OSB GROUP PLC - Interim Report
LEI: 213800ZBKL9BHSL2K459
*OSB GROUP PLC**
**Interim report for the six months ended 30 June 2023*
OSB GROUP PLC (OSBG or the Group), the specialist lending and retail savings group, announces today its results for the six months ended 30 June 2023.
*Following the Combination with Charter Court Financial Services Group plc (CCFS) on 4 October 2019, this press release includes results on an underlying basis, in addition to the statutory basis, which Management believe provide a more consistent basis for comparing the Group’s results between financial periods**. Underlying results exclude integration costs and other acquisition-related items (see the reconciliation in the Financial review).*
*Highlights*
· Underlying profit before tax^1 reduced to £116.6m (H1 2022: £294.1m) and statutory profit before tax was £76.7m (H1 2022: £268.1m) largely reflecting an adverse effective interest rate (EIR) adjustment of £180.7m and £208.5m on an underlying and statutory basis, respectively
· Underlying and statutory net loan book grew by 4% to £24.5bn and £24.6bn in the period (FY 2022: £23.5bn and £23.6bn, respectively). Organic originations in the first six months of 2023 were £2.3bn (H1 2022: £2.3bn)
· Underlying and statutory net interest margin (NIM)^2 reduced to 203bps and 171bps (H1 2022: 302bps and 280bps, respectively) as the benefit of base rate rises was more than offset by the adverse EIR adjustment
· Underlying and statutory cost to income ratios^3 increased to 40% and 47% (H1 2022: 23% and 25%, respectively) principally as a result of lower income due to the adverse EIR adjustment
· Underlying and statutory loan loss ratios^4 were 37bps (H1 2022: 2bps and 1bp, respectively) largely due to house price moderation, a worsening of the economic outlook and modelled IFRS 9 stage migration. Arrears balances greater than three months were broadly stable at 1.2% (31 December 2022: 1.1%)
· Underlying return on equity^5 reduced to 8% (H1 2022: 24%) and statutory return on equity was 5% (H1 2022: 22%) due to the reduction in profitability following the adverse EIR adjustment
· Basic earnings per share^6 were 19.5p and 12.8p on an underlying and statutory basis (H1 2022: 48.9p and 45.7p) primarily due to the adverse EIR adjustment
· Excluding the impact of the adverse EIR adjustment, the underlying net loan book grew by 5%, underlying NIM would have increased to 333bps (H1 2022: 302bps), underlying cost to income would have been 24% (H1 2022: 23%), underlying return on equity would have been 22% (H1 2022: 24%) and underlying EPS would have increased to 51.3p (H1 2022: 48.9p)
· The Common Equity Tier 1 capital ratio, which includes the full impact of the £150m share repurchase programme, remained strong at 15.7% (31 December 2022: 18.3%). As at 9 August, the Group had repurchased £107.2m worth of shares under the programme
· In April, the Group issued £250m of MREL qualifying Tier 2 debt securities making further progress in optimising its capital composition
· Interim dividend^7 of 10.2 pence per share (H1 2022: 8.7 pence per share) representing one-third of the total 2022 ordinary dividend, in line with the Group’s stated policy
The below table presents KPIs on a statutory and underlying basis including and excluding the adverse EIR adjustment:
* * *Statutory* *Underlying*
*H1 2023* *as reported* *excl. EIR* *difference* *as reported * *excl. EIR* *difference*
Net loan book growth 4% 5% (1)pps 4% 5% (1)pps
NIM 171bps 322bps (151)bps 203bps 333bps (130)bps
Cost to income ratio 47% 25% 22pps 40% 24% 16pps
Manex ratio 78bps 78bps - 78bps 78bps -
Pre-tax profit £76.7m £285.2m £(208.5)m £116.6m £297.3m £(180.7)m
EPS 12.8p 49.5p (36.7)p 19.5p 51.3p (31.8)p
RoE 5% 21% (16)pps 8% 22% (14)pps
CET1 ratio 15.7% 16.9% (120)bps - - -
Commenting on the results, Group CEO, Andy Golding said:
“I am disappointed by the results which reflect the adverse EIR adjustment announced in early July, against a backdrop of otherwise strong operational and financial performance in the first half. We continue to do the right thing by our customers by offering a full range of mortgage products, despite the volatile rate environment, resulting in strong demand and higher retention, driving net loan book growth of 4% in the period. The Group continued to increase share in its core lending sub-segments, having ranked fourth largest BTL lender in the UK in terms of gross new lending in 2022.^8 We also saw strong demand from savers and consistently high retention rates, as we continued to offer attractively priced products.
Our loan book continued to demonstrate consistently strong credit performance with balances over three months in arrears remaining broadly stable at 1.2% of the loan book at the end of June, although there was some deterioration in house prices and the macroeconomic outlook during the period, reflected in the higher IFRS 9 impairment charge. We maintained our focus on cost efficiency and discipline in the face of inflationary headwinds and planned investment in people and operations, with administrative expenses in the first half running slightly below expectation in absolute terms.
Based on our current pipeline and application volumes, we reiterate our target underlying net loan book growth of c.7% for 2023. The underlying NIM for the second half of 2023 is expected to be broadly flat to 2022, resulting in a full year NIM of c.2.6%, after the expected impact of further planned MREL qualifying debt issuance, subject to market conditions. We expect the underlying cost to income ratio to be c.29% for the second half and c.33% for the full year.
We remain cognisant of the uncertain macroeconomic outlook and the potential impact of the higher cost of living and borrowing on the mortgage market and customer affordability, however the strength and resilience of our business model, our strong capital and liquidity positions, high-quality secured loan book and strong customer franchises and risk-management capabilities, position us well to deliver attractive and sustainable returns across the cycle and I look to the future with confidence.”
*Enquiries:*
*OSB GROUP PLC Brunswick Group **
*Alastair Pate, Investor Relations Robin Wrench/Simone Selzer
t: 01634 838973 t: 020 7404 5959
*Results presentation *
A webcast presentation for analysts will be held at 9:30am on Thursday 10 August.
The presentation will be webcast or call only and will be available on the OSB Group website at www.osb.co.uk/investors/results-reports-presentations.
The UK dial in number is 020 4587 0498 and the password is 885709. Registration is open immediately.
