TIDM71XN TIDMTTM
RNS Number : 3702V
Tesco Personal Finance Group PLC
14 April 2021
Tesco Personal Finance Group plc
Publication of Annual Report and Financial Statements for the
year ended 28 February 2021
In accordance with Listing Rule 17.3.1, a copy of the above
document for Tesco Personal Finance Group plc has been submitted to
the UKLA document viewing facility and will shortly be available
for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The document is also available on the Company's website at: https://bank.tescoplc.com/
This announcement also contains additional information for the
purposes of compliance with the Disclosure and Transparency Rules,
including principal risks and uncertainties, details of related
party transactions and a responsibility statement.
Reference to pages and numbers refer to page numbers and notes
to the annual accounts in the Annual Report and Financial
Statements 2021.
Enquiries:
Investors Chris Griffith (Tesco PLC) 01707 940 900
Media Simon Rew (Tesco PLC) 0330 678 0639
Barry Cameron (Tesco Bank) 07841 192 899
14 April 2021
TESCO PERSONAL FINANCE GROUP PLC
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEARED 28 FEBRUARY 2021
Company Number SC173198
Contents
Directors and Advisers 1
Strategic Report 2
Directors Report 29
Consolidated Income Statement 40
Consolidated Statement of Comprehensive Income 41
Consolidated and Company Statements of Financial Position 42
Consolidated Statement of Changes in Equity 43
Company Statement of Changes in Equity 44
Consolidated and Company Cash Flow Statements 45
Notes to the Financial Statements 46
Independent Auditor's Report 157
Abbreviations 172
Glossary of Terms 173
Directors and Advisers
Directors: Sir John Kingman Non-Executive Chairman
Julie Currie Independent Non-Executive Director
Robert Endersby Independent Non-Executive Director
Jacqueline Ferguson Independent Non-Executive Director
Richard Henderson Chief Risk Officer
Declan Hourican Chief Financial Officer
Simon Machell Independent Non-Executive Director
Gerard Mallon Chief Executive
Amanda Rendle Independent Non-Executive Director
Alan Stewart Non-Executive Director
James Willens Senior Independent Non-Executive
Director
Company Secretary: Michael Mustard
Registered Office: 2 South Gyle
Crescent
Edinburgh
EH12 9FQ
Independent Auditor: Deloitte LLP
1 City Square
Leeds
LS1 2AL
Bankers: The Royal Bank of Scotland plc
36 St Andrew Square
Edinburgh
EH2 2YB
HSBC Bank plc
8 Canada Square
London
E14 5HQ
Bank of New York Mellon, London Branch
1 Canada Square
London
E14 5AL
Elavon Financial Services DAC UK
5th Floor
125 Old Broad
Street
London
EC2N 1AR
1
Strategic Report
The Directors present their Strategic Report for the year ended
28 February 2021.
The Annual Report and Financial Statements comprises the
Strategic Report, the Directors' Report and the Company and
Consolidated Financial Statements and accompanying notes. In the
Annual Report and Financial Statements, unless specified otherwise,
the 'Company' means Tesco Personal Finance Group plc (TPFG) and the
'Group' means the Company and its subsidiaries and joint venture
included in the Consolidated Financial Statements. The Group
operates using the trading name of Tesco Bank.
TPFG is a wholly owned subsidiary of Tesco PLC (Tesco). Tesco
results can be found on the Tesco internet page
https://www.tescoplc.com.
Business Model
The core objective of the Board is to create and deliver the
long-term sustainable success of the Group, generating value for
the Group's shareholder and contributing to wider society. The
Board sets the Group's purpose, strategy and values and is
accountable to the Group's shareholder for ensuring that the Group
is appropriately managed and achieves its objectives in a way that
is supported by the right culture and behaviours.
The Group provides financial services and products to personal
customers in the United Kingdom (UK). The Company is incorporated
and registered in Scotland. The Company owns the entire issued
share capital of Tesco Personal Finance plc (TPF), which is engaged
in the provision of banking and general insurance services. The
Group owns 49.9% of Tesco Underwriting Limited (TU), an authorised
insurance company. TU is accounted for as a joint venture of the
Group.
Covid-19
During the year, significant economic and social disruption has
arisen from the Covid--19 pandemic. The Group's priority throughout
the year has been helping customers and colleagues through the many
challenges created by the Covid--19 pandemic. The Group invoked
crisis management plans as it sought to serve and support its
customers while maintaining the safety and well--being of
colleagues but has since transitioned new working practices to
business-as-usual, with ongoing, stable operational
performance.
The crisis management response included a focus on operational
resilience. The actions taken included enhancing home working
capability for colleagues and self-serve capability for customers.
Close monitoring remains in place to ensure that the Group's
critical functions continue to be resilient. The Group continues to
engage with suppliers to ensure that service levels can continue to
be maintained throughout a prolonged Covid--19 pandemic. Regulators
have been consistently updated with progress through regular and
ad--hoc management information and relationship meetings.
The Group reviewed its stress testing scenarios to ensure it has
sufficient capital and liquidity to trade through a plausible range
of economic outcomes.
The Board has received frequent operational, financial and
colleague updates from the Executive team throughout the crisis and
provided challenge and support. There has also been a focus on both
conduct and prudential impacts and close tracking of all government
and regulator correspondence to gauge the potential impact on the
Group, now and in the future.
The Group is providing support to those customers who have
advised the Group that they are experiencing financial difficulty
as a result of the Covid--19 pandemic. During the year, the Group
granted temporary payment holidays of GBP762.0m to 139,673 Credit
Card and Personal Loan customers who have advised the Group that
they are experiencing financial difficulty as a result of the
Covid-19 pandemic. These were for an initial period of up to three
months and have in some cases been extended by a further three
months. Of the payment holidays granted at 28 February 2021,
126,012 have ended, with 85.8% of customers returning to normal
payment schedules.
The following table shows the outstanding balances at 28
February 2021 of all accounts where a payment holiday was granted
during the year, including their IFRS 9 'Financial Instruments'
staging and the percentage of the overall lending portfolio these
balances represent:
Gross balances at 28 Volume Stage 1 Stage 2 Stage 3 % Gross balance
February 2021
GBPm GBPm GBPm
Total 13,661 62.7 40.6 1.3 1.5%
Since 28 February 2021, the Group has granted further payment
holidays of GBP13.2m to 1,656 Credit Card and Personal Loan
customers.
2
Covid-19 (continued)
As a result of the Covid-19 pandemic, customer lending balances
have reduced due to lower overall consumer spending and new
business volumes in the year. Refer to page 4 for further details
of the impact of the Covid-19 pandemic on the Group's income for
the year.
There has also been a significant impact on expected credit
losses (ECLs) for potential bad debts in the year, with the Group
recognising a charge for the year of GBP359.5m (2020:
GBP178.6m).
The extension of government support measures such as furlough
has been unprecedented and this, coupled with the granting of
payment holidays by the Group, has broken the historically observed
relationship between unemployment and default. Although projected
levels of unemployment remain high, the Group is yet to see
significant defaults emerge in its lending portfolio and, as such,
Management has applied Covid-19 specific adjustments to the Group's
modelled ECL provision to capture the estimated impact of the
stress within the Group's ECL provision. Further information in
respect of these adjustments is set out at note 38.
The impact of the Covid-19 pandemic on income and ECLs has
resulted in a loss for the Group in the year ended 28 February
2021. Notwithstanding this, the Group's capital and liquidity
ratios, which are set out on page 8, are expected to remain above
regulatory requirements over the periods used by Management to
monitor these ratios. The impact of the current economic outlook on
ECLs is set out at note 38.
The Board considered in depth the impact of the Covid-19
pandemic on the Group's going concern status. The relevant
disclosures are set out on pages 24 to 25 and 29 to 30.
In response to the Covid-19 pandemic and lockdown conditions,
the Group introduced a number of benefits to help Tesco customers
manage their money a little better every day. These include an
increase in the contactless limit from GBP30 to GBP45; the removal
of insurance policy change fees, providing customers with
flexibility to make changes to their policies; the suspension of
overdraft interest on arranged overdrawn Personal Current Account
balances up to GBP500 from April until 31 October 2020; and
utilising Tesco gift cards to provide school lunches across the UK.
Additionally, the Group launched e-gift cards during the year,
which allowed friends or relatives to assist vulnerable customers
with their shopping.
Acquisition of Tesco Underwriting Limited
During the year, the Group reached an agreement with Ageas (UK)
Limited (Ageas UK) to acquire its stake in the Group's joint
venture, TU, which will become a 100%-owned subsidiary of the
Group. The deal is expected to complete in May 2021, following
regulatory approval received in March 2021.
