West.brom 6.15% Regulatory News (WBS)

West Bromwich Building SocietyHalf-year results announcement

for the six months to 30 September 2021

The West Brom today announces its results for the six months to 30 September 2021.

Key highlights:

· £479m of new mortgage lending (30 September 2020: £248m), with £123m of new mortgages to first-time buyers (30 September 2020: £102m).

· Statutory profit before tax of £14.6m (30 September 2020: £2.9m) driven by higher net interest income and fair value gains and lower impairment requirements.

· Rewarded savers with rates that were, on average 98% above those paid by the market1 for the period.

· Capital position remains strong with the Common Equity Tier 1 (CET 1) capital ratio of 16.3% (31 March 2021: 16.4%).

· Improved Net Promotor Score®2 to +80 from +76 at March 2021, with customer satisfaction maintained at 96%.

· Recognition in three categories of the Moneyfacts 2021 awards including Winner of Best Building Society Mortgage Provider, Highly Commended Best Fixed Rate Mortgage Provider and Commended Innovation in Personal Finance for the Modified Affordability proposition.

Jonathan Westhoff, Chief Executive, commented:

It is pleasing to be able report a strong half-year performance, despite much of the period continuing to be dominated by the pandemic and the knock on impact on our members, colleagues and communities. Whilst we are optimistic about the economic outlook and better days are seemingly coming, there are still challenges ahead and we remain committed to delivering our Purpose through three guiding principles:

- Prioritising the wellbeing of our members, colleagues and communities;

- Ensuring our products, services and premises are safe and accessible;

- Remaining operationally and financially resilient.

Prioritising the wellbeing of our members, colleagues and communities

Members

New lending performance has been supported by very competitive purchase and remortgage products, with £479m of new mortgage lending (30 September 2020: £248m), including the reintroduction of high LTV products up to 95%.

In the first six months of the year, we have helped a further 814 first-time buyers, who are very much at the heart of our Purpose (30 September 2020: 699).

Despite the challenges of the pandemic, we continued to deliver our Purpose of supporting home ownership, and maintained our high service standards, resulting in us being recognised as the Best Building Society Mortgage Provider at the Moneyfacts awards 2021.

With Bank of England Base Rate at an all-time low of 0.10%, the Society has continued to support savers as much as possible. During the first six months of the year the Society paid rates 98% (30 September 2020: 17%) above the market average1. This means that during this period, the Society has paid an additional annualised £8.8m (30 September 2020: £2.6m) in interest. We also welcomed 2,877 new savers (30 September 2020: 1,380).

The Society adopts a compassionate, fair and flexible approach towards borrowers who are unable to meet their payments. At 30 September, Group arrears for the core residential book stood at 0.34% (31 March 2021: 0.43%) which continues to compare favourably against the UK Finance average of 0.78% (31 March 2021: 0.85%).

We are also continuing to offer support to any borrowers struggling to meet their payments in the current climate, and we understand the impacts of events like the pandemic are often felt hardest amongst the most vulnerable. We take proactive action that is tailored to members' individual needs, and provide on-going training to colleagues to ensure this remains the case. We have recently signed up to the IEP Debt Code of Best Practice for Debt Collection and Recovery, an initiative launched by the Inclusive Economy Partnership, to ensure all consumers with low financial resilience are treated fairly and consistently across all sectors.

Colleagues

We supported colleagues throughout the pandemic in a number of ways, including providing physical and mental wellbeing initiatives, and adapted our working model to meet government guidelines during the various lockdowns. We are now in a position to use these learnings to reimagine the way we work to better support our colleagues and service our members in the future. We have set up a 'Hybrid Working Group' with colleagues from across the business, with a focus on shaping our new ways of working. We continue to engage both with our Employee and Member Councils to ensure the new model delivers the needs of our colleagues and members.

Diversity and inclusion in the workplace, including gender and BAME (Black, Asian and minority ethnic) representation, remains a top priority. We recently published the Society's first Ethnicity Pay Gap report on a voluntary basis, and were one of the few companies in financial services to do so, to achieve better transparency and drive the diversity agenda. Using similar methodology to the Gender Pay Gap report, it is pleasing to see that the Society's ethnicity pay gap statistics and representation across all levels of the Society are in a strong position, however, we acknowledge there is still more work to be done.

