Co-op Bk Hld 29 Regulatory News (93RD)

2023 Interim Financial Report

28 July 2023

The Co-operative Bank ('the Bank') is pleased to provide an update on its performance in the six months ended 30 June 2023.

· Profit before tax of £61.8m and underlying profit of £72.2m; in line with 1H 22 (£61.9m)

· Surplus liquidity position; Pillar 1 LCR spot position 224.0%, 12 month rolling average LCR 238.9%

· Strong asset quality; only 0.15% of secured accounts greater than 3 months in arrears

· Significant headroom to capital requirements; £200m successful MREL issuance in this quarter

Nick Slape, Chief Executive Officer, said:

"In the first half of 2023, we have delivered a strong financial performance with a statutory profit before tax of £61.8m and a statutory return on tangible equity of 13.0%.

We have made good progress on our mortgage and savings transformation program having launched a third new savings product, completed the insourcing of Capita colleagues and migrated c.60% of our existing savings accounts.

Our low risk balance sheet and strong capital and liquidity positions provide a resilient foundation from which to focus on our customer driven goals in an uncertain macro-economic environment.

I am pleased to see the investment in our customer proposition being validated and, looking to the future, I am excited by the opportunity to leverage our technology re-platforming to the benefit of both customers and colleagues alike.

We recognise the financial challenges that the current economic uncertainty and the cost of living crisis poses for a number of our customers and colleagues and we will continue to support them. We are proud to have signed up to the recent "Mortgage Charter" offering tailored help to those customers who need it.

I would again like to thank our colleagues and customers for their continued support."

FINANCIAL PERFORMANCE UPDATE

INCOME STATEMENT (£m)

1. Annualised net interest income over average interest earning assets

2. Annualised profit after tax over average equity less intangibles, assuming no further DTA benefit in 2H 23

3. Total statutory expenditure over total statutory income (excludes impairment)

4. Annualised impairment charge / (credit) over average customer assets

PERFORMANCE HIGHLIGHTS

Profit before tax of £61.8m and underlying profit of £72.2m

Total income of £266.5m; includes net interest income and other operating income and increased by 16% in comparison to the six months ended 30 June 2022 (1H 22: £229.6m).

Net interest income increased by 18% to £245.1m (1H 22: £208.2m) and net interest margin (NIM) has risen by 33 basis points (bps) from 151bps to 184bps, with both benefitting from increases in the base rate. The SVR-based component of our EIR asset is £25.8m and is underpinned by an assumption of a refinancing period of 0.5 months for the whole fixed rate mortgage book (10% of our customers reverting to SVR and then those customers spending an average of 5 months there before refinancing). In the last 6 months we have observed more customers reverting to SVR. See page 206 in 2022 Annual Report & Accounts for further information on assumptions.

Operating expenditure increased by 18% to £205.8m (1H 22: £175.1m); driven mainly by strategic decisions and commitments to complete key projects such as Capita mortgage insourcing which saw c.400 colleagues join the Bank in the first half of the year. Non-staff costs rose by 6% to £107.7m following inflationary pressures and project costs increased to £27.0m (1H 22: £16.5m), which includes costs of £7.5m relating to the mortgage and savings transformation programme, as we accelerate investment in transformation projects to realise future benefits. Our statutory cost:income ratio increased in the period to 76.8% from 74.8%, as a result of increased statutory expenditure outweighing increased income.

Net impairment charge of £0.3m (1H 22: £2.8m credit); driven by an increased provision for macroeconomic factors, most notably an increase in the base rate outlook, offset by refinement of unsecured modelling.

We have reported a £1.4m non-operating exceptional gain (1H 22: £4.6m), predominantly relating to Visa shareholdings. 2022 includes the sale of a small loan portfolio.

Income tax credit of £41.4m

The income statement tax credit of £41.4m is driven by further deferred tax asset recognition of historical tax losses partially offset by the tax charge on profits in the period.

Surplus liquidity position

Total assets reduced by 2% compared with 31 December 2022 with legacy assets reducing by 5% to £0.6bn. Retail secured balances have seen a slight increase to £19.8bn (FY 22: £19.6bn) as we look to manage new business volumes whilst strategically preserving Bank margins.

Total liabilities reduced by 2% to £26.3bn over the period (FY 22: £26.8bn). SME deposit balances have decreased slightly to £3.3bn (FY 22: £3.4bn) whilst retail deposit balances decreased by 3% to £16.1bn (FY 22: £16.6bn) driven by a reduction in retail current account balances to £5.4bn (FY 22: £5.8bn), following a decrease in customer average balances, primarily attributable to the cost of living crisis. 81.4% of our core customer deposits are insured through FSCS, and have remained stable throughout the year despite issues seen in the wider market relating to Silicon Valley Bank. The Bank maintains a very strong 12 month average LCR position of 238.9%. Total blended cost of funds has increased, due to base rate rises, to 210bps but still remains cost efficient (FY 22: 73bps). During the period we have repaid £376m of TFSME with a remaining balance of £4.9bn.

