Charter Court Regulatory News (CCFS)

Press release

21 August 2018

This announcement contains information in the table on page 1 and the penultimate paragraphs on pages 2 and 6 that, prior to its publication, is inside information.

Interim results for the six months ended 30 June 2018

A strong half for originations and profitability

Financial highlights[1]

Continued balance sheet growth

Rigorous risk management maintained

Continued success of dynamic funding strategy

Strong profitability driving improved returns

Interim dividend

Ian Lonergan, CEO of Charter Court, said:

"We continued to make progress in the first half of 2018, delivering against or exceeding all of our targets.

"Steady growth in our balance sheet was maintained, with originations driven primarily by the strong uptake of our specialist buy to let products designed for the growing sophistication of our chosen market segments.

"This positive result was achieved whilst controlling risk efficiently and effectively, maintaining the high quality of our mortgage book.

"Our asset growth remains supported by the strength of our capital markets execution capabilities demonstrated by the attractively priced securitisations and structured asset sales delivered during the first half, positioning us extremely well in a post TFS funding environment.

"Our cost income ratio, whilst being below our medium term target due to the impact of structured asset sales in the period, continues to benefit from our high operating leverage and our scalable platforms.

"We are also delighted to announce our inaugural dividend for H1 2018 of 2.8p per share.

"We remain well capitalised for future growth and remain on track to deliver against our medium term targets."

Enquiries:

Analyst and investor presentation

A presentation for analysts and investors will be held at 10am on 21 August 2018 at the South Place Hotel, 3 South Place, London EC2M 2AF.

Participants will be able to take part via a conference call facility by dialling +44 (0) 20 3003 2666 or 0808 109 0700 (Password: Charter Court Financial Services). A live audio webcast of the presentation will be broadcast on our IR website at http://www.chartercourtfs.co.uk/InvestorCentre.

Cautionary statement

This Interim Management Report ("IMR") has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The IMR should not be relied on by any other party or for any other purpose. The IMR contains certain forward‑looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report but such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward‑looking information.

Forward-Looking Statements

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". Forward-looking statements are statements that are not historical facts and may be identified by words such as "intend", "aim", "project", "anticipate", "estimate", "plan", "believes", "expects", "may", "envisage", "should", "will", "target", "continues", "set to", or similar expressions. These forward-looking statements involve substantial known and unknown risks, uncertainties, assumptions, estimates and other factors which may be beyond the control of Charter Court Financial Services Group plc ("Charter Court") and its subsidiaries (together, "the Group"). Actual results and developments may differ materially from those expressed or implied by these statements and depend on a variety of factors. These statements are made in respect of Charter Court's intentions or future beliefs and current expectations at the time made concerning, among other things, Charter Court's results of operations, financial condition, liquidity, prospects, growth and strategies. In light of these risks, uncertainties and assumptions, actual results could be materially different from projected future results expressed or implied by these forward-looking statements which speak only as to the date of this announcement. The Group cannot guarantee that its forward-looking statements will not differ materially from actual results. Charter Court disclaims any obligation to update any forward-looking statements in this announcement that may occur due to any change in its expectations or to reflect events or circumstances after the date of this announcement. Undue reliance should not be placed on any forward-looking statement.

About Charter Court Financial Services Group plc ("Charter Court")

Charter Court is one of the UK's leading specialist challenger banks by originations, founded in 2008 by its senior management team and purpose built to focus on specialist buy to let, residential, bridging and second charge mortgage lending. We operate through our three brands - Precise Mortgages, Exact Mortgage Experts and Charter Savings Bank - providing buy to let and specialist residential mortgages; mortgage servicing, administration and credit consultancy; and retail savings products.

We have continued to grow in our chosen markets and to translate that growth into strong financial and operational performance. At 30 June 2018, our total mortgage balances stood at £5.7 billion generated through our relationships with more than 21,000 registered introducers nationwide, whilst Charter Savings Bank held £4.3 billion in retail deposits at the same date from around 125,000 retail savings accounts. 

Underpinning our success, our risk management expertise and technology and systems ensure efficient processing, strong credit and collateral risk control and speed of product development and innovation. These factors have enabled our strong balance sheet growth whilst maintaining the high credit quality of our mortgage assets.

Charter Court was admitted to the main market of the London Stock Exchange in October 2017 (CCFS.L). Charter Court Financial Services Limited, a subsidiary of the Group, is authorised by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority ("FCA") and the PRA. Charter Mortgages Limited, also a subsidiary of the Group, is authorised and regulated by the FCA.

Chief Executive Officer's review

During the first half of 2018 we benefited from the momentum developed during 2017, delivering continued growth and increased profitability at Charter Court. 

Market dynamics remain supportive

The buy to let market remained resilient in H1 2018 following two years of significant regulatory change. The purchase market softened to £4.5 billion in the first six months of 2018 (first six months 2017: £5.2 billion)[3], with a shift towards specialist buy to let solutions such as limited company lending.[4] Remortgage volumes increased to £13.4 billion in the same period (first six months 2017: £11.7 billion) as borrowers took advantage of low interest rates, with £5.5 billion of the total fixed for five years.