*Notes*
1. Before acquisition-related items of £39.9m (H1 2022: £26.0m)
2. Net interest income as a percentage of a 7 point average of interest earning assets, annualised on an actual days basis
3. Administrative expenses as a percentage of total income
4. Impairment losses as a percentage of a 7 point average of gross loans and advances, annualised
5. Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, as a percentage of a 7 point average of shareholders’ equity (excluding £150m of AT1 securities), annualised
6. Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, divided by the weighted average number of ordinary shares in issue
7. The declared interim dividend of 10.2 pence per share is based on one-third of the total 2022 dividend of 30.5 pence per share (H1 2022: 8.7 pence per share)
8. UK Finance, Annual ranking of mortgage lenders, MM11G, July 2023
*About **OSB GROUP PLC*
OneSavings Bank plc (OSB) began trading as a bank on 1 February 2011 and was admitted to the main market of the London Stock Exchange in June 2014 (OSB.L). OSB joined the FTSE 250 index in June 2015. On 4 October 2019, OSB acquired Charter Court Financial Services Group plc (CCFS) and its subsidiary businesses. On 30 November 2020, OSB GROUP PLC became the listed entity and holding company for the OSB Group. The Group provides specialist lending and retail savings and is authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority. The Group reports under two segments, OneSavings Bank and Charter Court Financial Services.
*OneSavings Bank (OSB)*
OSB primarily targets market sub-sectors that offer high growth potential and attractive risk-adjusted returns in which it can take a leading position and where it has established expertise, platforms and capabilities. These include private rented sector Buy-to-Let, commercial and semi-commercial mortgages, residential development finance, bespoke and specialist residential lending, secured funding lines and asset finance.
OSB originates mortgages organically via specialist brokers and independent financial advisers through its specialist brands including Kent Reliance for Intermediaries and InterBay Commercial. It is differentiated through its use of highly skilled, bespoke underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through the long-established Kent Reliance name, which includes online and postal channels as well as a network of branches in the South East of England. Diversification of funding is currently provided by securitisation programmes and the Bank of England’s Term Funding Scheme with additional incentives for SMEs.
*Charter Court Financial Services Group (CCFS)*
CCFS focuses on providing Buy-to-Let and specialist residential mortgages, mortgage servicing, administration and retail savings products. It operates through its brands: Precise Mortgages and Charter Savings Bank.
It is differentiated through risk management expertise and best-of-breed automated technology and systems, ensuring efficient processing, strong credit and collateral risk control and speed of product development and innovation. These factors have enabled strong balance sheet growth whilst maintaining high credit quality mortgage assets.
CCFS is predominantly funded by retail savings originated through its Charter Savings Bank brand. Diversification of funding is currently provided by securitisation programmes and the Bank of England’s Term Funding Scheme with additional incentives for SMEs.
*Important disclaimer*
This document should be read in conjunction with any other documents or announcements distributed by OSB GROUP PLC (OSBG) through the Regulatory News Service (RNS). This document is not audited and contains certain forward-looking statements with respect to the business, strategy and plans of OSBG, its current goals, beliefs, intentions, strategies and expectations relating to its future financial condition, performance and results. Such forward-looking statements include, without limitation, those preceded by, followed by or that include the words ‘targets’, ‘believes’, ‘estimates’, ‘expects’, ‘aims’, ‘intends’, ‘will’, ‘may’, ‘anticipates’, ‘projects’, ‘plans’, ‘forecasts’, ‘outlook’, ‘likely’, ‘guidance’, ‘trends’, ‘future’, ‘would’, ‘could’, ‘should’ or similar expressions or negatives thereof but are not the exclusive means of identifying such statements. Statements that are not historical facts, including statements about OSBG’s, its directors’ and/or management’s beliefs and expectations, are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that may or may not occur in the future that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by OSBG or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in exchange rates, stock markets, inflation, deflation, interest rates, energy prices and currencies; policies of the Bank of England, the European Central Bank and other G7 central banks; the ability to access sufficient sources of capital, liquidity and funding when required; changes to OSBG’s credit ratings; the ability to derive cost savings; changing demographic developments, and changing customer behaviour, including consumer spending, saving and borrowing habits; changes in customer preferences; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the potential for countries to exit the European Union (the EU) or the Eurozone, and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural and other disasters, adverse weather and similar contingencies outside OSBG’s control; inadequate or failed internal or external processes, people and systems; terrorist acts and other acts of war (including, without limitation, the Russia-Ukraine war and any continuation and escalation thereof) or hostility and responses to those acts; geopolitical events and diplomatic tensions; the impact of outbreaks, epidemics and pandemics or other such events; changes in laws, regulations, taxation, ESG reporting standards, accounting standards or practices, including as a result of the UK’s exit from the EU; regulatory capital or liquidity requirements and similar contingencies outside OSBG’s control; the policies and actions of governmental or regulatory authorities in the UK, the EU or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; market relating trends and developments; exposure to regulatory scrutiny, legal proceedings, regulatory investigations or complaints; changes in competition and pricing environments; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; the success of OSBG in managing the risks of the foregoing; and other risks inherent to the industries and markets in which OSBG operates.
Accordingly, no reliance may be placed on any forward-looking statement. Neither OSBG, nor any of its directors, officers or employees provides any representation, warranty or assurance that any of these statements or forecasts will come to pass or that any forecast results will be achieved. Any forward-looking statements made in this document speak only as of the date they are made and it should not be assumed that they have been revised or updated in the light of new information of future events. Except as required by the Prudential Regulation Authority, the Financial Conduct Authority, the London Stock Exchange PLC or applicable law, OSBG expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this document to reflect any change in OSBG’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. For additional information on possible risks to OSBG’s business, please see the Risk review section in the OSBG Annual Report and Accounts 2022. Copies of this are available at www.osb.co.uk and on request from OSBG.
Nothing in this document or any subsequent discussion of this document constitutes or forms part of a public offer under any applicable law or an offer or the solicitation of an offer to purchase or sell any securities or financial instruments. Nor does it constitute advice or a recommendation with respect to such securities or financial instruments, or any invitation or inducement to engage in investment activity under section 21 of the Financial Services and Markets Act 2000. Past performance cannot be relied on as a guide to future performance. Statements about historical performance must not be construed to indicate that future performance, share price or results in any future period will necessarily match or exceed those of any prior period. Nothing in this document is intended to be, or should be construed as, a profit forecast or estimate for any period.
In regard to any information provided by third parties, neither OSBG nor any of its directors, officers or employees explicitly or implicitly guarantees that such information is exact, up to date, accurate, comprehensive or complete. In no event shall OSBG be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for inaccuracies or errors in, or omission from, any third-party information contained herein. Moreover, in reproducing such information by any means, OSBG may introduce any changes it deems suitable, may omit partially or completely any aspect of the information from this document, and accepts no liability whatsoever for any resulting discrepancy.
Liability arising from anything in this document shall be governed by English law, and neither OSBG nor any of its affiliates, advisors or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. Nothing in this document shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.
Certain figures contained in this document, including financial information, may have been subject to rounding adjustments and foreign exchange conversions. Accordingly, in certain instances, the sum or percentage change of the numbers contained in this document may not conform exactly to the total figure given.
