Tesco Regulatory News (TSCO)

Tesco Personal Finance plc

Publication of Annual Report and Financial Statements for the year ended 28 February 2018

In accordance with Listing Rule 9.6.1, 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: www.Hemscott.com/nsm.do

The document is also available on the Company's website at: www.corporate.tescobank.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 annual accounts in the Annual Report and Financial Statements 2018.

To view images associated with this announcement please click on the PDF link.http://www.rns-pdf.londonstockexchange.com/rns/4842K_-2018-4-10.pdf

For any media enquiries please contact Chris Sibbald (Head Of Communications, Tesco Bank) on 07855 955531.

11 April 2018

TESCO PERSONAL FINANCE PLC

ANNUAL REPORT AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED 28 FEBRUARY 2018

Company Number SC173199

TESCO PERSONAL FINANCE PLC

CONTENTS

Directors and Advisers........................................................................................................................................................................... 1

Strategic Report........................................................................................................................................................................................ 2

Directors' Report.................................................................................................................................................................................... 18

Consolidated Income Statement......................................................................................................................................................... 25

Consolidated Statement of Comprehensive Income....................................................................................................................... 26

Consolidated and Company Statements of Financial Position.................................................................................................... 27

Consolidated Statement of Changes in Equity................................................................................................................................. 28

Company Statement of Changes in Equity......................................................................................................................................... 29

Consolidated and Company Cash Flow Statements........................................................................................................................ 30

Notes to the Financial Statements...................................................................................................................................................... 31

Independent Auditor's Report........................................................................................................................................................... 110

TESCO PERSONAL FINANCE PLC

DIRECTORS AND ADVISERS

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STRATEGIC REPORT

The Directors present their Strategic Report for the year ended 28 February 2018.

The Annual Report and Financial Statements comprise the Strategic Report, the Directors' Report, and the Company and Consolidated Financial Statements and accompanying notes. In the Annual Report and Financial Statements, 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 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 Limited, the share capital of which is wholly owned by Tesco PLC. A reconciliation of the results contained within this Strategic Report to the Tesco Bank results presented in the Tesco PLC preliminary results 2017/18 can be found on the Tesco PLC internet page https://www.tescoplc.com/media/474596/broker-pack-2018.pdf.

Business Model

The Group is primarily focused on providing financial services and products to personal customers in the UK. 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. The Company is incorporated and registered in Scotland.

Headlines

Income Statement

· Profit before tax is 84.1% higher at £202.7m (2017: £110.1m). The key drivers of the increase in profit before tax are:

o a lower net customer redress charge of £23.8m compared to a charge of £45.0m in the prior year. An additional payment protection insurance (PPI) charge of £35.0m (2017: £45.0m) was recognised during the year, further detail on the drivers of which is set out in note 27. This was partially offset by a provision release of £1.5m (2017: £nil) from the Group's Consumer Credit Act (CCA) customer redress provision and a credit of £9.7m (2017: £nil) received following the conclusion of negotiations with a third party in respect of previously recognised customer redress;

o lower net restructuring charges of £nil compared to charges of £34.8m in the prior year relating to the Group's Customer 2020 (C2020) programme;

o a charge of £nil compared to a charge of £22.8m in the prior year representing the Group's share of losses incurred by TU relating to the impact on TU's insurance reserves of a prior year change in the Ogden tables, which are used to calculate future losses in personal injury and fatal accident claims; and

o higher unrealised gains on financial instruments of £11.0m (2017: £6.3m).

· Underlying profit before tax, which excludes items which are not reflective of ongoing trading performance, is 4.4% higher at £215.5m (2017: £206.4m)1. The key drivers of underlying profit are:

o a 12.3% increase in underlying net interest income to £493.1m (2017: £439.2m), reflecting higher interest earnings on the back of strong lending growth. Underlying net interest margin has decreased slightly to 3.9% (2017: 4.0%), reflecting the impact of growth in the lower margin Mortgage book as a percentage of the Group's overall lending portfolio, partially offset by an improved Credit Card margin;

o a 3.1% reduction in underlying non-interest income to £355.5m (2017: £366.9m). This is predominantly due to a reduction in ATM income as a result of the downward trend in ATM transactions being seen across the market as customers move towards contactless and other digital payment methods and increased pressure on Insurance renewal retention rates due to a highly competitive environment and revised Renewal Transparency rules; and

o a 0.8% increase in underlying operating expenses to £506.6m (2017: £502.4m). Cost control remains a key focus for the Group, and as such, the underlying cost:income ratio has improved to 59.7% (2017: 62.3%).

1 A reconciliation of statutory and underlying profit before tax is set out on page 6.

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STRATEGIC REPORT (continued)

· a 30.6% increase in underlying impairment charges to £136.5m (2017: £104.5m). This reflects a combination of balance growth and the implementation of a number of credit initiatives in recent years, which have been targeted at supporting the borrowing needs of Tesco customers in a profitable and controlled manner. The underlying impairment charge also reflects a higher gain on sale of non-performing debt, with £34.6m realised in the year (2017: £21.6m). The bad debt:asset ratio (BDAR) increased to 1.3% (2017: 1.1%).

· Income tax on the Group's profit for the year is a charge of £61.6m (2017: credit of £27.3m). The Group's current year effective tax rate is higher than the statutory rate principally due to the non-deductibility of the additional PPI charge recognised during the year. The negative effective tax rate in the prior year resulted from the availability of group relief from Tesco PLC. In future years, the Group's effective tax rate is not expected to be materially different to the statutory rate. The components of the tax charge/(credit) in the current and prior year are set out in note 11 to the Financial Statements.

Balance Sheet

· Loans and advances to customers have increased by 15.7% to £11.5bn (2017: £10.0bn). Mortgage balances reached £3.0bn (2017: £2.2bn) as the Mortgage product range continued to expand into the intermediary broker channel. The Group has also seen growth in both Credit Cards and Personal Loan balances of 12.7% and 8.1% respectively.

· Customer deposits have increased by 9.2% to £9.2bn (2017: £8.5bn), and continue to be the main source of the Group's funding. Deposits from banks at 28 February 2018 totalled £1,539.0m (February 2017: £499.8m). At the year end, the Group had entered into repurchase transactions of £200.0m (2017: £99.8m) and accessed £1,339.0m of funds from the Bank of England's (BoE) Term Funding Scheme (TFS) (February 2017: £400.0m). The Group had previously accessed the BoE's Funding for Lending Scheme (FLS), with £99.8m of repurchase transactions included within deposits from banks at 28 February 2017, all of which has now been repaid. The lower cost of funding provided by the TFS is reflected in competitive offers for the Group's borrowing customers.

· The balance sheet remains strong and well positioned to support future lending growth from both a liquidity and capital stand point. At 28 February 2018, the total capital ratio was 19.3% (2017: 20.0%) and net stable funding ratio (NSFR) was 118.3% (2017: 119.8%). The decrease in the NSFR over the year reflects the relative movements in the Group's available and required funding, with additional customer deposits resulting in increased available funding of £0.8bn, offset by a £1.6bn increase in the Group's required funding, arising from the growth in customer lending referred to above.

Strategic Priorities

The ambition of Tesco Bank is to 'be the bank for people who shop at Tesco'. In order to accelerate the Group's pursuit of this ambition, during the prior year the Group established the C2020 programme. This programme, comprising a number of initiatives and expected to provide the framework for business change over several years, continues to put the Tesco customer at the heart of the Group's activities. The Group's strategy to make it easier for Tesco customers to bank and insure with the Group is achieved by offering customers great value across all of the products offered by the Group and earning their trust through the Group's actions. The Group aims to achieve this through targeted investment in technology and data to simplify processes, making life simpler for both customers and colleagues and driving efficiency that can be reinvested in the customer offer.

In June 2017, the Group celebrated the 20th anniversary of the inception of Tesco Personal Finance in 1997. Over those 20 years, the Group has established a full range of retail banking products and seen strong growth in traditional banking markets, including Personal Current Accounts and Mortgages, as well as establishing and growing its insurance offering and improving payment services for the Group's customers.

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STRATEGIC REPORT (continued)

Changes made to the Group's mobile banking App during the year have also made banking easier for the Group's customers. Improvements include faster log-in speeds and the introduction of Face ID for iPhone X. For the Group's Credit Card customers, the App has been improved to include a card scanning feature, giving customers the ability to scan card details via their mobile phone camera, and also a feature allowing customers to easily report their credit card as lost or stolen and prevent it from being used further whilst keeping their account active. The card can subsequently be unblocked or cancelled via the App.

In September 2017, the Group announced that PayQwiq, the Group's digital wallet offering, was to be rebranded as Tesco Pay+. During the year, the Group completed the roll out of Tesco Pay+ to every Tesco store in the UK and the service continued to grow, offering Tesco's shoppers the ability to pay and collect Clubcard points with one simple and convenient scan of their phone and saving them time at the checkout.

In July 2017, the Group celebrated the fifth anniversary of the launch of its Mortgage offering to customers. The Group continues to deliver value to its customers and has helped even more customers to buy their home in the period by adding to its Tesco Bank Mortgage Intermediaries broker panel, and also making available to intermediaries a specialist support team dedicated to new build purchases.