The residential mortgage market remained stable in H1 2018 as historically low bank base rates were offset by the economic uncertainty driven by the ongoing Brexit negotiations. Residential mortgage volumes totalled £64.5 billion in the first six months of 2018 (first six months 2017: £63.5 billion), with £28.5 billion generated by first time buyers and £36.0 billion generated by home movers.[5]

The funding market was also supportive during H1 2018, with UK residential mortgage backed security ("RMBS") spreads reaching a post crisis low in Q1 2018.[6]

Maintaining our strong balance sheet growth

Charter Court's loan book continued to grow in H1 2018 increasing 29.0% year on year (H1 2017: 58.4%, FY 2017: 40.9%), and 41.7% on an underlying[7] basis (H1 2017: 69.2%, FY 2017: 48.7%). Of the £1.4 billion of new originations during the period, growth was primarily delivered through the continued uptake of our buy to let and specialist residential mortgage propositions, as we captured increased demand for professional buy to let products and non-standard residential mortgages. We continued to enhance our lending proposition by refining our product range and further improving our distribution and service standards.

Implementing our flexible approach to funding

During the first half of the year, we were proactive in the implementation of our dynamic funding strategy and took advantage of favourable conditions in wholesale markets to minimise our funding costs.

As a result, our retail deposit book remained broadly flat during the first half as we shifted our focus to customer retention rather than acquisition.

The H1 securitisation transactions had a combined value of over £900 million, surpassing our total issuance for the whole of 2017. Additionally, strong demand for equity tranches in our securitisations allowed us to complete two structured asset sales at attractive prices, recognising a gain on sale of £36.4 million, maximising shareholder value and in-line with our strategy.

Delivering robust financial performance

The Group continued to perform well during the first half of the year and the strong performance achieved across the business resulted in a 57.0% increase in profit before tax to £93.1 million from £59.3 million in H1 2017.

This growth was primarily attributable to the significant increase in our net interest income for the six months ended 30 June 2018 where we have managed to maintain a robust net interest margin, as well as the gains on the structured asset sales. Profit after tax for the six months ended 30 June 2018 rose to £71.1 million, from £43.6 million a year earlier.

Summary and Outlook

We continue to see robust demand for our specialist lending proposition which we expect to translate into further growth and returns in the second half through the efficiency of our unique business model that combines deep credit know-how and proprietary analytics, our extensive intermediary network and our scalable, bespoke operating platform that maintains the high quality of our underwriting.

On the liability side, we intend to continue to price our retail savings products tactically in the second half, to optimise our cost of funds and deliver a balanced funding mix. We will also continue to explore diversification opportunities to enhance further our competitive position in the savings market. We continually monitor capital markets conditions and, as demonstrated in the first half of the year, will continue to execute transactions when market conditions are favourable. While we do not expect to complete any structured asset sales in H2 2018, we anticipate realising a c. £15 million gain on sale from a structured asset sale in H1 2019.

Based on our robust first half performance and outlook for the remainder of 2018 we are increasing our guidance on organic originations to c. £2.7 billion for the full year from c. £2.5 billion previously. We continue to target a net interest margin of greater than 300 basis points for the year. Reflecting the impact of the structured asset sales, the strong increase in net interest income and our high operating leverage, we expect both our cost income ratio and return on equity to be better than our medium term guidance.

Considering Charter Court's strong capital position and reflecting confidence in its strategy and positive medium term outlook, the Board has adopted a progressive dividend policy with a payout ratio of 25% of earnings for 2018 and maintains its progressive dividend policy objective thereafter.

Going forward, the interim dividend will be based on one third of the prior year's total dividend. In line with this the Board has declared an interim dividend to ordinary shareholders based on one third of 25% of the profit after tax for the year ended 31 December 2017. The dividend of 2.8 pence per share is payable 4 October 2018.

The Group remains well capitalised with an anticipated CET1 ratio in excess of 15% for the full year.

Charter Court remains on track to deliver against its medium term financial targets as set out below.

Ian Lonergan

Chief Executive Officer

Financial review

Group highlights

Loan book growth of 29.0%

Charter Court's loan book growth to £5.7 billion at 30 June 2018 (30 June 2017: £4.4 billion, 31 December 2017: £5.4 billion) reflects strong mortgage origination volumes taking into account the derecognition of assets on structured asset sales, which reduces the loan book.

Low cost of risk maintained

As a result of our continued focus on credit quality, disciplined risk management and extensive experience in specialist mortgage risk assessment, only 0.1% of the Group's loan book was three months or greater in arrears at 30 June 2018 (30 June 2017: 0.1%, 31 December 2017: 0.1%). This is reflected in our low cost of risk on an IFRS 9 basis of 0.025% for the six months ended 30 June 2018 (30 June 2017: 0.004%, 31 December 2017: 0.011%, both on an IAS 39 basis). We maintain our guidance that we will continue to demonstrate a market leading cost of risk over the medium term.