Communities

As a mutual, supporting the communities in which we operate is a core part of our ethos. In the first six months of the year, we announced our new charity partnership with Barnardo's, which is closely linked to our Purpose. Over the next two years, the Society is looking to provide £500,000 for the development of four 'Gap Homes' using the Dormant Accounts Scheme, to support Barnardo's mission to provide accommodation for vulnerable young people leaving the care system in the Black Country area. Colleagues also supported local charities such as food banks, local health services and took part in 'The Great British Spring Clean'. In addition, a further £36,000 was raised for Birmingham Children's Hospital Charity through the Red Balloon Appeal Account, a special savings product designed to benefit both customers and the hospital.

Ensuring the Society's products, services and premises are safe and accessible

In the first six months of the year, we continued our commitment to supporting mortgage prisoners. These borrowers have been 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. In September 2020, we were the first lender to adopt the new FCA modified affordability rules by developing products to support mortgage prisoners, and our efforts led to greater public awareness of the issue and other lenders followed suit.

We recently extended our offering to help mortgage prisoners by introducing products up to 85% LTV, providing the most comprehensive options to help these borrowers in the current market. As a result of our efforts, the Society was commended in the Innovation in Personal Finance category for our Modified Affordability proposition at the Moneyfacts 2021 awards.

Remaining operationally and financially resilient

Throughout the pandemic, we continued to operate as a financially secure and resilient building society. Our performance and results are a further reflection of that. The Society has reported an increased level of profit before tax, at £14.6m (30 September 2020: £2.9m) which maintains our Common Equity Tier 1 ratio (CET 1), a key measure of financial resilience, at 16.3% (31 March 2021: 16.4%). As a comparison, during the financial crisis in 2008/2009, the Society's CET 1 ratio was at 6.8%, demonstrating the capital that has been built up to cope with economic shocks.

We adapted well to the operational challenges presented by the pandemic and continued to provide the level of service that our customers expect and our branch network remained open throughout. I am proud to say that our colleagues have maintained our commitment to outstanding customer service. The Society's Net Promoter Score®2 (NPS), which measures how likely our members are to recommend us, has increased to +80 (31 March 2021: +76), well in excess of the average across financial services of +50, with our customer satisfaction rating maintained at 96% (31 March 2021: 96%). These results are testament to our colleagues' commitment to work flexibly during the pandemic and reflects the customer-centred approach adopted by our colleagues.

Looking Ahead

As we come to the end of another reporting cycle in the seemingly 'post-pandemic' environment, I continue to be extremely proud of all the efforts of my colleagues and the determination to ensure the Society delivers and remains focused on its Purpose. As we move into the second half of the year, we have a cautiously optimistic outlook whilst remaining aware of the potential challenges ahead, which are supported by our strong capital position to weather any future storms. We will continue on our journey of adopting hybrid working and modernising our services to best support our saving and borrowing members, as well as our colleagues, in this new environment.

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. The Net Promoter Score is a measure of how likely our customers are to recommend us.

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 2021

Although the latter part of the half year saw some optimism following the removal of restrictions and the initial success of the vaccination programme, the period continued to be dominated by the pandemic and the knock on impact on our members, colleagues and communities. Against this backdrop, performance was strong as we continued to deliver our Purpose through 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 granted 14% of our residential mortgage borrowers with payment deferrals of which over 97% have been supported back into full payment status;

· Continued to provide tailored support and solutions for our members including vulnerable customers and mortgage prisoners;

· Rewarded savers by paying £8.8m more in interest than the market average1; and

· Progressed multiple fundraising and volunteering initiatives, including a new partnership with Barnados, for those causes hit hardest 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 has remained important. Throughout the first half of the year we have:

· Extended an additional £479m (30 September 2020: £248m) of new residential mortgage lending including £123m (30 September 2020: £102m) to first-time buyers;

· Continued to raise awareness of mortgage prisoners and enhance our Modified Affordability proposition to make it more widely accessible;

· Received recognition in three categories of the Moneyfacts 2021 awards including Winner of Best Building Society Mortgage Provider, Highly Commended Best Fixed Rate Mortgage Provider and Commended Innovation in Personal Finance for the Modified Affordability proposition;

· Followed government guidance in keeping all of our 34 branches and head office site COVID-19 secure as the country emerged from lockdown; and

· Continued with remote working for over 80% of our staff and progressed our approach to hybrid working through feedback from our colleagues and the formation of a 'Hybrid Working Group'.