The Group is committed to providing value to its Personal Current Account customers, and continues to offer new and existing customers 3% AER credit interest on credit balances up to £3,000, as well as even more Clubcard points when they spend with their debit card in Tesco stores from 1 April 2017 to 1 April 2019. In October 2017, the Group made its Personal Current Account offering available to its customers in Northern Ireland. Around 54,000 new Personal Current Accounts were opened during the year.

During the year, the Group successfully implemented a new digital servicing platform for Motor and Home Insurance customers, making life easier for customers and colleagues. The platform enables customers to self-serve and provides the Group's customer service colleagues with a simpler, more intuitive system through which to serve customers better.

The Group now has 320 Travel money bureaux across the UK, which provided customers with over £1 billion in currency in the 12 months to 28 February 2018 and served more than 3.7m customers.

The Group's commitment to offering attractive products and good service for customers has been rewarded with recognition as 'Best Remortgage Provider' at the 2017 Moneyfacts Awards, 'Best All-Round Current Account, Best 'In-Credit' Current Account' and 'Best Direct Mortgage Provider' at the 2018 Moneynet awards, 'Best Direct Lender' at the What Mortgage Awards 2017, and 'Best Travel Money Provider' at the 2017/18 Personal Finance Awards, with Tesco Pay+ being awarded 'Best Achievement in Retail Payments' at the Card and Payments Awards.

During the year, colleagues raised over £112,000 for the Group's charity partners and volunteered over 6,400 hours to their local communities.

Bernard Higgins retired as Chief Executive of the Group in February 2018, after 10 years in the role. In January 2018, the Group announced the appointment of Gerry Mallon, who will join the Group as Chief Executive in July 2018. Until that time, Iain Clink has been appointed Interim Chief Executive.

Regulatory Developments

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

Three major components of regulatory reform relating to data regulation come into force during 2018. These are Open Banking, the second Payment Services Directive (PSD2) and the new General Data Protection Regulation (GDPR), all of which are focused on innovation, competition and consumer protection.

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STRATEGIC REPORT (continued)

PSD2, the first phase of which took effect from 13 January 2018, together with Open Banking, allows customers to choose to share data from their banking products with Third Party Providers (TPPs) and bring together all of their financial relationships and data in one place, potentially leading to a fundamental change in how customers manage both their money and data over the longer term. The aim of these changes is to promote competition and enhance customer choice, providing potential opportunities for the Group to attract new customers as well as potentially increased competition from traditional banking businesses and new providers of financial services, including technology companies with strong brand reputation. The Group continues to monitor and review the risks associated with the introduction of PSD2, including the need to ensure that there is appropriate control and ownership of sensitive and confidential customer data as the use of TPPs becomes more widespread.

GDPR, which comes into effect on 25 May 2018, provides new and enhanced rights for individuals in respect of their personal information. The Group has undertaken a business-wide review in order to ensure the clear control and management of customer data and that compliant data retention policies are in place and adhered to in advance of the regulation coming into force.

Uncertainty remains around the implementation and impact of some regulatory developments including the finalisation of Basel III, which will be subject to EU and UK implementation. In addition, the Group will be 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.

Business Review

The C2020 programme continued during the year and resulted in a restructuring charge of £0.9m and a net restructuring credit of £0.9m (2017: charges of £34.8m) being recognised. The credit primarily reflects a reduction in the onerous lease provision recognised in the prior year relating to the early exit from the Group's office in central Edinburgh following sub-lease of part of the building, offset by an impairment charge of £0.9m following agreement to sell the Irish Credit Card book.

During the year, the business has continued to deliver growth across its primary products (Credit Cards, Personal Loans, Mortgages, Personal Current Accounts, Savings and Insurance), with active customer numbers increasing by 4.1% in 12 months.

Following the Bank of England's first base rate rise in over a decade in November 2017, the Group passed on a 0.15% rate increase to both its Savings and Mortgage standard variable rate and tracker customers as opposed to the full 0.25% base rate rise, reflecting the Group's desire to treat customers fairly.

Mortgage balances grew by 39.2%, reaching £3,000.7m (2017: £2,155.3m), while Credit Card balances increased by 12.7% and Personal Loans by 8.1%.

Customer deposits of £9,248.0m (2017: £8,466.8m) continue to be the Group's primary source of funding. The Group's customer deposits grew by 9.2% in the year, reflecting the value offered to customers and including an increase of 23.2% in Personal Current Account balances.

During the year, the Group increased its funding from the BoE's TFS to £1,339.0m (Feb 2017: £400.0m) in order to support future lending growth. Funding previously accessed under the BoE's FLS, of which £99.8m was included within deposits from banks at 28 February 2017, was repaid during the year.

Money services products have performed well overall as the Group continues to enhance the product range and expand the customer base. A reduction in ATM transaction volumes, due to the declining use of cash as customers move towards contactless and other digital payments, was offset by growth in other products, including Travel Money.

The total number of in-force insurance policies has remained flat year-on-year. Strong growth in the number of Home insurance policies of 7.3% has been offset by a decline of 4.1% in Motor insurance policies. Motor insurance continues to be a highly competitive market and has been impacted by regulatory change. Insurance income has declined by 7.3%, mainly as a result of falling Motor retention rates which has, in part, been impacted by the new Renewal Transparency regulation.

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STRATEGIC REPORT (continued)

Financial Performance

The Group's financial performance is presented in the Consolidated Income Statement on page 25. A summary of the Group's financial performance on an underlying basis, excluding items which are not reflective of ongoing trading performance, is presented below.

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STRATEGIC REPORT (continued)

The Directors consider the following to be Key Performance Indicators for the Consolidated Income Statement:

Capital and Liquidity Ratios

The Directors consider the following to be Key Performance Indicators for capital and liquidity reporting:

The Group's total capital ratio remains above internal targets and regulatory requirements at 19.3% (2017: 20.0%) and leaves the Group well placed to support future growth.

The NSFR, a measure of the Group's liquidity position, is within appetite at 118.3% (2017: 119.8%). The Group maintains a liquid asset portfolio of high quality securities of £2.2bn (2017: £1.8bn).

Risk Management

Risk Management Approach

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 a robust and 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. To support this, a Risk Management Framework (RMF) has been embedded across the Group 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 (RMFu).

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 Group is exposed to a variety of risks through its day to day operations. The following table sets out the principal risks and uncertainties and how they are managed within the RMF.

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STRATEGIC REPORT (continued)

Principal risks and uncertainties Key controls and mitigating factors

Credit risk

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STRATEGIC REPORT (continued)

Liquidity and Funding risk

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STRATEGIC REPORT (continued)

Regulatory risk (continued)

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STRATEGIC REPORT (continued)

Brexit

The following pages provide a more granular overview of the operational control processes and risk mitigants adopted by the Group.

A fuller description of these risks and controls can also be found in the Pillar 3 Disclosure Statements of Tesco Personal Finance Group Limited for the year ended 28 February 2018. These disclosures will be published in the Financial Information section of the Tesco Bank corporate website in due course.

http://www.corporate.tescobank.com/48/accounts-and-disclosures

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STRATEGIC REPORT (continued)

Risk Management Framework (RMF)

The Group has a formal structure for reporting, monitoring and managing risks. This comprises, at its highest level, the Group's Risk Appetite, approved by the Board, which is supported by detailed risk management frameworks (including policies and supporting documentation), independent governance and oversight of risk.

The scope of the RMF extends to all principal risks faced by the Group and is underpinned by governance, controls, processes, systems and policies within the first line business areas and those of the second line RMFu.

The key components of the RMF are as follows:

Risk Governance Structure

The Group has established a governance structure which is appropriate for the business in terms of its level of complexity and risk profile. This structure is reviewed so that it remains suitable to support the business.

The risk governance structure set out in these disclosures describes the structure that was in place for the year to 28 February 2018.

The Board

The Board is the key governance body and is responsible for overall strategy, performance of the business and ensuring appropriate and effective risk management, in line with the approved Risk Appetite.

The Board approves the Group's business plans, budget, long term plan, ICAAP, ILAAP and any material new product lines in line with the approved Risk Appetite. The Board also monitors the Group's risk profile and capital adequacy position. The Group employs hedging and mitigation techniques defined within the Group's policies to ensure risks are managed within Risk Appetite.

The Board has delegated responsibility for the day to day running of the business to the Chief Executive who has in turn established the ExCo to assist in the management of the business and to deliver the strategy in an effective and controlled way. The Board has established Board committees and the executive has established senior management committees to:

· oversee the Risk Management Framework;

· identify the key risks facing the Group; and

· assess the effectiveness of the risk management actions

The Board has overall responsibility for the business. It sets the Risk Appetite and strategic aims for the business, in some circumstances subject to shareholder approval, within a control framework which is designed to enable risk to be assessed and managed. The Board satisfies itself that financial controls and systems of risk management are robust through the reporting provided to it and provides feedback where necessary to ensure that reporting remains fit for purpose.

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STRATEGIC REPORT (continued)

In order to support effective governance and management of the wide range of responsibilities, the Board has established the following five sub-committees:

· Audit Committee (AC)

The AC comprises James McConville (chairman), Robert Endersby and Simon Machell.