*Non-IFRS performance measures *
OSB believes that any non-IFRS performance measures included in this document provide a more consistent basis for comparing the business' performance between financial periods and provide more detail concerning the elements of performance which OSBG is most directly able to influence or which are relevant for an assessment of OSBG. They also reflect an important aspect of the way in which operating targets are defined and performance is monitored by the Board. However, any non-IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well. For further details, refer to the Alternative performance measures section in the OSBG Annual Report and Accounts 2022. Copies of this are available at www.osb.co.uk and on request from OSBG.*Key Performance Indicators - statutory*
*£2.3bn*
*Gross organic lending up 2%*
* *
*H1 2022: £2.3bn*
*£24.6bn *
*Net loan book up 4%*
* *
*FY 2022: £23.6bn*
* *
*£76.7m*
* *
*Profit before tax down 71%*
* *
*H1 2022: £268.1m* *12.8p*
* *
*Basic EPS**^1 **down 72%*
* *
*H1 2022: 45.7p*
* *
*171bps*
*Net interest margin**^2* *down 109bps*
* *
*H1 2022: 280bps*
*47%*
* *
*Cost to income ratio**^3 **increased 22pps*
*H1 2022: 25%*
*37bps*
* *
*Loan loss ratio**^4* *up 36bps*
* *
*H1 2022: 1bp*
* * *78bps*
* *
*Management expense ratio**^5** up 5bps*
* *
*H1 2022: 73bps*
* *
*5%*
* *
*Return on equity**^6** declined 17pps*
* *
*H1 2022: 22%*
* *
*15.7%*
*CET1 remained strong*
*FY 2022: 18.3%*
*3 months + in arrears**^7** broadly stable*
* *
*OSB 1.3%, CCFS 1.0%*
*FY 2022: OSB 1.2%, CCFS 0.9%*
* * *Customer NPS**^8** strong*
* *
*OSB +71, CCFS +60*
*H1 2022: OSB +69, CCFS +70*
* *
1. Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, divided by the weighted average number of ordinary shares in issue
2. Net interest income as a percentage of a 7 point average of interest earning assets, annualised on an actual days basis
3. Administrative expenses as a percentage of total income
4. Impairment losses as a percentage of a 7 point average of gross loans and advances, annualised
5. Administrative expenses as a percentage of 7 point average of total assets, annualised
6. Profit attributable to ordinary shareholders, which is profit after tax and after deducting coupons on AT1 securities, gross of tax, as a percentage of a 7 point average of shareholders’ equity (excluding £150m of AT1 securities), annualised
7. Portfolio arrears rate of accounts for which there are missing or overdue payments by more than three months as a percentage of gross loans
8. OSB customer Net Promoter Score relates to Kent Reliance savings customers and CCFS customer NPS relates to Charter Savings Bank customers. It is calculated based on customer responses to the question of whether they would recommend the Group’s products to a friend. The responses provide a score between -100 and +100
*Key Performance Indicators - underlying*
Underlying key performance indicators for the six months to 30 June 2023 and 30 June 2022 reflect results for the combined Group, excluding integration costs and other acquisition-related items (see Reconciliation of statutory to underlying results in the Financial review).
*£24.5bn*
* *
*Net loan book up 4%*
* *
*FY 2022: £23.5bn*
*£116.6m *
* *
*Profit before tax down 60%*
* *
*H1 2022: £294.1m*
*19.5p*
* *
*Basic EPS^1 down 60% *
* *
*H1 2022: 48.9p*
* * *203bps*
* *
*Net interest margin**^2* *down 99bps*
* *
*H1 2022: 302bps*
* *
*40%*
* *
*Cost to income ratio**^3** increased 17pps*
* *
*H1 2022: 23%*
*37bps*
* *
*Loan loss ratio**^4 **up 35bps*
* *
*H1 2022: 2bps*
*78bps *
* *
*Management expense ratio**^5** up 6bps*
* *
*H1 2022: 72bps *
*8%*
*Return on equity**^6** down 16pps*
*H1 2022: 24%*
For definitions of key ratios please see footnotes in statutory KPIs above.
*
*
*CEO Report*
The first half of 2023 saw strong operational performance, however our financial results were significantly impacted by the adverse effective interest rate (EIR) adjustment announced in July. The fundamentals of our business remained strong; the Group delivered underlying net loan book growth of 4% (5% excluding the impact of the adverse EIR adjustment), our loan book demonstrated strong credit performance with three months plus arrears remaining broadly stable at 1.2% compared to 1.1% at the end of 2022, and the Group’s capital and liquidity positions remained robust.
The Group’s proposition continues to benefit from doing the right thing for our customers, as we offered a full range of mortgages to our brokers and customers even when others struggled to do so, demonstrated by growth in the mortgage book and our increasing share in core market sub-segments. This strong demand has also been seen from our savings customers, as we rewarded our loyal savers with consistent, attractively priced products.
The Group has embedded the FCA’s new Consumer Duty rules that came into force at the end of July, as we strive to deliver the best possible outcomes and experience for our customers, and we demonstrated our commitment to borrowers by becoming signatories to the Government’s Mortgage Charter.
*Financial performance*
The Group’s results for the first half of 2023 were significantly impacted by the adverse underlying EIR adjustment of £180.7m announced in the Trading update on 6 July 2023, however the Group’s performance excluding this adjustment remained strong.
The Group delivered an underlying pre-tax profit of £116.6m for the first six months of 2023, down 60% from £294.1m in the first half of 2022, with the benefit of net loan book growth and improved margins more than offset by the adverse EIR adjustment and a higher impairment charge, reflecting the deterioration in house prices and the macroeconomic outlook during the period. The underlying basic earnings per share was 19.5 pence (H1 2022: 48.9 pence). On a statutory basis, profit before tax was £76.7m and basic earnings per share was 12.8 pence (H1 2022: £268.1m and 45.7 pence, respectively).
The underlying and statutory net interest margins reduced to 203bps and 171bps, respectively (H1 2022: 302bps and 280bps) as the benefit of base rate rises was more than offset by the adverse EIR adjustment. Excluding this EIR adjustment, the underlying net interest margin (NIM) for the first half of 2023 would have been marginally ahead of market expectation.
The Group continued its focus on cost efficiency and discipline, with the management expense ratio increasing to 78bps on both an underlying and statutory basis (H1 2022: 72bps and 73bps, respectively), due to the anticipated impact of inflation and investment in people and operations, which also saw underlying administrative expenses increase to £109.2m, up 23% compared to the first half of 2022. The cost to income ratio was 40% and 47% on an underlying and statutory basis respectively for the first six months of 2023 (H1 2022: 23% and 25%, respectively), however this was impacted by the reduction in income due to the adverse EIR adjustment.