Strong asset quality

The asset quality ratio (AQR) in total across retail, SME and legacy customer lending remains strong, reflecting the Bank's low-risk lending profile. AQR for the Bank as a whole as at 30 June 2023 is a charge of 0.3bps (1H 22: release of 2.7bps). The average core mortgage book loan-to-value (LTV) remains low at 55.8% (FY 22: 53.5%). Secured accounts that are greater than three months in arrears represented only 0.15% of total accounts as at 30 June 2023 (FY 22: 0.13%). We are working hard to ensure our customers feel supported and can access the advice and services they need through our personal banking and SME dedicated financial support teams.

Significant headroom to capital requirements

Following the Bank's new £200m Green MREL Senior transaction in May, plus profits in the period, total MREL-qualifying resources have grown by £241.8m. We have £378.4m surplus MREL resources against a requirement of £1,463m including CRD IV buffers. This issuance creates further opportunity to optimise capital structure in line with our plans.

CET1 ratio has increased from 19.8% to 20.1% and remains well above the regulatory minimum of 13.3% with organic CET1 ratio generation in 1H 23 totalling 30bps. Risk-weighted assets (RWAs) totalled £4.9bn (FY 22: £4.8bn).

BUSINESS PERFORMANCE UPDATE

Retail and SME performance

Our retail and SME segments encompass the services we provide to our personal and SME banking customers and only provide services to UK-based customers.

To date, there has been lots of competition in the industry for current account customers, with a wide variety of different switch incentives across the market. To ensure we remained competitive in the current account market, we introduced our 'Refer a Friend' incentive throughout the second half of 2022 and the first half of 2023. This incentive gave customers the opportunity to introduce like-minded friends to our ethical banking proposition and has helped mitigate balance reductions driven by switch outs.

Earlier this year, we launched a new Visa promotion that benefits both customers and charity partners, giving customers the chance to win up to £2,500 when they make a purchase using their Co-operative Bank credit or debit card. To allow our customers to make a difference to the causes that matter to them, we're matching the total customer prize pot and customers will get to vote how the donation is allocated. The promotion will have three monthly draws and as at 30 June 2023 there were 16,185 entries.

Within our SME segment, our community customers are now able to apply for a business account digitally, significantly reducing friction within the customer journey and replacing the traditional paper-based application process. Since the implementation, there has been a 35% increase in the number of new community accounts opened compared to the same period in 2022.

Delivering our strategy alongside our scorecard measures

During the first half of the year, we have made progress against our scorecard measures. We aim to continuously improve the service we offer to customers whilst addressing their concerns, with a target to reduce complaints per 1,000 customers and currently year to date this has reduced compared with the prior six months. In 2023, we have started to track our customer perception on Trustpilot with our score climbing since the start of the year from 1.7 (Bad) to 3.5 (Average). Whilst we did experience some system outages earlier in the year, we were able to rectify the issue quickly and keep customer impact to a minimum.

As part of our transformation measures, the mortgage and savings platform simplification activity is critical to delivering cost efficiencies, improving flexibility for introducing new products and reducing technical debt. After a long period of planning and developing, we are set to complete the majority of the work this year, with decommissioning due to finish next year. During 1H 23 we welcomed c.400 colleagues from Capita as part of the insourcing of mortgage operations and have also launched a new savings product, Fixed Rate Cash ISA, following the launch of two other savings products in 2022. This year is significant in our transformation journey, and while we acknowledge the present challenges, we firmly believe that the changes we are making will yield substantial benefits in the future. The timeline for completing the transformation remains in line with expectations with savings to be concluded in 2023 and mortgages in early 2024.

The current environment is challenging. With the upward movement of base rates there is intensified competition for deposits, and mortgage margins remain under pressure across the whole industry. However, despite these hurdles, we remain on track with our financial progress. This year serves as a cornerstone for our long-term growth and success and we have made strong progress in the first half of 2023. We have already published our dividend policy in our 2022 Annual Reports and Accounts, providing clear guidance to our shareholders and stakeholders. We have further strengthened our capital position with the issuance of our second Green MREL qualifying debt in May 2023, supporting our commitment to Green residential mortgage lending which stands at £156m in 2023. We received an upgraded credit rating from Fitch in February to BB, meaning we are two notches away from investment grade, alongside our Moody's rating of Ba1, which is one notch away from investment grade. We expect further engagement with credit rating agencies post the interim results announcement.