The key responsibilities of the AC are to review the Financial Statements; review the accounting policies and practices for compliance with relevant standards; examine the arrangements made by management regarding compliance with requirements and standards under the regulatory system; review the scope and results of the annual external audit; oversee the process for selecting the external auditor and make recommendations to the Board in relation to the appointment, re-appointment and removal of the external auditor; consider the effectiveness of the external auditor and their independence; review reports covering anti-money laundering and compliance, in particular the Money Laundering Reporting Officer annual report and Risk Assurance Report; maintain a professional relationship with the external auditor; oversee the IA function and review the internal audit programme; work closely with the BRC to avoid, as much as possible, any overlap or gap in the overall risk and assurance activities of the two committees; carry out such investigations or reviews as shall be referred to it by the Board; review the Group's plans for business continuity; approve the annual plan of Risk Assurance activity within the Group; receive and review reports, findings and recommendations from Risk; review and consider the adequacy of any follow up action, and any relevant investigation work, carried out by or on behalf of Risk; review and monitor Management's response to findings and recommendations following investigations carried out by Risk; and review the findings of external assurance reports provided by outsourced providers.

Further detail on the AC is included within the AC section of the Directors' Report.

· Board Risk Committee (BRC)

The BRC comprises Robert Endersby (chairman), John Castagno, James McConville, Graham Pimlott, Amanda Rendle, Alan Stewart and James Willens.

The role of the BRC includes the oversight and challenge of the Group's Risk Appetite and the recommendation to the Board of any changes to Risk Appetite; provision of oversight and advice to the Board on the current key risk exposures of the Group and future risk strategy; reviewing and challenging, where appropriate, the outputs from the ALCo and the ERC; overseeing that a risk culture is appropriately embedded in the business which recognises risk and encourages all employees to be alert to the wider impact on the whole organisation of their actions and decisions; reviewing the design and operation of the RMF; and reviewing the monitoring of conduct and complaints in the business and alerting the Board to any systemic conduct or cultural risks.

· Remuneration Committee (RC)

The RC comprises James Willens (chairman), Robert Endersby, Graham Pimlott and Amanda Rendle.

The role of the RC is to determine and approve remuneration arrangements for all identified Material Risk Takers within the Group as defined by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority's (FCA) Remuneration Code; approve a remuneration framework for employees of the Group below the leadership level; align, where appropriate, remuneration in the Group with Tesco PLC Group Reward Policy; design the levels and structure of remuneration necessary to attract, retain, and motivate the management talent needed to run the Group's business in a way which is consistent with the Risk Appetite and ongoing sustainability of the business; and confirm that the remuneration policy in the Group is compliant with all applicable legislation, regulation and guidelines.

· Disclosure Committee (DC)

The DC comprises Graham Pimlott (chairman), Robert Endersby, Richard Henderson, Declan Hourican and James McConville.

The DC is responsible for reviewing formal company documents which are either destined for external publication or which, due to their size or complexity, are better reviewed in detail in a smaller group, to ensure Tesco Bank's compliance with relevant statutory and regulatory obligations.

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STRATEGIC REPORT (continued)

· Nomination Committee (NC)

The NC comprises Graham Pimlott (chairman), Simon Machell, James Willens and Amanda Rendle.

The role of the NC includes reviewing the structure, size and composition (including the skills, knowledge, experience and diversity) of the Board and making recommendations to the Board with regard to any changes; reviewing the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the marketplace; formulating plans for succession for both executive and non-executive directors and in particular for the key roles of Chairman and Chief Executive; and identifying and nominating for the approval of the Board, candidates to fill board vacancies as and when they arise.

Executive Committee (ExCo)

The Group's Board has delegated the day to day running of the business to the Chief Executive. The Chief Executive has established the ExCo to assist in the management of the business and to deliver against strategy in an effective and controlled way. The ExCo provides general executive management of the business. Each ExCo member is accountable to the Chief Executive and to the Board for managing performance in line with the Group's Risk Appetite, long term plan, strategy and annual budget.

The principal roles and responsibilities of the ExCo include providing general executive management of the Group and monitoring performance, including financial performance, in accordance with the approved strategic plan and Risk Appetite as approved by the Board; overseeing risks and controls across the business; promoting a culture of fairness and actively promoting and encouraging the Values; striving for the successful execution of strategy; setting out a framework of reporting to the Board that is sufficient to enable the Board to fulfil its responsibilities; developing strategic plans, budgets and all other matters to be referred to the Board, with regard to the interests of its shareholder, employees, customers and other stakeholders, prior to submission to the Board for approval; authorising certain levels of spend; reviewing, challenging and providing direction relating to the delivery of fair outcomes for customers through regular updates on conduct risk that are challenged and reviewed by the Conduct Oversight and Risk Committee; determining whether to launch the Group's Recovery Plan in the event of a breach of a recovery trigger and managing the crisis thereafter (with the exception of a liquidity crisis that would be managed by the Liquidity Event Management Committee); and overseeing Procurement and Supplier Management, with particular focus on ensuring that the key risks associated with outsourcing and third party supplier management are assessed and mitigated.

In order to support the ExCo, six sub-committees have been established. The ExCo receives the minutes from each sub-committee to monitor key activities and decisions taken under delegation as well as to receive updates as appropriate.

· Commercial Executive Committee (CEC)

The principal role of the CEC is to oversee performance and matters arising across the Commercial business through review of credit risk approvals, receipt of risk, risk event and internal audit reporting; manage top risks - ensuring that existing and emerging risks and issues are controlled appropriately and referred to the relevant Board or Committee when needed; approve proposals and business cases and appoint third party suppliers, in line with delegated authorities from the Board; oversee the use of budget allocated; review business financial and trading performance, and monitoring of pricing plans; review conduct risks and issues; undertake annual product reviews; identify risks to good customer outcomes, providing challenge and recommending further action to resolve and track those actions to completion; and escalate material conduct or Treating Customers Fairly risks to the ExCo.

The CEC has four sub-committees: Commercial and Credit Risk Committee; Transactional Banking Management Committee; Savings, Loans and Mortgages Management Committee and the Insurance Management Committee.

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STRATEGIC REPORT (continued)

· Asset and Liability Management Committee (ALCo)

The principal role of the ALCo is to optimise the Group's balance sheet structure, within boundaries and Risk Appetite set by the Board and regulation; identify, manage and control the Group's balance sheet risks in the execution of its chosen business strategy; oversee Treasury Principal Risk management activities - Capital, Funding and Liquidity and Market Risk; review and approve Treasury Principal Risk policies and key regulatory documents; and review and approve Risk Appetite change recommendations relating to Capital, Funding and Liquidity and Market Risk.

The ALCo has three sub-committees: the Liquidity Management Forum; Market Risk Forum and Capital Management Forum.

· Executive Risk Committee (ERC)

The principal role of the ERC is to oversee all aspects of the Risk Framework, and to ensure that the three lines of defence model is operating effectively; monitor the appropriateness of and adherence to Risk Appetite and make recommendations on any changes to Risk Appetite; debate and challenge the risks inherent within strategic plans; consider and challenge policy exceptions and waivers that are in place; consider action to deliver risk management solutions, and direct resource appropriately; consider the impact of regulatory initiatives on the current and future state of compliance by Tesco Bank; review and approve key policies of Tesco Bank; oversee procurement and supplier management, with particular focus on ensuring that the key risks associated with outsourcing and third party supplier management are assessed; oversee operational resilience; and provide review and challenge relating to the culture in managing conduct risks and customer fairness within the business.

The ERC has nine sub-committees: Operational Resilience Steering Committee; Supplier Management Group; Wholesale Credit Risk Forum; Provisions Forum; Risk 2020 Steering Committee; Security Risk Committee; Conduct Oversight and Risk Committee; Prudential Risk Forum and the Chief Information Officer Risk Committee.

· Customer Division Executive Committee (CDEC)

The role of the CDEC is to approve key decisions and provide oversight and challenge of performance and matters arising across the Customer Division of the business, including, but not limited to:

· The management of risk, including conduct and the fair treatment of customers, which is owned by the business lines within the first line of defence. The CDEC provides oversight and challenge to support the effective management of risk and control of all top risks and material events facing the Customer Division.

· The management of business and financial performance, which is owned by the relevant business lines within the Customer Division. The committee provides oversight and challenge to support efficient and effective performance across the Customer Division.

· Approving activities in relation to change and project related work and considering and challenging customer outcomes, as appropriate.

The CDEC has four sub-committees: Customer Security Committee; Service Risk Committee; Data Steering Group and the Customer Division Management Committee.

· Customer 2020 Executive Steering Committee (C2020 ESC)

The ambition of Tesco Bank is to 'be the bank for people who shop at Tesco'. In order to accelerate the Group's pursuit of this ambition, the Group established the C2020 programme. The Group aims to achieve its strategy through targeted investment in technology and data to simplify processes, making life simpler for both customers and colleagues and driving efficiency that can be reinvested in the customer offer.

The role of the C2020 ESC is to oversee C2020 and steer the delivery of the C2020 strategic plan.

The C2020 ESC has one sub-committee: C2020 Programme Board.

· Information Security Executive Committee (ISEC)

The role of the ISEC is to support the Deputy Chief Executive in delivering information security and cybercrime control improvements through executive direction, support and oversight of the programme of work.

The ISEC has one sub-committee: Information Security Forum.

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STRATEGIC REPORT (continued)

Three Lines of Defence

The Group has adopted the 'three lines of defence' model of governance with clearly defined roles and responsibilities to help drive effective risk management.