The Group delivered an underlying return on equity of 8% for the first half (H1 2022: 24%) and statutory return on equity was 5% (H1 2022: 22%) reflecting the impact of the adverse EIR adjustment on profit in the period.
The Board has declared an interim dividend of 10.2 pence per share, representing one-third of the total 2022 ordinary dividend, in line with our stated dividend policy.
*Our lending franchise*
*
*Throughout the first half of 2023, the macroeconomic backdrop was challenging for our owner occupier borrowers and Buy-to-Let landlords, as they dealt with inflationary headwinds and rapidly rising interest rates. However, we saw strong demand for the Group’s lending products, especially in the first quarter of the year, as borrowers took advantage of more attractive mortgage rates available at that time and our service capacity. Refinancing activity was particularly strong in the period, as borrowers sought to lock in lower monthly repayments in expectation of future base rate rises and we continued to benefit from some purchase activity in both the Buy-to-Let and Residential sub-segments, despite the overall subdued market dynamic.
I am particularly pleased that our lending franchises continue to grow and we are now ranked fourth largest Buy-to-Let lender in the UK in terms of gross new lending in 2022, according to recently released data from UK Finance.^1 This strong demand continued into the first half, supporting underlying and statutory net loan book growth of 4% to £24.5bn and £24.6bn respectively (31 December 2022: £23.5bn and £23.6bn). Excluding the adverse EIR adjustment, the underlying and statutory net loan book would have increased by 5% in the first six months of 2023. Organic originations of £2.3bn were up 2% from the prior period.
In addition to the performance of our Buy-to-Let and Residential sub-segments, I am pleased that our InterBay brand, which offers bespoke commercial and semi-commercial products, had a very successful first half of 2023. The new product set introduced earlier in the year led to a more than two-fold increase in organic originations.
Our well-established Kent Reliance retention programme, Choices, saw 75% of borrowers refinance with the Group within three months of their fixed rate product ending during the first half. We established a proactive retention programme for Precise Mortgages borrowers towards the end of 2022 and we are already seeing a steady improvement in levels of retention, with 59% of borrowers refinancing with the Group within three months of their fixed rate product ending in the first half. Our customer focus was further demonstrated as our brands and mortgage products continued to win industry awards, including Best Specialist Lender from L&G Mortgage Club for Kent Reliance and Best Short-Term Lender from Mortgage Strategy Awards for Precise Mortgages. Our strong relationships with brokers were reflected in improved Net Promoter Scores (NPS) of +56 for OSB and +61 for CCFS.
*Credit and risk management*
Our loan book continued to demonstrate consistently strong credit performance with balances over three months in arrears remaining broadly stable at 1.2% of the loan book at the end of June (31 December 2022: 1.1%). The Group’s loan to value (LTV) position remained strong with the weighted average LTV of the loan book at 63% as at 30 June 2023 (31 December 2022: 60%), reflecting a moderation in house prices in the period. The weighted average LTV of new business written by the Group improved marginally to 68% from 71% in the prior period.
The Group recorded an impairment charge of £44.5m on an underlying basis, which represented an underlying loan loss ratio of 37bps for the first six months of 2023 (H1 2022: £2.0m and 2bps, respectively). The impairment charge was primarily due to moderation in house prices and the worsening macroeconomic outlook as well as modelled IFRS 9 stage migration. The statutory impairment charge was £44.6m, equivalent to a loan loss ratio of 37bps (H1 2022: £1.6m and 1bp).
We continue to actively engage with the PRA on the timing of our IRB application, relating to rating systems covering our core Buy-to-Let and residential first charge mortgages. The Group is ready to submit module 1 when regulatory consent is provided.
*Multi-channel funding model *
Under our two savings brands, Kent Reliance and Charter Savings Bank, our focus is on combining excellent customer service with good value. I am pleased that our fair and competitively priced offering was popular during the first six months of 2023, which helped us grow our retail deposit book to £20.7bn from £19.8bn at the end of 2022, as we opened nearly 86,000 new savings accounts. Our actions were also reflected in the strong NPS for the first half of the year of +71 for Kent Reliance and +60 for Charter Savings Bank, as well as high retention rates; 90% for maturing fixed rate bonds and ISAs at Kent Reliance and 87% for Charter Savings Bank.
We complement retail deposits funding with our expertise in the wholesale markets, and in June we completed a £330m securitisation of owner-occupied prime mortgages, originated by Precise Mortgages under the CMF programme, demonstrating investors’ demand for Group issuance. The Group’s drawings under the Term Funding Scheme for SMEs remained at £4.2bn (31 December 2022: £4.2bn).
*Capital management*
The Group’s capital position, which reflects fully the £150m share repurchase programme announced in March and the post-tax impact of the adverse EIR adjustment, remained strong with a CET1 ratio of 15.7% as at 30 June 2023 (31 December 2022: 18.3%). The share repurchase programme has been progressing well and as at 9 August 2023 the Group had repurchased £107.2m worth of shares.
In April, the Group issued £250m of MREL^2 qualifying Tier 2 debt securities, marking further progress on our journey to optimise its capital structure. The Group had a total capital ratio of 19.2% as at 30 June 2023 (31 December 2022: 19.7%). The Group is targeting a CET1 ratio of 14% once the capital structure has been optimised fully, and we intend to come to the market with a programme of further MREL qualifying debt issuance ahead of our July 2024 interim MREL requirement. We expect to operate above the 14% target in the meantime and as we wait for clarity on the implementation of Basel 3.1 and its timing versus the Group’s IRB accreditation.
In line with our stated dividend policy, the Board has declared an interim dividend of 10.2 pence for the first half of 2023. As with previous years, the Board will make its full year dividend recommendation with the full year results, taking account of, amongst other factors, the economic outlook and continuing progress made against the Group’s MREL eligible debt issuance programme.
The Board is confident that the Group’s strategy and proven capital generation capability can support both strong net loan book growth and further capital returns to shareholders, supported by further planned issuance of MREL qualifying debt securities in advance of the Group’s interim MREL requirement in July 2024, subject to market conditions.
*Looking forward*
We are making good progress on the next phase of technology investment which focuses on improving efficiency in our business operations, an enhanced user experience for our customers and further streamlining the interaction with our broker community. In 2024, we expect to launch a new deposit platform that will enhance the journey for our savers, whilst driving further operational efficiency.
The Group remains well capitalised, with strong liquidity and a high-quality loan book and customer franchises. We have supported our customers and colleagues who are facing the realities of the increasing cost of living and rising interest rates, and we will continue to focus on those who require most assistance.