Funding mix optimised through further securitisation issuance

Charter Court's retail deposit customer base remained stable during the period, at £4.3 billion at 30 June 2018 (30 June 2017: £4.0 billion, 31 December 2017: £4.4 billion).

We continued to benefit from access to wholesale funding through securitisations and warehouse facilities. Securitisation transactions amounted to total issuance of £906.1 million during H1 2018 (FY 2017: two securitisations totalling £597.3 million). The two structured asset sales the Group executed in H1 2018 resulted in the derecognition of £562.5 million of underlying mortgage assets and associated risk weighted assets ("RWAs") (2017: one structured asset sale amounting to £300.0 million of underlying mortgage assets and associated RWAs), while generating an aggregate gain on sale of £36.4 million (H1 2017: £17.7 million).

Combined with an additional £150.0 million of Bank of England TFS drawdowns, (six months to 30 June 2017: £857.8 million, year to 31 December 2017: £977.8 million), this allowed us to further optimise the balance of our funding mix and extend the weighted average life of our liabilities. As a result, at 30 June 2018 the Group's loan to deposit ratio has increased to 133.6% (30 June 2017: 111.1%, 31 December 2017: 121.4%).

Our ability to identify market opportunities, execute tactical transactions and operate swiftly positions us well in a world post TFS.

Profit after tax up 63.1%

Our profit before tax increased to £93.1 million in H1 2018 (H1 2017: £59.3 million), reflecting a significant increase in net interest income and gains on the structured asset sales (see below).

The effective tax rate for the period was 23.6% (H1 2017: 26.4%, FY 2017: 27.2%) reflecting reductions in the rate of UK corporation tax.

Profit after tax for H1 2018 was up 63.1% to £71.1 million (H1 2017: £43.6 million).

Total income up 45.0%

Driven by continued growth of the mortgage loan book, our interest income and similar income increased by 31.1%, to £127.4 million (H1 2017: £97.2 million), mainly due to the continued expansion of the mortgage origination business, funded principally through securitisations and TFS drawdowns.

Interest expense and similar charges increased by 34.8% percent to £43.0 million in H1 2018, (H1 2017: £31.9 million).

The Group's net interest income increased by 29.2% to £84.4 million (H1 2017: £65.3 million). Net interest margin in H1 2018 was 3.08% (H1 2017: 3.17%).

The structured asset sales resulted in the full derecognition of the underlying mortgage assets and delivered net gains on sale totalling £36.4 million (H1 2017: £17.7 million). 

Our total income for the period increased by 45.0% to £124.7 million (H1 2017: £86.0 million).

Cost income ratio improved further

Administrative expenses increased by 15.7% to £30.9 million in H1 2018 (H1 2017: £26.7 million), principally as a result of increased staff costs and associated support expenses, reflecting the growth of the business. The average number of staff increased in the period to 557 (30 June 2017: 430; 31 December 2017: 462). In H1 2017 expenses included £2.3 million of costs associated with the IPO and private sale costs; no such costs were incurred in H1 2018.

The cost income ratio decreased from 31.0% in H1 2017 to 24.8% in H1 2018 reflecting strong growth in income, the scalability of our operations and the benefits of our high operating leverage as our balance sheet continues to grow.

Following the adoption of IFRS 9 on 1 January 2018, the charge for provision for loan impairments on a expected loss basis in the six months to 30 June 2018 was £0.7 million (H1 2017: on an IAS 39 incurred loss basis, £nil). For further explanation of the change in accounting policy see note 3 in the condensed financial statements.

Effective liquidity management

The Group predominantly offers term deposits and notice accounts to retail depositors. These deposits have a more predictable liquidity profile than easy access accounts and as at 30 June 2018 they represented 89% of all retail savings accounts.

At 30 June 2018, the Group held £751.2 million (31 December 2017: £848.0 million) of its liquid assets in Bank of England reserve account balances and £97.1 million (31 December 2017: £34.5 million) of liquid assets in balances held with tier 1 UK banking institutions, comfortably exceeding regulatory requirements. 

Robust capitalisation supports growth strategy

With a strong CET1 ratio of 16.6%[9] at 30 June 2018 (31 December 2017: 15.6%) and a leverage ratio of 5.67% comfortably above the Bank of England requirement of 3.25%, Charter Court remains well capitalised.

In June 2018, the Group received from the Prudential Regulatory Authority notification of its total capital requirement ("TCR") which is as follows:

Consolidated - a minimum amount of capital of 10.58% of RWAs with no fixed add-on.

Individual - a minimum amount of capital of 10.65% of RWAs with no fixed add-on.

The Group's preparations for adoption of the internal ratings based approach ("IRB") are progressing apace and have considerable traction. The resultant improvements in the credit risk management framework are expected to pave the way for lower risk weights under the IRB approach than the current standardised approach, thus reducing regulatory credit risk capital requirements, bringing important benefits.

