West.brom 6.15% Regulatory News (WBS)

WEST BROMWICH BUILDING SOCIETY

Announcement of half-year results for the six months

to 30 September 2016

The West Brom today announces its half-year results for the six months to 30 September 2016.

Key highlights:

- Gross residential mortgage lending for the half year of £441m, up nearly 50% from the previous year (30 September 2015: £295m).

- Loss before tax of £23.7m for the six months to 30 September 2016 (30 September 2015: Profit £6.0m) after allowing for costs of £27.5m relating to a one-off reimbursement of interest charged on certain buy to let mortgages.

- Underlying profit before tax of £3.8m (30 September 2015: £1.3m).

- Members' savings balances maintained at £4.4bn (31 March 2016: £4.4bn).

- Strong capital position, with a Common Equity Tier 1 ratio of 13.8% (31 March 2016: 14.6%) and a particularly strong leverage ratio of 7.2% (31 March 2016: 7.6%).

Following the disappointing outcome from the Court of Appeal decision in overturning the previous High Court judgement in our favour, our half year results include a one-off cost of £27.5m to refund certain buy to let customers for a proportion of interest charged since December 2013. As expected, and forecast when the outcome of the legal case was announced, this has resulted in a pre-tax loss of £23.7m for the half year.

The underlying business, however, continues to go from strength to strength with increased advances of £441m (30 September 2015: £295m) almost 50% higher than the previous half year, reduced arrears across residential mortgages (falling from 1.07% of mortgage balances at 31 March 2016 to 0.88% at 30 September 2016) and further reductions in our non-core lending (Commercial lending has reduced by £46m (6.8%) since the year-end to £634m). These results demonstrate a sound performance of the underlying business, with growth in underlying profitability, before the one-off impact of the buy to let refund, from £1.3m for the 6 months to 30 September 2015 to £3.8m.

Our capital position is robust and liquidity remains strong, with customer deposit balances being maintained.

The strength of the underlying progress that the Society has made in the first six months of this financial year is pleasing. We have continued to invest in developing the systems to support the Society's ambitions of enhancing our ability to provide an increasing number of members with the opportunity to fulfil their ambitions for home ownership. At the same time we remain very aware of the impact ultra-low investment rates continue to have on the Society's savers. Although savers' rates have reduced, we have ensured that the average rates paid by the Society have remained above those for the sector.

Following the Brexit decision the economic environment has become more uncertain, particularly in the commercial real estate sector where the Society still has an exposure albeit significantly less so than in previous years. This presents the most prominent area of uncertainty for the second half of the financial year. Despite this, we are confident that the Society will deliver on its lending plans.

ENQUIRIESthe West Brom 0121 796 7785

Jonathan Westhoff - Chief Executive

Mark Gibbard - Group Finance & Operations Director

West Bromwich Building Society

Condensed consolidated

half-yearly financial information

30 September 2016

Chief Executive's BUSINESS Review

Performance

The Society has increased its new lending by nearly 50% in the first half of 2016/17 and, before one-off costs, has improved its underlying profitability. These costs relate to the well-publicised overturning in June, by the Court of Appeal, of an earlier decision of the High Court in respect of the Group's ability to vary the interest charged on certain loans to property investor landlords with multi-property portfolios. The result of this is that the Group can no longer levy this additional interest and must reimburse what has been charged thus far. This refund has been made. The cost of this, £27.5m, which is charged as a one-off item under the heading "Provisions for liabilities", has resulted in the Society reporting a loss before tax of £23.7m for the six months to 30 September 2016 (30 September 2015: Profit £6.0m).

The table below is a comparison of the underlying performance excluding the impact of the buy to let case, which shows that the underlying net interest income and pre-tax profit have improved against the comparative period.

* Half 1 2016/17 included 2 months (Half 1 2015/16: 6 months) of additional interest receivable which has been returned to borrowers following the overturning of the buy to let case, as such this has been deducted from net interest income in order to give a like-for-like comparison.

Income Statement

The underlying net interest income at £25.6m for the half year is up from £25.2m for the previous half year.

The result for the six months includes a revaluation gain of £3.3m (30 September 2015: £2.5m) on the Group's portfolio of residential investment properties, as a result of house price increases in the period.