The acquisition is in line with the Group's strategy of focusing
on propositions which better meet the needs of Tesco shoppers. The
investment will significantly enhance the Group's insurance
capability and enable the Group to create an insurance business
that is uniquely positioned to help Tesco shoppers manage their
money a little better every day.
The Group, TU and Ageas UK are working closely together to
ensure a smooth transition as the Group works towards the formal
change of ownership.
3
Sale of the Group's Mortgage Business
The Group completed the sale of the majority of its Mortgage
business on 27 September 2019 for a cash consideration of
GBP3,694.6m. As is customary in such a transaction, the Group
continued to recognise a small element of the Mortgage business,
representing new advances to existing Mortgage customers, until
migration of all Mortgage accounts to the purchaser, which took
place on 30 March 2020. The Group received additional cash
consideration of GBP53.8m in respect of these accounts. In
accordance with the requirements of International Financial
Reporting Standard (IFRS) 5 'Non-current assets held for sale and
discontinued operations', the Group has classified its Mortgage
business as a discontinued operation in the current and prior year
Consolidated Income Statement.
Further information on the Group's discontinued operations is
set out at note 14.
Headlines
Income Statement
-- Loss before tax from continuing operations is GBP154.9m (2020: profit of GBP79.2m).
-- Underlying loss before tax from continuing operations, which
excludes items which are not reflective of ongoing trading
performance, is GBP152.4m (2020: profit of GBP227.9m). A
reconciliation of statutory to underlying (loss)/profit for the
current and prior year is set out at note 4.
-- Profit after tax from discontinued operations is GBP0.2m (2020: GBP56.7m).
-- Loss before tax from continuing operations
The key drivers of the loss before tax from continuing
operations are:
o a 12.4% decrease in net interest income to GBP453.5m (2020:
GBP517.5m), reflecting lower interest earnings on the reduced
customer lending balances. Net interest margin has increased to
5.2% (2020: 4.4%), predominantly reflecting an improved Credit Card
margin and lower funding costs following the sale of the Group's
Mortgage business. In the prior year, interest expense of GBP37.5m
in respect of the Group's cost of funding the Mortgage business
continued to be presented within net interest income of continuing
operations. Since this cost could not be directly attributed to
liabilities of the Group entered into specifically to fund the
Group's Mortgage business, as required by IFRS 5, it was not
possible to present this cost within statutory profit for the year
after tax from discontinued operations for the prior year. There
was no such charge in the current year;
o a 43.1% decrease in net fees and commission income to
GBP176.1m (2020: GBP309.7m). Fee and commission income has reduced
significantly in the year due to reduced activity as a result of
the Covid-19 pandemic. Credit Card fees have been impacted by a
large reduction in Credit Card transactions by customers during the
lockdown period. Income from the Group's Travel Money service has
fallen as this is currently only available online, reflecting the
unprecedented fall in demand for Travel Money. ATM income has also
decreased as a result of significantly reduced volumes. Insurance
income has fallen due to a reduction in premiums in a highly
competitive market;
o a loss on financial instruments at FVPL of GBP2.5m (2020:
GBP4.1m);
o a loss on disposal of investment securities of GBPnil (2020:
GBP0.2m);
o a decrease of 23.7% in operating expenses to GBP438.7m (2020:
GBP575.3m). This includes, in the prior year, an additional payment
protection insurance charge of GBP45.0m and restructuring charges
of GBP65.8m, comprising accelerated amortisation of GBP55.0m and
other restructuring costs of GBP10.3m. There were no such charges
in the current year. Operating expenses also reflect an overall
reduction in activity due to the Covid-19 pandemic;
4
-- Loss before tax from continuing operations (continued)
o a 101.3% increase in charges for ECLs on financial assets to
GBP359.5m (2020: GBP178.6m). Although projected levels of
unemployment remain high, the Group is yet to see significant
defaults emerge in its lending portfolio and, as such, Management
has applied Covid-19 specific adjustments to the Group's modelled
ECL provision to capture the estimated impact of the stress within
the Group's ECL provision. Further information in respect of these
adjustments is set out at note 38. The bad debt:asset ratio in
respect of continuing operations increased to 4.6% (2020: 1.6%);
and
o a 58.8% increase in the Group's share of profit from its joint
venture, TU, to GBP16.2m (2020: GBP10.2m). This includes, in the
prior year, a credit of GBP3.7m, representing the Group's share of
credits recognised by TU during the prior year relating to the
impact on TU's insurance reserves of a change to the Ogden tables,
which are used to calculate future losses in personal injury and
fatal accident cases. There was no such credit in the current year.
The increase in profit is predominantly driven by a reduction in
motor insurance claims as a result of the Covid-19 pandemic.
-- Income tax credit on loss from continuing operations
Income tax on the Group's loss from continuing operations for
the year is a credit of GBP51.2m (2020: charge of GBP32.7m). This
predominantly reflects the impact of the Covid-19 pandemic on the
Group's results for the year and the expected relief of the loss
for the year against prior year profits.
-- Profit after tax from discontinued operations
The reduction in profit after tax from discontinued operations
to GBP0.2m (2020: GBP56.7m) predominantly reflects the impact of
the sale of the Group's Mortgage business, the majority of which
completed in September 2019. The key components are net interest
income of GBPnil (2020: GBP41.3m), other income of GBP(0.6)m (2020:
GBP(6.6)m), a reduction in operating expenses to a credit of
GBP0.4m (2020: expense of GBP17.0m), a post-tax gain on sale of
GBP0.4m (2020: GBP43.0m) and a reduction in tax to a credit of
GBPnil (2020: charge of GBP5.1m). As the remaining Mortgage
business was migrated to the purchaser on 30 March 2020, the
current year profit after tax from discontinued operations reflects
only one month of trading and the sale of the remaining element of
the Mortgage business which continued to be recognised at 29
February 2020.
Balance Sheet
-- Loans and advances to customers have decreased by 24.2% to
GBP6.4bn (2020: GBP8.5bn). Credit Card balances have reduced by
29.1% due to lower overall consumer spend in the year, while
Personal Loans have reduced by 20.1%, reflecting lower new business
volumes during the year.
-- Customer deposits, which continue to be the Group's main
source of funding, have decreased by 25.5% to GBP5.7bn (2020:
GBP7.7bn) as the Group has continued to reduce its Savings balances
in response to the reduced activity in loans and advances to
customers as a result of the Covid-19 pandemic and the reduction in
funding requirements following the sale of the Mortgage business.
At the year end, the Group had accessed GBP500.0m of funds from the
Bank of England's (BoE) Term Funding Scheme (TFS) (2020: GBP500.0m)
and GBP100.0m (2020: GBPnil) under the BoE's TFS with incentives
for Small and Medium Sized Entities.
-- The balance sheet remains well positioned to support future
lending growth from both a liquidity and capital standpoint. At 28
February 2021, the total capital ratio was 28.4% (2020: 23.3%) and
the net stable funding ratio (NSFR) was 127.6% (2020: 129.3%).
5
Regulatory Developments
The Group continues to monitor and prepare for a number of
regulatory changes taking effect over the next few years.
Onshoring of European Union (EU) Regulations After Brexit
Following the UK's withdrawal from the EU and the ending of the
transition period, any reference to EU regulations and directives
(including technical standards) should be read as a reference to
the UK's version of such regulation or directive, as onshored into
UK law under the European Union (Withdrawal) Act 2018, as
amended.
Open Banking
Open Banking, which is supported by a secure technology
standard, is designed to give customers more control over their
financial data and money. Customers can more easily compare
accounts from different providers, understand features, service
quality and pricing, and select which offers best value. Using Open
Banking, the Group's customers can choose to connect their Credit
Cards, Instant Access Savings Accounts, Internet Saver accounts or
Personal Current Accounts to third-party providers (TPPs), which
provide a range of different Apps and websites offering new ways
for customers to manage money and make payments.
During the year, the Group enabled Credit Card customers to more
easily manage and pay their balances, launching a 'Pay by Bank'
facility, which is a market leading Open Banking feature. This
facility enables Mobile and Online Credit Card customers to make
payments directly from their personal current account via
electronic payment devices. In doing so, the Group became the first
UK bank to introduce this functionality.
Capital Requirements Regulation
Amendments to the Capital Requirements Regulation (CRR) and
Capital Requirements Directive (CRD) were published in the Official
Journal of the European Union on 7 June 2019, including amendments
due in June 2021. However, in a joint statement, published on 16
November 2020, HM Treasury, the Prudential Regulation Authority
(PRA) and the Financial Conduct Authority (FCA) confirmed an
implementation date of 1 January 2022 for those Basel III reforms
which make up the UK equivalent to the outstanding elements of the
EU's second CRR. The Group of Central Bank Governors and Heads of
Supervision announced in March 2020 that the implementation of the
Basel III standards would be delayed by one year to 1 January
2023.
