West.brom 6.15% Regulatory News (WBS)

 WEST BROMWICH BUILDING SOCIETY

Announcement of half-year results for the six months

to 30 September 2015

The West Brom today announces its half-year results for the six months to 30 September 2015.

Key highlights:

- Profit before tax of £6.0m for the six months to 30 September 2015 (30 September 2014: £6.0m)

- Net interest margin improved to 1.08% (30 September 2014: 1.05%)

- Gross residential mortgage lending of £295m (30 September 2014: £300m)

- Growth in members' savings balances to £4.05bn (31 March 2015: £3.99bn)

- Strong capital position

Jonathan Westhoff, Chief Executive, commented:

These results demonstrate a sound performance, with the West Brom's profit levels maintained year on year.

We continue to make funds available for homebuyers, advancing £295m of gross prime residential lending during the period, and are well on track to exceed the full year figure of £446m in completions for 2014/15.

Much of this is down to our increased presence and growing reputation in the intermediary market, which enables us to broaden our lending to a wider geographical area. We pride ourselves on delivering a high standard of service to our intermediary partners so that they can recommend the Society's mortgage products to their clients with confidence. This is reflected in the four star rating we achieved in this month's Financial Adviser Service Awards.

Arrears levels for mortgages issued since the Society re-entered the market in 2012 are negligible and none of these accounts are currently at three months or more in arrears.

For savings members we have kept our offering competitive through a range of branch, direct and internet accounts. Our products are simple to understand and in some cases returns are tiered so that we reward those who are able to save more with our very best rates.  

It is pleasing to have seen an increase in retail savings balances since the end of our last full financial year, which means that the vast majority of new mortgage lending is funded by retail deposits.

Savers are also making use of the current opportunities for tax-free saving, with an increase of just over 15% achieved in ISA balances amongst our membership. In light of this, we anticipate members will welcome changes scheduled for next year to the rules governing taxation for savings income. The government estimates that 95% of the population will no longer pay tax on their savings once the new Personal Savings Allowance is introduced in April 2016.

Looking ahead to the coming months, the West Brom will stay focused on delivering all round member value and we expect to see further growth in our residential lending. We will continue to invest in our mortgage and savings systems in order to facilitate this.

We also eagerly await the unveiling of our new West Bromwich head office at Providence Place. Completion is expected shortly, after which we can begin the fit-out and transition phase with a view to moving colleagues across by the end of the financial year.

ENQUIRIESthe West Brom 0121 500 7785

Jonathan Westhoff - Chief Executive

Mark Gibbard - Group Finance & Operations Director

West Bromwich Building Society

Condensed consolidated

half-yearly financial information

30 September 2015

Chief Executive's BUSINESS Review

Performance

Profit before tax for the six months to 30 September 2015 was £6.0m (30 September 2014: £6.0m) demonstrating a sound profit performance.

Net interest margin improved to 1.08% (30 September 2014: 1.05%). Although down on the full year margin for 2014/15 of 1.15%, this latter figure was boosted by the recognition of recoverable default interest on a number of impaired commercial loans.

The result for the six months includes a revaluation gain of £2.5m (30 September 2014: £4.9m) on the Group's portfolio of residential rental properties, as a result of the house price increases we have experienced in the period.

Management expenses for the six months to 30 September 2015 have been held flat compared with the first half of 2014/15. Whilst continuing to invest in the future of the business, we have delivered efficiency savings, enabling us to hold down costs. As a result, and despite a reduction in the average assets, which are the denominator in this ratio, the management expenses ratio has been held broadly flat at 0.82% (30 September 2014: 0.81%).

The £3.4m provision for liabilities comprises the Financial Services Compensation Scheme (FSCS) levy of £2.5m (30 September 2014: £3.6m) and an amount set aside for potential Payment Protection Insurance (PPI) claims of £0.9m. We have recently seen an increase in PPI claims being upheld by the Ombudsman. The charge is based on an estimate of the future costs we may see. The Society has only sold regular, monthly premium Mortgage Payment Protection Insurance, which was not a compulsory element of any mortgage product, so the PPI costs we have experienced, even allowing for this charge, remain considerably below those of many other lenders.

