West.brom 6.15% Regulatory News (WBS)

West Bromwich Building SocietyHalf-year results announcement

for the six months to 30 September 2020

The West Brom today announces its results for the six months to 30 September 2020.

Key highlights:

· £248m of new mortgage lending (30 September 2019: £251m), with 48% of new mortgages to first-time buyers (30 September 2019: 56%)

· First lender to launch new mortgage product proposition specifically designed to support mortgage prisoners, who have previously been trapped in paying higher rates due to strict borrowing criteria

· Maintained our average rate for savers at 17%1 above the market average for the period, rising to 52% above by the period end

· Statutory profit before tax of £2.9m (30 September 2019: (restated): £5.5m) after setting aside additional provisions for credit losses in respect of the anticipated economic impact arising from the COVID-19 pandemic

· A strong capital position with the Common Equity Tier 1 (CET 1) capital ratio improving to 16.5% (31 March 2020: 15.9%)

· Improving Net Promoter Score®2 from +73 at March 2020 to +75, with customer satisfaction remaining strong at 96% (31 March 2020: 96%)

Jonathan Westhoff, Chief Executive, commented:

Set against the challenges of operating in full lockdown for half of the period, I'm pleased to report the Society has delivered a robust first half performance. Throughout this period, we have been focusing on prioritising the wellbeing of our members, colleagues and communities, remaining operationally and financially resilient and ensuring our products, services and premises are safe and accessible.

Prioritising the wellbeing of our members, colleagues and communities

We responded to the first lockdown back in March by adapting our operating model to ensure we could maintain our high service standards. We did not place any employees on the furlough scheme, and ensured all employees were paid their full salary irrespective of whether they are required to work their full contractual hours. We supported homeworking for a high number of employees, and reduced the number of people working in our head office and branches to enable social distancing.

A priority was to support our most financially vulnerable borrowers, and help them access a payment deferral and other specific support measures if required. We set up a dedicated team to support these customers, and as of 30 September 2020, 14% of all our residential mortgages had taken a payment deferral. For those that had reached the end of their initial payment deferral, 84% had either restarted their monthly payments or redeemed their mortgage, with 16% requiring an extension, representing 2% of total residential mortgages outstanding.

Our activity in the mortgage market, after a relatively short hiatus at the start of the first lockdown, recovered strongly. The knock on effects of a pause in the housing market mean that gross lending for the six months to September does not accurately reflect the true strength of our performance; compared with the same period last year, our application volumes were up 39% to £563m.

Although we took the responsible approach to limiting the amount of high loan to value lending, this did have an impact on the volume of first-time buyer activity. This segment of the market, however, is still at the heart of our Purpose and we were able to support a further 699 first-time buyers to become homeowners in the six months to 30 September 2020.

With Bank of England Base Rate at an all-time low of 0.10%, and the prospect of the rate potentially turning negative, savers have been hit hard by the pandemic with savers' rates at extremely low levels. Despite this, throughout the first six months of the year, the Society has continued to help savers by paying average rates some 17%1 above the market average; this had increased to 52% by 30 September. In monetary terms, this means the Society has paid an additional annualised £2.6m in interest and equivalent to £5.7m using the period end rates. While this is lower than previous years, this is reflective of our duty to balance the needs of savers and borrowers.

An area that has been hit hard by the pandemic is the third sector, with donations and fundraising levels falling due to the lockdown restrictions. As a mutual, supporting the communities in which we operate is a core part of our ethos, and we were able to channel our fundraising efforts to helping groups most in need as a result of the pandemic. This includes donations to local food banks, care packages to new mothers at Walsall Manor Hospital, and colleagues volunteering to provide hot meals to the homeless. We also raised £30,000 to support the Midlands Air Ambulance to support the vital, lifesaving work they do across the region.