BOARD MATTERS

The Board and its committees have focused on many key matters in the period. These included, amongst others:

· Reviewing the outputs of the Board and Committee Performance Evaluation undertaken by the Chartered Governance Institute UK & Ireland in November 2022;

· The appointment of Fiona Clutterbuck to the Board of Directors with effect from 17 April 2023;

· The issuance of £200m of MREL-qualifying funds in May 2023, the second issuance under the Bank's Green, Social and Sustainability (GSS) Financing Framework;

· Considering the impacts of the proposed reforms to the Basel III Standards upon the Bank, and the steps being taken to implement the required changes;

· Oversight of the activities being undertaken to progress and deliver the requirements of the Financial Conduct Authority's Consumer Duty regulations;

· The approval of the 2022 Annual Report and Accounts in February 2023 and the first quarter results in May 2023;

· Reviewing, challenging and approving the Bank's 2022 Sustainability Report evidencing how the Bank has delivered against its Ethical Policy over the previous 12 months;

· Overseeing the enhancement of customer experience, colleague wellbeing and creation of an agile culture, whilst maintaining focus on regulatory compliance, cyber security and sustainability. The Board continues to review the ways of working to adapt to changing market dynamics, remain competitive and deliver value and good customer outcomes;

· Overseeing the Bank's approach to the ongoing support of co-operatives, the continued progress on our values and ethics-led ESG commitments and ensuring the risks from climate change are properly considered and incorporated into all areas of the business;

· The quarterly refresh of financial forecasting, including the impact on the longer-term financial and capital plans, continuously adapting to the external economic market conditions;

· The regulatory agenda including the review and approval of the Bank's internal capital adequacy assessment process (ICAAP), the internal liquidity adequacy assessment process (ILAAP) and operational resilience self-assessment;

· The Board's ambitious transformation plan to simplify its mortgage and savings platforms and overseeing the successful in-housing of mortgage servicing operations.

Strengthening our values and ethics

We continue to campaign on matters that are consistent with our values and ethics and in line with our customers' priorities, such as demonstrating our ongoing commitment to protecting the environment, campaigning alongside Zero Hour in their fight to reverse the damage from the climate and nature crisis we're all facing. Earlier this year on World Environment Day, representatives from the Bank joined Zero Hour ambassadors and supporting Parliamentarians to hand in the United For Nature petition, calling on the Prime Minister to increase the UK Government's environmental ambition from halting, to halting and reversing, nature loss by 2030.

The Co-operative Bank and Friends of the Earth have joined forces to launch a multi-year partnership which will bring back nature to some of the UK's most nature-deprived communities through the Postcode Gardener Programme. The Postcode Gardener Programme is an initiative aimed at connecting professional gardeners with their communities, helping to organise and support local people in getting greenery and wildlife to thrive in their local areas. The idea was born of the realisation that whilst many people want to live on streets thriving with greenery and wildlife, they need help to make it happen.

Over the next two years, we will be campaigning alongside Shelter to demand long-overdue reforms that could transform renting. These reforms would bring an end to all-too-common unfair evictions, unsafe housing, and secure stronger rights for all renters. Over the past five years, we have become a leading voice on youth homelessness thanks to our long-standing partnership with Centrepoint. Our campaign with Shelter takes our work in this area to the next level by bringing about positive change for those in the UK facing housing insecurity.

Supporting and protecting human rights has been a commitment within our Ethical Policy for over 30 years, which is why we are delighted to have announced our sponsorship of Amnesty International UK's "Team Amnesty", a group of passionate supporters who raise funds to allow Amnesty International to perform vital work to expose abuses, educate, and mobilise millions around the world. We recognise the impact that the cost of living crisis is having on those affected by economic abuse and continue to work and fundraise with Refuge to provide specialist services to those who are affected.

Outlook

Our financial outlook for the remainder of the year is as follows:

· Bank net interest margin of approximately 180bps; reflecting additional base rate rises offset by mortgage margin pressure.

· Total statutory costs of approximately £420m; further investment in our brand and systems alongside inflationary pressures.

· Asset quality ratio of less than 5bps; arrears remain low and stable across all portfolios.

· Customer assets of £20-21bn; guidance refreshed as we actively manage mortgage volumes in the second half of the year.

· Return on tangible equity of over 10%; profitability and improved performance drives shareholder value.

· Our new capital management framework including dividend policy will enable a more efficient level of capital resources and allow us to make the required investment in our business to grow and provide capital returns to our shareholders over the long term.

Whilst we are delivering against the challenging objectives we set ourselves in our 2021 strategic plan, we acknowledge that there is more to accomplish as we approach the second half of 2023. We maintain a strong belief in our ability to achieve the multi-year strategic goals outlined in our current phase of the strategic plan. This plan is designed to enhance operational efficiency, pursue growth opportunities, and diversify revenue streams, positioning ourselves to challenge high street banks and provide a service to customers who want an ethical alternative.

