance with all applicable International
Financial Reporting Standards. Directors are also required to:
· properly select and apply accounting policies;
· present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information; and
· provide additional disclosures when compliance with the specific
requirements in International Financial Reporting Standards is insufficient to
enable users to understand the impact of particular transactions, other events
and conditions on the entity's financial position and financial performance.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company, for safeguarding the assets, for taking reasonable steps for the
prevention and detection of fraud and other irregularities and for the
preparation of a directors' report and directors' remuneration report which
comply with the applicable requirements of the Companies Act 2006.
The directors are responsible for the maintenance and integrity of the
Company's website. Legislation in the United Kingdom governing the preparation
and dissemination of financial statements differs from legislation in other
jurisdictions.
The directors confirm that, to the best of their knowledge:
· the financial statements, prepared in accordance with International
Financial Reporting Standards as adopted by the European Union, give a true
and fair view of the assets, liabilities, financial position and profit or
loss of the Company and of the Group taken as a whole; and
· the business review, which is incorporated into the Directors' Report,
includes a fair review of the development and performance of the business and
the position of the Group taken as a whole, together with a description of the
principal risks and uncertainties it faces.
Approved by the Board of Directors and signed on behalf of the Board.
JOHN G GEMMELL
Company Secretary
20 November 2012
The Paragon Group of Companies PLC
PRINCIPAL RISKS AND UNCERTAINTIES
For the year ended 30 September 2012
There are a number of potential risks and uncertainties which could have a
material impact on the Group's performance and could cause actual results to
differ materially from expected and historical results. The Group's system of
risk management, which includes risk review and an active internal audit
function, is monitored by the Audit and Compliance Committee.
The principal risks to which the Group is exposed include the following:
Economic environment
A further deterioration in the general economy may adversely affect all
aspects of the Group's business. Adverse economic conditions might increase
the number of borrowers that default on their loans or adversely affect
funding structures, which may in turn increase the Group's costs and could
result in losses on some of the Group's assets, or restrict the ability of the
Group to develop in the future.
The general economic factors affecting the Group in the period going forward,
together with the steps taken by the Group's management to address these
issues are described in more detail in the management report.
Changes in interest rates may adversely affect the Group's net income and
profitability. The steps taken by the Group to mitigate against the long term
effects of interest rate movements, through the structuring of its products
and the use of hedging procedures are described in note 6 to the accounts.
Credit risk
As a primary lender the Group faces credit risk as an inherent component of
its lending activities. Adverse changes in the credit quality of the Group's
borrowers, a general deterioration in UK economic conditions or adverse
changes arising from systematic risks in UK and global financial systems could
reduce the recoverability and value of the Group's assets.
Operational risk
The activities of the Group subject it to operational risks relating to its
ability to implement and maintain effective systems to process the high volume
of transactions with customers. A significant breakdown of the IT systems of
the Group might adversely impact the ability of the Group to operate its
business effectively.
To address these risks, the Group's internal audit function carries out
targeted reviews of critical systems to ensure that they remain adequate for
their purpose. The Group has a business continuity plan, which is kept under
regular review and is designed to ensure that any breakdown in systems would
not cause significant disruption to the business.
Competitor risk
The Group faces strong competition in all of the core markets in which it
operates. There is a danger that its profitability and /or market share may be
impaired.
To mitigate this risk the Group maintains relationships with its customers,
business introducers and other significant participants in the markets in
which it is active, as well as being active in industry-wide organisations and
initiatives. This enables market trends to be identified and addressed within
the relevant business strategy.
Governmental, legislative and regulatory risk
The market sectors to which the Group supplies products, and the capital
markets from which it has historically obtained much of its funding, have been
subject to intervention by United Kingdom Government, European Union and other
regulatory bodies. Current regulatory developments are discussed in the
section of the management report headed 'Regulation'. To the extent that such
actions disadvantage the Group, when compared to other market participants,
they present a risk to the Group.
In order to mitigate this risk the Group has been active in explaining its
position to the authorities in order that it is not inadvertently
disadvantaged.
Management
The success of the Group is dependent on recruiting and retaining skilled
senior management and personnel.
Working capital
The Group's capital position and its policies in respect of capital management
are described in the accounts. These policies and their application are
described more fully in the section of the management report headed 'Capital
Management'.
Financial risk
The Group's exposure to other financial risks, including liquidity risk and
foreign currency risk, and the procedures in place to mitigate those risks are
described in detail in the accounts.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR BKCDBOBDDDDD -0- Nov/20/2012 07:00 GMT
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