In the face of all the challenges the pandemic has bought, I am proud to say that our colleagues have maintained their commitment to outstanding customer service. The Society's Net Promoter Score®2, which measures how likely our members are to recommend us, has increased to 75+ (31 March 2020: +73), exceeding the average across the financial services sector +50. As well as this, our customer satisfaction rating maintained at 96% and is a testament to the hard work and flexibility displayed by all colleagues during this crisis.

Remaining operationally and financially resilient

Of course the economic impact of the actions taken to contain the spread of COVID-19 has impacted on our reported profits, which reduced to £2.9m (30 September (restated): £5.5m). However, pre-tax profit before the impact of total impairment provisions increased by 19.3% to £10.5m year on year and we preserved our capital strength, with the CET1 ratio increasing to 16.5% (31 March 2020: 15.9%).

At 30 September, Group arrears for the core residential book stood at 0.42% (31 March 2020: 0.34%) which continues to compare favourably against the UK Finance average of 0.82%3. As employment markets start to reflect the impact of the actions employed to contain the spread of COVID-19, there is a likelihood that these levels will increase.

Ensuring our products, services and premises are safe and accessible

An important group to benefit from an exclusive product was mortgage prisoners. These are borrowers trapped paying higher interest rates, following the financial crisis in 2008, due to being unable to remortgage to cheaper deals as they didn't meet the affordability criteria introduced as a consequence of the lessons learned in that crisis. Although this was only the start and much more work needs to be done to support mortgage prisoners, we're proud to have been the first lender to implement the FCA's new modified affordability approach, and launch a mortgage product proposition specifically for these borrowers. We also launched an exclusive product to NHS employees with a higher loan to value, to help these key workers when other products in the market were closed to them.

As we move into the second half of the year, we are adapting our products regularly with the ever changing market conditions, and we will seek to reintroduce more first-time buyer products once we are comfortable the risks to them and the Society are more balanced, especially as we are yet to see the full impact of the lockdown measures in respect to the housing market and employment.

Looking ahead

I am extremely proud of the efforts of all my colleagues, who have remained resolute in their determination to ensuring the Society could continue to deliver its Purpose. When considering the progress the Society has made over the last decade to repair its balance sheet and deliver a strong capital position, this gives us the confidence that we will certainly weather the storm financially and, most importantly, continue to support both our current and future members. For the second half of the year, the outlook remains uncertain as we grapple with the 'second wave' of the pandemic, and second lockdown, despite the most recent optimism of a vaccine potentially improving the longer term outlook. That is why we will adapt and continue deliver the best service for both our saving and borrowing members and, crucially, be there for those who find themselves in financial difficulty as a result of this crisis.

1 Average market rates sourced from Bank of England Bankstats table A6.1

2 Net Promoter Score and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.

3 Average market rates sourced from UK Finance at 30 September 2020

ENQUIRIESThe West Brom PR Manager Beth Meads

07507 634128

Jonathan Westhoff - Chief Executive

Ashraf Piranie - Group Finance & Operations Director

West Bromwich Building Society

Condensed consolidated

half-yearly financial information

30 September 2020

Delivering our Purpose through the pandemic: Three areas of focus.

1) Prioritising the wellbeing of our members, colleagues and communities.

Supporting the wellbeing of members, colleagues and communities has remained top of our priority list. Throughout the first half of the year we have:

· Approved payment deferrals for 14% of our residential mortgage borrowers since the pandemic started;

· Continued to reward savers by paying £2.6m more in interest than the market average;

· Committed to not place any colleagues on furlough or reduce payments where working hours or activities have reduced;

· Supported the wellbeing of colleagues by introducing a range of digital tools and activities to help people stay connected through the pandemic; and

· Progressed multiple fundraising and volunteering initiatives for those causes hit hard by the pandemic.

2) Ensuring our products, services and premises are safe and accessible.