Business review by segment

Lending

Highlights

Profit by lending segment

Continued focus on distribution and service standards

During H1 2018, Charter Court successfully maintained its distribution leadership across more than 21,000 registered introducers nationwide and affirmed its position as one of the largest single specialist bank providers through the country's leading mortgage clubs and networks.

The Group's 'Broker Journey' project continued to deliver non system based service improvements aimed at providing increased volumetric activity, increasing conversion rates and reducing time to offer. A recent survey commissioned through independent market research group BDRC[11] showed Precise Mortgages ranking first versus its peer group in the following measures: efficient online application, efficient case communications, efficient offer processing and clear and consistent underwriting.

In H1 2018, the Group commenced a review of its sales proposition with a view to delivering national sales coverage through both a technology and telephony-based channel whilst optimising the use of field based sales force.

Buy to let

Highlights

During the first half of 2018, Charter Court saw a sustained shift in demand towards specialist buy to let products of the type the Group offers.

Charter Court further developed its proposition for landlords with limited company structures and remained active in the houses in multiple occupation ("HMO") market. With a range of five-year fixed term products and the launch of its income supported buy to let proposition, Charter Court continued to offer a variety of options for landlords who do not fit the profile required by high street lenders.

Such proactive new product development and effective management of mortgage applications allowed the Group to maintain its strong competitive position in this market. The BDRC report showed Charter Court as the No.1 lender mentioned by intermediaries for limited company buy to let lending. 

As a result, originations for the first half of 2018 increased by 10.5% to £835.3 million (H1 2017: £756.1 million). Net interest income increased from £30.8 million in H1 2017 to £47.6 million in the same period of 2018.

Buy to let mortgages represent 69% of Charter Court's total loan book.

Residential

Highlights

The specialist residential market also remained robust during H1 2018 supported by strong demand for help to buy and new build products.

In addition to distribution improvements, during H1 2018 the Group added an interest only proposition to its product range. As a result, Charter Court maintained its No.1 ranking in the BDRC report for intermediaries looking to place residential lending with adverse credit, with 68% of intermediaries surveyed recommending Precise Mortgages for this type of lending.

Originations for the first half of 2018 were slightly ahead at £362.9 million compared with £356.2 million for the six months to 30 June 2017. Net interest income from specialist residential mortgages increased from £22.1 million in the first half of 2017 to £26.2 million.

Charter Court remains focused on delivering further improvements to its specialist residential proposition through the Group's new product development programme. The Group sees potential growth opportunities in the retirement market, where favourable regulatory changes have recently been introduced.

Specialist residential mortgages represent 25% of Charter Court's total loan book.

Short term lending (Bridging)

Highlights

In the first two months of 2018 Charter Court chose not to react to competitive movements in its core bridging market. Activity remained acceptable and throughout this period the Group maintained its focus on high quality, low risk bridging finance.

In late Q1 2018 Charter Court took the opportunity to restructure its product range and introduced product enhancements to successfully drive renewed growth. Q2 2018 delivered notably increased applications levels relative to Q1 2018 and the same period last year. This trend was supported by a restructured sales team and improved distribution which has enabled the Group to access a larger potential market.

Bridging loans represent 3% of Charter Court's total loan book.

Second charge loans

Highlights

During the first half of 2018, Charter Court maintained its focus on high quality lending at appropriate margins, prioritising quality over volume of loans. Although originations fell compared with the first half of 2017, the loan book increased from £170.8 million to £175.5 million and net interest income increased from £2.8 million in H1 2017 to £3.1 million in H1 2018.

Second charge loans represent 3% of Charter Court's total loan book.

Funding

Charter Court continued to implement its dynamic funding strategy in H1 2018, taking advantage of changing market conditions to balance funding sources and deliver an optimal cost of funds.

Retail deposits

Highlights

Charter Court's retail deposits remained broadly stable versus the year end 2017 at £4,262.6 million (31 December 2017: £4,420.0 million and 30 June 2017: £3,976.7 million), as the Group continued to price tactically and reprice quickly so that its retail savings products appeared at the top of "best buy" tables when most efficient and effective.

Whilst this has led to a low level of balance attrition in H1 2018, this was planned for and controlled within the overall funding mix as wholesale funding opportunities were more economical.

As at 30 June 2018, the Group had 102,145 savings customers (31 December 2017: 102,394 and 30 June 2017: 90,156), operating 125,468 savings accounts (31 December 2017: 122,825 and 30 June 2017: 104,477), with an average balance per account of £33,700 (31 December 2017: £36,000 and 30 June 2017: £36,000). The significant weighting of savings deposited with the Group towards longer term and notice-based products continued to provide relative stability of funds.

Charter Court continued to benefit from high levels of customer satisfaction and growing recognition from media coverage and awards. This was evident in the strong performance that was delivered as the Group's focus shifted from acquisition to retention.

In addition, the Group's ISA offering provided access to another retail deposit market with fewer competitors and lower customer rates than their equivalent non-ISA products. Despite choosing not to compete during the ISA's traditionally busiest period at the end of the tax year, ISA balances exceeded £700 million since the product was launched twelve months ago.