· First line of defence

Senior management within each business area are responsible for establishing an effective control framework within their area of operation; identifying and controlling all risks so that they are operating within the organisational Risk Appetite; ensuring that they are fully compliant with Group policies and, where appropriate, operating within defined thresholds; and devising, managing and reporting appropriate key risk indicators, using management information and assurance processes to allow assessment of their control framework to manage key risks as they arise in their area of operation.

· Second line of defence

The RMFu operates under the leadership of the CRO. Risk teams reporting to the CRO are the second line of defence, and are resourced by people with expertise in each of the principal risks faced by the Group. 

The RMFu is responsible for analysing, challenging, understanding and overseeing each of the principal risks; devising the suite of policies necessary to control the business, including the overarching framework for independent monitoring of the risk profile; providing oversight and challenge where required; and proposing to the Board appropriate objectives and measures to define the Group's Risk Appetite.

The RMFu uses expertise and provides frameworks, tools and techniques to assist Management in meeting their responsibilities. The RMFu has responsibility for aggregated risk reporting across the Group to ensure that risk coverage is considered holistically so that risks and issues have clear ownership and do not fall between functions.

· Third line of defence

This comprises the IA function, which is responsible for providing independent assurance to the Board and senior management on the adequacy of the design and operational effectiveness of internal control systems and measures across the business. The IA function has an independent reporting line to the Chairman of the AC and is resourced by individuals with relevant experience and professional qualifications. In addition, IA resources are supplemented across a range of audits by external support to provide additional subject matter expertise when required.

Independent assessment is provided through the execution of an agreed plan of audits and through attendance at relevant governance committees and through stakeholder management meetings.

The primary role of IA is to help the Board and ExCo to protect the assets, reputation and sustainability of the Group by assessing whether all significant risks are identified and appropriately reported by Management and the Risk function to the Board and ExCo; assessing whether all significant risks are adequately controlled; and challenging the ExCo on the effectiveness of governance, risk management and internal controls. The IA function achieves this through its core responsibilities, which include proposing an annual audit plan based on its assessment (after discussion with Management) of the significant potential risks to which the organisation could be exposed; carrying out audits of functions and processes in accordance with the annual audit plan and any additional special investigations requested by Management, the Board, the AC or the regulators; assessing the adequacy and effectiveness of the controls in the functions and processes audited, and issuing recommendations where improvement is required based on the results of work carried out; verifying compliance with those recommendations; reporting to the AC in relation to internal audit matters; and providing input to the Tesco PLC IA department's reporting to the Tesco PLC AC.

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STRATEGIC REPORT (continued)

Group Policies

The Group has a framework of key policies in place which are approved at Board and Executive level committees. Each policy is owned by a specific individual who is responsible for maintenance and assurance of the policy. Each policy must be reviewed on at least a bi-annual basis, or earlier if there is a trigger for policy review such as a regulatory change, to ensure its continued effectiveness and applicability in line with changing risks. The RMFu provides tracking and oversight of the policy framework and is responsible for undertaking assurance and providing reports to the Board on its effectiveness.

· Stress Testing

Stress testing is the process by which the Group's business plans are regularly subjected to severe but plausible scenarios to assess the potential impact on the business, including projected capital and liquidity positions. The scenarios adopted are subject to a rigourous selection process and include hypothetical operational failures, macroeconomic stress events and customer behaviour impacts. The results, along with proposed actions, are reported to the ALCo and BRC. These are captured in both the ILAAP and the ICAAP.

· Monitoring and Reporting

The Group monitors and tracks current exposures against limits defined in the agreed Risk Appetite and by the regulators. Exceptions are reported on a monthly basis to the ALCo and ERC and to each meeting of the BRC. Adherence to these limits is independently monitored, measured and reported using a suite of key indicators defined by each risk team responsible for managing the major specific risk categories faced by the Group. Decisions made at subordinate risk committees and forums are reported to senior committees as appropriate.

The Strategic Report was approved by the Board of Directors and signed by order of the Board.

Michael Mustard

Company Secretary

9 April 2018

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TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT

The Directors present their Annual Report, together with the Company and Consolidated Financial Statements and Independent Auditor's Report, for the year ended 28 February 2018.

Business review and future developments

The Group's business review and future developments are set out in the Strategic Report on page 5.

Risk management

The Group's risk management disclosures are set out in the Strategic Report on pages 7 to 17.

Financial instruments

The Group's policies for hedging each major type of transaction are discussed in notes 1 and 15 to the Financial Statements.

Capital structure

The Group's capital structure is discussed in notes 31 and 38 to the Financial Statements.

Events after the reporting date

Details of events occurring after the reporting date are discussed in note 43 to the Financial Statements.

Going concern

The Directors have made an assessment of going concern, taking into account both current performance and the Group's outlook, including consideration of projections for the Group's capital and funding position. As a result of this assessment, the Directors consider that it is appropriate to adopt the going concern basis of accounting in preparing the Company and Consolidated Financial Statements.

Dividends

An interim dividend of £50.0m (2017: £50.0m) in respect of ordinary share capital was paid to Tesco Personal Finance Group Limited on 22 February 2018.

Treating Customers Fairly

Treating Customers Fairly is central to the Financial Conduct Authority's principles for businesses and remains central to the Tesco Values which sit at the heart of the business. These Values are designed to ensure that customer outcomes match their understanding and expectations.

Directors

The present Directors and Company Secretary, who have served throughout the year and up to the date of signing the Financial Statements, except where noted below, are listed on page 1.

Since 1 March 2017 to date the following changes have taken place:

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TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

Audit Committee (AC)

Introduction from the AC Chairman

The Group operates in a demanding environment, particularly with regard to economic, reputational, political and regulatory factors. The role of the AC is critical in reviewing the effectiveness of the Group's internal control framework and assurance processes and in assessing and acting upon findings from both external and internal audit. The AC keeps the current internal control framework and assurance processes under review to ensure that they adapt to the changing environment and remain appropriate for the Group.

AC composition, skills and experience

The AC acts independently of Management. This ensures that the interests of shareholders are properly protected in relation to financial reporting and internal control.

As detailed in the section of the Strategic Report on the Board, the AC comprises three Independent Non-Executive Directors. All AC members have recent and relevant experience in finance and/or the banking or insurance industry.

James McConville is a Chartered Accountant and has significant financial and banking experience gained from over 30 years in the financial services sector, thus enabling him to fulfil the role as AC Chair.

James is currently Group Finance Director at Phoenix Group Holdings and joined their Board of Directors in June 2012 with responsibility for Finance, Treasury and Investor Relations. Previous appointments include Chief Financial Officer of Northern Rock plc and a variety of senior finance and strategy related roles for Lloyds Banking Group plc, including Finance Director of the Scottish Widows Group.

Robert Endersby has spent over 30 years working in the financial services sector, both within the UK and internationally and is an Associate of the London Institute of Banking and Finance. 

Robert's previous key appointments included Chief Risk Officer and member of the Executive Board of Danske Bank A/S, Vice Chairman of Danske Bank Oyj and senior risk management positions in Barclays, The Royal Bank of Scotland and ING Group. Robert currently holds Non-Executive positions with Credit Suisse International and Credit Suisse Securities (Europe) Limited.

Simon Machell has worked in financial services for over 30 years and has experience in both general and life insurance in the UK, Europe and Asia. The majority of Simon's experience was gained from a range of roles with Aviva, including Chief Executive of the RAC, Chief Executive of the general insurance business in the UK and running the insurance businesses in 14 markets across Eastern Europe and Asia. Simon holds Non-Executive roles with Pacific Life Re, Prudential Corporation (Asia), Suncorp Group and Tesco Underwriting Limited (TU).

The Chairman, Chief Executive, Chief Financial Officer, Chief Risk Officer, Internal Audit Director, Director of Financial Control and Tesco PLC Internal Audit Director attend committee meetings. The external auditor also attends.

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DIRECTORS' REPORT (continued)

AC responsibilities

The key responsibilities of the AC are set out in the Strategic Report on page 13.

During the year, the AC received reports from a number of business areas including Finance in relation to financial reporting and Risk in relation to regulatory compliance, fraud, bribery and corruption and integrated assurance. The AC also considered a variety of matters including the internal financial control framework and operational resilience.

Financial Statements and related financial reporting

In relation to the Financial Statements, the AC reviewed and recommended approval of the half-yearly results and annual Financial Statements and provided oversight of the statutory audit process.

During the year ended 28 February 2018, the AC considered the following matters:

· Consistency and appropriateness of, and any changes to, significant accounting policies

The AC considered and accepted Management's review of the Group's accounting policies. In particular, the AC has received reports from Management on the Group's readiness to comply with IFRS 9 'Financial Instruments', which came into force for annual periods beginning on or after 1 January 2018.

· The methods used to account for significant transactions

The AC reviewed and supported proposals from Management on the accounting for the issuance of notes in relation to securitisation transactions.

· Going concern assessment

The AC considered Management's approach to, and the conclusions of, the assessment of the Group's ability to remain as a going concern. The AC supported the conclusion that it remained appropriate to adopt the going concern basis in preparing the Financial Statements.

· Review of Financial Statements

The AC considered Management's approach to, and governance arrangements over, the preparation of the half-yearly results and annual Financial Statements and recommended to the Board that these should be approved.

· Appropriate critical accounting estimates and judgements

The AC reviewed the nature, basis for and the appropriateness of the estimates and judgements proposed by Management in the Financial Statements.