Given the challenges of the pandemic, providing products and services in a safe and accessible way is more important than ever. Throughout the first half of the year we have:

· Extended an additional £248m of new residential mortgage lending with 48% of new mortgages to first-time buyers;

· Introduced a specific mortgage product to support NHS workers with small deposits;

· Become the first lender to launch a specific proposition to help mortgage prisoners;

· Prioritised enquiries from key workers;

· Made sure all of our 36 branches and head office site are COVID-19 secure and implemented social distancing; and

· Enabled remote working for over 90% of our head office colleagues.

3) Remaining operationally and financially resilient.

The successful transition of our operating model and responsible management of risk has delivered both operational and financial resilience. Throughout the first half of the year we have:

· Continued to provide all essential services to members;

· Improved Net Promoter Score from +73 at March 2020 to +75, with customer satisfaction remaining strong at 96%;

· Improved our financial strength by increasing our CET 1 ratio to 16.5%; and

· Reported a statutory profit before tax of £2.9m after setting aside provisions for the impact of the pandemic.

Chief Executive's Business Review

Progressing by delivering our Purpose in uncertain times

The Society has delivered a robust first half performance despite the very significant uncertainties that faced the UK economy, and indeed all global economies, with the country having entered into full lockdown at the start of this reporting period.

As I covered in detail in my report at the year-end, from the onset of the pandemic the Society's focus has been on ensuring the Society remains operationally resilient, continuing to provide members with the essential services on which they rely, while doing everything we can to keep both members and colleagues safe.

After a very short period of adapting our operating model to the challenges, we have remained fully operational. We have maintained our high service standards, most notably in the mortgage market where, after a short hiatus, activity recovered strongly. Indeed, the new mortgage lending volume we report for the period to 30 September does not truly reflect the strength of our performance; the knock-on effects of the initial lockdown period mean that much of the activity of the first half will not show on the balance sheet until the second half of the year. Our application volumes were up 39% to £563m compared to the first six months of last year.

Shortly after the period end, the Society further demonstrated its commitment to supporting borrowers by becoming the first UK lender to announce help to those borrowers who are referred to as 'mortgage prisoners', those who despite meeting their mortgage commitments for many years, would not pass the stringent affordability tests introduced following the 2008 financial crisis. Our view was that in these times, more than ever, these borrowers deserved to be helped, and it was time that someone took the lead.

For savers, we continue to face the challenge of the ultra-low interest rate environment. At the period end, we were paying our savers 52% above the market average (30 September 2019: 52%), as we strive to give what support we can. Regrettably for our savers we can't be optimistic in terms of any material increase in interest rates going forward, particularly as the prospect of Bank Rate turning negative remains a serious consideration for the Monetary Policy Committee.

Of course, with the future as uncertain as it is and with the 'second wave' of the pandemic now upon us, the range of potential outcomes for economic recovery become both more unpredictable and possibly increasingly pessimistic. The 'V' shaped recovery initially anticipated is now less probable with a more enduring downturn more likely. For the West Brom, the main impact of this will be around credit provisioning, not only as unemployment increases, and some borrowers struggle to meet their mortgage commitments, but also as certain segments (such as high street retail and the hospitality sector for example) face immense challenges to their recovery. The latter will impact the performance of the legacy commercial real estate lending that the Society is still managing, even though this is now a fraction of the exposure the Society had historically.

At the end of October, the UK government announced a second lockdown for England, initially for a period of four weeks. As with the first lockdown, the Society will continue to provide members with essential services and will not be placing any employees on furlough, will ensure all employees are paid their full salary irrespective of whether they are required to work their full contractual hours and will support fully the mortgage payment deferral scheme. Regardless of the ongoing external challenges and future uncertainties the Society remains extremely well positioned to support members through the times that may lie ahead, underpinned by its capital strength.

Performance update

Despite the impact additional credit provisioning has had in terms of reduced profits, the capital position has strengthened further to a Common Equity Tier 1 (CET 1) ratio of 16.5% (31 March 2020: 15.9%) and Leverage Ratio of 7.0% (31 March 2020: 6.9%). This capital strength, along with access to the Bank of England's latest funding scheme, has allowed the Society to continue to lend at very competitive interest rates. At £248m our level of new mortgage lending is in line with the first six months of the last financial year (30 September 2019: £251m), despite a 37% fall in market activity for the first two months of the period.