Wholesale funding

Highlights

Securitisation remains a key strategic funding source for the Group, with more than £3 billion of issuance since December 2013. As well as providing cost efficient funding, further diversifying the funding mix, and increasing the weighted average life of the Group's liabilities, securitisations can be used strategically to accelerate organic capital generation through the sale of residual positions.

H1 2018 has been exceptionally productive in this regard, with the Group taking full advantage of strong markets to complete issuances totalling more than £900 million. These transactions priced at spreads narrower than those previously achieved by the Group, with new benchmarks set for both the buy to let ("PMF") and residential ("CMF") RMBS programmes. On a combined basis, the overall day-1 cost of funds across the c. £900 million of mortgage collateralised notes placed was 3-month LIBOR plus 69bps.

During the period the Group also took advantage of a strong residuals market, selling the residual certificates in its CMF 2017-1 and CMF 2018-1 transactions to third party investors in January and June respectively. The sales enabled the derecognition of the underlying mortgage assets and generated a combined gain on sale of £36.4 million.

Of particular highlight was the CMF 2018-1 transaction, which closed in June 2018. The £285.5 million prime residential transaction followed on from the Group's inaugural CMF deal of July 2017. It achieved a senior note margin of LIBOR plus 47bps, and a weighted average day 1 cost of funds across the mortgage collateralised notes placed of 3-month LIBOR plus 55bps. Simultaneously, the Group went on to agree the sale of the residual positions in this transaction, resulting in a gain on sale of £21.3 million and representing a premium of 7.5% over the current balance of the sold mortgage assets.

The Group was equally successful in its buy to let securitisation activities, where it closed two PMF deals, and in the process achieved a record tight senior margin for a publically placed sterling buy to let transaction of 3-month LIBOR plus 65bps for its £246.1 million PMF 2018-1B deal, which closed in January 2018. It followed that up in March with the larger and longer duration PMF 2018-2B transaction, which securitised £374.5 million of buy to let mortgage assets with a senior spread of 3-month LIBOR plus 68bps. Day 1 cost of funds, across the mortgage collateralised notes was 3-month LIBOR plus 74bps for the PMF 2018-1B deal and 77bps for the PMF 2018-2B deal.

Both transactions have detachable residual positions, providing the opportunity for these to be sold at a future point in time should the business require. Such a sale would result in the derecognition of the underlying assets, release associated RWAs and generate a profit on sale.

During the period, the Group was also able to extend the maturity of its non-bank warehouse line. The line provides committed senior finance of up to £350 million against both prime residential and buy to let mortgage assets.

The Group also utilised its large TFS quota to draw down further amounts under the scheme prior to its closing in February (taking total outstanding drawings to £1,147.8 million), as well as also to repay and redraw the majority of its existing 2017 drawings. Each drawing has maturity of 4 years to the date upon which it was drawn, and therefore by repaying and redrawing existing drawdowns in this way, the Group was effectively able to reset the maturity date of the majority of its TFS liabilities out to February 2022, maximising the optionality and economic benefit of the scheme to the Group.

Risk Management

Maintaining our robust approach to risk management

A robust, clearly defined and effective risk management framework

Charter Court has a well-structured and mature risk management framework which was developed further in the first half of the year.

Further financial and people investment in the risk function, stress testing capability and ongoing adherence to the three lines of defence model is reflected in a strong performance in the first half of 2018 and will support ongoing business and organisational growth.

Strong credit risk management and standards

Our high credit standards and controls were maintained across the lending book with continued focus on disciplined underwriting systems and standards contributing to a low cost of risk.

Data Protection Law Changes

General Data Protection Regulation (EU) 2016/79 ("GDPR") and the Data Protection Act 2018 replaced the Data Protection Act 1998 with effect from 25 May 2018. The GDPR has brought about significant changes to data protection law including new requirements for record keeping, accountability, data subject rights, breach reporting and new obligations on processors.

A project to implement the necessary GDPR requirements was incepted in 2017 and the first phase - which included the preparation of Privacy Notices and implementation of procedures for providing them to existing and future customers, colleagues and brokers was completed in good time for the 25 May deadline.

Priorities for the remainder of 2018

The main goal for 2018 remains taking a forward-looking view and maintaining the high standards of insight, risk management and reporting that enable Charter Court to realise its business plan within prudent risk management parameters.

We remain alert to a potentially volatile economic and political outlook and will continue to monitor closely and assess the external environment as well as understanding potential adverse effects resulting from emerging and fast developing risks such as IT and cybercrime; the changing and likely future regulatory landscape is also a priority, particularly that which might affect capital requirements and credit standards, competitive trends in mortgage lending and retail savings markets and possible changes emanating from macro-economic conditions.

The introduction of a new operational risk management system is planned for implementation in the second half of 2018. This will augment centralised monitoring, control and reporting of operational risk.

The second phase of our GDPR project includes the enhancement of the data inventory, review and update of all contracts with data processors; implementation of procedures for the anonymisation of data at the end of agreed retention dates; and enhancements to the data management and control framework, for example identification of areas where data privacy risk can be reduced.