The key estimates and judgements reflected in the Group's Financial Statements for the year ended 28 February 2018 are:

o Loan impairment provision (Refer to note 14)

At 28 February 2018, the Group's loan impairment provision was £238.1m.

The AC received regular reports from Management on provisioning, which assessed the adequacy of provisioning based on a number of factors. These included levels of arrears, collateral, past loss experience, defaults based on portfolio trends, and expected loss rates.

The AC concluded that a robust governance framework existed to monitor provision adequacy and that the assumptions and judgements applied by Management were appropriate.

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TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

o Effective interest rate (EIR) (Refer to note 2)

IAS 39 requires the Group to measure the interest earned on its lending portfolio by applying the EIR methodology.

The AC received regular reports from Management summarising their approach, with particular focus given to reviewing the expected attrition rate of balances drawn, including the pay rates assumption used by Management.

The AC is satisfied that the carrying value of the assets and the associated income recognition is appropriate.

o Provision for Customer Redress (Refer to note 27)

The Group has a provision for potential customer redress in relation to Payment Protection Insurance (PPI).

The AC reviewed the key assumptions made in arriving at each element of the provision.

The AC is satisfied that the provisions and related disclosures in the Financial Statements, in respect of PPI and other customer redress provisions, are appropriate.

o Investment in Joint Venture (Refer to note 20)

The Group holds an investment in a joint venture, TU, an authorised insurance company, and recognises the carrying value of its investment and the Group's share of TU's results using the equity method of accounting.

TU's results are sensitive to changes in the insurance reserves it recognises in respect of insurance policies written, net of reinsurance. Consequently, material increases in these reserves could have an impact on the carrying value of the investment in the Company and Consolidated Statement of Financial Position.

The AC reviewed the key judgements and estimates made by TU in determining the level of reserves held at the reporting date.

The AC is satisfied that the carrying amount of the Group's investment in TU is appropriate.

o Payment fraud incident (Refer to note 40)

In November 2016, Tesco Bank's debit cards were the subject of an online fraudulent attack. The Group undertook remedial action and initiated an independent review of the issue and continues to work closely with the authorities and regulators on this incident.

The AC has reviewed the key judgements made by Management in assessing the potential financial penalty and associated uncertainty.

The AC is satisfied that the contingent liability disclosure in note 40 is appropriate.

· IT controls

The Group utilises a range of information systems to support its ongoing operations and financial reporting.

During the year, the AC received a number of reports on the Group's information systems, including the effectiveness of access rights to certain operating systems and applications used in the financial reporting process.

While ongoing improvements to access controls continue to be implemented, further improvements are required. The AC will receive further reports on the implementation of these improvements and the effectiveness of access controls during the next financial year.

Performance and effectiveness of IA

The IA function supports the AC in providing an independent assessment of the adequacy and effectiveness of internal controls and the system of risk management. The function has the necessary resources and access to information to enable it to fulfil its mandate, and is equipped to perform in accordance with the Institute of Internal Auditors International Standards of the Professional Practice of Internal Auditing.

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TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

It is essential for the AC to be able to have an honest and open relationship with both its external and internal auditors. This relationship is developed and maintained through private meetings with both Deloitte and the Internal Audit Director.

In compliance with the above standards, the AC assessed the effectiveness of the IA function with the results of the 2017 assessment being positive.

Performance and effectiveness of AC

The AC assesses the need for training on an ongoing basis and the annual agenda provides time for technical updates, which are provided by both internal and external experts. During the year, the AC received specific training on accounting and reporting developments, with the key focus being on IFRS 9. Training is also provided on an ongoing basis to meet the specific needs of individual committee members.

The effectiveness of the AC was reviewed as part of the wider Board effectiveness review which included interviews with all AC members. It was concluded that the AC continued to be effective.

Non-audit fees

Deloitte contributes an independent perspective, arising from its work, on certain aspects of the Group's internal financial control systems, and reports to the AC. The independence of the external auditor in relation to the Group is considered annually by the AC.

The Group has a non-audit services policy for work carried out by its external auditor. This is split into three categories as explained below:

1. Pre-approved for the external auditor - audit-related in nature;

2. Work for which AC approval is specifically required - transaction work and corporate tax services, and certain advisory services; and

3. Work from which the external auditor is prohibited.

The AC concluded that it was in the best interests of the Group for the external auditor to provide a limited number of non-audit services during the year due to their experience, expertise and knowledge of the Group's operations. Auditor objectivity and independence was considered for each engagement and the AC was satisfied that the audit independence was not, at any point, compromised.

Deloitte follows its own ethical guidelines and continually reviews its audit team to ensure its independence is not compromised. The fees paid to the external auditor in the year are disclosed in note 8 to the Financial Statements.

Directors' Indemnities

In terms of Section 236 of the Companies Act 2006, all Non-Executive Directors have been issued a Qualifying Third Party Indemnity Provision by Tesco Personal Finance Group Limited. All Qualifying Third Party Indemnities were in force at the date of approval of the Financial Statements.

There was also a Qualifying Third Party Indemnity Provision issued by Tesco Personal Finance Group Limited in force during the year for Raymond Pierce and Bernard Higgins until the dates of their resignation.

Our People

The Group is committed to promoting a diverse and inclusive workplace, reflective of the communities in which it does business. It approaches diversity in the broadest sense, recognising that successful businesses flourish through embracing diversity into their business strategy, and developing talent at every level in the organisation.

The Group's selection, training, development and promotion policies are designed to provide equality of opportunity for all colleagues, regardless of factors such as age, disability, gender reassignment, race, religion or belief, ethnic origin, gender, sexual orientation, marriage and civil partnership, pregnancy and maternity or trade union affiliation. Decisions are based on merit.

22

TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

The Group is committed to developing the skills and knowledge and supporting the wellbeing of its colleagues in order to help achieve its objectives and create a great place to work. It ensures that the Tesco Values are reflected within its employment policies and practices to encourage engagement, enabling colleagues to be their best and able to contribute to the delivery of the Group's core purpose.

There are processes in place for understanding and responding to colleagues' needs through surveys and regular performance and development reviews. Business developments are communicated frequently to keep colleagues well informed about the progress of the Group. Ongoing training programmes also seek to ensure that colleagues understand the Group's objectives and the regulatory environment in which it operates.

The Group works with colleagues, including those with disabilities, to adapt work practices where necessary in order to help them work effectively within the business.

Colleagues are encouraged to become involved in the financial performance of the wider Tesco PLC Group through a variety of schemes, principally the Tesco savings related share option scheme (Save As You Earn) and the partnership share plan (Buy As You Earn).

During the year, the Bank became a signatory to The Women in Finance Charter, which is a pledge for gender balance across financial services and represents a commitment from HM Treasury and signatory firms to work together to build a more balanced and fair industry. The Charter commits signatory firms to supporting the progression of women into senior roles in the financial services sector; recognises the diversity of the sector and that firms will have different starting points, meaning that each firm will set its own targets; and requires firms to publicly report on progress to deliver against these internal targets in support of the accountability and transparency needed to drive change.

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 underlying any such forward-looking information. The Group cautions users of these 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 8 to 11.

Statement of Directors' Responsibilities

The following should be read in conjunction with the responsibilities of the independent auditor set out in their report on page 110.

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare such financial statements for each financial year. Under that law the Directors have prepared the Group and Company Financial Statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU). Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that year.

In preparing these Financial Statements, the Directors are required to:

· properly select and apply accounting policies;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's and Company's financial position and financial performance; and

· make an assessment of the Group's and Company's ability to continue as a going concern.

23

TESCO PERSONAL FINANCE PLC

DIRECTORS' REPORT (continued)

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Group's website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names are listed on page 1 of the Annual Report and Financial Statements, confirms that to the best of their knowledge:

· the Financial Statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group;

· the Strategic Report contained in the Annual Report includes a fair review of the development and performance of the business and the position of Group, together with a description of the principal risks and uncertainties that it faces; and

· the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for the Company's shareholders to assess the Group's and Company's position, performance, business model and strategy.

Disclosure in respect of the Independent Auditor

So far as each Director is aware at the date of approving this report, there is no relevant audit information, being information needed by the auditor in connection with preparing this report, of which the auditor is unaware. All of the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information.

External Audit Partner

The external audit partner for the year to 28 February 2018 was Stephen Williams ACA who has fulfilled this role since Deloitte LLP's appointment as external auditor on 30 June 2015.

The Financial Reporting Council's Audit Quality Review (AQR) team inspected the audit of the 28 February 2017 Financial Statements of the Group as part of its 2017/18 annual inspection of audit firms. This review is in its final stages, and some matters have been identified as requiring improvement. In response, Deloitte developed an action plan to ensure that the matters identified by the AQR have been addressed in the current audit of the Group's 28 February 2018 Financial Statements.

Approved by the Board of Directors and signed by order of the Board.

Michael Mustard

Company Secretary

9 April 2018

24

TESCO PERSONAL FINANCE PLC

CONSOLIDATED INCOME STATEMENTFor the Year Ended 28 February 2018

25

26

TESCO PERSONAL FINANCE PLC

CONSOLIDATED AND COMPANY STATEMENTS OF FINANCIAL POSITIONFor the Year Ended 28 February 2018

Company number SC173199

Profit for the year of £130.2m (2017: £152.6m) is attributable to the Company.