However, as stated earlier, this does not reflect fully the activity of the first half with the number of new mortgage applications increasing by 39% to £563m (30 September 2019: £406m). Although pre-tax profits have reduced by 47.3%, this is primarily as a result of the need for impairment provisions attributable to the legacy commercial real estate loan exposure which increased by £5.8m (30 September 2019: decrease of £0.3m). Pre-tax profit before the impact of total impairment provisions increased by 19.3% to £10.5m.

As reported at the year end, and in line with guidance from RICS, we continue to note the material valuation uncertainty in the West Brom Homes (WBH) investment portfolio. Accordingly the interim valuation is based on the lower gain from either the Halifax or Nationwide house price indices.

Although there have been additional costs incurred as a consequence of the need to adapt the business to the initial lockdown and subsequent 'social distancing' conditions, the ongoing focus on efficiency resulted in costs being held broadly flat at £23.1m (September 2019: £22.9m).

Capital resources

1 Other adjustments mainly comprise IFRS 9 transitional arrangements and deductions for intangible assets and deferred tax. Regulation (EU) 2020/873, issued in June 2020, extends the period of IFRS 9 transition, for capital purposes, as part of a series of measures to mitigate the impact of the COVID-19 pandemic. Under the revised arrangements, 100% of the increase in stage 1 and stage 2 expected credit losses (ECLs) from 1 January 2020 can be added back to CET 1 capital with this relief to be phased out over the five financial years ending 31 March 2025. The relief for increases in ECLs arising on IFRS 9 implementation and from 1 April 2018 to 31 December 2019 continues to amortise in accordance with the original arrangements, currently at 70%. By way of derogation from point (b) of paragraph 7 of CRR Article 473a, the Society has exercised the option set out in Regulation (EU) 2020/873 to include the value of IFRS 9 transitional relief within its total exposure measure and risk weight it at 100% when calculating its capital requirements.

2 Tier 2 capital comprises subordinated liabilities excluding accrued interest.

3 The 'Full implementation of CRD IV' basis includes the full unwind of IFRS 9 transitional relief.

Commitment to borrowers

The Society's new lending performance has been supported by very competitive purchase and remortgage products. In part driven by the market environment, the average loan to value of new lending, at 71% was lower than for the comparative period last year (30 September 2019: 79%). However, this reflects the decision to restrict high loan to value products until such time as the economic outlook, and its impact on the housing market in particular, is better understood. There is a fine line between helping borrowers with low deposits into home ownership, and exposing those same borrowers to the harrowing experience of not being able to meet their mortgage payments and maybe even suffering from 'negative equity'.

Even with this responsible approach, in the first six months of the year the Society has supported a further 699 first-time buyers (30 September 2019: 790) to become home owners and this remains a segment at the heart of our Purpose. These borrowers did include, quite early into the lockdown period, one exception to our high loan to value limitation, when we offered a product restricted to NHS workers. This product helped ensure that those who were contributing so much to the pandemic response were still able to access the market with a much smaller deposit, where they were able to demonstrate this remained affordable. While the overall lending to first-time buyers has reduced compared with recent years, we will seek to reintroduce more products suited to the needs of first-time buyers once we consider that the risks to them and the Society are a little more balanced than they have appeared of late, particularly in respect of the housing market and employment.

There is one other segment that has been neglected for too long given the constraints introduced by regulation regarding affordability assessment; mortgage prisoners. These are borrowers trapped paying higher interest rates than they may need to, despite being up to date with payments, because they have been unable to re-mortgage to new cheaper deals as they would not meet the affordability criteria, primarily in terms of meeting the required 'stressed interest rate' introduced as a consequence of the financial crisis of 2008. Following the FCA's introduction of a 'modified affordability' approach to address this constraint, the Society became the first lender to offer support to these borrowers through the design and launch of a new mortgage product proposition. This market leading stance was well received by commentators and whilst we acknowledge that this proposition will not be able to help all such trapped borrowers, we hope that we have set an example for others to follow. Indeed recently, a number of lenders have now agreed to offer help to these borrowers.