Minimum Requirements for Own Funds and Eligible Liabilities
The Group became subject to the minimum requirements for own
funds and eligible liabilities (MREL) on an interim basis from 1
January 2020, with full implementation applicable from 1 January
2023. The interim target remains at 18% of risk-weighted assets
until 31 December 2022. The requirements are factored into the
Group's funding and capital plans. The Company undertook an initial
GBP250.0m issuance of MREL-compliant debt in July 2019 in support
of the interim requirements and subsequently invested the proceeds
in TPF via an intercompany subordinated loan. Further issuances may
be required to support end-state requirements. Refer to page 8 for
details of the Group's compliance with MREL requirements as at 28
February 2021.
Upon full implementation, MREL targets will be set on a
bank-specific basis and calculated as the sum of two components: a
loss absorption amount, being the amount needed to absorb losses up
to and in resolution; and a recapitalisation amount, which reflects
the capital that a firm would be likely to need
post-resolution.
Countercyclical Capital Buffer
The Financial Policy Committee of the BoE is responsible for
setting the UK countercyclical capital buffer (CCyB), being the
rate that applies to UK exposures of banks, building societies and
large investment firms incorporated in the UK. In response to the
economic shock from the Covid-19 pandemic, the Financial Policy
Committee reduced the UK CCyB from 1.0% to 0.0% on 11 March 2020,
to support further the ability of banks to supply the credit needed
to bridge a potentially challenging period. Following its meeting
in December 2020, the Financial Policy Committee confirmed that it
expects the 0% rate to remain until at least Q4 of 2021. Due to the
usual 12 month implementation lag, any subsequent increase in the
CCyB requirement is not expected to take effect until Q4 2022 at
the earliest.
6
Regulatory Developments (continued)
Climate Change
The Group has identified climate change as a risk on which there
is growing focus. During the year, the PRA issued a Supervisory
Statement which set out its expectations in relation to how banks
should manage the financial risks of climate change.
The Group has defined its strategy and approach for managing
climate change risk, which was reviewed and approved by the Board
in September 2020. This strategy commits the Group to have net zero
carbon emissions from its own operations by 2035, with a series of
carbon reduction targets currently under development. The strategy
also sets out the Group's approach to dealing with the physical and
transition risks associated with climate change as well as the
opportunities that climate change may present. Management continues
to engage regularly with Tesco to ensure that the Group remains
aligned in its approach to managing climate change risk and that
best practices are shared between these businesses.
The Group has designated the Chief Risk Officer (CRO) as the
Senior Management Function holder responsible for embedding climate
change risk into the Group's Risk Management Framework (RMF). As
part of the plan to tackle climate change, a Climate Change
Steering Group has been established, with Senior Executive
attendance from across the Group. Steering Group members have
ownership and oversight of the work being undertaken to address
climate change. The Board Risk Committee (BRC) and Board review the
plan and progress on at least an annual basis.
The identification and management of climate-related risks
follow the Group's established risk management process. A number of
enhancements have been made to the Bank's risk management framework
over the past 12 months to support the effective management of
climate change risk, including amendments to the new product
approval and change processes.
The Group has also analysed two climate-related scenarios
considering the potential impacts to the Group's customers and
business arising from both a transition and physical risk scenario
over the period to 2030. The scenarios have not identified any
material threats to the Group's current business model arising from
climate change. Further climate-related scenario analysis is
planned for the upcoming financial year.
The Group has engaged with an environmental consultancy to
perform an assessment of its carbon footprint arising from its
operations. This assessment will be used to set targets, which will
be subject to Board approval, for reducing the Group's
environmental impact in order to achieve its strategy of being net
zero from its own operations by 2035. The Group is working towards
disclosure, by 28 February 2022, of its carbon footprint and
relevant environmental targets, in line with the Science Based
Targets initiative and Task Force on Climate-related Financial
Disclosures principles.
IBOR Reform
The Group has transitioned the majority of its London Interbank
Offered Rate (LIBOR) exposures to Sterling Overnight Index Average
(SONIA). The only remaining LIBOR exposure relates to the Group's
investment in subordinated debt issued by TU, which the Group
expects to transition to SONIA by 31 December 2021.
7
Key Performance Indicators
The Directors consider the following to be Key Performance
Indicators for the Consolidated Income Statement:
2021 2020
Underlying net interest margin 5.2% 4.1%
Net interest margin 5.2% 4.4%
Underlying cost:income ratio 69.7% 53.7%
Cost:income ratio 70.0% 69.9%
Bad debt:asset ratio 4.6% 1.6%
Capital and Liquidity Ratios
The Directors consider the following to be Key Performance
Indicators for capital and liquidity reporting:
2021 2020
Common equity tier 1 ratio 25.3% 20.7%
Total capital ratio 28.4% 23.3%
MREL ratio 31.9% 26.1%
Net stable funding ratio 127.6% 129.3%
Underlying loan to deposit ratio 111.6% 110.2%
Loan to deposit ratio 111.6% 109.7%
The Group's total capital ratio remains above internal targets
and regulatory requirements at 28.4% (2020: 23.3%) and leaves the
Group well placed to support future growth.
On 1 March 2018, IFRS 9 came into force and a transitional
period was introduced, allowing the Group to phase in the IFRS 9
impact on capital over a period of 5 years. On 27 June 2020, the
CRR was further amended to accelerate specific CRR2 measures and
implement a new IFRS 9 transitional relief calculation which
applies additional relief to increases in ECL provisions arising as
a result of the Covid-19 pandemic. The Group's total capital ratio
remains above regulatory requirements at 28.4% (2020: 23.3%) on a
transitional basis. On an end-point basis, the Group's total
capital ratio is 25.1% (2020: 21.7%), which is also above
regulatory requirements. Refer to note 42 for full details of the
impact of these amendments on the Group.
An interim MREL ratio requirement of 18% of risk-weighted assets
has been set from 1 January 2020 to 31 December 2022. At 28
February 2021 the ratio was 31.9% (2020: 26.1%).
The NSFR, a measure of the Group's liquidity position, is within
appetite at 127.6% as at 28 February 2021 (2020: 129.3%). The Group
maintains a liquid asset portfolio of high quality securities of
GBP1.7bn (2020: GBP2.5bn).
8
Risk Management
Risk Management Approach
The Board of Directors has overall responsibility for
determining the Group's strategy and related Risk Appetite. The
Board's Risk Appetite comprises a suite of Risk Appetite
statements, underpinned by corresponding measures with agreed
triggers and limits. The Risk Appetite framework defines the type
and amount of risk that the Group is prepared to accept to achieve
its objectives and forms a key link between the day-to-day risk
management of the business, its strategic objectives, long-term
plan, capital plan and stress testing. The Risk Appetite is
formally reviewed by the Board on at least an annual basis.
The Board is also responsible for overall corporate governance,
which includes overseeing an effective system of risk management
and that the level of capital and liquidity held is adequate and
consistent with the risk profile of the business. To support this,
a RMF has been embedded across the Group, creating an integrated
approach to managing risk. The RMF brings together governance, Risk
Appetite, the three lines of defence, the Policy Framework and risk
management tools to support the business in managing risk as part
of day-to-day activity, and is underpinned by governance, controls,
processes, systems and policies within the first line business
areas and those of the second line Risk Management Function (RMFu).
Further information on the Group's RMF is set out on pages 17 to
24.
The CRO performs a strategic risk management role and is
responsible for managing and enhancing the RMF. The CRO is
independent from any commercial function, reports directly to the
Chief Executive Officer (CEO) and can only be removed from his
position with the approval of the Board.
The Group is exposed to a variety of risks through its
day-to-day operations. The Board undertakes a robust review of
principal risks and areas of emerging risks at least annually. The
following table sets out the principal risks and uncertainties and
how they are managed within the RMF. These risks do not comprise
all of the risks associated with the business and are not set out
in priority order. Additional risks not presently known to
Management, or currently deemed to be less material, may also have
an adverse effect on the business. All business areas and functions
in the Group are required to maintain and actively manage a risk
register. In addition, the BRC oversees a Strategic and Horizon
Risks process which focuses on emerging risks.