SEGMENTAL PROFIT / (LOSS) (£m)

Further information is provided in note 3.

SME performance has improved during the first six months of the year with profit before tax increasing to £20.9m (1H 22: £7.0m) whereas retail profit has reduced to £53.7m (1H 22: £60.5m). Both segments have benefited from base rate rises with retail total income increasing by 8% to £212.0m (1H 22: £195.7m) and SME total income increasing by 42% to £53.5m (1H 22: £37.8m). The significant increase in SME income is due to a high proportion of the SME balance sheet comprising deposits which have benefited from the rising rate environment. The SME segment remains a key strategic focus for its growth potential.

Retail operating expenditure increased from £136.7m to £158.4m. This is predominantly driven by the insourcing of Capita colleagues and recruitment in the second half of 2022. SME operating expenditure has increased to £32.8m (1H 22: 30.0m). Legacy & unallocated operating expenditure has increased from £8.4m to £14.6m due to increased strategic project spend that has not been allocated to any segment.

SEGMENTAL BALANCE SHEET (£m)

SELECTED KEY PERFORMANCE INDICATORS

1. Calculated as per PRA definition, excluding Bank of England reserves

2. Calculated in line with Pillar 3 requirements

Investor enquiries:

investorrelations@co-operativebank.co.ukGary McDermott, Corporate & Strategic Development Director: +44 (0) 7811 599495

Media enquiries:

Sam Cartwright, H/Advisors Maitland: +44 (0) 7827 254 561

Dan Chadwick, Communications: +44 (0) 7724 701319

The person responsible for arranging the release of this announcement on behalf of The Co-operative Bank Finance p.l.c and The Co-operative Bank p.l.c. is Catherine Green, Company Secretary.

About The Co-operative Bank

The Co-operative Bank p.l.c. provides a range of banking products and services to about 2.5m retail customers and c.94k small and medium sized enterprises ('SME'). The Bank is committed to values and ethics in line with the principles of the co-operative movement. The Co-operative Bank is the only high street bank with a customer-led ethical policy, which gives customers a say in how their money is used. Launched in 1992, the policy has been updated on six occasions, with new commitments added in June 2022 to cover what we do for our planet, people and the community.

The Co-operative Bank p.l.c. is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Co-operative Bank p.l.c. eligible customers are protected by the Financial Services Compensation Scheme in the UK, in accordance with its terms.

Note: This announcement contains inside information.

The Co-operative Bank p.l.c. LEI: 213800TLZ6PCLYPSR448

The Co-operative Bank Finance p.l.c. LEI: 213800KNE8ER4N9BLF11

RISK MANAGEMENT

1. RISK MANAGEMENT OBJECTIVES & POLICIES - PRINCIPAL RISKS AND UNCERTAINTIES

The following Principal Risks and Uncertainties section highlights the changes in risk profile and mitigation we have experienced and pursued within credit, operational, and capital risk since the publication of the 2022 Annual Report and Accounts (ARA).

Risk Management Framework (RMF)

We have continued to enhance the RMF in 2023, 'right sizing' the framework to suit both our current and future operating model. Key areas of focus in 2023 have been to rationalise the principal risk taxonomy to ensure it is representative of the Bank's most significant risks which has resulted in the removal of pensions risk and product risk from the Group's list of principal risk taxonomies. The current list of principal risks within the Group RMF can be seen in the chart below. We have also made changes to how risk metrics are constructed and reported by translating risk appetite into specific, Board-monitored Key Risk Appetite Metrics (KRAMs).

The Group's 2023 principal risk taxonomy and relevant pages in the 2022 ARA are as follows:

Retail credit risk

Our strategy remains focused on monitoring both secured and unsecured retail portfolios. At the start of 2023, we initiated an unsecured "cost of living task force" set up to review customer management processes and arrears strategies in light of the current continued unfavourable macroeconomic conditions. This activity will continue throughout the rest of 2023, alongside tracking our existing suite of cost of living early warning indicators, and operating our pre-arrears contact strategy for unsecured customers. 

Over 2023, we have also revised and updated the affordability assessments of the residential secured portfolio to reflect the impacts on household disposable income from the rising cost of living and rate increases for customers with rate maturities in 2023 and 2024. These assessments enable us to identify customers with the highest likelihood of entering a negative disposable income position and are the most likely to require support. The Group's "at risk" population for its Platform mortgages was 1,901 in December (2.04% of the portfolio) and has risen to 2,120 in April (2.18% of the portfolio) which is expected given the macroeconomic environment. We are contacting at risk customers to remind them support is available should they require it.