Commitment to savers

With the Bank Rate at an all-time low of 0.10% and the realistic prospect of this rate turning negative, it is perhaps unsurprising that interest rates for savers are now at extremely low levels. The Society has, however, continued to do what it can to help its savers. During the first 6 months of the year, the Society paid rates 17%1 above (2019: 50% above) the market average, this had increased to 52% by 30 September. This means that during this period the Society has paid an additional annualised £2.6m (30 September 2019: £13.7m) in interest (equivalent to £5.7m using the period end rates). As a consequence of this, and balancing the needs of our borrowers and savers, the Net Interest Margin reduced modestly to 1.04% (31 March 2020: 1.06%).

1 Average market rates sourced from Bank of England Bankstats table A6.1

Managing the potential credit impact of the pandemic

The long-term impact of the pandemic on the Society's borrowers is very much dependent on how the economy emerges from the actions taken to manage the containment of the virus. We are continuing to monitor all developments closely and use a wide range of future economic scenarios to assess the potential economic outcomes, which include a large rise in unemployment, short term reductions to house prices, and muted growth thereafter.

Where the economy emerges in terms of the range of these scenarios, will dictate the credit losses that result. The robustness of the housing market over the six months to 30 September is not necessarily an indicator of whether the government interventions have succeeded in supporting this important segment of the economy going forward. The income support mechanisms, mortgage payment deferral, pent up demand for house moves built up during the full lockdown and the Stamp Duty Land Tax concession all combine to mask the underlying position of the housing market. While the longer term trajectory remains uncertain, the Society's exposure to credit losses from residential loans is mitigated by a modest average loan to value, with 79% of loans being below 75%. Taking into account the scenarios assessed by the Society, a further £0.2m was set aside in the period to cover potential residential lending credit losses.

Through the first half of the year the performance of the Society's legacy commercial exposures, which include particular concentrations in retail, healthcare and leisure sectors, has been aligned with our expectations at the financial year end. However, there is an increased potential for underperformance over the medium to longer term as changing consumer habits start to emerge and the financial strength of tenants becomes more stressed due to the continued impact of COVID-19 restrictions on trading.

As a consequence we have taken a more pessimistic view of the portfolio, predominately in relation to the retail linked exposures, and set aside a further £5.8m in provisions to cover potential credit losses. This takes the total provision increase since the onset of the pandemic to £17.9m. Through a combination of provisions and capital held for potential losses above this level, the total loss cover for this legacy portfolio stands at over 32% with a full breakdown of this position included on page 23 of this report.

Supporting our borrowers through the pandemic

Our teams have continued to work hard to ensure borrowers who need to access a payment deferral period are able to do so, with specific support measures put in place for our most financially vulnerable borrowers. As at 30 September 14% of all our residential mortgages had utilised the support of an initial payment deferral period, 5,306 accounts. For borrowers who had reached the end of their initial deferral period at 30 September, 84% had either recommenced payments or redeemed their mortgage. Only 16% required an extended period of deferral representing just 2% of total residential mortgages outstanding.

At 30 September, Group arrears for the core residential book stood at 0.42% (31 March 2020: 0.34%) which continues to compare favourably against the UK Finance average of 0.82%2 (31 March 2020: 0.74%). This increase is largely attributable to arrears in the Buy to Let portfolio where we have deferred the appointment of Law of Property Act Receivers during the pandemic. Needless to say the Society does expect further increases in arrears rates through the second half of the year as employment markets start to anticipate the unwind of the pandemic support mechanisms. We will continue to provide those borrowers who are facing an unexpected period of employment challenge with an empathetic, flexible and fair approach to forbearance options.