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 ®2 from +76 at March 2021 to +80, with customer satisfaction remaining strong at 96%;

· Maintained our financial strength with our CET 1 ratio at 16.3% (31 March 2021: 16.4%); and

· Reported a statutory profit before tax of £14.6m (30 September 2020: £2.9m). 

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. The Net Promoter Score is a measure of how likely our customers are to recommend us.

Chief Executive's Business Review

A Purpose-led performance

We have delivered a strong first half performance, driven by increased lending volumes and the emergence from lockdowns being more positive than some of the scenarios that may have adversely affected people's ability to maintain their mortgage commitments. 

Once again my colleagues have demonstrated a great degree of innovation, flexibility, commitment and agility in continuing to deliver a high level of service to our customers, constantly responding to changing circumstances. There is some cause for optimism as we emerge from the pandemic and, in the expectation that we may soon find ourselves in the 'new normal', we have turned our attention to what that may mean for us. This has seen changes to some of our branch operations and the development of a new 'hybrid' way of working. We want to harness the creativity and flexibility that our colleagues have demonstrated over the past 18 months to continue to adapt the way we work and deliver the best outcomes for our members and colleagues.

We have maintained our high service standards in the six month period, most notably in the mortgage market where, despite the challenges brought about by the pandemic, we won the award for Best Building Society Mortgage Provider1. Our new lending increased by 93% to £479m compared with the first six months of the last financial year.

Our ongoing support for mortgage prisoners through our Modified Affordability product range has been a key feature of us innovating to deliver on our Purpose. We continue to lead the way in working with this segment of the market, with a recent increase in our Loan to Value (LTV) criteria broadening this offering to include more eligible borrowers. Our market leading contribution was recognised as we were awarded a 'Commended Innovation in Personal Finance' for our Modified Affordability proposition1.

The ultra-low interest rate environment has continued, and the uptick in inflation, even if proven to be temporary is, of course, particularly troubling for our saving members who provide us with the valuable funds to help the likes of first-time buyers achieve their goals and mortgage prisoners to escape the trap of inflated costs. This is why we strive to provide savers with what support we can in their efforts to build financial resilience and a steady income. In the six months to 30 September 2021, we paid our savers 98% above the market average2 (30 September 2020: 17%). This means that during this period, the Society has paid an additional annualised £8.8m (30 September 2020: £2.6m) in interest.

Although the macroeconomic environment emerging from the pandemic restrictions appears initially promising, there remain many factors creating uncertainty about the future which will impact the potential for interest rates to increase to a level above inflation. As the government support schemes put in place to mitigate the financial impacts of the pandemic draw to an end, the longer term effect on unemployment remains unknown. What is more likely is that supply chain issues, and sharp rises in energy costs, maintain inflationary pressures in the near term and adversely impact on households, reducing disposable income. We will be focused on supporting our borrowers should they be impacted in this way.

Performance update

Our capability to navigate any such economic pressures safely is underpinned by a strong capital base, as measured through the Common Equity Tier 1 (CET 1) ratio, which ended the period at 16.3% (31 March 2021: 16.4%).  The very modest reduction in the ratio is primarily as a consequence of the unwind of IFRS 9 transitional arrangements and the increase in lending as we looked to support borrowers throughout the difficult pandemic conditions. New mortgage lending, at £479m, was almost double that delivered in the first six months of the last financial year (30 September 2020: £248m). 

Pre-tax profits increased to £14.6m (30 September 2020: £2.9m) driven in the main by improvement in net interest income of £2.6m, fair value gains of £3.9m (30 September 2020: losses of £1.8m), a release of residential impairment provisions of £3.0m (30 September 2020: charge of £0.2m) and a reduced commercial impairment provision charge of £2.7m (30 September 2020: £5.8m). 