We are committed to complying fully with the mortgage charter set out by the Chancellor in June 2023 and already have a full suite of forbearance options for customers in financial difficulty. These include the ability to temporarily switch their mortgage from repayment to interest only, or extend the term of the mortgage. We consider repossession of a property as a last resort and will work with customers to find other options where possible. Any repossessions will comply fully with the requirement to have a full twelve months between falling into arrears and repossession.

SME credit risk

SME customers continue to face high inflation and rising interest rates, with some operating in sectors which continue to struggle with recruitment due to a shortage of skilled labour. Despite these challenges, the majority of our business customers have continued to service their lending facilities without the need for intervention. Customers who have experienced financial difficulties have been supported with forbearance solutions where appropriate. We operate tailored contact strategies for businesses in need of assistance, driving dialogue to explore the need for support. Where appropriate, customers are directed towards reliable external advice and forbearance is considered where necessary.

To address the increasing SME credit risk resulting from worsening economic conditions, we have refreshed our affordability assessments and stress testing requirements at loan origination and throughout the loan life cycle. This supports good customer outcomes by reducing the potential for customers to become overcommitted. Sector appetites and key credit criteria have been updated to support our selective growth strategy.

Treasury credit risk

Credit monitoring has not identified any material changes (including external credit rating downgrades) in the creditworthiness of the Group's low-risk treasury portfolio during the year, even accounting for recent banking sector turmoil leading to the resolution of SVB and Signature Bank in early March 2023, the takeover of Credit Suisse later in the month and the subsequent collapse and rescue of First Republic Bank in May. We have not experienced any historic defaults and current exposures remain predominantly concentrated to counterparties rated AA- or higher, suggesting a very low probability of default. We will continue to monitor counterparty creditworthiness closely in the coming months alongside monetary policy decisions (particularly in the UK), evolving funding conditions and any potential impacts to counterparty earnings which may cause credit deterioration.

Regulatory change

We are committed to compliance with a high volume of significant regulatory change in 2023 aimed at enhancing customer protection and outcomes, and the Group's financial resilience. The following highlights key regulatory change activity delivered in 2023:

· FCA Consumer Duty - designed to increase the current level of consumer protection across the retail financial services market. We have made progress in 2023 to ensure readiness for the FCA's implementation dates. Key Moment of Truths (KMOTs) and high risk products have been assessed using predefined assessment frameworks to identify areas of potential customer harm. All areas identified have been triaged to understand the remediation or mitigation which is required prior to the end of July 2023, and to develop the day 2 plan. We have delivered the 'All intermediaries Distribution Product Review' ahead of the 30th of April 2023 deadline. In addition, the Group's governance framework and data and management information capabilities are being enhanced and developed to ensure that good customer outcomes continue to be evidenced. We have also invested in cultural change, supported by specific training sessions, including Executive Committee training, monthly Q&A sessions, mandatory training and regular updates. We are currently on track to meet further FCA implementation dates.

· [New] PRA Model Risk Management (MRM) Principles for Banks - ensures firms take a strategic approach to MRM as a risk discipline in its own right. This will lead to strengthened Group policies, procedures, and practices to identify, manage, and control the risks associated with the use of models.

· [New] PSR New Reimbursement Requirements for Victims of Authorised Push Payment (APP) Fraud - will ensure a greater number of customers who fall victim to APP fraud will be reimbursed, prompting banks to enhance control frameworks. In 2024, the new reimbursement requirement will come into force. We welcome the new PSR requirements, and have begun strengthening existing controls to protect both customers and the Group from the risk of APP fraud.

We recognise that a high volume of regulatory change activity carries significant execution risks and represents a significant resource demand across the business. We remain fully committed to successfully delivering a significant regulatory change agenda across 2023 and beyond, with significant time and effort invested into planning and building the capability to mitigate the risks of non-compliance or late / failed delivery.

Fraud risk

Fraud losses continue to be a significant factor contributing to operational losses in 2023 although implementation of the card not present (CNP) online transaction security enhancement in 2022 has continued to reduce both the number of fraud cases and overall fraud loss. We recognise that APP, impersonation and purchase scams are some of the leading forms of fraud impacting our customers, which aligns with wider industry data. In response, we have continued to invest in our behavioural biometrics tool (Trusteer), enabled to protect customers when they do their banking online. To further mitigate this risk, we have planned security enhancements and improved fraud notification banners within payment journeys scheduled to be delivered later in 2023. In addition, tactical controls remain in place for SME with a planned upgrade to our SME transaction screening tool (Detica) scheduled for H2 2023, delivering further protection against both account takeover and APP for our business customers.