2 Average market rates sourced from UK Finance at 30 September 2020

Adapting our operating model to maintain excellent service levels

In the face of the operational challenges the pandemic has brought, I am proud to say that our colleagues have maintained our commitment to outstanding customer service. The Society's Net Promoter Score®3 (NPS), which measures how likely our members are to recommend us, has increased to +75 (31 March 2020: +73), well in excess of the average across financial services of +50, with our customer satisfaction rating maintained at 96% (31 March 2020: 96%). These results are testament to the commitment of our colleagues to work flexibly during the pandemic while maintaining a resolute focus on best in class customer service and good customer outcomes.

3 Net Promoter Score and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.

Our Member and Employee councils have continued to meet through the pandemic, enabled by videoconferencing technology and have provided much valued input to key focus areas such as our Corporate Social Responsibility (CSR) strategy, defining our Member Commitments, supporting customers who find themselves in financially vulnerable situations and how we continue to respond to the challenges of the pandemic along with a demonstration of what will become our new online savings system. This project represents a significant investment in the Society's future and once delivered, will represent a step change in the Society's digital capabilities. The new system will provide both new and existing members with the ability to open and view accounts across a range of desktop and mobile devices. This development complements a range of recent digital initiatives such as our recently launched online mortgage portal.

Community response

Through the first six months of the year the Society's fundraising efforts have been directed to helping groups most in need as a result of the pandemic. Specific activities have included collections in support of the West Bromwich Food Bank and the Trident Reach supported living complex in Wednesbury, with our colleagues also working to support the Midland Langar Seva Society who provide hot meals to the homeless. These fantastic contributions sit alongside our ongoing work to support the Midlands Air Ambulance with over £30,000 raised for this service during our partnership.

Principal risks and uncertainties

The Society continues to recognise that effective risk management is essential to achieving the Society's objectives in an operating environment where the nature of the threats which prevail is continually evolving.

Where applicable, this report provides an update on the principal risks and uncertainties reported on pages 33 to 39 of the 2019/20 Annual Report and Accounts.

Principal risks

The Society's identified principal risk categories have remained unchanged in the period. The principal risks and uncertainties reported at the year-end were updated to incorporate the impact of COVID-19. To avoid repetition, we have chosen to focus on developments in certain areas during the first 6 months of the year.

Business conditions and the economic environment

As unavoidably referred to in many places in this report, the UK economic environment remains extremely uncertain and therefore challenging given both COVID-19 and Brexit. Both take us into uncharted territory, with a wide range of potential economic outcomes.

The government's suite of measures, combined with those of the Bank of England and regulators, to mitigate the economic impact from COVID-19, including the Job Retention Scheme (JRS), payment deferrals, a new Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), the suspension of Stamp Duty Land Tax and Bank Rate being reduced to 0.10%, will need to unwind over time. Others such as Bank Rate turning negative may still be introduced in the future, an action that has never been used before and hence the consequences of which cannot be fully assessed.

Although our prime focus in terms of the risk of a fall in house values is the impact this would have on borrowers who fall into payment difficulties, there would also be an immediate impact on the Society's reported financial performance, in terms of profitability, resulting from the Society's residential investment subsidiary, West Brom Homes. These properties are revalued at each financial reporting date, and any change recorded as a gain or loss. This introduces short term volatility from an asset class held for long term return. Some £17.8m of capital, 12.6% of the portfolio's total value, has been set aside to recognise this potential volatility.

Credit risk

The government has recently announced extensions to some of the support schemes referred to above, including the furlough scheme. As these approach their end, the impact on unemployment may create a knock on impact on arrears levels and, where a borrower's difficulties become extended, further credit losses.

At the year-end, the Society's IFRS 9 provisioning and stress testing models had already been enhanced to incorporate a relatively severe downside position which included delays or permanent reductions in rental receipts or asset values. In the first six months of the year, actual experience has broadly been better than expected, although there are specific instances where performance of individual accounts has deteriorated resulting in additional provision. The retail exposures in the commercial lending portfolio are particularly susceptible to such shocks although, as detailed already, the combination of provisions set aside against and capital directly allocated to these exposures is significant. At the period end, coverage against the retail sector exposures stood at 59.4% (30 September 2019: 49.2%).