In the last six months management expenses have increased to £25.0m compared with £22.7m (first half of 2015/16) primarily as a result of the Society's continuing programme of investment. This is reflected in an increase in the management expenses ratio to 0.87% (30 September 2015: 0.82%).

Residential mortgages in arrears by more than three months, as a percentage of balances outstanding, have reduced since 31 March 2016, from 1.07% to just 0.88%. This reflects both the high quality of our residential lending book and stable economic conditions. All lending undertaken since the Society re-entered the mortgage market over three years ago has been subject to strict credit criteria and, as a result, there are no loans originated in this period which are three months or more in arrears at 30 September 2016. This quality is reflected in a residential provision release of £3.0m for the half year to 30 September 2016 (30 September 2015: release £0.4m).

The total impairment charge of £0.8m for the half year (30 September 2015: £4.1m) includes a charge of £3.8m (30 September 2015: £4.5m) relating to the Commercial loan book, which is a market we have exited and where we are continuing to manage down our remaining exposure. Outstanding balances have reduced by £46m (6.8%) since the year-end to £634m. Provisions set aside for potential losses in this book equated to 6.7% of total loan balances outstanding (31 March 2016: 6.5%).

In addition to the £27.5m one-off cost of refunding interest to buy to let landlords following the Court of Appeal ruling, the provisions for liabilities charge includes the Financial Services Compensation Scheme (FSCS) levy of £1.3m. This is a considerable reduction on the charge to 30 September 2015 of £2.5m as FSCS has confirmed that no capital levy is anticipated. A further £0.5m has been set aside for potential Payment Protection Insurance (PPI) claims (30 September 2015: £0.9m) to allow for potential costs through to a deadline of June 2019 which is anticipated to be introduced.

The buy to let legal case has affected the tax charge because it has pushed out the expected time to recover the existing deferred tax asset. Consequently no tax credit is recognised against the loss for the half year and a charge of £6.8m has been recorded to write down the value of the brought forward deferred tax asset to a level we anticipate will be recovered in the next 5 years.

Balance Sheet

Growth in prime residential lending continued with advances of £441m almost a 50% increase on the comparable period (30 September 2015: £295m). Nearly 20% of this was lending to first time buyers (30 September 2015: 20.5%).

As a traditional building society, the West Brom continues to be funded predominantly by retail savings with balances of £4.4bn, unchanged from the year end. At 30 September 2016, 85.2% (31 March 2016: 84.8%) of total shares and borrowings were in the form of members' retail deposits.

Throughout the period the Society has maintained its liquid assets at an appropriate level and quality to ensure that it can meet its financial obligations under both normal and severe, but plausible, stressed scenarios. At 30 September 2016 the liquidity ratio was 14.9% (31 March 2016: 17.3%).

All of the Society's treasury investments were rated single A or better or held with a Global Systemically Important Counterparty. The Group has no exposure to those markets where concerns have been expressed, including non-UK sovereign debt or to any mortgage market outside the UK. There were no impairment charges against liquid assets during the current or comparative periods.

The table below shows an analysis of the Group's liquidity portfolio:

Capital

Capital is held to provide protection for depositors at levels which exceed internal and minimum regulatory requirements at all times.

The following table details the Group's capital ratios at 30 September 2016 and 31 March 2016:

The two key measures of capital, under the legislative reforms introduced in 2014 to strengthen regulatory standards on capital adequacy, are the Common Equity Tier 1 (CET1) and the leverage ratio, both currently calculated under CRD IV transitional rules but with the impact of full implementation also shown. The leverage ratio is based on total assets (including all structured entities) and a number of regulatory adjustments.

The Group's Common Equity Tier 1 capital ratio remains strong at 13.8% (31 March 2016: 14.6%) but has reduced as a result of the buy to let interest refund. The leverage ratio at 7.2% (31 March 2016: 7.6%) remains significantly above the current regulatory minimum of 3.0%.

Member value

The low interest rate environment is creating opportunities for homeowners to borrow at increasingly competitive rates. We offer considerable choice for mortgage customers, with our fixed rates now extending to terms of up to ten years for those who appreciate the certainty of knowing what their repayments will be.