Change risk

Since 2022 we have introduced improved governance and oversight for the delivery of business change. A refreshed business change methodology, supported by a new financial control framework is now in place and subject to reporting and review by a dedicated committee. Our 2023 transformation portfolio continues to deliver a set of initiatives core to our strategy with a focus on risk remediation, improved customer experience, regulatory compliance and most significantly, the migration of mortgage and savings customers from legacy IT systems to a new platform.

We have delivered a number of significant improvements through change in the first half of 2023, most notably;

· the continued removal of legacy systems across our IT estate in line with the approved plan;

· transfer of Capita staff into the Group to a refurbished location for mortgage operations;

· cyber security enhancements; and,

· updated features and stability fixes within the retail and SME digital banking app.

For the remainder of 2023, robust programme monitoring and oversight of key developments will continue to be driven across all three lines of defence. Our regulators will continue to receive frequent updates on the Group's transformation progress.

Capital compliance

Over the first half of 2023, the UK economy has continued to see high levels of inflation (8.7% YoY CPI increase, for the 12 months to April 2023), with the Bank of England increasing base rate from 3.5% as at 31 December 2022, to 5% (as at 30 June 2023). The lag effects of changes in prices and interest rates have resulted in continued resilience across our lending portfolios, supported by sustained resilience in the labour market. Group RWAs have increased to £4,943m, due to changes in balance sheet composition, rather than balance sheet growth. Despite this, our capital position has been strengthened by a further £200m MREL Senior debt issuance, completed in May 2023.

Capital risk is monitored on a continuous basis by senior management across all three lines of defence, and we remain well positioned to react to changes in our capital risk profile. We regularly assess changes in macroeconomic variables (such as house prices, unemployment, inflation, interest rates and others) in order to understand the potential impact on credit losses and RWAs. We conduct an annual stress testing exercise to assess the impact of highly severe yet plausible downturn scenarios, for which the Group remains adequately capitalised to absorb. Furthermore, capital contingency planning and recovery planning are regularly reviewed by management in order to ensure that we are prepared to take actions to protect our capital position.

With respect to PS11/20 model changes and the impact on RWAs and expected loss (EL), we continue to engage closely with the PRA in order to implement change. In order to ensure that RWAs and EL are not underestimated, we have implemented a post model adjustment (PMA) for PS11/20. We will continue to review the size of this PMA to ensure it remains suitable as we complete our PS11/20 model development. Capital risk is also mitigated through the continued accrual of organic CET1 resources as a result of sustained profitability. We plan to reduce dependency on interest income and remain committed to diversifying its income streams, as noted in the 2022 Annual Report and Accounts. Overall, we continue to maintain a strong position across all regulatory capital frameworks (TCR/MREL/Leverage) including capital buffers, on both an actual and forecast basis.

Capital regulatory change

Regulatory change remains a key risk to the Group's capital position. On 30 November 2022, the PRA released Consultation Paper 16/22 (CP16/22), which outlined the proposals for the implementation of Basel 3.1 in the UK. As noted in the 2022 Annual Report and Accounts, the PRA proposed a series of changes to the current approach to calculating regulatory capital requirements, to be implemented on 1 January 2025 on a phased basis. We highlighted the magnitude of the development required ahead of implementation, in order to calculate and report Pillar 1 requirements in line with the proposed changes. We have developed a plan for delivering all required changes in time for the implementation date and continue our detailed assessment of potential impacts, all overseen through Board and Executive-level governance. We have provided responses to the consultation directly to the PRA and through UK Finance's industry responses.

On 13 July 2023, after the reporting period end date, the FPC implemented the increase in the UK CCyB rate as expected. There have been no further regulatory changes that are expected to materially impact the Group's capital position.

Banking sector instability

The collapse of Silicon Valley Bank (SVB) and Signature Bank in early March 2023, the takeover of Credit Suisse (CS) in April, and the subsequent collapse of First Republic Bank in May drove increased volatility in interest rate and wholesale debt markets, leading to global "risk-off" sentiment as markets sought to identify any potential risk of contagion.

Our response to this threat included the immediate enhancement of customer and market monitoring and engagement with stakeholders including meeting regulatory requests for liquidity data. There were no material impacts to the Group arising from this period of instability.

We are not exposed to the same profile of risks which led to the failure of SVB, notably weakness within the Pillar 2 IRRBB framework, and do not expect any long run idiosyncratic impacts as a result of March's instability. We continue to closely monitor any impacts of regulatory developments - aimed at limiting the risk of bank failures occurring in the UK - on both the UK banking sector and the Group.

Base rate rises

The UK economy over the past 12 months has been characterised by persistently high levels of inflation. In response, the Bank of England has increased the base rate by 150 basis points in 2023 as at 30 June with further rate rises expected, following the total 325 basis point increase through 2022. We anticipate that further base rate increases are likely to drive affordability challenges for our borrowers, especially those on standard variable rate (SVR) mortgages. Whilst our portfolios have not been materially affected as yet, increased affordability pressure on our customers consequentially increases the potential for increased rates of arrears within our secured and unsecured portfolios.