Margin compression

The Net Interest Margin has reduced slightly as we do all we can to balance the support to saving and borrowing members. The increased application volumes as lockdown restrictions eased, which have yet to be drawn, are at rates that we expect to support the margin for the second half of the financial year. As outlined above, the prospect of negative interest rates remains a very real one, and if introduced could erode the Net Interest Margin, although such an impact ought to be limited for this financial year. The Society is well advanced in planning for the potential impacts of a negative Bank Rate from an operational perspective.

Operational resilience and technology investment

The focus on operational resilience remains high to ensure that critical business services are readily available to meet members' demands. As outlined at the year-end, COVID-19 resulted in a number of changes to working practices which impacted the operational risk profile. The Society has continued to adapt as guidance in this area evolves. The risk and control environment associated with remote working is subject to monitoring by Second and Third Line functions. The Society remains committed to developing an operational environment that is strong and resilient, meeting members' and regulatory expectations.

Despite all of the challenges in the year to date, investment in the core technology platforms, to allow greater digital capability in both savings and mortgage origination, continued and this is expected to retain significant management involvement through to 2021.

Outlook

In my report at year-end I reflected on the enormous progress the Society had made over the last decade to repair its balance sheet and capital position, to become one which is able to support its members, even through conditions as extreme as those we are currently dealing with. This progress has not only allowed the Society to enter a potential economic stress with the confidence that we are able to weather the storm financially, but that we can also contribute to supporting the economy by continuing to lend to UK households, as we have done in this first reporting period. While both the near and long-term outlooks continue to be subject to significant volatility, this resolute commitment to delivering on our Purpose, in support of the financial wellbeing of our members, will continue through the second half of the year and beyond. I would like to conclude by thanking all colleagues for their enormous efforts to support the continued delivery of the Society's Purpose during the first half of the financial year. 

Jonathan Westhoff

Chief Executive

 Forward-looking statements

Certain statements in this half-yearly 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 financial information

30 September 2020

Condensed consolidated half-yearly Income Statement 

for the six months ended 30 September 2020

*30 September 2019 fair value losses on financial instruments and taxation have been restated as explained in note 4.

Condensed consolidated half-yearly Statement of Comprehensive Income

for the six months ended 30 September 2020

*30 September 2019 profit for the period has been restated as explained in note 4.

Condensed consolidated half-yearly Statement of Financial Position

at 30 September 2020

*30 September 2019 loans and advances to customers, deferred tax assets and general reserves have been restated as explained in note 4.

Condensed consolidated Statement of Changes in Members' Interests and Equity

for the six months ended 30 September 2020

*30 September 2019 profit for the financial period and general reserves have been restated as explained in note 4.

Condensed consolidated half-yearly Statement of Cash Flows

for the six months ended 30 September 2020

For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with maturities of three months or less from the date of acquisition:

The Group is required to maintain certain mandatory balances with the Bank of England which, at 30 September 2020, amounted to £11.5m (30 September 2019: £10.6m and 31 March 2020: £11.3m). The movement in these balances is included within cash flows from operating activities.

The Group's loans and advances to credit institutions includes £49.9m (30 September 2019: £56.4m and 31 March 2020: £43.2m) of balances belonging to the Society's structured entities which are not available for general use by the Society.

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

for the six months ended 30 September 2020

*30 September 2019 profit before tax and loans and advances to customers have been restated as explained in note 4, which have no impact on net cash inflow from operating activities.