The Consolidated and Company Financial Statements on pages 25 to 109 were approved by the Board of Directors and authorised for issue on 9 April 2018 and were signed on its behalf by:

Declan Hourican

Director

27

TESCO PERSONAL FINANCE PLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the Year Ended 28 February 2018

28

TESCO PERSONAL FINANCE PLC

COMPANY STATEMENT OF CHANGES IN EQUITYFor the Year Ended 28 February 2018

29

TESCO PERSONAL FINANCE PLC

CONSOLIDATED AND COMPANY CASH FLOW STATEMENTSFor the Year Ended 28 February 2018

j

30

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS

1. Accounting Policies

Basis of preparation

The Company and Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the International Accounting Standards Board (IASB) as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to companies reporting under IFRSs.

In these Financial Statements the 'Company' means Tesco Personal Finance plc and the 'Group' means the Company and its subsidiaries and joint venture. Details of these subsidiaries and joint venture are provided in notes 19 and 20. These Consolidated Financial Statements comprise the Financial Statements of the Group. The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Income Statement and Statement of Comprehensive Income of the Company.

The Company and Consolidated Financial Statements have been prepared under the historical cost convention as modified by the revaluation of derivative financial instruments and available-for-sale investment securities held at fair value.

The Company and Consolidated Financial Statements are presented in Sterling, which is the functional currency of the Group. The figures shown in the Financial Statements are rounded to the nearest £0.1 million unless otherwise stated.

New and amended accounting standards adopted by the Group in the year are detailed in note 42.

Change in accounting policy

During the year, the Group has reclassified cash flows relating to debt securities in issue, along with related derivatives, from operating to financing activities. This reclassification more appropriately reports these cash flows in the section of the Consolidated and Company Cash Flow Statements in which the principal funding transactions were reported. Prior year comparatives have been restated to align to the current year approach. The impact of this restatement on the prior year Consolidated and Company Cash Flow Statements is as follows:

Group

Company

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TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1. Accounting Policies (continued)

Going concern

The Directors have completed an assessment of the Group's going concern status, taking into account both current and projected performance, including projections for the Group's capital and funding position and having regard to the Group's risk profile. As a result of this assessment, the Directors consider the Group to be in a satisfactory financial position and have a reasonable expectation that the Group has adequate resources to continue in business for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the Financial Statements.

Principal accounting policies

A summary of the Group's accounting policies is set out below. These policies have been consistently applied to all of the years presented, unless otherwise stated.

Basis of consolidation

The Consolidated Financial Statements of the Group comprise the Financial Statements of the Company and all consolidated subsidiaries, including certain securitisation structured entities, and the Group's share of its interest in a joint venture, as at 28 February 2018.

Investment in Group undertakings

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The results of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. The Company's investments in its subsidiaries are stated at cost less any impairment.

Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the Consolidated Financial Statements.

Securitisation structured entities

The Group enters into securitisation transactions in which it assigns Credit Card receivables to a securitisation structured entity which supports the issuance of securities backed by the cash flows from the securitised Credit Card receivables. Although none of the equity of the securitisation structured entities is owned by the Company, the nature of these entities means that the Group has the rights to variable returns from its involvement with these securitisation structured entities and has the ability to affect those returns through its power over them. As such they are effectively controlled by the Group and are consolidated on a line by line basis in the Consolidated Financial Statements.

Investment in joint venture

A joint arrangement is an arrangement over which the Group has joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. A joint venture is a joint arrangement whereby the Group has rights to a share of the net assets of the joint arrangement.

The Group's share of the results of a joint venture is included in the Consolidated Income Statement using the equity method of accounting. The Group's investment in a joint venture is carried in the Consolidated Statement of Financial Position at cost plus post-acquisition changes in the Group's share of the net assets of the entity, less any impairment.

If the Group's share of losses in a joint venture equals or exceeds its investment in the joint venture, the Group does not recognise further losses, unless it has incurred obligations to do so or made payments on behalf of the joint venture.

The Company's investment in a joint venture is stated at cost less any impairment.

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TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1. Accounting Policies (continued)

Revenue recognition

Net interest income recognition

Interest income and expense for all financial instruments measured at amortised cost are recognised using the Effective Interest Rate (EIR) method.

The EIR method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the expected life of the financial asset or financial liability. The EIR is the rate that exactly discounts estimated future cash flows to the instrument's initial carrying amount. Calculation of the EIR takes into account fees receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual and behavioural terms of a financial instrument are considered when estimating future cash flows.

Net fees and commissions income recognition

Fees in respect of services are recognised on an accruals basis when the service to the customer has been provided. The arrangements are generally contractual and the cost of providing the service is incurred as the service is rendered. The price is usually fixed and always determinable.

The Group generates commission from the sale and service of Motor and Home insurance policies underwritten by Tesco Underwriting Limited (TU) or, in a minority of cases, by a third party underwriter. This is based on commission rates which are independent of the profitability of underlying insurance policies. Similar commission income is also generated from the sale of white label insurance products underwritten by other third party providers. This commission income is recognised as such policies are sold, with a provision being recognised for commission expected to be repayable following the cancellation of policies by customers.

Customer loyalty programmes

The Group participates in the customer loyalty programme operated by Tesco Stores Limited. The programme operates by allowing customers to accumulate Clubcard points on purchases for future redemption against a range of Tesco products. The cost of providing Clubcard points to customers is recharged by Tesco Stores Limited to the Group and is treated as a deduction from net fees and commissions income in the Consolidated Income Statement in the period the costs are incurred.

The Group has no obligation to customers in respect of Clubcard points once the obligation with Tesco Stores Limited is settled.

Dividend income

Dividends are recognised in the Consolidated Income Statement when the entity's right to receive payment is established.

Taxation

The tax charge or credit included in the Consolidated Income Statement consists of current and deferred tax. Tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or equity, respectively.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted by the reporting date.

Deferred tax is provided using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Company and Consolidated Financial Statements. Deferred tax is calculated at the tax rates that have been enacted or substantively enacted by the reporting date.

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised.

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TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1. Accounting Policies (continued)

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be realised.

Deferred tax assets and liabilities are offset against each other when there is a legally enforceable right to set-off current tax assets against current tax liabilities and it is the intention to settle these on a net basis.

Foreign currency translation

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transaction.

Monetary items denominated in foreign currency are translated at the closing rate as at the reporting date.

Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Income Statement, except when deferred in equity as gains or losses from qualifying cash flow hedging instruments. All foreign exchange gains and losses recognised in the Consolidated Income Statement are presented net in the Consolidated Income Statement within the corresponding item. Foreign exchange gains and losses on other comprehensive income items are presented in other comprehensive income within the corresponding item.

In the case of changes in the fair value of monetary assets denominated in foreign currency classified as available-for-sale, a distinction is made between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to the changes in the amortised cost are recognised in the Consolidated Income Statement, and other changes in the carrying amount, except impairment, are recognised in equity.

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and demand deposits with banks together with short-term highly liquid investments with short term maturities.

Financial instruments

The Group classifies a financial instrument that it issues as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. An instrument is classified as a liability if it creates a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities on potentially unfavourable terms. An instrument is classified as equity if it evidences a residual interest in the assets of the Group after the deduction of liabilities. 

Financial assets

The Group classifies its financial assets in the following categories: at fair value through profit or loss (FVTPL), loans and receivables, and available-for-sale. Management determine the classification of its financial assets at initial recognition. Purchases and sales of financial assets are recognised on the trade date - the date on which the Group commits to purchase or sell the asset.

Financial assets at FVTPL include financial assets held for trading and those designated at FVTPL at inception. Financial assets held at FVTPL are recognised at fair value with any gains or losses included in the Consolidated Income Statement in the period in which they arise. Transaction costs are expensed at the time of initial recognition. Derivative financial assets are classified as held for trading unless they are accounted for as an effective hedging instrument but are not separately categorised in the Statement of Financial Position. The Group does not currently hold any financial assets designated at FVTPL at inception.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition at fair value plus transaction costs, these assets are carried at amortised cost using the EIR method and adjusted for any impairment losses or adjustments made as part of fair value hedging arrangements.

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NOTES TO THE FINANCIAL STATEMENTS (continued)

1. Accounting Policies (continued)

Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. Subsequent to initial recognition at fair value plus transaction costs, these financial assets are recorded at fair value, with the movements in fair value recognised in other comprehensive income until the financial asset is derecognised or impaired, at which time the cumulative gain or loss previously recognised in other comprehensive income is recognised in the Consolidated Income Statement. For available-for-sale financial assets in fair value hedge relationships, the element of the fair value movement which relates to the hedged risk is recycled to the Consolidated Income Statement.

Financial liabilities

All of the financial liabilities held by the Group, other than derivative financial liabilities, are measured at amortised cost using the EIR method, after initial recognition at fair value. Fair value is calculated as the issue proceeds, net of premiums, discounts and transaction costs incurred. The Group does not hold any financial liabilities classified as held for trading. For financial liabilities in fair value hedge relationships, the carrying value is adjusted by the hedged item (the fair value of the underlying hedged risk) through the Consolidated Income Statement.

Derecognition of financial assets and financial liabilities

Financial assets are derecognised when the contractual rights to receive cash flows have expired or where substantially all of the risks and rewards of ownership have been transferred and the transfer qualifies for derecognition. Financial liabilities are derecognised when they have been redeemed or otherwise extinguished.