The retail credit risk section on page 7 provides details on how we are monitoring the impacts of the rising rate environment on our customers.

Global conflict

The Group continues to have no direct exposure to the conflict in Ukraine or potential conflict in Taiwan. Although no direct threats have emerged over 2023, we remain conscious of a select number of continued indirect impacts these conflicts have on our risk profile and delivery of financial strategy. The most prominent of these include:

· Inflation - the impact that Russian sanctions continues to have on global market prices for goods in particular oil prices, exacerbating inflationary pressures on the UK economy.

· Sanctions - the enforcement of sanctions regimes on Russia causes a heightened level of compliance risk. Our lack of exposure to affected regions provides some mitigation however enhanced compliance resource is still required due to the increased severity of sanctions imposed.

· Cyber threats - international conflict opens the Group to potential cyber threats from state sponsored groups / individual threat actors. We are continuously strengthening and adapting cyber defences in place to remain prepared for this evolving threat.

LIBOR transition

The Group has exposure to legacy LIBOR-linked products, primarily across its legacy retail secured and corporate portfolios. LIBOR was phased out at the end of 2021, and the work to transition the Group's affected exposures to appropriate replacement rates now been materially completed. For further information on the risk management associated with this activity, refer to the market risk disclosures within the 2022 Annual Report and Accounts.

The table below outlines the Group's exposure at 30 June 2023 to significant IBORs subject to reform that are yet to be transitioned to an alternative benchmark rate. The carrying amounts of financial assets are presented gross of any expected credit losses (ECLs).

Of the above balances, none (31 December 2022: £5.7m) are classed as tough legacy. The majority of the remaining balances will have completed their transition to an alternative rate by the end of 2023, and the remaining population are expected to be moved to a replacement rate when the synthetic LIBOR benchmark is removed in March 2024.

The Group also has responsibility for the migration of certain legacy LIBOR retail secured assets sold to unconsolidated structured entities or other third parties but where it continues to hold legal title. The gross outstanding balances of these LIBOR assets not recognised on the Group's balance sheet are £133.5m (31 December 2022: £142.6m), of which £21.2m (31 December 2022: £22.7m) are classed as 'tough legacy' (i.e. those that do not allow for variation of benchmark rates) and for which solutions continue to be developed.

2. CREDIT RISK

All amounts are stated in £m unless otherwise indicated

The Group manages credit risk on the following balance sheet items:

· Loans and advances to banks;

· Loans and advances to customers;

· Investment securities;

· Derivative financial instruments; and

· Other assets.

Expected credit loss (ECL) assessment approach

The Group's portfolio of assets on which credit risk is managed remains low-risk and well-positioned to withstand the current environment.

During 2023 the Group has observed the following impacts:

1. Level of arrears in the mortgage portfolio (core >3 months) is 0.02% higher compared to the year end: 0.15% as at 30 June 2023 (0.13% at 31 December 2022). We are seeing some small increases driven by the squeeze on household finances due to inflation and a rising interest rate environment.

2. There has not been a significant amount of material defaults in the SME or legacy corporate portfolios in the period. The profiles of customers are closely monitored including via strategies to identify and contact 'at risk' customers as described in the year end risk management report and which are managed on a case-by-case basis.

More information is included in note 2 to the condensed consolidated financial statements in relation to assumptions around stage transfers and also in relation to the economic scenarios.

Allowance for losses and credit impairment charge analysis by segment

Although the Group manages credit risk arising from a number of balance sheet items, the most significant is the loans and advances. The following tables analyse the allowance for losses as at 30 June 2023 and the credit impairment charge for the period by segment. Comparative information is shown within the analysis of credit risk section alongside segmental information disclosed within note 3 and information included in note 8 in relation to loans and advances to customers.

The credit impairment (ECL charge) and the allowance for losses (ECL provision) for the period arises from both modelled and also post-model adjustments (PMAs) (i.e. known model deficiency overlay). These management judgements were described within the Annual Report and Accounts within the critical judgements of note 2, with an update in note 2 of this document. During the period, the following represent the key movements within ECL:

Retail - the ECL provision has reduced from £28.1m to £26.6m. This £1.5m reduction is driven by a higher retail secured ECL provision of £0.6m offset by lower credit cards (£1.9m) and overdrafts (£0.2m) ECL provisions. A key driver of movement in ECL is changes in the PMAs applied by the Group, which are disclosed in further detail in note 2 to the condensed consolidated financial statements. This has resulted in a coverage of c.9bps on the retail secured Platform book.