We remain cognisant of the uncertain macroeconomic outlook and the potential impact of the higher cost of living and borrowing on the mortgage market and customer affordability, however we are building a healthy pipeline of new business and have a proven track record of retaining customers, attracting new business and working with high quality borrowers. Based on our current pipeline and application volumes, we reiterate our target underlying net loan book growth of c.7% for 2023. The underlying NIM for the second half of 2023 is expected to be broadly flat to 2022, resulting in a full year underlying NIM of c.2.6%, after the expected impact of further planned MREL qualifying debt issuance, subject to market conditions. We expect the underlying cost to income ratio to be c.29% for the second half and c.33% for the full year.
The Group has a proven track record of delivering strong results, with a clear strategy and risk management framework. We have consistently demonstrated our resilience, which allows us to look to the future with cautious optimism.
*Andy Golding*
*Chief Executive Officer*
*10 August 2023*
1. UK Finance, Annual ranking of mortgage lenders, MM11G, July 2023
2. Minimum requirement for own funds and eligible liabilities
*Mortgage market *
UK gross mortgage lending in the first five months of 2023 reduced by 28% to £89.5bn from £124.8bn in the same period of 2022.^1 Similarly, property transactions reduced by 20% during the first five months to 388,000^2 and new mortgage approvals reduced by 36% to £84.1bn from £132.1bn in the same period of 2022.^3 This decline in activity was widely attributed to rapidly rising interest rates, with the Bank of England’s base rate increasing by 1.50% from 3.50% at the start of January to 5.00% by the end of June, and related increases in mortgage pricing that led to affordability challenges for some borrowers with maturing mortgages and particularly for first time buyers.
Pricing of fixed rate mortgages in the first half reflected volatile interest rate swap prices that were in turn reacting to significant changes in the outlook for inflation. The Bank of England’s reported average quoted interest rates on two-year fixed rate residential mortgages at 75% loan to value illustrate this dynamic. At the end of 2022 the average rate was 5.43%, gradually falling to 4.63% in April before rising to 5.50% at the end of June.^4 This effect was mirrored by the availability of mortgage products in the market, with data from the mortgage sourcing provider Twenty7Tec indicating that c.14,000 products were available in January increasing to c.17,000 in May and falling back to c.13,500 by the end of June^5.
The rapidly rising interest rates and higher cost of living led to a greater emphasis on refinancing activity as borrowers sought to lock in fixed repayments to protect against further interest rate rises. According to UK Finance, total refinancing increased by 1.5% in the first four months of the year, compared to the same period in 2022.^6
Within this total, product transfers, where borrowers take a new product from their existing lender, increased in popularity with volumes increasing by 12.5% to £70.5bn from £62.7bn in 2022, representing 74% of all refinancing activity (2022: 67%).^7 Notably, these transactions are not reflected in new mortgage lending and provide context for the reductions in gross lending volumes across the market during the period.
High inflation and the impact of rising interest rates have impacted prospective borrowers’ confidence and affordability. Figures from the HM Land Registry demonstrate that house prices reduced by 1.4% in the five months to May 2023, in contrast to the 4.6% growth reported at the same point last year.^8
In the Private Rented Sector, the first half of 2023 saw continued high tenant demand and tight supply, as landlords considered their options amid rising costs and potential future requirements contained in the Renter’s Reform Bill introduced to Parliament in May. Respondents to the RICS Residential Market Survey have reported consistently high levels of demand for over two years, while landlord instructions have continued to decline^9. This mismatch exerted upward pressure on rents, with private rental prices in the UK rising by 5.0% in the 12 months to May 2023, according to data from the ONS.^10
Buy-to-Let gross advances reached £12.5bn in the five months to May 2023, a decrease of 46% compared with £23.3bn in the same period in 2022, with new purchases at c.28% of total lending, broadly stable to the prior period.^11
1. UK Finance, New mortgage lending, UK (BOE) purpose of loan, June 2023
2. HMRC, Monthly property transactions, June 2023
3. UK Finance, Approvals for new mortgages by purpose of loan, UK (BOE), June 2023
4. BoE, 2 year (75% LTV) fixed rate mortgage to households (IUMBV34), June 2023
5. Twenty7Tec, Mortgage Market Report, May 2023
6. UK Finance, RF14 new refinancing and releveraging mortgages, June 2023
7. UK Finance, RF14 new refinancing and releveraging mortgages, June 2023
8. ONS, UK House Price Index, May 2023
9. RICS, Residential Market Survey, May 2023
10. ONS, Index of Private Housing Rental Prices, May 2023
11. UK Finance, BTL mortgages outstanding and new lending, June 2023
*Segment review*
The Group reports its lending business under two segments: OneSavings Bank and Charter Court Financial Services.
*OneSavings Bank (OSB) segment*
The following tables present OSB’s contribution to profit and loans and advances to customers on a statutory basis:
*Contribution to profit** for the period*
* *
*BTL/SME* * *
* *
*Residential* * *
*Total*
*For the six months ended 30 June 2023* *£m* *£m* *£m*
Net interest income *196.3* *44.8* *241.1*
Other expense *(7.6)* *(2.3)* *(9.9)*
Total income *188.7* *42.5* *231.2*
Impairment of financial assets *(34.4)* *(4.8)* *(39.2)*
Contribution to profit *154.3* *37.7* *192.0*
*For the six months ended 30 June 2022*
Net interest income 175.7 42.9 218.6
Other income 3.4 0.7 4.1
Total income 179.1 43.6 222.7
Impairment of financial assets (2.6) 0.7 (1.9)
Contribution to profit 176.5 44.3 220.8
* *
* *
*Loans and advances to customers*
* * * * * * * *
* * *BTL/SME* *Residential* *Total*
*As at 30 June 2023* *£m* *£m* *£m*
Gross loans and advances to customers *11,606.7* *2,342.1* *13,948.8*
Expected credit losses *(129.9)* *(9.7)* *(139.6)*
Net loans and advances to customers *11,476.8* *2,332.4* *13,809.2* * * * * * *
Risk-weighted assets
*5,819.8* *1,066.3* *6,886.1*
*As at 31 December 2022*
Gross loans and advances to customers 10,920.0 2,324.7 13,244.7
Expected credit losses (95.2) (8.0) (103.2)
Net loans and advances to customers 10,824.8 2,316.7 13,141.5
Risk-weighted assets 5,258.8 1,033.7 6,292.5
*OSB Buy-to-Let/SME sub-segment*
*Loans and advances to customers*
* * *30-Jun-2023*
*£m* *31-Dec-2022*
*£m*
Buy-to-Let *10,287.7* 9,755.0
Commercial *996.4* 881.3
Residential development *237.5* 184.5
Funding lines *85.1* 99.2
*Gross loans and advances to customers* *11,606.7* 10,920.0
Expected credit losses *(129.9)* (95.2)
*Net loans and advances to customers* *11,476.8* 10,824.8
This sub-segment comprises Buy-to-Let mortgages secured on residential property held for investment purposes by experienced and professional landlords, commercial mortgages secured on commercial and semi-commercial properties held for investment purposes or for owner-occupation, residential development finance to small and medium-sized developers, secured funding lines to other lenders and asset finance.