Collateral furnished by the Group under standard repurchase agreements is not derecognised because the Group retains substantially all the risks and rewards on the basis of the predetermined repurchase price, therefore the criteria for derecognition are not met. Credit Card receivables assigned by the Group to a securitisation structured entity do not qualify for derecognition, as the Group retains substantially all the risks and rewards of ownership of the securitised Credit Card receivables.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the Company and Consolidated Statements of Financial Position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise an asset and settle a liability simultaneously.

Impairment of financial assets

The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or portfolio of financial assets is impaired and an impairment loss incurred if there is objective evidence that an event or events since initial recognition of the financial asset or group of financial assets have adversely affected the amount or timing of future cash flows expected from the financial asset or group of financial assets.

Financial assets carried at amortised cost

If there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and receivables has been incurred, the Group measures the amount of the loss as the difference between the carrying amount of the financial asset or group of financial assets and the present value of estimated future cash flows from the financial asset or group of financial assets discounted at the EIR of the instrument(s) at initial recognition. Impairment losses are assessed individually for financial assets that are individually significant and collectively for financial assets that are not individually significant. In making the collective assessment of impairment, financial assets are grouped into portfolios on the basis of similar risk characteristics. Future cash flows from these portfolios are estimated on the basis of the estimated cash recoveries and historical loss experience for financial assets with similar credit risk characteristics.

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TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1. Accounting Policies (continued)

Impairment losses are recognised in the Consolidated Income Statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an allowance for impairment losses. If, in a subsequent year, the amount of the impairment loss reduces and the reduction can be related objectively to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance.

When a loan is deemed uncollectable it is written off against the related provision after all of the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off received from customers or other third parties are recognised directly in the Consolidated Income Statement as a reduction in the loan impairment charge for the year.

Financial assets classified as available-for-sale

In the case of debt instruments classified as available-for-sale, the recognition of an impairment loss occurs if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a loss event), and that have an impact on the estimated future cash flows of the financial asset and which can be reliably measured. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the Consolidated Income Statement - is removed from equity and recognised in the Consolidated Income Statement. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases, and the increase can be objectively related to an event occurring after the impairment loss was reported in the Consolidated Income Statement, the impairment loss is reversed through the Consolidated Income Statement.

Derivative financial instruments and hedge accounting

The Group uses derivative financial instruments for the purpose of providing an economic hedge to its exposures to interest rate and foreign exchange risks as they arise from operating, financing and investment activities. The Group does not hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are initially recognised at fair value on the contract date and are remeasured at their fair value at subsequent reporting dates.

Hedge accounting

The Group designates certain hedging instruments as either fair value hedges or cash flow hedges, where it is efficient to do so and the IAS 39, 'Financial instruments: Recognition and Measurement', criteria are met. The Group applies hedge accounting as follows:

Hedge relationships are classified as fair value hedges where the derivative financial instruments hedge the change in the fair value of fixed rate financial assets or financial liabilities due to movements in interest rates.

Hedge relationships are classified as cash flow hedges where the derivative financial instruments hedge the inflation risk on an index linked issued bond or when they hedge the Group's exposure to variability in cash flows that are either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction.

To qualify for hedge accounting, the Group documents, at the inception of the hedge: the hedging risk management strategy; the relationship between the hedging instrument and the hedged item or transaction; and the nature of the risks being hedged. The Group also documents the assessment of the effectiveness of the hedging relationship, to show that the hedge has been and will be highly effective on an ongoing basis.

Fair value hedges

Changes in the fair value of derivative financial instruments that are designated as fair value hedges are recognised in the Consolidated Income Statement. The hedged item is also adjusted for changes in fair value attributable to the hedged risk, with the corresponding adjustment made in the Consolidated Income Statement.

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TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1. Accounting Policies (continued)

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to the Consolidated Income Statement over the remaining period to maturity.

Cash flow hedges

Changes in the fair value of the derivative financial instruments that are designated as hedges of future cash flows are recognised directly in other comprehensive income and the ineffective portion is recognised immediately in the Consolidated Income Statement. Amounts recognised in other comprehensive income are recycled to the Consolidated Income Statement when equivalent amounts of the hedged item are recognised in profit or loss.

When the hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time is recognised immediately in the Consolidated Income Statement.

Derivative financial instruments not in hedge accounting relationships

Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the Consolidated Income Statement as they arise.

Impairment of non-financial assets

Non-financial assets are reviewed for impairment when there are indications that the carrying value may not be recoverable. In the event that an asset's carrying amount is determined to be greater than its recoverable amount, an impairment loss is recognised immediately in the Consolidated Income Statement and the carrying value of the asset is written down by the amount of the loss. The recoverable amount is the higher of the asset's fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets for which an impairment loss has been recognised are reviewed for possible reversal of the impairment at each reporting date.

Property, plant and equipment

Items of property, plant and equipment are stated at historical cost less accumulated depreciation and any impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent expenditure is included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group. All other repairs and maintenance costs are charged to the Consolidated Income Statement in the period in which they are incurred.

Depreciation is charged to the Consolidated Income Statement on a straight-line basis so as to allocate the costs less residual values over the lower of the useful life of the related asset and, for leasehold improvements, the expected lease term. Depreciation commences on the date that the assets are brought into use. Work in progress assets are not depreciated until they are brought into use and transferred to the appropriate category of property, plant and equipment. Estimated useful lives are:

· Plant and equipment 2 to 8 years

· Fixtures and fittings 4 to 14 years

· Computer hardware 3 to 10 years

· Freehold buildings 40 years

· Leasehold improvements 15 to 20 years

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in administrative expenses in the Consolidated Income Statement.

During the prior year, the Group reassessed the useful life of certain of its tangible fixed assets, reducing the expected life to a maximum of one year. Refer to note 23 for further detail.

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TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1. Accounting Policies (continued)

Intangible assets

Acquired intangible assets

Intangible assets that are acquired by the Group are stated at historical cost less accumulated amortisation and any impairment losses. Amortisation is charged to the Consolidated Income Statement on a straight-line basis over the estimated useful lives. The Group's intangible assets are computer software, for which the estimated useful lives are 3 to 10 years.

Internally generated intangible assets - research and development expenditure

Research costs are expensed in the Consolidated Income Statement as incurred.

Development expenditure incurred on an individual project is capitalised only if all of the following criteria are demonstrated:

· an asset is created that can be identified (such as software);

· it is probable that the asset created will generate future economic benefits; and

· the development cost of the asset can be measured reliably.

Following the initial recognition of development expenditure, the cost is amortised over the estimated useful life of the asset created. Amortisation commences on the date that the asset is brought into use. Work in progress assets are not amortised until they are brought into use and transferred to the appropriate category of intangible assets.

During the prior year, the Group reassessed the useful life of certain of its intangible fixed assets, reducing the expected life to a maximum of one year. Refer to note 22 for further detail.

Leases

If a lease agreement, in which the Group is a lessee, does not transfer the risks and rewards of ownership of the asset, the lease is recorded as an operating lease.

Operating lease payments are charged to the Consolidated Income Statement on a straight-line basis over the period of the lease. Where an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor as compensation is charged to the Consolidated Income Statement in the period in which the termination takes place. 

The Group has entered into a number of operating leases for office buildings.

Employee benefits

The Group accounts for pension costs on a contributions basis in line with the requirements of IAS 19 'Employee Benefits'. The Group made contributions in the year to a closed funded defined benefit scheme and a funded defined contribution scheme. Both of these schemes are operated by Tesco Stores Limited.

IAS 19 requires that, where there is no policy or agreement for sharing the cost of a defined benefit scheme across the subsidiaries, the Sponsoring employer recognises the net defined benefit cost of a defined benefit scheme. The Sponsoring employer of the funded defined benefit scheme is Tesco Stores Limited and the principal pension plan is the Tesco PLC pension scheme.

Share based payments

Employees of the Group receive part of their remuneration in the form of share based payment transactions, whereby employees render services in exchange for Tesco PLC shares or rights over shares (equity-settled transactions) or in exchange for entitlements to cash based payments based on the value of the shares (cash-settled transactions).

The fair value of employee share option plans is calculated at the grant date using the Black-Scholes model. The resulting cost is recognised in the Consolidated Income Statement over the vesting period. The value of the charge is adjusted to reflect expected and actual levels of vesting.

38

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

1. Accounting Policies (continued)

The grant by Tesco PLC of options over its equity instruments to the employees of the Group is treated as a capital contribution in equity. The social security contribution payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge is treated as a cash-settled transaction.

Provision for liabilities and charges and contingent liabilities

A provision is recognised where there is a present legal or constructive obligation as a result of a past event, it is more likely than not that an outflow of economic resources will be required to settle the obligation, and the amount can be reliably estimated.

Provisions are measured at the present value of the expenditure expected to be required to settle the obligation.

A contingent liability is a possible obligation which is dependent on the outcome of uncertain future events not wholly within the control of the Group, or a present obligation where an outflow of economic resources is not likely or the amount cannot be reliably measured.

Contingent liabilities are not recognised in the Company or Consolidated Statement of Financial Position but are disclosed unless the possibility of an outflow of economic resources is remote.

Dividends paid

Dividends are recognised in equity in the period they are approved by the Group's Board.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined the Board of Directors as its chief operating decision-maker.