SME - the movement of the ECL provision from £7.9m to £7.1m reflects a net (£0.3)m reduction in specific provision and PMA movements (described in note 2).

Legacy & central items - the ECL provision has moved from £4.3m at 31 December 2022 to £5.1m. The PMA movement is described in note 2.

Analysis of credit risk

1. Accounting adjustments include some FV non- customer balances.

2. Operational model adjustments are recognised in respect of individually insignificant model corrections where management judgement does not have a substantial impact on the quantification of the adjustment

1. Accounting adjustments include some FV non-customer balances.

2. Operational model adjustments are recognised in respect of individually insignificant model corrections where management judgement does not have a substantial impact on the quantification of the adjustment

The movement in the gross customer exposure (excludes those assets held at FVTPL) across the segments is shown below:

The movement in the allowance for losses across the three segments (excludes FVTPL) is shown below:

Secured residential portfolio analysis

The following tables show the secured residential drawn balances (excluding Legacy) analysed by a number of key risk measurements. The portfolio has remained stable in size. Within this book 4.3% of balances have a probability of default (PD) of greater than 1% (31 December 2022: 3.3%), with the majority of the increase in the 1 to 3% PD band. The book is also subject to a range of forbearance measures which are detailed in the 2022 Annual Report and Accounts. There have been no changes in the measures since the December 2022 year end.

a) Loan-to-value (LTV) and repayment type

The table shows gross customer balances analysed by indexed LTV bandings (with interest only including mortgages on a part repayment/part interest basis).

b) Mortgage type

The table below shows gross customer balances for mortgages analysed by asset class. The LTV shown is the current indexed average percentage. 99.9% of the total book is classified as prime or buy-to-let mortgages. The higher risk self-certified, almost prime and non-conforming account for only 0.1% of the total book.

c) UK regional distribution

The table below shows the analysis of LTVs and gross customer balances by UK regions. Regional split now based on Government Office Regions (was Economic Planning Regions). 2022 has been re-presented on the same basis. The largest sector of London & South East has an LTV broadly in line with the overall average; with no significant variation in the LTV's between the regions.

Unsecured retail portfolio analysis

The table below shows the analysis of unsecured retail gross customer exposure by product. The decline reflects the continued lower usage of cards and overdrafts. The drawn balance has declined from a combined £237.0m to £232.7m.

SME portfolio analysis

The table below shows the analysis of SME gross customer exposure by product. The movement is mainly driven through CBILS and Bounce-Back loan repayments, partially offset by new lending.

Sector analysis

The table below analyses the gross customer exposure for the SME by sector excluding FVTPL of £1.8m (31 December 2022: £2.9m). The exposure to higher-risk sectors is limited.

Legacy portfolio analysis

The table below shows the analysis of corporate legacy gross customer exposure by sector. As shown below the majority of the balance is either in the low-risk private finance initiative (PFI) or housing association (HA) sectors.

INDEPENDENT REVIEW REPORT TO THE CO-OPERATIVE BANK HOLDINGS LIMITED

Conclusion

We have been engaged by the Group to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 which comprises the Condensed Consolidated Income Statement, Condensed Consolidated Statement of Comprehensive Income, Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Cashflows, Condensed Consolidated Statement of Changes in Equity and related notes 1 to 17. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 is not prepared, in all material respects, in accordance with UK-adopted International Accounting Standard 34.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 1.1, the annual financial statements of the Group are prepared in accordance with UK-adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK-adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusions Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that management have inappropriately adopted the going concern basis of accounting or that management have identified material uncertainties relating to going concern that are not appropriately disclosed. 

This conclusion is based on the review procedures performed in accordance with this ISRE, however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of the Directors

The Directors are responsible for preparing the half-yearly financial report in accordance with UK-adopted International Accounting Standard 34.

In preparing the half-yearly financial report, the Directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly report, we are responsible for expressing to the Group a conclusion on the condensed set of financial statements in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

This report is made solely to the Group in accordance with guidance contained in International Standard on Review Engagements 2410 (UK) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Group, for our work, for this report, or for the conclusions we have formed.

Ernst & Young LLP

London

27 July 2023

CONDENSED CONSOLIDATED INCOME STATEMENT

£m

The results above wholly relate to continuing activities.

The profit for the financial period is wholly attributable to equity shareholders.

Notes 1 to 17 form part of these interim condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

£m

Notes 1 to 17 form part of these interim condensed consolidated financial statements.

CONDENSED CONSOLIDATED BALANCE SHEET

£m

Notes 1 to 17 form part of these interim condensed consolidated financial statements.

Approved by the Board of The Co-operative Bank Holdings Limited on 27 July 2023:

CONDENSED CONSOLIDATED STATEMENT OF CASHFLOWS

£m