The Group's preparations for the internal ratings based approach ("IRB") are progressing apace and have considerable traction. There are a number of primary benefits from the approach. These include enhancements to our robust credit risk management framework, afforded by the build and application of enhanced application scoring to support underwriting decisions; the build and implementation of behavioural models which enable better and more dynamic mortgage portfolio monitoring and control and increased assessment and differentiation of relative counterparty risk enabling more proactive management and opportunities for better price differentiation. Improvements in credit risk management, measurement and control would be expected to pave the way for lower risk weights under the IRB approach than the standardised approach, thus reducing credit risk capital requirements.

Principal risks

In addition to credit risk, for which updated data are provided below along with updated Treasury risk exposures, the principal risks are as set out in detail on pages 26-33 of the 2017 annual report and accounts.

Each risk has an appetite limit set and owned by the Board. The Group operated within its Board approved risk appetite statements for the six months to 30 June 2018.

Credit risk

Risk exposure

The majority of the Group's buy to let, specialist residential and bridging finance is secured by first charge on residential property and relates primarily to prime, complex prime and near-prime credit which, to a limited extent, gives exposures to borrowers with a degree of impaired credit.

The Group's second charge lending is secured by second charges on residential property where the existing first charge typically secures a mortgage at a low loan to value ("LTV").

Counterparty risk

There is a minimum counterparty risk rating for wholesale funding and limits on maximum allowable exposures are imposed.

The assets of the Group subject to credit risk are set out below:

The Group's investments, derivatives and cash counterparties are primarily large financial institutions and there is no significant history of credit losses and no significant impairment provisions have been made.

Analysis of loans by Loan to Value (LTV)

The analysis by LTV is based on the principal amount of the loans, which does not agree to the Condensed consolidated statement of financial position as it excludes accounting adjustments, such as EIR adjustments, mortgage fair value hedge adjustments and provision for loan impairments.

At 30 June 2018, the average loan to value percentage of underlying mortgage assets to which the loans relate was 71% (30 June 2017: 70% and 31 December 2017: 70%) and £0.6 million (30 June 2017: £0.4 million and 31 December 2017: £0.4 million) of the total balance represented arrears (amounts quoted being the actual amount in arrears).

At 30 June 2018, the estimated value of property collateral held against residential mortgages was £10,272.6 million (30 June 2017: £8,495.7 million and 31 December 2017: £9,887.9 million). Collateral values are determined using an indexed valuation based on value at origination, unless there is an expectation that the security will be realised, in which case an independent appraised value is used. Collateral values are not capped at the value of the underlying loan. The collateral cannot usually be sold unless it is in possession.

At 30 June 2018, there were two properties in possession (30 June 2017: one and 31 December 2017: three) with a value of £ 0.2 million (30 June 2017: £0.1 million and 31 December 2017: £0.3 million).

Forbearance

The Group offers borrowers in financial difficulties a range of forbearance options, including capitalisation of arrears, temporary interest only concessions, payment holidays and term extensions. Term extensions are available on all loans but typically are applicable to short term loans and generally for no more than three months; the period of time is dependent upon the individual circumstances. These are granted on a discretionary basis.

Forbearance is considered to be an indicator that a loan may be impaired and such loans are allocated a higher probability of default in the Group's loan impairment provisioning.

The table below shows loans subject to active forbearance strategies:

Treasury risk

Risk exposure

The contractual maturity analysis of the Group's liabilities is summarised below:

The above table includes all debt securities in issue being redeemed on their contractual call option dates.

Treasury risk (continued)

Risk exposure (continued)

The future contractual undiscounted cash flows including interest of the above liabilities are shown below.

Interest rate risk

The Group does not seek to take a significant interest rate position and is exposed to interest rate risk only as a consequence of the provision of its financial services products. Interest rate risk is managed to ensure that the level of risk from shifts in the yield curve does not exceed a maximum percentage of capital resources or that earnings at risk do not exceed a specified percentage of projected earnings and CET1 capital in the following twelve months. The use of derivatives is designed to reduce this risk.

Other risk factors

The risk factors described below represent those other risks that the Group currently considers to be material and remain unchanged from those described on page 34 of the 2017 full year report.

Risk Factor - Global economy

The Group's business and financial performance have been and will continue to be affected by general economic conditions in the UK and adverse developments in the UK or global financial markets could have a detrimental impact on its earnings and profitability. 

Risk Factor - UK macro-economy and housing market

The Group's business and financial performance have been and will continue to be affected by the economic condition of its customers and of the UK housing market. Pressures on household incomes may lead to an increase in arrears in the Group's residential mortgage portfolios, and an associated increase in provision for loan impairments. High levels of consumer debt could also impact affordability assessments and other factors in underwriting decisions and may contribute to reduced willingness by lenders to lend to individuals.

Risk Factor - Competition

Competition in the UK mortgage and retail savings markets may adversely affect the Group's operations.