Sale and repurchase agreements

Investment securities sold subject to a commitment to repurchase them at a predetermined price are retained on the Company and Consolidated Statements of Financial Position when substantially all of the risk and rewards of ownership remain with the Group. The counterparty liability is included in deposits from banks.

Encumbered assets

The Group's methodology used to identify encumbered assets is aligned to definitions used in calculating the Group's Pillar 3 encumbrance disclosures.

2. Critical Accounting Estimates and Judgements in Applying Accounting Policies

In the course of preparing the Financial Statements, no judgements have been made in the process of applying the Group's accounting policies, other than those using estimations (which are presented separately below), that have had a significant effect on the amounts recognised in the Financial Statements.

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its Financial Statements. The Group's principal accounting policies are set out in note 1. United Kingdom company law and IFRSs require the Directors, in preparing the Group's Financial Statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. Where accounting standards are not specific and Management have to choose a policy, IAS 8, 'Accounting Policies, Changes in Accounting Estimates and Errors', requires them to adopt policies that will result in relevant and reliable information in the light of the requirements and guidance in IFRSs dealing with similar and related issues and the IASB Framework for the Preparation and Presentation of Financial Statements.

The judgements and assumptions involved in the Group's accounting policies that are considered to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.

39

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

2. Critical Accounting Estimates and Judgements in Applying Accounting Policies (continued)

Loan impairment provisions

The Group's loan impairment provisions are established to recognise incurred impairment losses in its portfolio of customer loans classified as loans and receivables and carried at amortised cost. A loan is impaired when there is objective evidence that events since the loan was granted have affected expected cash flows from the loan. The impairment loss is the difference between the carrying value of the loan and the present value of estimated future cash flows at the loan's original EIR.

The Group's loan impairment provisions are established on a portfolio basis using a statistical methodology taking into account the level of arrears, collateral, past loss experience and defaults based on portfolio trends. The most significant factors in establishing these provisions are the expected loss rates. These portfolios include Mortgages, Credit Card receivables, Personal Loans and Personal Current Accounts. The future credit quality of these portfolios is subject to estimation uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions.

The key assumptions used in the statistical models are the probability of default; the expected cash recoveries included in the loss given default; and the loss emergence period. These key assumptions are monitored throughout the year to ensure the impairment provision takes into account the most recent trends observed in each portfolio.

The table below shows a sensitivity analysis of key assumptions, demonstrating the impact on the unsecured Personal Loan receivables provision and the unsecured Credit Card receivables provision, respectively, of a variation in each.

Individual impairment losses on secured Mortgages are estimated using an individual valuation of the underlying asset. Although the portfolio is growing, sensitivity to movement in the House Price Index remains relatively low.

The impairment loss on loans and advances is disclosed in further detail in note 9.

Effective interest rate (EIR)

IAS 39 requires the Group to measure the interest earned on its Credit Cards portfolio by applying the EIR methodology. The main area of estimation uncertainty in measuring the EIR on the Group's Credit Card portfolio is the expected attrition of the balances drawn at the reporting date.

Management use a pay rates assumption to determine the expected repayment profile of the balances drawn as at the reporting date to the expected remaining term (capped to a maximum of 5 years from origination).

An increase of the pay rates assumption by 10% will reduce the asset value by £5.0m and a corresponding reduction of the pay rates assumption will increase the asset value by £5.8m.

Provision for customer redress

The Group has a provision for potential customer redress in relation to Payment Protection Insurance (PPI). For further details, including the key assumptions made in arriving at each element of this provision and a sensitivity analysis of key assumptions in the PPI model, refer to note 27.

40

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

2. Critical Accounting Estimates and Judgements in Applying Accounting Policies (continued)

Investment in joint venture

The Group holds an investment in a joint venture, Tesco Underwriting Limited (TU), an authorised insurance company, and recognises the carrying value of its investment and the Group's share of TU's results using the equity method of accounting (see notes 1 and 20 for further details). 

TU's results are sensitive to changes in the insurance reserves it recognises in respect of insurance policies written, net of reinsurance. Consequently, material increases in these reserves could have an impact on the carrying value of the investment in the Company and Consolidated Statement of Financial Position.

The impact of any increase in reserves is determined by TU's ability to amend its pricing to reflect the increased costs of providing cover under the policies written.

A key element of the reserving calculation is the application of the Ogden tables, which are used to calculate the cost of any claim that involves compensation for loss of future benefits. The tables provide an estimate of the return to be expected from the investment of a lump sum damages award. A discount rate of 2.5% was set in 2001 and was previously used by TU in assessing its reserves for relevant cases.

Following a consultation by the Ministry of Justice (MoJ), which was launched in August 2012, a new rate of -0.75% was set by the MoJ on 27 February 2017 and was effective from 20 March 2017. The impact of this in TU was a post-tax charge of £45.7m, of which the Group recognised £22.8m in the Consolidated Income Statement for the prior year through its share of TU's results as an adjusting event after the reporting date for the prior year. The carrying value of the Group's investment in TU was correspondingly reduced by an equivalent amount. A full reconciliation of the Group's carrying value of TU is set out at note 20.

A reduction in the Ogden rate for 2018 to -1.0% would decrease the carrying value of the Group's investment in TU by £0.2m. An increase in the Ogden rate for 2018 to +1.0% would increase the carrying value of the Group's investment in TU by £1.2m.

3. 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 has one operating segment covering all of the Group's activities, the results of which are set out in the Consolidated Income Statement and Group and Company Statements of Financial Position. The group is primarily focused on providing financial services and products to personal customers in the UK therefore no geographic analysis is presented.

41

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

4. Net Interest Income

5. Net Fees and Commissions Income

42

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

6. Unrealised Gains on Financial Instruments

7. Realised Gain on Financial Instruments

8. Administrative Expenses

*During the year, the Group recognised organisational restructuring credits within administrative expenses amounting to £(1.2)m (2017: charges of £9.9m), of which £nil (2017: £6.9m) related to staff costs and £(1.2)m (2017: £3.0m) related to property operating lease exit costs.

43

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

8. Administrative Expenses (continued)

During the year the Group obtained the following services from the incumbent auditor, Deloitte.

The average monthly number of persons (including Executive Directors) employed by the Group split by employee function during the year, was:

9. Impairment on Loans and Advances to Customers

*Recoveries include £34.6m received through the sale of non-performing debt to third parties (2017: £21.6m).

10. Directors' Emoluments

The remuneration of the Directors paid by the Group during the year was as follows:

44

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

10. Directors' Emoluments (continued)

The total emoluments of the highest paid Director were £2.3m (2017: £2.1m). During the year the highest paid Director did not exercise any share options (2017: £nil).

At 28 February 2018 the accrued pension and lump sum under a defined benefit scheme for the highest paid Director was £nil (2017: £nil).

During the year to 28 February 2018 two Directors (2017: three Directors) left the company. One Director (2017: one Director) was paid a sum of £0.3m (2017: £0.4m) upon leaving, in line with contractual terms and conditions.

11. Income Tax

Income tax charge/(credit)

The standard rate of corporation tax in the UK was changed from 20% to 19% with effect from 1 April 2017. This gives a blended Corporation Tax rate for the Group for the full year of 19.1% (2017: 20.0%). In addition, a banking surcharge of 8% is applied to the Group's results.

45

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

11. Income Tax (continued)

The tax assessed for the full year is higher (2017: lower) than that calculated using the overall blended Corporation Tax rate for the Group. The differences are explained below:

\* The majority of the adjustment relates to the non deductibility of an additional PPI provision of £35.0m recognised in the year (2017: £45.0m).

*\* The 2017 adjustment in respect of prior years arises largely as a result of group relief being made available to the Company from the Tesco PLC tax group, reducing the tax charge in respect of 2016 by £48.8m.

The March 2016 Budget Statement included an announcement that the standard rate of corporation tax in the UK would be reduced to 17% from 1 April 2020. This rate reduction was enacted during the year ended 28 February 2017 and is therefore incorporated in these Financial Statements. The rate change is expected to reduce the Group's effective tax rate in the medium term.

Income tax relating to components of other comprehensive income

46

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

11. Income Tax (continued)

Deferred tax charged directly to the Statement of Changes in Equity

12. Distributions to Equity Holders

On 22 February 2018 an interim dividend of £50.0m (£0.0410 per ordinary share) was paid. In the prior year, an interim dividend of £50.0m (£0.0410 per ordinary share) was paid on 22 February 2017.

13. Cash and Balances with Central Banks

Mandatory reserve deposits held with the Bank of England of £15.1m (2017: £14.3m) are not included within cash and cash equivalents for the purposes of the cash flow statement as these do not have short term maturities. These balances are not available in the Group's day to day operations and are non-interest bearing. Other balances are subject to variable interest rates based on the Bank of England base rate.

47

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)

14. Loans and Advances to Customers

Fair value hedge adjustments

Fair value hedge adjustments amounting to £(16.4)m (2017: £23.4m) are in respect of fixed rate Loans and Mortgages. 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.

Allowance for impairment

The following table shows the movement in the provision for impairment on loans and advances to customers:

*Recoveries include £34.6m received through the sale of non-performing debt to third parties (2017: £21.6m).

48

TESCO PERSONAL FINANCE PLC

NOTES TO THE FINANCIAL STATEMENTS (continued)