9
Principal risks and uncertainties Key controls and mitigating
factors
Covid-19 The principal risk categories impacted
During the current financial by the Covid-19 pandemic were credit
year the Covid-19 pandemic and operational risk. Further information
has caused significant economic on the impact on the Group of the
and social disruption. The Covid-19 pandemic in respect to
Group has been impacted by these risks and the Group's response
higher ECLs arising from the are set out under the relevant sections
economic downturn and lower below.
revenues as a result of lower Regulators have been consistently
consumer spending and borrowing. updated with progress through regular
The Group's future performance and ad--hoc management information
is sensitive to the speed of and relationship meetings.
the economic recovery. The Board has received frequent
operational, financial and colleague
updates from the Executive team
throughout the crisis and provided
challenge and support. There has
also been a focus on both conduct
and prudential impacts and close
tracking of all government and regulator
correspondence to gauge the potential
impact on the Group, now and in
the future.
Credit risk All lending is subject to underwriting
The risk that a borrower will processes and the performance of
default on a debt or obligation all exposures is monitored closely.
by failing to make contractually Regular management reports are submitted
obligated payments, or that to the Board and appropriate Committees.
the Group will incur losses The macro-economic outlook deteriorated
due to any other counterparty significantly due to the Covid-19
failing to meet their financial pandemic. This resulted in a significant
obligations increase in credit risk provisions
to account for the future rise in
expected defaults and the potential
for reduced recoverability relating
to customers in arrears. Planning
for the timing of these defaults
through the Covid-19 pandemic stress
has proven difficult due to the
various customer, regulatory and
Government support measures that
are in place. These measures have
reduced the overall impact of the
stress but have meant that, although
projected levels of unemployment
remain high, the Group is yet to
see significant defaults emerge
in its lending portfolio.
The Group has improved its IFRS
9 models that are used to evaluate
the impact of various macro-economic
scenarios and has regularly benchmarked
its macro-economic outlook against
other external forecasts to ensure
its ECL provisions remain at appropriate
levels.
Prior to the start of the Covid-19
pandemic, the Group already had
a suite of early warning indicators
in place, together with playbooks
for a range of economic scenarios.
These playbooks were deployed in
response to the Covid-19 pandemic
recession, resulting in a range
of actions to tighten credit underwriting
criteria. The Group's risk appetite
framework was also enhanced to limit
exposure to certain higher risk
segments.
10
Credit risk (continued) The performance of the credit portfolios
is actively monitored and, during
the Covid-19 pandemic stress, this
has included evaluating the credit
quality of customers accessing payment
holiday support and their subsequent
performance at the end of the payment
holiday period. Analysis was also
undertaken to understand which customers
will be more or less impacted by
the Covid-19 pandemic. These activities
help ensure that the Group's underwriting
controls remain appropriate for
the latest macro-economic outlook.
Management has applied specific
adjustments to the Group's modelled
ECL provision to capture the estimated
Operational risk impact of the stress within the
The risk of loss resulting Group's ECL provision. Further information
from inadequate or failed internal in respect of these adjustments
processes, people and systems is set out at note 38.
or from external events. The Group reviewed its stress testing
scenarios to ensure it has sufficient
capital and liquidity to trade through
a plausible range of economic outcomes.
The Group aims to manage operational
risks within defined Risk Appetite
limits.
Business units and functions assess
operational risks on an ongoing
basis via a prescribed Risk and
Control Self Assessment (RCSA) process
and operational risk scenario analysis.
The RCSA process is reviewed and
updated on a timely basis by first
line business areas to reflect the
risk and control environment and
any changes arising from changes
in products, processes and systems.
The outputs are reported to relevant
governance bodies, including the
BRC. This is supplemented further
by an event management process and
regular reporting of the operational
risk profile to the Executive Risk
Committee (ERC) which provides oversight
of the Group's operational risk
profile
The Group's priority throughout
the year has been helping customers
and colleagues through the many
challenges created by the Covid--19
pandemic. The Covid-19 pandemic
posed a number of operational risks
to the Group, including a high proportion
of colleagues changing to work from
home at short notice and for extended
periods; the need to implement social
distancing measures across the Group's
premises for colleagues unable to
work from home; introducing new
operational processes quickly such
as those related to customer payment
holidays; the potential for the
Group's suppliers to be impacted
by the Covid-19 pandemic; and increased
operational volumes such as those
related to refunds associated with
holiday cancellations.
11
Operational risk (continued) The Group invoked crisis management
plans as it sought to serve and
support its customers throughout
the early stages of the Covid-19
pandemic while maintaining the safety
and well--being of colleagues but
has since transitioned new working
practices to business-as-usual,
with ongoing, stable operational
performance. The crisis management
response included a focus on operational
resilience. The actions taken included
enhancing home working capability
for colleagues and self-serve capability
for customers. Close monitoring
remains in place to ensure that
the Group's critical functions continue
to be resilient.
A significant number of services
and processes are provided by third-party
service providers and a key operational
risk is the failure of an outsourced
service provider.
The Procurement and Supplier Management
Framework provides an appropriate
and consistent approach to procurement
and the management of suppliers
to ensure the Group is able to effectively
engage, manage and terminate supplier
relationships.
The Framework supports the relevant
Group policies applicable to procurement
and supplier management and enables
the Group to meet its regulatory
requirements, understand and manage
supplier and service risk effectively,
and take a consistent approach to
supplier relationships.
Increased market demand for specialist
personnel could result in increased
costs of recruitment and retention
or reduced organisational effectiveness
if a sufficient number of skilled
staff cannot be employed or retained.
The Executive Committee (ExCo) oversees
key aspects of people risk, including
talent management, performance management,
retention and succession planning.
Financial crime and fraud are significant
drivers of operational risk and the
external threat continues to be a
high priority area of risk management
across the Financial Services industry.
The Group has a suite of policies
that provide clear standards for
the management of financial crime
risks. The Group has a dedicated
Financial Crime team and continually
monitors emerging risks and threats
and engages with industry experts
to identify and manage the risks.
Regular updates are provided to Executive
and Board level committees.
The financial services industry remains
under significant threat from cyber-attacks.
This includes various organised groups
targeting institutions through phishing,
malware, denial of service and other
sophisticated methods.
The Group manages cyber security
risks through its Information Security
team. The Group continually monitors
emerging risks and threats. Regular
reporting is provided to the ERC
and the BRC.
12
Operational risk (continued) As primarily a digital bank, technology
is a key element in providing services
to the Group's customers in a consistent
and secure manner. Causes of technology
outages across the industry include
failed change, third-party failures
or security events.
The Group manages technology and
technology risk through its Information
Technology team and has aligned key
processes and controls with industry
recognised standards such as the
Information Technology Infrastructure
Library and those set out by the
National Institute of Standards and
Technology. Regular reporting on
technology services and technology
risk are provided to the Group's
ExCo, ERC, BRC and the Board.
Liquidity and funding risk
Liquidity risk is the risk that Liquidity risk is governed through
the Group is not able to meet the Asset and Liability Management
its obligations as they fall Committee (ALCo), BRC and the Board.
due. This includes the risk that The Group maintains a liquidity position
a given security cannot be traded in excess of internal and regulatory
quickly enough in the market requirements. The Treasury function
to prevent a loss if a credit ensures all liquidity and funding
rating falls. measures are managed within policy
Funding risk is the risk that and Risk Appetite on a daily basis.
the Group does not have sufficiently The key liquidity and funding measures
stable and diverse sources of monitored on a daily basis are set
funding. out on page 122. The Group measures
and manages liquidity adequacy in
line with these metrics and maintains
a liquidity and funding profile to
enable it to meet its financial obligations
under normal and stressed market conditions.
The Group monitors and reports on
the composition of its funding base
against defined thresholds to avoid
funding source and maturity concentration
risks.
Liquidity and funding risk is assessed
through the internal liquidity adequacy
assessment process (ILAAP) on at least
an annual basis. Stress testing of
current and forecast financial positions
is conducted to inform the Group of
required liquidity resources. Reverse
stress testing is conducted to inform
the Group of the circumstances that
would result in liquidity resources
being exhausted. Liquidity stress
tests are presented to the ALCo on
a regular basis to provide evidence
that sufficient liquidity is held
to meet financial obligations in a
stress.
The Group is predominantly funded
by its retail deposit base, which
reduces reliance on wholesale funding
and, in particular, results in minimal
short-term wholesale funding.
13
Market risk
The risk that movements in market Control of market risk is governed
prices (such as interest rates, by the ALCo and Treasury Committee
foreign exchange rates and the (TCo). These bodies provide oversight
market value of financial instruments) of the Group's market risk position
lead to a reduction in either at a detailed level, providing regular
the Group's earnings or capital. reports and recommendations to the
BRC and the Board.
Market and Liquidity Risk, as part
of the RMFu, also review and challenge
policies and procedures relating to
market risk and provide oversight for
the Balance Sheet Management and Transaction
Management teams within the Treasury
function.