Many of our mortgage products also incorporate incentives that help bring down the overall cost of borrowing, such as the removal of completion fees and valuation charges, as well as paying cashback upon completion. Such an approach is particularly welcomed by first time buyers, who can then focus their efforts purely on saving money for a suitable deposit on their home.

While beneficial to borrowers, we appreciate that current market conditions are very challenging for our saving members. This situation has not been helped by a further reduction in Bank Base Rate which has resulted in many providers, including ourselves, having to review the returns they can realistically offer.

We are doing what we can to minimise the impact on savers and still have options for members to earn a little more by investing in fixed rate bonds or accounts with a limited number of withdrawals. Our regular savings accounts are also an excellent way to build up a savings pot over the course of a year through monthly deposits.

Savings and mortgages continue to be our core proposition to members, but during the period we have been proactive in other areas too. We relaunched our later life proposition by bringing in new partners so that members can access important services such as funeral planning and will writing.

Financial advice is available in our branches through independent advisers from Wren Sterling and selected sites have hosted free open days so that members can find out more in an informal environment without any obligation to invest.

Principal risks and uncertainties

Effective management of risks and opportunities is essential to achieving the Society's strategic objectives. The Society aims to manage effectively all of the risks that arise from its activities and believes that its approach to risk management reflects an understanding of actual and potential risk exposures, the quantification of the impact of such exposures and the development and implementation of appropriate controls to manage these exposures within the Board's agreed risk appetite.

The Directors have agreed a set of statements which describe the Board's risk appetite in terms of a number of key risk categories: business, credit, capital, liquidity, market, basis, operational, retail conduct and pension liability (the Society's Risk Appetite Statements).

These Risk Appetite Statements drive corporate planning activity, including capital and liquidity planning, as well as providing the basis for key risk measures.

The principal risks and uncertainties which could impact the Society's long-term performance remain those outlined on pages 17 to 20 of the Annual Report and Accounts for the year ended 31 March 2016, with the exception of what was previously referred to as the risk of the buy to let judgement being overturned; this event has now occurred. There have been no significant changes in the Society's approach to risk management during the six months ended 30 September 2016.

Outlook

The Society will continue to build on its prime residential lending, helping our borrowing members to purchase their own homes, funded by our savings members who can rest assured that their savings are safe.

Following the vote to leave the EU we have experienced some market volatility and the economic environment has become more uncertain, particularly in the commercial real estate sector where the Society still has an exposure albeit significantly less so than in previous years. The residential lending market does, however, remain robust.

The further reduction in the Bank Base Rate to 0.25% has had an adverse impact on savers and is likely to increase competition in the mortgage market which may put pressure on the net interest margin.

Despite the disappointment of the buy to let judgement, I am pleased with the underlying progress that the Society has made in the first six months of this financial year. We expect to see further growth in our residential lending and ongoing investment in our mortgage and savings systems to support sustainable growth and continue to improve the customer experience for our members.

Jonathan Westhoff

Chief Executive

Forward looking statements

Certain statements in this half-year report are forward looking.  Although the West Brom believes that the expectations reflected in these forward looking statements are reasonable, we can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of the West Brom. As a result, the West Brom's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward looking statements. Due to such risks and uncertainties the West Brom cautions readers not to place undue reliance on such forward looking statements. We undertake no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.

Condensed consolidated half-yearly Income Statement 

for the six months ended 30 September 2016

Condensed consolidated half-yearly Statement of Comprehensive Income

for the six months ended 30 September 2016

Condensed consolidated half-yearly Statement of Financial Position

at 30 September 2016

Condensed consolidated Statement of Changes in Members' Interest

for the six months ended 30 September 2016

Under the terms of the profit participating deferred shares (PPDS), 25% of the annual post-tax profits or losses are allocated against the PPDS reserve.

Condensed consolidated half-yearly Statement of Cash Flows

for the six months ended 30 September 2016

For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with less than 90 days maturity:

The Group is required to maintain certain mandatory balances with the Bank of England which, at 30 September 2016, amounted to £7.1m (30 September 2015: £7.0m and 31 March 2016: £6.7m). The movement in these balances is included within cash flows from operating activities.