Risk Factor - Cybercrime, Fraud

The Group may be subject to privacy or data protection failures, cybercrime and fraudulent activity. The Group has implemented, and manages, on an ongoing basis a number of robust policies and procedures relating to data protection and the prevention of cyber-theft, however a residual risk still remains.

Risk Factor - IT failure

The Group is dependent on its IT systems, including those of its outsourced providers which may fail or be subject to disruption.

Risk Factor - Key employee dependency

The Group is reliant on a small number of key employees, within its senior management team and the wider business, who are central to the Group's approach to lending in its specialist markets. Intense competition in the financial services industry for skilled and/or qualified personnel further accentuates this risk.

Risk Factor - Outsourcing 

The Group relies on third parties for a number of its key processes and functions, with a particular reliance on a single third-party provider for a number of key services in relation to the Group's online retail savings account business.

Risk Factor - Regulatory risks

The Group's business is subject to risks relating to changes in Government policy and applicable regulations affecting the UK housing market and related matters.

Risk Factor - 'Brexit'

Regulatory and other changes resulting from the UK's exit from the EU could impact the Group's results. This is in part due to uncertainty in relation to the eventual outcome of the negotiations and in part due to a large proportion of the regulatory regime applicable to the Group being derived from EU directives and regulations - the UK exiting the EU could materially change the regulatory framework applicable to the Group's operations.

Directors' responsibilities statement

We confirm that to the best of our knowledge:

The Board of Directors, as listed below, represents those individuals responsible for this interim management report:

Sir Malcolm Williamson, Chairman

Philip Jenks, Deputy Chairman

Noël Harwerth, Senior Independent Director

Ian Ward, Chair of the Remuneration Committee and Chair of the Nomination Committee

Tim Brooke, Chair of the Board Risk Committee

Rajan Kapoor, Chair of the Audit Committee

Ian Lonergan, Chief Executive Officer

Sebastien Maloney, Chief Financial Officer

Peter Elcock, Chief Risk Officer

Approved by the Board of Directors and signed on its behalf by:

Independent Review Report to Charter Court Financial Services Group plc

We have been engaged by the Company to review the condensed set of financial statements in the interim financial report for the six months ended 30 June 2018 which comprises the Condensed consolidated statement of comprehensive income, the Condensed consolidated statement of financial position, the Condensed consolidated statement of changes in equity, the Condensed consolidated statement of cash flows and related notes 1 to 23. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company 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 Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The interim financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, 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.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Statutory Auditor

Birmingham, United Kingdom

20 August 2018

CONDENSED FINANCIAL STATEMENTS

Condensed consolidated statement of comprehensive income

For the six months ended 30 June 2018

All items dealt with in arriving at the profit before tax, the profit for the financial period, and the preceding financial period, relate to continuing operations.

Condensed consolidated statement of financial position

As at 30 June 2018

Approved by the Board of Directors on 20 August 2018 and signed on its behalf by:

Company number: 06712054

Condensed consolidated statement of changes in equity

For the six months ended 30 June 2018

Condensed consolidated statement of cash flows

For the six months ended 30 June 2018

At 30 June 2018 cash and cash equivalents includes £64.2 million (30 June 2017: £94.4 million and 31 December 2017: £79.9 million) of restricted cash.

Notes to the condensed financial statements

For the six months ended 30 June 2018

Charter Court Financial Services Group plc (the "Company") is a company incorporated in the United Kingdom and registered in England and Wales under the Companies Act 2006 with company number 06712054. The address of the registered office is 2 Charter Court, Broadlands, Wolverhampton, West Midlands, WV10 6TD.

The information for the year ended 31 December 2017 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2017 have been delivered to the Registrar of Companies in England and Wales in accordance with section 447 of the Companies Act 2006. The Auditor has reported on those accounts. Its report was unqualified, did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report, and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The condensed set of financial statements for the six months ended 30 June 2018 is unaudited, but has been reviewed by the auditor and their report to the Company is included in this statement. These interim financial statements were authorised for issue by the Company's Board of Directors on 20 August 2018.

The critical accounting judgements and key sources of estimation uncertainty are unchanged from those disclosed on pages 112 and 113 of the 2017 full year report.

The annual financial statements of Charter Court Financial Group plc are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting", as adopted by the European Union.

The accounting policies, presentation and methods of computation are consistent with those applied by the Group in its latest audited financial statements, which were prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU and interpretations issued by the International Financial Reporting Interpretations Committee, except for those changes in accounting policies that have been applied with effect from 1 January 2018 (see note 3 below).

Going concern

After considering the Group's current financial condition, assessing future forecasts and the principal risks and uncertainties, the Directors have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the consolidated financial statements.

In the current financial period, the Group has adopted IFRS 9 Financial instruments, changing the classification and measurement of financial assets and introducing a new impairment model for financial instruments which requires entities to recognise expected credit losses based on unbiased forward-looking information. The new impairment model replaces the incurred loss model which only recognises impairment if there is objective evidence that a loss is already incurred and measures the loss at the most probable outcome under IAS 39 'Financial Instruments: recognition and measurement'.