Insurance risk
The risks accepted through the The Group's aim is to actively manage
provision of insurance products insurance risk exposure, with particular
in return for a premium. These focus on those risks that impact profit
risks may or may not occur as volatility. The Group has no direct
expected and the amount and timing underwriting risk. However, the Group
of these risks are uncertain and is exposed to underwriting risk through
determined by events outside of its joint venture, TU. TU is a separately
the Group's control. regulated entity and is capitalised
accordingly.
TU operates a risk management framework
designed to identify and manage risks
to which it is exposed. This includes
the use of reinsurance to limit risk
exposure above certain levels and the
engagement of external independent
actuaries to provide assurance over
the valuation of insurance liabilities.
Risk Appetite and a suite of risk policies
are in place to manage risk in TU.
Regulatory risk
The risk of reputational damage, The Group's Risk Appetite is to comply
liability or material loss from with the relevant rules, regulations
failure to comply with the requirements and data protection legislation.
of the financial services regulators As part of the Group's Policy Framework,
or related codes of best practice a dedicated Compliance team is responsible
applicable to the business areas for the Compliance and Conduct Risk
within which the Group operates. Policy which is approved by the Board,
as well as for monitoring, challenge
and oversight of regulatory risk
and compliance across the business.
Where breaches occur, the Group will
take appropriate rectifying action.
The Group seeks to deliver fair outcomes
for customers.
The risk of business conduct leading
to poor outcomes can arise as a result
of an over-aggressive sales strategy,
poor management of sales processes,
credit assessments and processes
or failure to comply with other regulatory
requirements.
Business areas manage conduct risk
and use a range of management information
to monitor the fair treatment of
customers. A framework of product-led
conduct management information has
been developed and is reviewed by
Senior Management in the business
lines. Customer outcomes are also
assessed as part of the development
and design of new products and through
annual product reviews of existing
products. The ERC and the Board review
and challenge delivery of fair outcomes
for customers.
14
Regulatory risk (continued) The risk that regulatory changes
such as Open Banking, the Second
Payment Services Directive (PSD2)
and the General Data Protection Regulation
will have an impact on how customers
manage both their money and data
over the longer term, with the potential
for such regulatory changes to fundamentally
alter the nature of competition in
UK retail banking and have an impact
on the Group's activities. These
changes also create opportunities
for traditional competitors as well
as non-banking firms, particularly
digitally focused technology companies
who have the ability to move at pace.
The volume and pace of regulatory
change remain high. The Group actively
engages in relevant industry consultation
and closely monitors potential changes
to regulatory requirements to allow
it to address possible opportunities
while recognising potential competitive
risks. The Group has unique opportunities
arising from these changes to create
additional benefits for customers
due to its position within the wider
Tesco group.
Capital risk
The risk that the Group holds The Group undertakes close monitoring
regulatory capital which is of of capital ratios to ensure it complies
insufficient quality and quantity with current regulatory capital requirements
to enable it to absorb losses. and is well positioned to meet any
anticipated future requirement. Management
of capital is governed through the
ALCo, BRC and the Board.
The Group undertakes an Internal Capital
Adequacy Assessment Process (ICAAP).
Material risks to the Group are reviewed
through stress testing to support
an internal assessment of the level
of capital that the Group should maintain.
Where capital is not considered to
be an appropriate mitigant for a particular
risk, alternative management actions
are identified.
The stress testing scenarios and final
ICAAP results are presented to the
BRC for challenge and to the Board
for approval. The ICAAP is submitted
to the regulator on a regular basis
and forms the basis of the total capital
requirement (TCR) given to the Group.
The prudential regulation of banks
continues to develop, with a number
of topics currently under consultation
in both the EU and the UK. The impact
of future changes to capital and funding
regulation may have an impact on the
Group's activities.
The Group actively engages in relevant
industry consultation and closely
monitors potential changes to regulatory
requirements.
15
Brexit
The Brexit transition period The most significant potential impact
ended on 31 December 2020, with arises in respect of credit risk relating
the UK agreeing a trade deal to the performance of the Group's
with the European Union. In preparation portfolio of loans and advances to
for Brexit, the Group actively customers. Their performance and the
considered the potential risks associated ECLs required will be influenced
associated with the UK's exit by the macro-economic outcomes of
from the EU and their impact Brexit. Assessment of the ECL allowance
on both the UK financial services under IFRS 9 has considered a range
market and the Group itself. of macro-economic scenarios.
The Group also continues to monitor In addition, the Group's ILAAP and
related developments to the UK's ICAAP are designed to ensure that
exit from the EU, including the the Group has sufficient capital resources
possibility of a second Scottish to allow it to cope with a severe
independence vote. economic stress and maintain sufficient
liquidity above required limits throughout
the going concern forecast period.
The Group also established a Brexit
working group with the remit to ensure
operational readiness, focussing on
the impacts relating to customers,
colleagues and suppliers. The working
group undertook a significant amount
of planning and assessment work, readying
solutions for known impacts and potential
trade deal scenarios. As a UK retail
bank, the impacts were assessed as
being limited and as a result of the
trade deal being reached, heightened
operational readiness activities were
stood down and returned to business-as-usual
activity.
The following pages provide a more granular overview of the
operational control processes and risk mitigants adopted by the
Group.
A fuller description of these risks and controls can also be
found in the Pillar III Disclosure Statements of TPFG for the year
ended 28 February 2021. These disclosures will be published in the
Financial Information section of the Group's corporate website in
due course.
16
Risk Management Framework (RMF)
The Group has a formal structure for reporting, monitoring and
managing risks. This comprises, at its highest level, the Group's
Risk Appetite, approved by the Board, which is supported by the
RMF.
The key components of the RMF are as follows:
Governance Structure
The Group has established a governance structure which is
appropriate for the business in terms of its level of complexity
and risk profile. This structure is reviewed periodically so that
it remains suitable to support the business. The governance
structure set out in these disclosures describes the structure that
was in place as at 28 February 2021.
The Board
Chair Executive Directors Non-Executive Directors
Sir John Kingman Richard Henderson Julie Currie
Declan Hourican Robert Endersby
Gerard Mallon Jacqueline Ferguson
Simon Machell
Amanda Rendle
Alan Stewart
James Willens
On 17 April 2020, Graham Pimlott retired from his position as
the Independent Non--Executive Chair. James Willens was appointed
to the role on an interim basis, assuming responsibility for the
role during the period until Sir John Kingman was permanently
appointed to the position on 7 July 2020. James Willens re--assumed
his role as Senior Independent Non--Executive Director on 7 July
2020. During the year, James McConville resigned from his role on
the Board and was replaced by Julie Currie, who was also appointed
as Chair of the Board Audit Committee (BAC).
The Board is the key governance body and is responsible for
overall strategy, performance of the business and ensuring
appropriate and effective risk management, in line with the
approved Risk Appetite.
The Board approves the Group's business plans, budget, long-term
plan, ICAAP, ILAAP and any material changes to product lines in
line with the approved Risk Appetite. The Board also monitors the
Group's risk profile and capital adequacy position. The Group
employs hedging and mitigation techniques defined within the
Group's policies to ensure risks are managed within Risk
Appetite.
17
The Board (continued)
The Board has delegated responsibility for the day-to-day
running of the business to the Chief Executive who has in turn
established the ExCo to assist in the management of the business
and to deliver the strategy in an effective and controlled way. The
Board has established Board committees and the executive has
established Senior Management committees to:
-- oversee the RMF;
-- identify the key risks facing the Group; and
-- assess the effectiveness of the risk management actions.
Tesco Personal
Finance Group Board
Board Audit Board Risk Board Remuneration Board Disclosure Board Nomination
Committee Committee Committee Committee Committee
------------- ---------------------- ------------------ ------------------
The Board has overall responsibility for the management of the
business and acts as the main decision-making forum. It sets the
Risk Appetite and strategic aims for the business, in some
circumstances subject to shareholder approval, within a control
framework which is designed to enable risk to be assessed and
managed. The Board satisfies itself that financial controls and
systems of risk management are appropriate through the reporting
provided to it and provides feedback where necessary to ensure that
reporting remains fit for purpose.
Gender Diversity at Board Level
The Group has a formal, Board approved Policy on Diversity and
Inclusion and is fully committed to creating an inclusive culture
where everyone is made to feel truly welcome regardless of age;
disability; gender; gender reassignment; marital and civil
partnership status; pregnancy and maternity; race; religion or
belief, or absence of religion or belief; sexual orientation or
trade union affiliation. The overall objective of the Policy is to
ensure that there is a fair process to attract, develop and retain
talent and ensure that all colleagues are afforded equal
opportunities regardless of protected characteristics or
background, creating a diverse and inclusive workplace that
reflects the customers the Group serves.