The Net Interest Margin (NIM) rose to 1.07% (30 September 2020: 1.04%) reflecting higher margins on new lending as well as the continued benefits of low cost funding through the Term Funding Scheme with additional incentives for SMEs (TFSME) and lower wholesale funding costs. The end of the TFSME and increased competition in the mortgage market, combined with the increase in retail funding costs and falling lending rates, may create downward pressure on NIM. 

The interim valuation for the West Brom Homes portfolio indicates a gain of £0.4m (30 September 2020: £2.0m). This represents an increase in property valuations based on regional house price index movements offset by an additional charge recorded for the impact of planned property improvements which were delayed due to the pandemic. 

Costs have increased to £24.4m (30 September 2020: £23.1m) with the one-off cost of the write down of certain project related costs and the accelerated depreciation of core systems being offset by cost savings that have been achieved as a result of our ongoing efforts towards operational efficiency.

Exposure to credit losses on residential loans has fallen resulting in a release of provision of £3.0m. The predominant driver for this is the improvement in house prices. Offsetting this is the impact of model enhancements and increase in overlays, including the overlay for potential losses associated with combustible materials where borrowers struggle to meet the demands of freeholders, which has risen by £0.3m to £1.5m. Although the longer term trajectory for the economy, and in particular house prices remains uncertain, our exposure to credit losses from residential loans is mitigated by a modest average LTV with 84% of loans (30 September 2020: 79%) being below 75%. 

The provision charge against legacy commercial exposures, which include particular concentrations in retail, healthcare and leisure sectors, has reduced to £2.7m (30 September 2020: £5.8m) reflecting the improved economic certainty in comparison to our 31 March year end. These exposures remain materially sensitive to changes in the wider economic climate and we continue to make appropriate provisions against them, resulting in increased provision coverage of 24.5% (31 March 2021: 23.1%). Balances on the non-core commercial book have reduced in the last six months by 5% to £378.6m (31 March 2021: £398.3m). A full breakdown of this position is included in note 8 of the condensed consolidated half-yearly information in this report.

The increase in profitability has added a further £11.9m to member reserves, and reduced the notional Profit Participating Deferred Shares (PPDS) reserve deficit by £3.2m to £0.7m which is important to the holders of the Society's Permanent Interest Bearing Shares (PIBS) as, under the forecast distribution policy announced in April 2018, interest payments (which are entirely at the Board's discretion) will only be considered once the reserve moves into surplus. For Core Capital Deferred Share (CCDS) holders, this means that the Board currently expects to return to the path of forecast distributions outlined in April 2018, which would mean that the interim distribution would be £1.50 per CCDS to be paid in February 2022. 

Capital resources

1 Other adjustments mainly comprise IFRS 9 transitional arrangements and deductions for intangible assets and deferred tax assets.

2 Tier 2 capital comprises subordinated liabilities excluding accrued interest.

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

Prioritising the wellbeing of our members, colleagues and communities

We remain committed to supporting the wellbeing of our members, colleagues and communities as described below.

For members

New lending performance has been supported by very competitive purchase and remortgage products. As detailed previously, new lending almost doubled in the first half of the year compared with the same period last year. In the first six months of the year, we have helped a further 814 first-time buyers, who are very much at the heart of our Purpose (30 September 2020: 699).

The average LTV on new mortgage lending has been maintained at 71% in the first six months of the year. Many lenders initially restricted high LTV products in response to market uncertainty created by the pandemic, which of course impacted key segments such as first-time buyers. This segment of the market has since opened up and we have continued to achieve high levels of new lending, whilst maintaining balance against our internal risk appetite.

The Society adopts a compassionate, fair and flexible approach towards borrowers who are unable to meet their payments. At 30 September, Group arrears for the core residential book stood at 0.34% (31 March 2021: 0.43%) which continues to compare favourably against the UK Finance average of 0.78% (31 March 2021: 0.85%).