Other changes to accounting standards in the current period, including the adoption of IFRS 15 Revenue, had no material impact.

IFRS 16 Leases is effective for the Group's consolidated financial statements for the year ending 31 December 2019. IFRS 16 removes the distinction between operating and finance leases and requires recognition of a right-of-use asset and a lease liability for all leases, except for short-term leases and leases of low value assets. The Group is currently reviewing the impact of the new standard but does not expect its impact to be material.

Impact of IFRS 9 on the financial statements

The impacts of the adoption of IFRS 9 are unchanged from those disclosed in note the 3 of the financial statements for the year ended 31 December 2017.

Under IFRS 9, the Group is required to classify and measure financial assets according to the business model within which they are managed and their contractual cash flow characteristics. Financial assets are measured at amortised cost if they are held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and their contractual cash flows represent solely payments of principal and interest. Financial assets are measured at fair value through other comprehensive income ("FVOCI") if they are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and their contractual cash flows represent solely payments of principal and interest. Other financial assets are measured at fair value through profit and loss ("FVTPL").

The Group has reviewed the business model within which each financial asset is managed and concluded that, except as set out below, the measurement of all non-derivative financial assets remains unchanged in the Group consolidated financial statements and they continue to be carried at amortised cost. The measurement of derivative financial assets also remains unchanged and they continue to be carried at FVTPL.

The Group has a purchased portfolio of mortgage assets that may generate cash flows other than payments of principal and interest. Under IAS 39 the portfolio was carried at amortised cost, with a net carrying amount of £24.1 million at 31 December 2017. Under IFRS 9, the same portfolio is now carried at FVTPL. On transition to IFRS 9 the fair value of the portfolio was calculated as £24.1 million.

The opening impairment allowance as at 1 January 2018 measured in accordance with the IFRS 9 expected loss model is £1.7 million, an increase of £0.7 million, 70%, compared with £1.0 million closing impairment allowance as at 31 December 2017 measured in accordance with the IAS 39 incurred loss model. The £0.7 million relates to loans and receivables and there is an immaterial amount relating to loan commitments and guarantees.

The Group has elected not to restate comparatives on initial application of IFRS 9 on 1 January 2018, and adjustments arising from changes have been recognised in opening equity.

The calculation of expected credit losses under IFRS 9 requires significant management judgements, estimates and assumptions. Key concepts and management judgements include:

These key concepts and management judgements are set out in more detail in note 3 to financial statements for the year ended 31 December 2017.

IFRS 9 Financial instruments - Accounting policies applied from 1 January 2018

The accounting policy for financial instruments has been revised following the first time application of IFRS 9 Financial instruments in 2018, see Appendix: Implementation of IFRS 9.

The Group's activities are all UK based therefore no geographical segmentation is reported. The Group's reportable segments are operating units engaged in providing different products or services and whose operating results and overall performance are regularly reviewed by the entity's Chief Operating Decision Maker, the Board of Directors.

The Group's business is organised into the following principal reportable segments:

Interest expense is allocated in proportion to the average balances of the interest-earning segment assets during the period / year.

The Group does not allocate administrative expenses by segment as the Group's operations are primarily split by function (origination, servicing and central) rather than by segment.

Segment profit or loss is total net income less provision for loan impairment charges. It is reconciled to the Condensed consolidated statement of comprehensive income in the tables below.

Assets allocated to the originated lending related segments are customer loans and receivables balances only. Bridestone loans and receivables (£24.1 million) acquired in 2017, cash and cash equivalents, investments in debt securities and are allocated to the "Other" segment. Remaining asset balances (which includes intangible assets, tangible fixed assets, deferred tax assets, trade and other receivables, other assets and derivatives) and all liability balances are not allocated to any reporting segment.

There has been no change in the basis of segmentation or in the basis of measurement of segment profit or loss in the period.

Profit before tax for the period has been arrived at after charging:

Staff costs include £0.9 million (30 June 2017: £0.5 million and 31 December 2017: £1.1 million) relating to share-based payments.

The tax charge on the profit for the six months ended 30 June 2018 was £22.0 million (six months ended 30 June 2017: £15.7 million, year ended 31 December 2017: £30.4 million). The effective tax rate for the six months ended 30 June 2018 is 23.56% (30 June 2017: 26.36%, 31 December 2017: 27.23%). A reconciliation from the expected tax charge based on the standard rate of tax for the six months ended 30 June 2018 of 19.00% (six months ended 30 June and year ended 31 December 2017: 19.25%) to the actual tax charge is set out below.

Change in tax rate

Reductions in the UK corporation tax rate from 21% to 19% (effective 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015, and a further reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. This will reduce the Company's future current tax charge accordingly. The deferred tax asset as at each Condensed consolidated statement of financial position date has been calculated based on the enacted rate at the relevant date.

Earnings per share ("EPS") are based on the profit for the period and the number of ordinary shares in issue. Basic EPS are calculated by dividing profit attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. Diluted EPS take into account share options and awards which can be converted to ordinary shares.