The Group is a Women in Finance Charter signatory, supporting
the progression of women into senior roles in the financial
services sector, championing the benefits of greater diversity
within businesses through setting a variety of targets regarding
female representation. Signatories are required to publicly report
on progress to deliver against these internal targets in support of
the accountability and transparency needed to drive change. The
Group is focused on building a sustainable talent pipeline to
ensure that it continues to develop diverse talent throughout all
levels of the organisation. Details of the Group's targets and
progress can be found at https://bank.tescoplc.com/.
In February 2021, the Group provided an update on progress
against gender pay gap targets that showed it had not met its
objectives for the year. Whilst the Group is ahead of the financial
services industry average, it remains short of the UK-wide average.
The Group remains committed to improving the gender balance across
the business.
The Group appointed an Executive Sponsor for Inclusion who is
also accountable for progress towards the Women in Finance Charter
targets. Gerry Mallon leads the Inclusion agenda for the Group and
chairs the Inclusion Network, which consists of Sponsors and Chairs
of colleague networks, the Director of Colleague Experience and the
Inclusion Team.
Further information on the role of the Group's Nomination
Committee (NomCo) in reviewing the diversity of the Board, and the
Group's Senior Management, is set out on page 21.
18
The Board (continued)
Board and Committee Attendance
The Board and its Committees held regular meetings throughout
the year, excluding meetings held to consider matters of a
time-sensitive or ad-hoc nature. Directors are expected to attend
all Board and relevant Committee meetings. The table below shows
the attendance at the scheduled Board and Committee meetings(1)
:
Board Remuneration Board Disclosure Board Nomination
Board Risk Board Audit Committee Committee Committee
Board Committee Committee
Sir John Kingman 21/21 6/6 - 7/7 - 6/6
Richard Henderson 21/21 - - - 4/4 -
Declan Hourican 21/21 - - - 4/4 -
Gerard Mallon 21/21 - - - - -
Julie Currie(2) - - 1/1 - - -
Robert Endersby(3) 21/21 6/6 9/9 7/7 4/4 2/2
Jacqueline Ferguson(4) 17/21 5/6 9/9 - - 1/2
Simon Machell 21/21 - 9/9 - - 6/6
James McConville(5) 19/21 5/5 8/8 - 4/4 2/2
Amanda Rendle 20/21 6/6 - 7/7 - 6/6
Alan Stewart(6) 19/21 5/6 - - - 2/2
James Willens 21/21 6/6 - 7/7 4/4 6/6
Graham Pimlott(7) 6/6 1/1 - 3/3 2/2 1/1
(1) Attendance recorded is of Committee members only and does
not reflect Directors' attendance as observers.
(2) Julie Currie was appointed to the Board on 1 February
2021.
(3) Robert Endersby was appointed to the Nomination Committee on
1 December 2020.
(4) Jacqueline Ferguson was appointed to the Nomination
Committee on 1 December 2020.
(5) James McConville was appointed to the Nomination Committee
on 1 December 2020 and resigned from the Board on 1 February
2021.
(6) Alan Stewart was appointed to the Nomination Committee on 1
December 2020.
(7) Graham Pimlott resigned from the Board on 17 April 2020.
19
The Board (continued)
Board Evaluation
In accordance with the requirements of the Corporate Governance
code, the Board carries out a review of the effectiveness of its
performance and that of its Committees and Directors every year and
the evaluation is facilitated externally every third year.
An externally facilitated review was carried out and presented
in 2018/19, with facilitation provided by Boardroom Dialogue. The
review concluded that the performance of the Board, its Committees
and each of the Directors continues to be effective. No conflicts
of interest exist between Boardroom Dialogue and any members of the
Board.
The evaluation highlighted a number of strengths, including a
breadth of skills across the Board, a clear focus on strategy and
an effective definition of roles across various Committees.
Whilst no fundamental changes were proposed in the evaluation,
it also highlighted a number of opportunities for improvement,
including changes to the number of Board meetings and further
progress to be made on gender and ethnic diversity.
In 2020/21, an internal Board evaluation has been carried out in
order to assess the Board's and Directors' collective progress
against the Group's objectives. The evaluation was carried out in
accordance with the FRC guidance on board effectiveness. Interviews
were held with each Board member, members of the Group's Executive
Committee and a selection of senior management. The conclusion of
the evaluation was that the Board remains effective, with some
minor areas to support continuous improvement. These improvements
included identifying opportunities to support more colleague
engagement, additional Board training sessions and further
consideration of a longer term view on certain Board topics.
Sub-committees
In order to support effective governance and management of the
wide range of responsibilities, the Board has established the
following five sub-committees:
-- Board Audit Committee (BAC)
The BAC comprises Julie Currie (Chair), Robert Endersby,
Jacqueline Ferguson and Simon Machell.
The role of the BAC is to review the Financial Statements;
review accounting policies and practices for compliance with
relevant standards; examine the arrangements made by Management
regarding compliance with regulations and standards; review the
scope and results of the annual external audit; oversee the process
for selecting the external auditor and make recommendations to the
Board in relation to the appointment, re-appointment and removal of
the external auditor; consider the effectiveness of the external
auditor and their independence; review reports covering anti-money
laundering and compliance, in particular the Money Laundering
Reporting Officer annual report and Risk Assurance Report; maintain
a professional relationship with the external auditor; oversee the
Internal Audit (IA) function and review the IA programme; work
closely with the BRC to avoid as far as possible any overlap or gap
in the overall risk and assurance activities of the two committees;
carry out such investigations or reviews as shall be referred to it
by the Board; review the Group's plans for business continuity;
approve the annual plan of Risk Assurance activity within the
Group; receive and review reports, findings and recommendations
from Risk; review and consider the adequacy of any follow up
action, and any relevant investigation work, carried out by or on
behalf of Risk; review and monitor Management's response to
findings and recommendations following investigations carried out
by Risk; and review the findings of external assurance reports
provided by outsourced providers.
Further detail on the BAC is included within the BAC section of
the Directors' Report.
-- Board Risk Committee (BRC)
The BRC comprises Robert Endersby (Chair), Jacqueline Ferguson,
Sir John Kingman, Amanda Rendle, Alan Stewart and James
Willens.
The role of the BRC is to oversee that a culture is
appropriately embedded which recognises risk and encourages all
colleagues to be alert to the wider impact on the whole
organisation of their actions and decisions; take a forward-looking
view of possible economic trends and risks, informed by analysis of
appropriate information, and consider their potential impact on the
business; consider, and recommend to the Board the Group's Risk
Appetite and seek to ensure that overall business strategy is
informed by and remains aligned with it; and review and challenge
all major risks, controls, actions and events in the business,
alerting the Board to any areas of concern.
20
The Board (continued)
-- Board Remuneration Committee (RemCo)
The RemCo comprises Amanda Rendle (Chair), Robert Endersby, Sir
John Kingman, Simon Machell and James Willens.
The role of the RemCo is to monitor compliance with regulatory
requirements relating to remuneration, specifically the approval
and identification of Material Risk Takers (MRTs) and overseeing
the establishment and implementation of a Remuneration Policy for
all colleagues within the Group (including specific arrangements
for MRTs). The RemCo also provides performance and risk assessment
in the determination of pay outcomes including the oversight of pay
outcomes for MRT colleagues. The RemCo seeks to ensure that the
levels and structure of remuneration are designed to attract,
retain, and motivate the talent needed to run the business in a way
which is consistent with the Risk Appetite and ongoing
sustainability of the business and is compliant with all applicable
legislation, regulation and guidelines.
-- Board Disclosure Committee (DisCo)
The DisCo comprises James Willens (Chair), Julie Currie, Robert
Endersby, Richard Henderson and Declan Hourican.
The DisCo reviews, on behalf of the Board, formal company
documents which are either destined for publication or which, due
to their size or complexity, are better reviewed in detail in a
smaller group, to ensure the Group's compliance with relevant
statutory and regulatory obligations.
-- Board Nomination Committee (NomCo)
The NomCo comprises Sir John Kingman (Chair), Julie Currie,
Robert Endersby, Jacqueline Ferguson, Simon Machell, Amanda Rendle,
Alan Stewart and James Willens.
The NomCo has responsibility for reviewing the structure, size
and composition (including the skills, knowledge, experience and
diversity) of the Board and making recommendations with regard to
any changes required, including the nomination of candidates to
fill Board vacancies as and when they arise; considering succession
planning for Directors and other senior executives, taking into
account the challenges and opportunities facing the Group, and the
skills and expertise needed in the future; and keeping under review
the leadership needs of the organisation, both executive and
non-executive, with a view to safeguarding the continued ability of
the organisation to compete effectively in the marketplace by
keeping up-to-date and fully informed about strategic issues and
commercial changes affecting the Group and the market in which it
operates.