The Buy-to-Let/SME net loan book increased by 6% to £11,476.8m in the first six months of 2023 supported by organic originations of £1,080.5m, which were up by 30% from £832.3m in the prior period.
Buy-to-Let/SME net interest income increased by 12% to £196.3m from £175.7m in the prior period, primarily due to growth in the loan book and the beneficial impact of base rate rises. The Group also recognised an adverse EIR adjustment of £2.6m in the period (H1 2022: £3.9m gain) based on updated customer behavioural trends.
This segment recognised £7.6m of other expenses relating to losses from the Group’s hedging activities (H1 2022: £3.4m gain) and an impairment charge of £34.4m (H1 2022: £2.6m). The impairment charge was largely due to house price moderation, changes in the macroeconomic outlook and modelled IFRS 9 stage migration. Overall, the Buy-to-Let/SME segment made a contribution to profit of £154.3m, down 13% compared with £176.5m in the first six months of 2022, largely due to the higher impairment charge in the period.
The Group remained highly focused on the risk assessment of new lending, as demonstrated by the reduction in the average loan to value (LTV) for Buy-to-Let/SME originations to 70% (H1 2022: 74%). The average book LTV in the Buy-to-Let/SME segment increased to 66% (31 December 2022: 63%) as a result of house price depreciation in the period, with 4.3% of loans exceeding 90% LTV (31 December 2022: 3.2%).
*Buy-to-Let*
The Buy-to-Let gross loan book increased by 5% to £10,287.7m at the end of June 2023 (31 December 2022: £9,755.0m) supported by originations of £786.9m, which increased by 17% from £673.2m in the prior period.
Rapidly rising mortgage interest rates led to a continued focus on refinancing in the first half as landlords sought to lock in lower monthly repayments in expectation of further base rate rises, and the proportion of Kent Reliance Buy-to-Let completions represented by remortgages remained broadly stable at 59% (H1 2022: 60%). In addition, there was also an increasing trend in product transfers, with 75% of existing borrowers choosing a new product, under the Choices retention programme, within three months of their initial rate ending (H1 2022: 62%).
Five-year fixed rate mortgages remained popular and represented 70% of Kent Reliance completions (H1 2022: 67%). Professional, multi-property landlords continued to add to their portfolios and optimise their businesses from a tax perspective and represented 91% of completions by value for the Kent Reliance
brand (H1 2022: 83%) and 86% of mortgage purchase applications in Kent Reliance came from landlords borrowing via a limited company (H1 2022: 76%).
Research conducted by BVA BDRC, on behalf of the Group, showed that the overall proportion of landlords planning to purchase new properties had fallen to 10% from 18% in the first quarter of 2022. However, of those planning to acquire more properties, the proportion planning to do so within a limited company ownership structure, preferred by professional landlords, has continued to increase, reaching 62% in the first quarter of 2023 (Q1 2022: 50%). This was especially true for landlords with portfolios of six or more properties, who represented just under two-thirds (64%) of all landlords that intended to purchase within a limited company structure.
The weighted average LTV of the Buy-to-Let book as at 30 June 2023 increased to 65% from 62% at the end of 2022, as a result of house price depreciation in the period and the average loan size remained unchanged from the end of 2022 at £255k. The weighted average interest coverage ratio for Buy-to-Let originations during the first six months of 2023 remained high at 178% (H1 2022: 211%) despite significantly higher mortgage interest rates.
*Commercial*
Through its InterBay brand, the Group lends to borrowers investing in commercial and semi-commercial property, reported in the Commercial total, and more complex Buy-to-Let properties and portfolios, reported in the Buy-to-Let total.
The Group experienced an increased level of applications following the launch of new products in February and March under the InterBay brand. Organic originations more than doubled to £193.7m in the period (H1 2022: £72.0m) supporting a 13% growth in the gross loan book to £996.4m as at 30 June 2023 (31 December 2022: £881.3m).
The weighted average LTV of the commercial book increased to 73% and the average loan size increased to £390k for the first six months of 2023 (31 December 2022: 69% and £375k).
InterBay Asset Finance, which predominantly targets UK SMEs and small corporates financing business-critical assets, continued to grow in the first half of 2023, adding to the high quality portfolio. The gross carrying amount under finance leases was £202.6m as at 30 June 2023 (31 December 2022: £163.2m).
*Residential development*
Our Heritable residential development business provides development finance to small and medium-sized residential property developers. The preference is to fund house builders which operate outside of central London and provide relatively affordable family housing, as opposed to complex city centre schemes where affordability and construction cost control can be more challenging. New applications represent repeat business from the team’s extensive existing relationships.
The residential development finance gross loan book at the end of June 2023 was £237.5m, with a further £137.5m committed (31 December 2022: £184.5m and £162.2m, respectively). Total approved limits were £518.7m (31 December 2022: £502.6m), exceeding drawn and committed funds due to the revolving nature of the facility where construction is phased and facilities are redrawn as sales on the initially developed properties occur. The increased rates of sale experienced by Heritable’s developer customers in 2022 decreased at the end of that year and loan repayments have been at a lower level during the first half of 2023.
At the end of June 2023, Heritable had commitments to finance the development of 1,971 residential units, the majority of which are houses located outside of central London. Heritable continues to take an exacting approach to approving funding for new customers, given the headwinds in the economy.
*Funding lines*
OSB continued to provide secured funding lines to non-bank lenders which operate in certain high-yielding, specialist sub-segments, primarily secured against property-related mortgages. Total credit approved limits as at 30 June 2023 were £202.5m, with total loans outstanding of £85.1m (31 December 2022: £274.0m and £99.2m, respectively). During the period, the Group maintained a cautious risk approach focusing on servicing existing customers.
*OSB Residential sub-segment *
*Loans and advances to customers*
* * *30-Jun-2023*
*£m* *31-Dec-2022*
*£m*
First charge *2,189.7* 2,152.9
Second charge *152.4* 171.8
*Gross loans and advances to customers* *2,342.1* 2,324.7
Expected credit losses *(9.7)* (8.0)
*Net loans and advances to customers* *2,332.4* 2,316.7
This sub-segment comprises lending to owner-occupiers, secured via first charge against a residential home and under the shared ownership scheme.