Condensed consolidated half-yearly Statement of Cash Flows (continued)

for the six months ended 30 September 2016

Notes to condensed consolidated half-yearly financial information

for the six months ended 30 September 2016

1 General information

These half-yearly financial results do not constitute statutory accounts as defined in section 81A of the Building Societies Act 1986. A copy of the statutory accounts for the year to 31 March 2016 has been delivered to the Financial Conduct Authority and the relevant information in this report has been extracted from these statutory accounts. These accounts have been reported on by the Group's auditor and the report of the auditor was (i) unqualified, and (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report.

The consolidated half-yearly financial information for the six months to 30 September 2016 and 30 September 2015 is unaudited and has not been reviewed by the Group's auditor.

2 Basis of preparation

This condensed consolidated half-yearly financial report for the six months ended 30 September 2016 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim Financial Reporting' as adopted by the European Union. The half-yearly condensed consolidated financial report should be read in conjunction with the Annual Report and Accounts for the year ended 31 March 2016, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

3 Going concern

Details of the Group's objectives, policies and processes for managing its exposure to risk are contained in the Risk Management Report of the 2016 Annual Report and Accounts. The Directors also include a statement in the Directors' Report in respect of going concern on page 24 of the 2016 Annual Report and Accounts.

The Directors have reviewed the plans and forecasts for the Group giving consideration to liquidity and capital adequacy, together with the outlook for the UK economy following the vote to leave the European Union. Following on from the loss of the buy to let legal case, the Group had sufficient capital set aside to cover for such eventuality and remains in a strong capital position, at a level significantly in excess of regulatory requirements. In this context the Directors consider the Group has adequate liquidity to meet both the normal demands of the business and the requirements which might arise in stressed circumstances for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing these half-yearly financial results.

4 Accounting policies

The accounting policies adopted by the Group in the preparation of its 2016 Interim Financial Report are consistent with those disclosed in the Annual Report and Accounts for the year ended 31 March 2016.

A number of minor amendments were made to some accounting standards that have no material impact on the preparation of the 2016 Interim Accounts.

5 Business segments

Operating segments are reported in accordance with the internal reporting provided to the Group Board (the chief operating decision maker), which is responsible for allocating resources to the reportable segments and assessing their performance.

The Group has three main business segments:

- Retail - incorporating residential lending, savings, investments and protection;

- Commercial - primarily representing loans for commercial property investment; and

- Property - a portfolio of residential properties for rent.

Central Group operations have been included in Retail and comprise risk management, funding, treasury services, human resources and computer services, none of which constitute a separately reportable segment.

There were no changes to reportable segments during the period.

Transactions between the business segments are carried out at arm's length. The revenue from external parties reported to the Group Board is measured in a manner consistent with that in the consolidated Income Statement.

Funds are ordinarily allocated between segments, resulting in funding cost transfers disclosed in inter-segment net interest income. Interest charged for these funds is based on the Group's cost of capital. Central administrative costs are also allocated between segments and are disclosed in inter-segment administrative expenses. There are no other material items of income or expense between the business segments.

The Group does not consider its operations to be cyclical or seasonal in nature.

6 Allowance for losses on loans and advances to customers

7 Provisions for liabilities

Financial Services Compensation Scheme (FSCS)

In common with all regulated UK deposit takers, the Society pays levies to the Financial Services Compensation Scheme (FSCS) to enable the FSCS to meet claims against it. The FSCS levy consists of two parts: a management expenses levy and a compensation levy. The management expenses levy covers the costs of running the scheme and the compensation levy covers the amount of compensation the scheme pays, net of any recoveries it makes using the rights that have been assigned to it. During 2008 and 2009 claims were triggered against the FSCS in relation to Bradford & Bingley plc, Kaupthing Singer and Friedlander, Heritable Bank plc, Landsbanki Islands hf, London Scottish Bank plc and Dunfermline Building Society.

The FSCS met these claims by way of loans received from HM Treasury. The terms of these loans were interest only for the first three years, and the FSCS recovers the interest cost, together with ongoing management expenses, by way of annual management levies on members.

The Society FSCS provision reflects market participation up to the reporting date.