Additionally, the NomCo is responsible for the evaluation of
Board members' performance and appointment of new Board members.
The NomCo establishes the requirements and profile of the candidate
required and then engages with third-party recruitment firms to
find the appropriate individual. During the year, Korn Ferry Hay
Group and Carlyle Associates were engaged to support recruitment to
the Board. No conflict of interest exists between these firms and
any members of the Board.
The Group is committed to promoting a diverse and inclusive
workplace, which is reflected in the work of the NomCo. The Group's
Diversity and Gender Balance Policy is discussed in further detail
on page 18.
Executive Committee (ExCo)
The Group's Board has delegated the day-to-day running of the
business to the CEO. The CEO has established the ExCo to support
delivery against the strategy in an effective and controlled way
and to set out a framework of reporting to the Board that is
sufficient to enable the Board to fulfil its responsibilities. The
ExCo supports the CEO, who has responsibility for the executive
management of the business, by reviewing, challenging and
overseeing the performance of the business and critical developing
matters in the areas of responsibility of each member. Each ExCo
member is accountable to the CEO and to the Board for managing
performance in line with the Group's Risk Appetite, long-term plan,
strategy and annual budget. To support this, the ExCo receives and
considers customer matters, where these are deemed material to the
Group; provides review and challenge that delivers good customer
outcomes across the business activities the Group undertakes;
oversees and monitors trade and financial performance; reviews the
ongoing material operations of the Group; reviews the overall
management and monitoring of risk; reviews colleague experience,
performance, development and succession planning of Senior
Management; considers the colleague experience agenda; and reviews
the organisational design of the Group.
21
Executive Committee (ExCo) (continued)
In addition, in order to support its own decision-making, the
ExCo has established four sub-committees which report directly to
it. The ExCo receives and considers regular reports from each
sub-committee on delegated matters and receives the minutes from
those sub-committees to monitor key activities.
-- Asset and Liability Management Committee (ALCo)
The ALCo has been established to support the Chief Financial
Officer by providing oversight and challenge in relation to the
optimisation of the Group's balance sheet structure, within Board
approved Risk Appetite for liquidity, capital and market risk. This
includes defining strategic balance sheet structural objectives for
liquidity, funding and capital which align with the Board's stated
Risk Appetite, the regulatory obligations of the Group and the
commercial and business objectives set out in the Long Term Plan as
approved by the Board; recommending to the BRC any changes to the
amount or composition of the Group's capital base; providing
oversight of the Group's continuous compliance with all internal
and regulatory limits relating to liquidity, capital and market
risk; and undertaking periodic reviews of Treasury policies and key
regulatory documents for approval by the Board. The ALCo minutes
are circulated to the ExCo, with any material matters being
escalated, as appropriate.
The ALCo has one sub-committee: the Treasury Committee.
-- Executive Risk Committee (ERC)
The ERC has been established to support the CRO by providing
oversight and challenge in relation to the effective implementation
of the RMF across the Group's business. This includes overseeing
that the Three Lines of Defence model is operating effectively; the
appropriateness of, and adherence to, the Risk Appetite; providing
oversight of material risks facing the Group; and assessing whether
appropriate arrangements are in place to manage and mitigate those
risks effectively. In addition, the ERC supports the monitoring of
the status of regulatory compliance; considers the impact of
regulatory initiatives and upstream regulatory risk on the current
and future state of compliance; and provides oversight and
challenge on conduct risks and customer outcomes. The ERC reviews
key policies and provides agreement for onward submission to the
Board for final approval. The ERC minutes are circulated to the
ExCo, with any material matters being escalated, as
appropriate.
The ERC has six sub-committees: Operational Risk Committee;
Executive Credit Committee; Models and Ratings Systems Oversight
Committee; Financial Crime Committee; the Compliance and Conduct
Risk Committee; and the Third Party Governance Committee.
-- Investment Review Committee (IRC)
The IRC has been established to support the Chief Executive
Officer by providing oversight and challenge of the effective
delivery of the Group's change portfolio. This includes the
planning, objectives and strategy of the change portfolio in
relation to customer outcomes, business and financial performance,
operational matters, risk management and resourcing. The IRC
minutes are circulated to the ExCo, with any material matters being
escalated, as appropriate.
-- Operating Executive Committee (OEC)
The OEC has been established to support the Chief Customer
Officer, Chief Operating Officer, Colleague Experience Director and
the Insurance Director, providing oversight and challenge in
relation to the effective running of the Banking and Insurance
businesses by supporting and enabling an end-to-end operating model
across the Group. This includes reviewing customer-related
activities (including customer outcomes); trade performance
(including pricing plans and customer impact of pricing decisions);
operational matters; change initiatives; risk management; and
certain colleague related matters. The OEC minutes are circulated
to the ExCo, with any material matters being escalated, as
appropriate.
22
Three Lines of Defence
The Three Lines of Defence model is a widely recognised, best
practice approach to ensuring that the risks within a financial
institution are appropriately managed and are subject to effective
oversight and challenge. Clearly defined roles and responsibilities
help to drive effective risk management.
-- First Line of Defence
Senior Management within each business area is responsible for
managing the risks that arise from the activities in which it is
engaged in accordance with the Group's RMF and policies. The role
of the first line of defence is to adhere to the Group's RMF,
policies, standards and processes; identify, assess, own and manage
risks that arise from the activities in which it is engaged;
design, implement, own, check and operate management controls;
identify and manage risk events, including the delivery of remedial
actions and performance of root cause analysis; operate within Risk
Appetite and any and all related limits which the second line
establish; comply with risk reporting standards established by the
second line; perform risk aggregation, analysis and reporting
within their business line; maintain appropriate awareness of
external and future risk to support effective management; and
ensure compliance with all relevant regulation and codes.
-- Second Line of Defence
The RMFu operates under the leadership of the CRO. Risk teams
reporting to the CRO are the second line of defence and are
resourced by people with expertise in each of the principal risks
faced by the Group. This enables appropriate analysis, challenge,
understanding, oversight and assurance of each of the principal
risks.
The role of the second line of defence is to own, develop,
communicate and provide advice on the Group's RMF and policies;
provide risk-based oversight and assurance of the first line's
implementation of, and adherence to, the RMF and policies; provide
risk-based oversight and assurance of first line risk management
and control, including challenging the completeness of risk
identification and assessment, which can take a variety of forms
including active involvement in committees and meetings, analysis
of Management information and data and providing an independent
perspective on topics of significant interest; own the Risk
Appetite framework on behalf of the Board and oversee
implementation of Risk Appetite in the first line of defence;
design and deliver standards for risk reporting and escalation;
perform Group-wide risk aggregation and analysis; and deliver and
co-ordinate specific regulatory returns.
-- Third Line of Defence
This comprises the IA function, which is responsible for
providing independent assurance to the Board and Senior Management
on the adequacy of the design and operational effectiveness of
internal control systems and measures across the business. The IA
function has an independent reporting line to the Chair of the BAC
and is resourced by individuals with relevant experience and
professional qualifications. In addition, IA resources are
supplemented across a range of audits by external support to
provide additional subject matter expertise when required.
Independent assessment is provided through the execution of an
agreed plan of audits, through attendance at relevant governance
committees and through stakeholder management meetings.
The primary role of IA is to provide independent assurance on
the effectiveness of governance, risk management and control across
the first and second lines. The IA function achieves this through
its core responsibilities, which include proposing an annual audit
plan based on its assessment (after discussion with Management) of
the significant potential risks to which the organisation could be
exposed; carrying out audits of functions and processes in
accordance with the annual audit plan and any additional special
investigations requested by Management, the Board, the BAC or the
regulators; assessing the adequacy and effectiveness of the
controls in the functions and processes audited, and issuing
recommendations where improvement is required based on the results
of work carried out; verifying compliance with those
recommendations; reporting to the BAC in relation to internal audit
matters; and providing input to the Tesco IA department's reporting
to the Tesco Audit Committee.
23
Three Lines of Defence (continued)
Group Policies
The Group has a framework of key policies in place which are
approved at Board and Executive level committees. Each policy is
owned by a specific individual who is responsible for developing
and maintaining the policy, including gaining approval for the
policy at the requisite level; communicating the policy, ensuring
it is embedded so that those affected by it have sufficient
information/understanding to comply; undertaking suitable assurance
work to monitor compliance across the business; and reviewing
non-compliance/policy waiver requests and agreeing suitable
actions.
