TSC5.L Regulatory News (TSC5)

Tesco Personal Finance plc

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

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

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

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

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

Enquiries:

7 October 2020

TESCO PERSONAL FINANCE PLC

INTERIM FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 31 AUGUST 2020

COMPANY NUMBER SC173199

TESCO PERSONAL FINANCE PLC

INTERIM MANAGEMENT REPORT

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

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

Cautionary Statement Regarding Forward-Looking Information

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

Business Model

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

Strategic Review

Covid-19

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

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

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Strategic Review (continued)

Covid-19 (continued)

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

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

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

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

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

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

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

Sale of the Group's Mortgage Business

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

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Sale of the Group's Mortgage Business (continued)

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

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

Headlines

Income Statement

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

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

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

· Loss before tax from continuing operations

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

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

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

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

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

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

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

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Income Statement (continued)

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

· Income tax credit on loss from continuing operations

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

· Profit after tax from discontinued operations

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

Balance Sheet

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

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

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

Regulatory Developments

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

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

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

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Regulatory Developments (continued)

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

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

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

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

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Key Performance Indicators

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

Capital and Liquidity Ratios

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

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

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

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

Principal risks and uncertainties

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

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

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Principal risks and uncertainties (continued)

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

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

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

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Principal risks and uncertainties (continued)

Going Concern

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

As part of this assessment the Board considered:

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

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

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

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

· The resilience of the Group's IT systems;

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

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

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

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

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

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

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

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TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2020

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TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2020

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

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TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

AS AT 31 AUGUST 2020

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TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2020

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TESCO PERSONAL FINANCE PLC

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED 31 AUGUST 2020

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

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TESCO PERSONAL FINANCE PLC

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

1. Basis of Preparation

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

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

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

Going concern

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

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

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

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

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

· The resilience of the Group's IT systems;

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

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

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

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

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

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Going concern (continued)

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

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

Adoption of new and amended IFRS

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

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

Change in classification

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

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2. Segmental Reporting

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

The Group's two operating segments are as follows:

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

· Insurance - incorporating Motor, Home and Pet Insurance.

There are no transactions between the operating segments.

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

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

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

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2. Segmental Reporting (continued)

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

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

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3. Underlying (Loss)/Profit

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

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4. Net Interest Income

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

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5. Net Fees and Commissions Income

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

6. Expected Credit Loss on Financial Assets

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

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

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

7. Income Tax

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

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

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

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

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

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8. Capital Expenditure and Commitments

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

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

Assets/Liabilities of the disposal group

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

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

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

Discontinued operations - income statement

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

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

Discontinued operations - details of the sale of the Mortgage business

Discontinued operations - statement of cash flows

10. Loans and Advances to Customers

Contractual lending commitments and ECL provision

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

Fair value hedge adjustments

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

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11. Debt Securities in Issue

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

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

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

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

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

12. Provisions for Liabilities and Charges

Customer redress provision - Payment protection insurance

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

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

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

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

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

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12. Provisions for Liabilities and Charges (continued)

Customer redress provision - Payment protection insurance (continued)

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

Customer redress provision - Consumer credit act (CCA)

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

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

Restructuring provision

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

Expected Credit Loss provision

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

Other provisions

Other provisions predominantly reflect:

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

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

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

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13. Subordinated Liabilities and Notes

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

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

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14. Credit risk management

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

· Credit risk: ECL measurement

Incorporation of forward-looking information

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

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

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

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

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

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

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14. Credit risk management (continued)

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