The Society has continued to build on its objective to position the West Brom as a major provider of homeowner financing, advancing £295m of gross prime residential lending. Whilst this figure is in line with performance in the comparative period for the 2014/15 financial year, we expect our second half performance to mean that we exceed the total of £446m for 2014/15.

At 14.5%, (31 March 2015: 14.4%) the Group's Common Equity Tier 1 capital ratio remains strong and evidences the progress the Society continues to make in reducing non-core lending balances. The leverage ratio at 8.1% is unchanged from the March year end and remains significantly above the current regulatory minimum of 3%.

Residential mortgage arrears have reduced since 31 March 2015, from 1.63% to just 1.41% for mortgages in arrears by more than three months. 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 accounts at three months or more in arrears at 30 September 2015 on loans originated in this period. This quality is reflected in a residential provision release of £0.4m for the half year to 30 September 2015 (30 September 2014: charge £0.3m).

The total impairment charge of £4.1m for the half year (30 September 2014: £1.8m) includes a charge of £4.5m relating to the Commercial loan book, which we continue to manage down in a controlled exit from this market. The balances have reduced by £94.1m (11.6%) since the year-end to £718.0m. Provisions set aside for potential losses in this book equated to 6.2% of total commercial loan balances (31 March 2015: 5.7%).

Member value

For mortgage borrowers, we have broadened our product range by adding a choice of highly competitive discounted mortgages to our established selection of two, three and five year fixed rates, with regular mentions in the Best Buy tables.

The Society continues to strengthen its partnerships in the intermediary sector, securing greater geographical reach for mortgage lending outside our West Midlands heartland. We have redesigned and improved the West Brom for Intermediaries website to support online mortgage applications via brokers. The West Brom received commendations in both the Moneyfacts Awards and the Personal Finance Awards for the quality of its fixed rate mortgages.

While still a challenging market, we have endeavoured to support savings members by offering competitive rates of interest, resulting in growth in members' savings balances to £4.05bn (31 March 2015: £3.99bn).

We have added to our range of web-based savings accounts for those who prefer to manage their money online. Our recently launched WeBSave Easy Saver accounts, both taxable and tax-free, have tiered interest rates which reward those who are able to save more with a market leading return and have proven to be the most popular products with our members for the 6 month period.

Funding

As a traditional building society, West Brom continues to be funded predominantly by retail savings with balances of £4.05bn (31 March 2015: £3.99bn). At 30 September 2015, 82.3% (31 March 2015: 79.7%) of total shares and borrowings were in the form of members' retail deposits. 

Liquidity

Throughout the period the Society has managed its liquidity position to meet all regulatory and internal requirements without holding excess funds, as this would have an adverse impact on interest margins due to the low returns generated by holding liquid assets. During the six months to 30 September 2015 the Society has reduced its liquidity to £613.7m (31 March 2015: £721.6m) resulting in a liquidity ratio of 13.7% (31 March 2015: 15.9%).

At 30 September 2015 and 31 March 2015, all of the Society's treasury investments were rated single A or better with no exposure to any non-UK sovereigns or mortgage markets. 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 shows the Group's capital ratios at 30 September 2015 and 31 March 2015:

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 leverage ratios, both currently calculated under transitional rules.

The Society's capital ratios exceed regulatory requirements. At 8.1% (31 March 2015: 8.1%), the leverage ratio is particularly strong and compares very favourably with peers in the bank and building society sector.

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, capital, liquidity, credit, market, operational, pension liability and conduct (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 19 to 22 of the Annual Report and Accounts for the year ended 31 March 2015. There have been no significant changes in the Society's approach to risk management during the six months ended 30 September 2015. Since 1 December 2013 a rate adjustment has been applied to non-consumer buy to let loans held in West Bromwich Mortgage Company. Legal proceedings were initiated by a number of borrowers affected by the adjustment and although the Court upheld the Company's position, an appeal is due to be heard in April 2016. As at 31 March 2015, this was reported as a contingent liability, and has also been classified as such for these half year accounts (see note 6). The total cumulative value of the rate adjustment is £21.0m, including £4.7m for the six months to 30 September 2015.  