Notes to condensed consolidated half-yearly financial information

for the six months ended 30 September 2020

1 General information

These half-yearly financial results do not constitute statutory accounts within the meaning of the Building Societies Act 1986. A copy of the statutory accounts for the year to 31 March 2020 has been delivered to the Financial Conduct Authority and the relevant information in this report has been extracted from these statutory accounts. The statutory accounts for the year ended 31 March 2020 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 2020 and 30 September 2019 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 2020 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 2020, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

3 Going concern and business viability statement

Details of the Group's objectives, policies and processes for managing its exposure to risk are contained in the Risk Management Report of the 2019/20 Annual Report and Accounts. The Directors also include statements in the Directors' Report in respect of going concern and longer-term business viability on page 44 of the 2019/20 Annual Report and Accounts.

The Directors have reviewed the latest plans and forecasts for the Group giving consideration to liquidity and capital adequacy. They are satisfied that the Group has adequate resources to meet both the normal demands of the business and the requirements which might arise in stressed circumstances for the next 12 months and that the longer-term business viability statement in the 2019/20 Annual Report and Accounts remains appropriate. 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 consolidated half-yearly information are consistent with those disclosed in the Annual Report & Accounts for the year ended 31 March 2020. The year-end accounting policies were updated to include the impacts of COVID-19. There have been no significant changes to accounting policies within the period.

Prior period restatement

As explained in note 43 to the Annual Report and Accounts for the year ended 31 March 2020, a prior year restatement was recorded at 31 March 2019. This arose as a result of certain mortgages (hedged items) within the portfolio interest rate risk hedge being valued in accordance with reference to SONIA, which did not correspond to the documented hedged risk for that portfolio. The hedged items have been revalued in accordance with the documented hedged risk (being fair value movements attributed to movements in LIBOR). In accordance with IAS 8 Accounting policies, Changes in Accounting Estimates and Errors, comparative amounts for the six months to 30 September 2019 are restated as set out in the table below.

The table below shows the effect of the retrospective restatement on the prior year Group statement of financial position.

Statements of financial position

at 30 September 2019

The table below shows the effect of the retrospective restatements on the Group's income statement for the period ended 30 September 2019.

Critical accounting estimates and judgements in applying accounting policies

In the process of applying accounting policies, the Group makes various judgements, estimates and assumptions which affect the amounts recognised in the financial statements. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

For the half year accounts, tax has been charged on the statutory profit before tax at the UK standard rate of 19%. A full review of the tax position of the Society and its subsidiaries will be carried out at the year end date. Otherwise, the significant judgements in applying accounting policies and key sources of estimation uncertainty at 30 September 2020 are unchanged from those existing at 31 March 2020.

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 real estate - 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, finance, 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.

*30 September 2019 fair value losses on financial instruments, total assets and total liabilities have been restated as explained in note 4.

6 Allowance for losses on loans and advances to customers

In accordance with IFRS 9, 'Financial instruments', forecasts of future economic conditions are integral to the expected credit loss calculations. At 30 September 2020, the Group modelled four forward-looking macroeconomic scenarios: central, upside, downside and stress with respective probability weightings unchanged from 31 March 2020. Individual economic variables within the scenarios are regularly reviewed and updated to reflect the current economic outlook.

Consistent with residential mortgages, the IFRS 9 ECL calculation for the commercial portfolio incorporates central, upside, downside and stress economic scenarios with the same probability weightings applied.

In addition to the scenario weightings and account-specific factors that impact cashflows, the key model assumption for commercial provisioning is considered to be the exit yield requirement, which is used to estimate the cash flows arising from realisation of the property values on sale. While interest rates also have a significant impact on the ECL, via the discount factor applied in the model, compensating economic hedge arrangements would substantially offset the movement in profit or loss terms. Compared with the central economic forecast, the exit yield requirement for each loan increases by 0.9% and 2.0% in the downside and stress scenarios respectively and reduced by 0.2% in the upside scenario. This compares to an average exit yield of 8%.

Presented below is the sensitivity to the total residential and commercial ECL provision arising from the application of 100% weighting to each scenario.

*(increase in 10% weighting with a corresponding reduction in the central scenario)

The tables below analyse the movement in commercial impairment provisions by IFRS 9 stage.