We are also continuing to offer support to any borrowers struggling to meet their payments in the current climate, and we understand the impacts of events like the pandemic are often felt hardest amongst the most vulnerable. We take proactive action that is tailored to members' individual needs, and provide on-going training to colleagues to ensure this remains the case. We have recently signed up to the IEP Debt Code of Best Practice for Debt Collection and Recovery, an initiative launched by the Inclusive Economy Partnership, to ensure all consumers with low financial resilience are treated fairly and consistently across all sectors.

The Bank of England (BoE) Bank Rate has remained at an all-time low of 0.10%; whilst at this time last year the prospect of interest rates turning negative was a real possibility, the current inflationary pressures mean an increase in interest rates in the near future is more likely than has been the case since the start of the pandemic. We have continued to support savers as much as possible and during the first six months of the year paid rates 98% above (30 September 2020: 17% above) the market average2. This means that during this period, the Society has paid an additional annualised £8.8m (30 September 2020: £2.6m) in interest. We also welcomed 2,877 new savers (30 September 2020: 1,380).

For colleagues

We supported colleagues throughout the pandemic in a number of ways, including providing physical and mental wellbeing initiatives, and adapted our working model to meet government guidelines during the various lockdowns. We are now in a position to use these learnings to reimagine the way we work to better support our colleagues and service our members in the future. We have set up a 'Hybrid Working Group' with colleagues from across the business, with a focus on shaping our new ways of working. We continue to engage with both our Employee and Member Councils to ensure the new model delivers the needs of our colleagues and members.

Given the 'v-shaped' economic recovery, demand for people skills has grown and there is increased competition for skilled resource. Like many in the sector and beyond, we are now facing greater staff turnover than seen in recent years. We have implemented targeted staff retention measures to minimise the impact to the business.

Diversity and inclusion in the workplace, including gender and BAME (Black, Asian and minority ethnic) representation, remains a top priority. We recently published the Society's first Ethnicity Pay Gap report on a voluntary basis, and were one of the few companies in financial services to do so, to achieve better transparency and drive the diversity agenda. Using similar methodology to the Gender Pay Gap report, it is pleasing to see that the Society's ethnicity pay gap statistics and representation across all levels of the Society are in a strong position, however, we acknowledge there is still more work to be done.

For our communities

As a mutual, supporting the communities in which we operate is a core part of our ethos. In the first six months of the year, we announced our new charity partnership with Barnardo's, which is closely linked to our Purpose. Over the next two years, the Society is looking to provide £500,000 for the development of four 'Gap Homes' using the Dormant Accounts Scheme, to support Barnardo's mission to provide accommodation for vulnerable young people leaving the care system in the Black Country area. Colleagues also supported local charities such as food banks, local health services and took part in 'The Great British Spring Clean'. In addition, a further £36,000 was raised for Birmingham Children's Hospital Charity through the Red Balloon Appeal Account, a special savings product designed to benefit both customers and the hospital.

Ensuring the Society's products, services and premises are safe and accessible

Throughout the pandemic, we followed all government guidelines in place to create a safe environment for our customers and colleagues. As restrictions have lifted, we continue to follow the updated guidance, and this, together with the changes to our branch network operating model discussed below, allows us to provide our customers with the services they require while continuing to provide the sense of community we have always done.

In September 2020 we became the first lender to support mortgage prisoners through the development of a new mortgage product proposition. Mortgage prisoners 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. Our response led to greater public awareness of the issue and other lenders followed suit. We recently extended our offering to help mortgage prisoners by introducing products up to 85% LTV, providing the most comprehensive options to help these borrowers in the current market. As a result of our efforts, the Society was commended in the Innovation in Personal Finance category for our Modified Affordability proposition at the Moneyfacts 2021 awards.

Remaining operationally and financially resilient

Throughout the pandemic, we continued to operate as a financially secure and resilient building society. Our performance and results for the six months to 30 September are a further reflection of that. The Society has reported an increased level of profit before tax to £14.6m (2019/20: reduction in profit to £2.9m) which maintains our CET 1 capital ratios, a key measure of financial resilience, at 16.3% (31 March 2021: 16.4%).