Buy to let provision

In December 2013, West Bromwich Mortgage Company Limited (the Company) chose to vary the interest rate margin charged for certain multi-property landlords in line with the terms and conditions of their buy to let mortgages. Certain impacted parties initiated legal proceedings against the Company to challenge this increase. To 31 March 2016, the rate uplift contributed £25.1m to Group interest receivable. Following our successful defence of this challenge in the High Court a final judgement was made in the Court of Appeal in June 2016 which ruled against the Company. Subsequently, refunds have been issued to affected customers along with interest.

Other provisions

Other provisions include an allowance for customer claims relating to Payment Protection Insurance (PPI) redress. The charge to September 2016 represents the amounts expected to be settled based on an anticipated introduction of a deadline for PPI claims.

8 Loans and advances to customers

Included within loans and advances to customers are £633.5m (31 March 2016: £679.6m) of Commercial lending balances of which £76.4m (31 March 2016: £92.1m) have been sold by the Group to bankruptcy remote structured entities. A further £1,081.5m (31 March 2016: £1,165.8m) of residential mortgage balances, included within loans and advances to customers, have also been sold by the Group to structured entities. The structured entities have been funded by issuing mortgage backed securities (MBSs) of which £845.3m (31 March 2016: £889.9m) are held by the Group.

The Group has made subordinated loans to the structured entities to provide some level of credit enhancement to the MBSs. In future periods the Group will earn interest income on the subordinated loans and fees for managing the loans. The Group will earn deferred consideration once the cash flows generated by the structured entities have been used to pay interest and capital to the holders of the MBSs. Since the Group maintains substantially all of the risks (key risk being an exposure to credit risk through the subordinated loan agreements) and rewards emanating from the mortgages, they have been retained on the Group's Statement of Financial Position in accordance with IAS 39.

9 Shares

10 Property, plant, equipment and intangible assets

Capital commitments

The Group has placed contracts amounting to a total of £1.6m (31 March 2016: £4.2m) for future expenditure that was not provided in the financial statements.

11 Investment properties

12 Debt securities in issue

The non-recourse finance comprises mortgage backed floating rate notes (the Notes) secured over portfolios of mortgage loans secured by first charges over residential and commercial properties in the United Kingdom. Prior to redemption of the Notes on the final interest payment date, the Notes will be subject to mandatory and/or optional redemption, in certain circumstances, on each interest payment date.

13 Profit participating deferred shares

The profit participating deferred shares (PPDS) are entitled to receive a distribution, at the discretion of the Society, of up to 25% of the Group's post-tax profits in the future (calculated prior to payment of the PPDS dividend). No such distribution may be made if the cumulative reserves are in deficit.

14 Related party transactions

Related party transactions for the six months to 30 September 2016 are within the normal course of business and of a similar nature to those for the last financial year, full details of which are disclosed in the Annual Report and Accounts for the year ended 31 March 2016.

15 Subscribed capital

In a winding up or dissolution of the Society the claims of the holders of permanent interest bearing shares (PIBS) would rank behind all other creditors of the Society, with the exception of holders of profit participating deferred shares (PPDS) with which the PIBS rank pari-passu, and the claims of members holding shares as to principal and interest. The holders of PIBS are not entitled to any share in any final surplus upon winding up or dissolution of the Society.

With respect to future interest payments, as a condition of the PPDS, the Society has undertaken to pay an amount which, when annualised, represents the lower of: 6.15% of the outstanding principal amount of the PIBS and the dividend yield attributable to the PPDS with respect to the prior financial year ending 31 March whose payment is at the discretion of the Society.

16 Financial instruments

Fair values of financial assets and financial liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Group determines fair values by the following three tier valuation hierarchy:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Valuation techniques where all inputs are taken from observable market data, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3: Valuation techniques where significant inputs are not based on observable market data.

Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist and other valuation models. Assumptions and market observable inputs used in valuation techniques include risk-free and benchmark interest rates, equity index prices and expected price volatilities. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm's length. Observable prices are those that have been seen either from counterparties or from market pricing sources including Bloomberg. The use of these depends upon the liquidity of the relevant market.

Financial assets and financial liabilities held at amortised cost

The tables below show the fair values of the Group's financial assets and liabilities held at amortised cost in the Statement of Financial Position, analysed according to the fair value hierarchy described above.