The Residential sub-segment net loan book grew by 1% to £2,332.4m as at 30 June 2023 (31 December 2022: £2,316.7m) and organic originations reduced 27% to £179.7m during the period (H1 2022: £244.9m).
Net interest income in the Residential sub-segment increased by 4% to £44.8m (H1 2022: £42.9m) due to growth in the loan book and the beneficial impact of base rate rises. The Group recognised an adverse EIR adjustment of £0.2m (H1 2022: £2.5m gain). This segment also recognised £2.3m of other expenses (H1 2022: £0.7m) relating to losses from hedging activities and an impairment charge of £4.8m (H1 2022: £0.7m credit) largely due to house price moderation, changes in the macroeconomic outlook and modelled IFRS 9 stage migration. The contribution to profit from this segment was £37.7m, down 15% from £44.3m in the same period of 2022.
The average book LTV increased to 47% (31 December 2022: 45%) as a result of house price depreciation in the period, with only 2.1% of loans with LTVs exceeding 90% (31 December 2022: 0.8%). The average LTV of new residential origination in the first six months of 2023 remained broadly flat at 62% (H1 2022: 61%).
*First charge*
First charge mortgages are provided under the Kent Reliance brand, which largely serves prime credit quality borrowers with more complex circumstances. This includes high net worth individuals with multiple income sources and self-employed borrowers, as well as those buying a property in conjunction with a housing association under shared ownership schemes.
The first charge originations under Kent Reliance brand reduced by 27% to £179.7m in the first six months of 2023 (H1 2022: £244.9m) due to volatility in market pricing reducing the overall activity in this segment. The gross loan book increased by 2% to £2,189.7m from £2,152.9m at the end of 2022.
*Second charge*
The OSB second charge mortgage book is in run-off and managed by Precise Mortgages. Total gross loans were £152.4m as at 30 June 2023 (31 December 2022: £171.8m).
*Charter Court Financial Services (CCFS) segment*
The following tables present the segment’s contribution to profit and loans and advances to customers on an underlying basis, excluding acquisition-related items and the reconciliation to the statutory results.
*Contribution to profit for the period*
*For the six months to 30 June 2023* *Buy-to-Let
£m* *Residential *
*£m* *Bridging*
*£m* *Second charge*
*£m* *Other^1*
*£m* *Total *
*underlying *
*£m* *Acquisition- related items^2*
*£m* *Total *
*statutory*
*£m*
Net interest income/(expense) *3.1* *20.3* *3.8* *2.7* *9.3* *39.2* *(42.8)* * (3.6)*
Other income *-* *-* *-* *-* *0.5* *0.5* *4.0* *4.5*
Total income *3.1* *20.3* *3.8* *2.7* *9.8* *39.7* *(38.8)* * 0.9*
Impairment of financial assets *(3.2)* *(1.8)* *(0.4)* *0.1* *-* *(5.3)* *(0.1)* * (5.4)*
Contribution to profit *(0.1)* *18.5* *3.4* *2.8* *9.8* *34.4* *(38.9)* * (4.5)*
*For the six months to 30 June 2022* Buy-to-Let
£m Residential
£m Bridging
£m Second charge
£m Other^1
£m Total
underlying
£m Acquisition- related
items^2
£m Total
statutory
£m
Net interest income/(expense) 102.4 45.6 2.1 3.0 (2.5) 150.6 (25.8) 124.8
Other income - - - - 10.7 10.7 5.3 16.0
Total income 102.4 45.6 2.1 3.0 8.2 161.3 (20.5) 140.8
Impairment of financial assets (2.6) 2.5 (0.1) 0.1 - (0.1) 0.4 0.3
Contribution to profit 99.8 48.1 2.0 3.1 8.2 161.2 (20.1) 141.1
1. Other relates to net interest income from acquired loan portfolios as well as gains on structured asset sales, fee income from third party mortgage servicing and gains or losses on the Group’s hedging activities.
2. For more details on acquisition-related adjustments, see Reconciliation of statutory to underlying results in the Financial review.
*Loans and advances to customers *
*As at 30 June 2023* *Buy-to-Let *
*£m* *Residential *
*£m* *Bridging*
*£m* *Second charge*
*£m* *Other^1*
*£m* *Total*
*underlying *
*£m* *Acquisition-related items^2*
*£m* * *
*Total statutory*
*£m*
Gross loans and advances to customers *7,634.9* *2,757.9* *266.8* *97.3* *15.1* *10,772.0* *38.1* *10,810.1*
Expected credit losses *(27.0)* *(5.7)* *(0.9)* *(0.1)* *-* *(33.7)* *1.2* *(32.5)*
Net loans and advances to customers *7,607.9* *2,752.2* *265.9* *97.2* *15.1* *10,738.3* *39.3* *10,777.6*
Risk-weighted assets *3,076.6* *1,178.9* *139.1* *40.7* *5.6* *4,440.9* *26.9* *4,467.8*
*As at 31 December 2022* Buy-to-Let
£m Residential
£m Bridging
£m Second charge
£m Other^1
£m Total
underlying
£m Acquisition-related items^2
£m
Total statutory
£m
Gross loans and advances to customers 7,468.8 2,671.3 149.7 111.9 14.6 10,416.3 81.7 10,498.0
Expected credit losses (23.5) (3.8) (0.5) (0.2) - (28.0) 1.2 (26.8)
Net loans and advances to customers 7,445.3 2,667.5 149.2 111.7 14.6 10,388.3 82.9 10,471.2
Risk-weighted assets 2,927.1 1,107.3 70.9 45.4 5.5 4,156.2 46.0 4,202.2
1. Other relates to acquired loan portfolios.
2. For more details on acquisition-related adjustments, see Reconciliation of statutory to underlying results in the Financial review.
*CCFS segment *
*Underlying loans and advances to customers*
* * *30-Jun-2023*
*£m* *31-Dec-2022*
*£m*
Buy-to-Let *7,634.9* 7,468.8
Residential *2,757.9* 2,671.3
Bridging *266.8* 149.7
Second charge *97.3* 111.9
Other^1 *15.1* 14.6
*Gross loans and advances to customers* *10,772.0* 10,416.3
Expected credit losses *(33.7)* (28.0)
*Net loans and advances to customers* *10,738.3* 10,388.3
1. Other relates to acquired loan portfolios
CCFS targets specialist mortgage market sub-segments with a focus on specialist Buy-to-Let mortgages secured on residential property held for investment purposes by both non-professional and professional landlords. It also provides specialist residential mortgages to owner-occupiers, secured against residential properties, including those unsupported by the high street banks. In addition, it provides short-term bridging loans, secured against residential property in both the regulated and unregulated sectors.