We adapted well to the operational challenges presented by the pandemic and continued to provide the level of service that our customers expect. 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 +80 (31 March 2021: +76), well in excess of the average across financial services of +50, with our customer satisfaction rating maintained at 96% (31 March 2021: 96%). These results are testament to our colleagues' commitment to work flexibly during the pandemic and reflects the customer-centred approach adopted by our colleagues. Our branch network remained open throughout the pandemic, although at reduced hours. This, combined with a change in how customers use the branches has resulted in reduced branch usage over the past 18 months. Feedback reflects that members value the branches, albeit at reduced hours. In response to the changing needs we have revised our branch network operating model so that branches maintain their valuable role in local communities without presenting an unfair cost burden on members who do not use the branch network.

Engagement through the pandemic

Our Member and Employee Councils have continued to meet virtually through the pandemic, enabled by videoconferencing technology and have provided much valued input to key focus areas such as ways of working post pandemic and the proposed approach to member and staff engagement on the roll out of our digital savings programme and input to our Purpose-led strategy.

Principal risks and uncertainties

We 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 36 to 43 of the 2020/21 Annual Report and Accounts.

Principal risks

The Society's identified principal risk categories have remained unchanged in the period. To avoid repetition, we have chosen to focus on developments in certain areas during the first six months of the year.

Business conditions and the economic environment

As lockdown restrictions were eased throughout the second quarter of 2021 the UK economy showed signs of recovering from the effects of the pandemic. GDP grew by 5.5% in the second quarter of the year, and inflation has picked up significantly, reducing the lingering threat of negative interest rates which had been a concern in late 2020. The Bank of England (BoE) now forecasts inflation to rise above 4% by the end of the year, and it is now expected that the Bank will increase the Bank Rate in an effort to bring inflation back down in line with its target of 2%.

Furthermore, the winding down of the government's Job Retention Scheme (furlough) has not yet resulted in the expected redundancies with the level of employment actually rising. The proportion of mortgage payments deferrals that subsequently experienced payment difficulties is significantly less than initially expected. Against this backdrop, HPI has remained robust, with the associated positive impact on the West Brom Homes portfolio and provisions, although its growth has recently been moderated due to the ending of the Stamp Duty holiday in June. We have drawn funds from the BoE's TFSME Scheme which helped to supplement retail funding over the pandemic period and refinance legacy BoE Term Funding Scheme exposure.

Credit risk

It was anticipated that the end of the government support schemes such as furlough would be followed by an impact on levels of unemployment. This would then potentially have a knock on impact on arrears levels and credit losses should borrowers be presented with more long term difficulties. This impact, to date, has not come to fruition with the economic recovery following the pandemic continuing. We remain watchful to delayed adverse outcomes and emerging risks such as interest rate rises that could put pressure on the ability of households to meet their financial commitments. This is possibly exacerbated by rising inflation costs having an impact on day-to-day living expenses as well as the significant uplift in energy costs recently observed.

Given this, our provision models continue to reflect the uncertainty in economic outlook at 30 September 2021 by using a range of economic scenarios, albeit this uncertainty has reduced in comparison to the last year end and last interim reporting date. Our stress testing continues to reflect the broad range of outcomes we may see as the pandemic comes to an end. 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 60.7% (30 September 2020: 59.4%).

Margin compression

Margin Compression Risk (MCR) is the risk of margin squeeze caused by having limited ability to increase rates on the mortgage book if the Society were to experience a relative increase in funding costs affecting variable rate funding, and in particular the administered rate retail balances. Throughout the year MCR has reduced as the Society has lower exposure to an increase in administered rate funding costs through utilisation of the Bank of England's TFSME funding.

Given the strong recovery in GDP growth and inflation experienced in the first half of the year, the probability of negative interest rates, and the potential for further margin compression, has significantly decreased. The Society is well prepared should the prospect of negative rates occur. If Bank Rate is forecast to rise to counter inflation, we will continue to balance the support provided to both savers and borrowers in this rising rate environment. 