Outlook

The Society provides a safe home for savers and is now helping an increasing number of borrowing members realise their ambition of home ownership.

The Society continues to manage some legacy issues, such as commercial lending, and is well positioned to meet its plans for growth as the UK economy continues to improve.

The Bank Rate is now predicted to begin to rise in 2016. Although this may not be so welcome for borrowers, the expectations are that the rate rises will be modest. With the Society having followed a prudent lending policy with sensible affordability rules borrowers, who have benefited in recent years from low rates, should be well positioned to deal with any increases in rates. Importantly, this will be welcomed by savers who have seen their returns diminish in recent years.

I am pleased with the continued 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 we continue to invest in our mortgage and savings systems to enable us to process and fund additional lending.

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 2015

Condensed consolidated half-yearly Statement of Comprehensive Income

for the six months ended 30 September 2015

Condensed consolidated half-yearly Statement of Financial Position

at 30 September 2015

Condensed consolidated Statement of Changes in Members' Interest

for the six months ended 30 September 2015

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 2015

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 2015, amounted to £7.0m (30 September 2014: £7.5m and 31 March 2015: £7.2m). The movement in this balance is included within cash flows from operating activities.

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

for the six months ended 30 September 2015

Notes to condensed consolidated half-yearly financial information

for the six months ended 30 September 2015

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 2015 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 2015 and 30 September 2014 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 2015 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 2015, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

3 Accounting policies

The accounting policies adopted by the Group in the preparation of its 2015 Interim Financial Report are consistent with those disclosed in the Annual Report and Accounts for the year ended 31 March 2015, except for the adoption of new accounting policies and new standards or interpretations effective as of 1 April 2015 which were not previously adopted. The following new or amended accounting standards and interpretations, have been adopted during the period to 30 September 2015 but have had no impact on the interim accounts:

- IAS 19 Defined Benefit Plans: Employee contributions.

The revised standard clarifies the treatment of netting employee contributions against service cost. As the defined benefit pension scheme has been closed and there are no further employee contributions, this has no impact on the Society.

- Annual improvements to IFRSs 2010-2012 Cycle

Minor amendments and clarifications to seven accounting standards, none of which materially impacts the Society's financial statements.

- Annual improvements to IFRSs 2011-2013 Cycle

Minor amendments and clarifications to four accounting standards, none of which materially impacts the Society's financial statements.

With the exception of the changes set out above, the accounting policies adopted in the preparation of the half-yearly financial information are consistent with those disclosed in the Annual Report and Accounts for the year ended 31 March 2015.

4 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.

5 Allowance for losses on loans and advances to customers

6 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.

Other provisions and contingent liabilities

The £0.9m charge is for PPI claims. The provision balance under 'other' also includes £0.3m relating to customer redress for mortgage redemption interest charged in previous years' accounts.

Certain external parties have initiated legal proceedings against West Bromwich Mortgage Company Limited (the Company) in relation to an interest rate increase on the non-consumer buy to let portfolio. The rate uplift contributed £21.0m to Group interest receivable from the application of the rate change in December 2013 to 30 September 2015, of which £4.7m has been recognised in the 6 months ended 30 September 2015. The Company believes that it has a robust defence to such claim and judgement has been received in Court which has upheld the Society's view, although it should be noted that an appeal will be heard in April 2016. No provision has been recognised in these financial statements for this matter.

7 Loans and advances to customers

Included within loans and advances to customers are £111.9m (30 September 2014: £153.1m) of commercial mortgage balances and £1,251.2m (30 September 2014: £1,413.8m) of residential mortgage balances that the Group has sold to bankruptcy remote structured entities. The structured entities have been funded by issuing mortgage backed securities (MBSs) of which £918.9m (30 September 2014: £1,037.6m) 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 Property, plant, equipment and intangible assets

Capital commitments

The Group has placed contracts amounting to a total of £4.0m (30 September 2014: £1.4m) for future expenditure that was not provided in the financial statements.

10 Investment properties

11 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. 

12 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.

13 Related party transactions

Related party transactions for the six months to 30 September 2015 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 2015.

14 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. 

15 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.