The CCFS underlying net loan book grew by 3% to £10,738.3m at the end of June 2023 (31 December 2022: £10,388.3m) supported by organic originations of £1,060.3m, which decreased by 12% from £1,204.8m of new business written in the same period last year.
*Buy-to-Let sub-segment*
In the first half of 2023, CCFS’ organic originations in the Buy-to-Let sub-segment through the Precise Mortgages brand decreased by 40% to £516.4m (H1 2022: £867.5m) however the underlying gross Buy-to-Let loan book grew by 2% in the period to £7,634.9m from £7,468.8m at the end of 2022.
Rapidly rising mortgage interest rates led to an increase in refinancing activity in the first half of the year as landlords sought to lock in lower monthly repayments in expectation of further base rate rises, consequently the proportion of remortgages increased to 53% of completions under the Precise Mortgages brand as at 30 June 2023 (H1 2022: 50%). In October 2022, the Group established a proactive retention programme for Precise Mortgages borrowers that contributed to 59% of customers choosing a new product with the Group within three months of their initial rate coming to an end.
Five-year fixed rate mortgages continued to be popular and accounted for 66% of Precise Mortgages completions in the period (H1 2022: 69%). Borrowing via a limited company made up 65% of Buy-to-Let completions (H1 2022: 66%) and loans for specialist property types, including houses of multiple occupation and multi-unit properties, represented 18% of completions in this sub-segment (H1 2022: 21%).
Research conducted by BVA BDRC on behalf of the Group for the first quarter of 2023, found that 67% of landlords reported an increase in rental demand.
The weighted average LTV of the loan book and the average loan size in this segment remained broadly stable at 67% and £190k, respectively (31 December 2022: 66% and £191k). The new lending average LTV reduced to 71% (H1 2022: 74%) and the weighted average interest coverage ratio for Buy-to-Let origination remained high at 154% (H1 2022: 197%) despite significantly higher mortgage interest rates.
Underlying net interest income in this sub-segment reduced to £3.1m compared with £102.4m in the prior period, as the benefit of loan book growth and base rate rises were more than offset by the underlying adverse EIR adjustment of £137.7m (H1 2022: £6.2m) due to the expectation that Precise Mortgages borrowers would spend less time on the higher reversionary rate before refinancing, based on recently observed customer behavioural trends. This segment recognised an impairment charge of £3.2m (H1 2022: £2.6m) largely due to house price moderation, changes in the macroeconomic outlook and modelled IFRS 9 stage migration. On an underlying basis, the Buy-to-Let sub-segment made a negative contribution to profit of £0.1m in the first half of 2023 (H1 2022: £99.8m).
On a statutory basis, the Buy-to-Let sub-segment made a negative contribution to profit of £30.8m (H1 2022: £81.8m).
*Residential sub-segment *
The underlying gross loan book in CCFS’ Residential sub-segment increased by 3% to £2,757.9m at the end of June 2023 (31 December 2022: £2,671.3m) supported by a 23% increase in organic originations to £317.2m in the first half of 2023 (H1 2022: £257.1m).
The Group continued to benefit from CCFS’ expertise, with a strong focus on first time buyers, including self-employed individuals and those with minor adverse credit records. Strong application levels were observed throughout the period following the relaunch of several products in January, including products supporting the Right to Buy scheme.
The average loan size in this sub-segment increased to £152k with the average book LTV remaining broadly stable at 58% as at 30 June 2023 (31 December 2022: £147k and 57%, respectively). The average LTV for new lending reduced to 62% in the period (H1 2022: 66%) as the Group continued to focus on the risk assessment of new lending.
Underlying net interest income reduced to £20.3m (H1 2022: £45.6m) as the benefits of loan book growth and base rate rises were more than offset by the underlying adverse EIR adjustment of £40.3m (H1 2022: £0.5m) due to the expectation that Precise Mortgages borrowers would spend less time on the higher reversionary rate before refinancing, based on observed customer behavioural trends. The Residential sub-segment recorded an impairment charge of £1.8m versus a £2.5m credit in the first half of 2022 largely due to house price moderation, changes in the macroeconomic outlook and modelled IFRS 9 stage migration. On an underlying basis, the Residential sub-segment made a contribution to profit of £18.5m, compared with £48.1m in the same period in 2022.
On a statutory basis, the Residential sub-segment made a contribution to profit of £7.5m (H1 2022: £41.3m).
*Bridging sub-segment*
Short-term bridging originations increased to £226.7m compared with £77.0m in the first half of 2022 as the Group continued to enhance and promote its bridging product offering throughout the period. The gross loan book in this sub-segment increased by 78% to £266.8m as at 30 June 2023 (31 December 2022: £149.7m).
Underlying net interest income increased to £3.8m from £2.1m in the first half of 2022, primarily due to strong new business volumes in the period. The bridging sub-segment recorded an impairment charge of £0.4m (H1 2022: £0.1m) largely due to portfolio growth as the Group became more active in this sector and overall made a contribution to profit of £3.4m in the first half of 2023 (H1 2022: £2.0m).
On a statutory basis, the bridging sub-segment made a contribution to profit of £2.6m (H1 2022: £1.8m).
*Second charge sub-segment*
The second charge gross loan book reduced to £97.3m compared with £111.9m as at 31 December 2022, as the Group no longer offers second charge products and the book is in run-off.
Underlying net interest income in the second charge sub-segment was £2.7m (H1 2022: £3.0m) and the contribution to profit was £2.8m (H1 2022: £3.1m) after an impairment credit of £0.1m, unchanged from the first half of 2022.
On a statutory basis, the contribution to profit from the second charge sub-segment was £2.4m (H1 2022: £2.7m).
*Impact of the rapidly changing interest rate environment on customer behaviour and EIR accounting*
*Rapidly rising rates and volatile outlook*
The Bank of England raised the UK’s base rate (BBR) 12 times from the start of 2022 through to 30 June 2023, as summarised in Table 1 below. The interest rate outlook was also volatile across the same period and Table 2 below shows the futures implied BBR peak since 30 June 2021 by quarter.
Table 1 Table 2
*Date changed* *Base rate * * * *Date* *Implied BBR peak^1* % %
December 2021 0.25 30 June 2021 0.70
February 2022 0.50 30 September 2021 0.99
March 2022 0.75 31 December 2021 1.37
May 2022 1.00 31 March 2022 2.52
June 2022 1.25 30 June 2022 3.09
August 2022 1.75 30 September 2022 5.88
September 2022 2.25 31 December 2022 4.74
November 2022 3.00 31 March 2023 4.65
December 2022 3.50 30 June 2023 6.29
February 2023 4.00
March 2023 4.25
May 2023 4