Operational resilience and technology investment

The Policy Statements have now been issued by the regulatory authorities and we have a plan in place to meet the requirements laid down by the regulators in line with the March 2022 deadline, including both supplier management and outsourcing. Further plans are being developed for the transition period that runs through to March 2025. Outside this our focus on operational resilience remains high to ensure that important business services are readily available to meet members' expectations. We continue to respond to the impact of COVID-19 and the revised operating model was successfully implemented. We remain committed to developing an operational environment that is strong and resilient, meeting members' and regulatory expectations.

Investment in the core technology platforms, to allow greater digital capability in both savings and mortgage origination, has continued and this is expected to retain significant management focus through to 2023.

Outlook

As we come to the end of another reporting cycle in the seemingly 'post-pandemic' environment, I continue to be extremely proud of all the efforts of my colleagues and the determination to ensure the Society delivers and remains focused on its Purpose. As we move into the second half of the year, we have a cautiously optimistic outlook whilst remaining aware of the potential challenges ahead, which are supported by our strong capital position to weather any future storms. We will continue on our journey of adopting hybrid working and modernising our services to best support our saving and borrowing members, as well as our colleagues, in this new environment.

Jonathan Westhoff

Chief Executive

1 Moneyfacts 2021 Awards

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

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

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 2021

Condensed consolidated half-yearly Income Statement 

for the six months ended 30 September 2021

Condensed consolidated half-yearly Statement of Comprehensive Income

for the six months ended 30 September 2021

Condensed consolidated half-yearly Statement of Financial Position

at 30 September 2021

Condensed consolidated Statement of Changes in Members' Interests and Equity

for the six months ended 30 September 2021

Condensed consolidated half-yearly Statement of Cash Flows

for the six months ended 30 September 2021

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 2021, amounted to £13.9m (30 September 2020: £11.5m and 31 March 2021: £11.8m). The movement in these balances is included within cash flows from operating activities.

The Group's loans and advances to credit institutions includes £43.0m (30 September 2020: £49.9m and 31 March 2021: £41.7m) 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 2021

Notes to condensed consolidated half-yearly financial information

for the six months ended 30 September 2021

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 2021 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 2021 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 2021 and 30 September 2020 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 2021 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and in accordance with the UK adopted International Accounting Standards (IAS 34 'Interim Financial Reporting'). The half-yearly condensed consolidated financial report should be read in conjunction with the Annual Report and Accounts for the year ended 31 March 2021, which have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted pursuant to Regulation (EC) No 1606/2002 as it applies in 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 2020/21 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 48 of the 2020/21 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 2020/21 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 2021.

IBOR transition

The amendments to IAS 39 and IFRS 7 (Phase 2) are effective for the period beginning on or after 1 January 2021. The amendments provide practical expedients in respect of accounting for changes to financial assets and liabilities where the modification is as a direct result of the IBOR reforms. The amendments allow firms to account for the modification to the asset or liability by applying the updated effective interest rate following a transition to a new benchmark interest rate to value the financial asset or liability, rather than continuing to discount the asset or liability at the original discount rate and recognising a gain or loss in the Income Statement as per the usual requirements under IFRS 9 for modifications of financial assets and liabilities.

The Group is continuing to wind down its exposure to LIBOR linked derivatives using a mixed approach to active transition and reliance on fallbacks to minimise operational impacts and manage risks. The Group is on track to complete this activity in accordance with the regulator's expectations.

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 2021 are unchanged from those existing at 31 March 2021.

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.

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 (ECL) calculations. At 30 September 2021, the Group modelled four forward-looking macroeconomic scenarios: central, upside, downside and severe with respective probability weightings reviewed and updated from those applied at 31 March 2021. The Group's scenario weightings as at 30 September 2021 are 60% for the central scenario, 5% for the upside scenario, 25% for the downside scenario and 10% for the severe scenario (31 March 2021: central scenario 50%, upside scenario 10%, downside scenario 25% and severe scenario 15%). The amendments to the weightings reflect that the macroeconomic forecasts are more promising than anticipated along with house price growth since the year end. Individual economic variables within the scenarios are regularly reviewed and updated to reflect the current economic outlook.

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 with an opposing fair value movement. Compared with the central economic forecast, the exit yield requirement for each loan increases by 0.8% and 1.9% in the downside and severe scenarios respectively and reduces 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).