Each policy must be reviewed on at least a bi-annual basis, or
earlier if there is a trigger for policy review such as a
regulatory change, to ensure its continued effectiveness and
applicability in line with changing risks. The RMFu provides
tracking and oversight of the Policy Framework and is responsible
for undertaking assurance and providing reports to the Board on its
effectiveness.
-- Stress Testing
Stress testing is the process by which the Group's business
plans are regularly subjected to severe but plausible scenarios to
assess the potential impact on the business, including projected
capital and liquidity positions. The scenarios adopted are subject
to a rigorous selection process and include hypothetical
operational failures, macro-economic stress events and customer
behaviour impacts. The results, along with proposed actions, are
reported to the ALCo, BRC and the Board. These are captured in both
the ILAAP and the ICAAP.
-- Monitoring and Reporting
The Group monitors and tracks current exposures against limits
defined in the agreed Risk Appetite and by the regulators.
Exceptions are reported on a monthly basis to the ALCo and ERC and
to each meeting of the BRC. Adherence to these limits is
independently monitored, measured and reported using a suite of key
indicators defined by each risk team responsible for managing the
major specific risk categories faced by the Group. Decisions made
at subordinate risk committees and forums are reported to senior
committees as appropriate.
Viability Statement
-- Assessing the Group's Longer-Term Prospects and Viability
The Directors have based their assessment of viability on the
Group's current strategic plan, which is updated and approved
annually by the Board and sets out how the Group will achieve its
purpose of 'helping Tesco customers manage their money a little
better every day'.
To be a viable business, there should be a high level of
confidence that both solvency and liquidity risks can be managed
effectively, meaning that the Group must successfully fund its
balance sheet and hold adequate capital and liquidity over the
entire period covered by its Viability Statement.
The Group's Viability Statement is considered over a three-year
period, as this horizon most appropriately reflects the environment
in which the Group operates.
-- Current Position
The Group is subject to regulatory requirements in respect of
the amount of capital it holds and the quality of that capital. The
capital the Group is required to hold comprises a TCR of which at
least 75% must be held as common equity tier 1, a capital
conservation buffer (CCB) and a CCyB. The CCB and CCyB are designed
to ensure the Group meets its TCR at all points in the economic
cycle. A bank may utilise its CCB in times of stress and the BoE's
Financial Policy Committee may reduce the CCyB buffer to zero.
The TCR is the key capital requirement for the Group and it is
the Group's intention to maintain a surplus over its TCR for the
foreseeable future. Based upon the latest Capital Plan, the Group
is projected to have capital headroom over the assessment
period.
The Group's liquidity position is described in note 38 and its
capital position is set out at note 42.
24
Viability Statement (continued)
-- Longer-term Prospects
The following factors are considered both in the formulation of
the Group's Strategic Plan, and in the longer-term assessment of
the Group's prospects:
-- The principal risks and uncertainties faced by the Group, as
well as emerging risks as they are identified, and how these can be
addressed;
-- The prevailing economic climate and global economy,
competitor activity, market dynamics and changing customer
behaviours; and
-- The potential short and longer-term economic impact of Brexit and the Covid-19 pandemic.
The Group's principal risks and policies and processes for
managing those risks are set out on pages 10 to 16.
Assessing the Group's Viability
The viability of the Group has been assessed, taking into
account the Group's current financial position, including external
funding in place over the assessment period, and after modelling
the impact of certain scenarios arising from the principal risks
which have the greatest potential impact on viability in that
period. Certain scenarios, considered severe but plausible, have
been modelled which encompass these identified risks. Stress
testing has been performed for each principal risk.
An additional key assessment was the Group's viability through
the Covid-19 pandemic. As part of this assessment the Board
considered:
-- The impact on the Group's profits as income and charges for
ECLs continue to be affected by the Covid-19 pandemic. As part of
this, the Board considered the latest macro-economic scenarios
which were received from the Group's third-party supplier. These
are discussed in note 38;
-- The sufficiency of the Group's capital base throughout the
Covid-19 pandemic. The revised macro-economic scenarios received
were significantly less severe than those used in the ICAAP reverse
stress test. The Group reviewed its stress testing scenarios to
ensure it has sufficient capital and liquidity to trade through a
plausible range of economic outcomes;
-- The adequacy of the Group's liquidity as the Group supports
customers through a period of financial stress;
-- The operational resilience of the Group's critical functions
including call centres, mobile and online channels and the Group's
ability to provide continuity of service to its customers
throughout a prolonged stress;
-- The resilience of the Group's IT systems;
-- A detailed assessment of the Group's supplier base,
considering any single points of failure and focussing on suppliers
experiencing financial stress. This included consideration of
contingency plans should suppliers be deemed at risk;
-- The regulatory and legal environment and any potential conduct risks which could arise;
-- Any potential valuation concerns in respect of the Group's
assets as set out in the Company and Consolidated Statements of
Financial Position;
-- The impact of the pandemic on TU, the Group's joint venture insurance company; and
-- The structural protections of the Group's securitisation vehicles.
The Board also considered the results of stress testing which is
performed as an integral part of both the ICAAP and ILAAP, with the
Group having sufficient capital and liquidity to fund the balance
sheet in each scenario.
Viability Statement
Based on these scenarios, the Directors have a reasonable
expectation that the Group will continue in operation and meet its
liabilities as they fall due over the three-year period
considered.
25
S172 Statement by the Directors
S172 Companies Act 2006 requires a director of a company to act
in the way he or she considers, in good faith, would be most likely
to promote the success of the company for the benefit of its
members as a whole. In doing so, s172 requires a director to have
regard, amongst other matters, to the:
-- likely consequences of any decisions in the long-term;
-- interests of the company's employees;
-- need to foster the company's business relationships with suppliers, customers and others;
-- impact of the company's operations on the community and environment;
-- desirability of the company maintaining a reputation for high
standards of business conduct; and
-- need to act fairly between members of the company.
In discharging its s172 duties, the Board has regard to the
factors set out above. The Board also has regard to other factors
which it considers relevant to the decisions it makes. The Board
acknowledges that not every decision it makes will necessarily
result in a positive outcome for all of the Group's stakeholders.
By considering the Group's purpose, vision and values together with
its strategic priorities and having a process in place for
decision-making, the Board does, however, aim to make sure that its
decisions are consistent.
The Board delegates authority for the day-to-day running of the
business to the CEO and, through him, to Senior Management to set,
approve and oversee execution of the Group's strategy and related
policies. The Board reviews matters relating to financial and
operational performance; business strategy; key risks;
stakeholder-related matters; compliance; and legal and regulatory
matters, over the course of the financial year. This is supported
through the consideration of reports and presentations provided at
Board meetings and reviewing aspects of the Group's strategy at
least twice a year.
Engaging with the Group's stakeholders is key to the way the
Group runs its business and is an important consideration for the
Directors when making relevant decisions. Details of how the
Directors engage with colleagues and have regard to the need to
foster relationships with suppliers, customers and other key
stakeholders can be found in the Directors' Report on pages 30 to
32.
The Board has made some key strategic decisions during the year
ended 28 February 2021 where due consideration was given to the
Group's key stakeholders, including:
Covid-19 pandemic response
During the year, significant economic and social disruption has
arisen from the Covid--19 pandemic. The Group's priority throughout
the year has been helping customers and colleagues through the many
challenges created by the Covid--19 pandemic. The Group invoked
crisis management plans as it sought to serve and support its
customers throughout the early stages of the pandemic while
maintaining the safety and well--being of colleagues but has since
transitioned new working practices to business-as-usual, with
ongoing, stable operational performance. The crisis management
response included a focus on operational resilience. The actions
taken included enhancing home working capability for colleagues and
self-serve capability for customers. Close monitoring remains in
place to ensure that the Group's critical functions continue to be
resilient.
Regulators have been consistently updated with progress through
regular and ad--hoc management information and relationship
meetings.
The Group reviewed its stress testing scenarios to ensure it has
sufficient capital and liquidity to trade through a plausible range
of economic outcomes.
The Board has received frequent operational, financial and
colleague updates from the Executive team throughout the crisis and
provided challenge and support. There has also been a focus on both
conduct and prudential impacts and close tracking of all government
and regulator correspondence to gauge the potential impact on the
Group, now and in the future.
26
Covid-19 pandemic response (continued)
The Group maintained full alignment with the industry approach
to offering customers payment holidays for Credit Cards and Loans,
and interest-free overdrafts (up to the industry's GBP500 limit)
for Personal Current Accounts. As the impact of the Covid-19
pandemic grew, and furlough was extended, the period for which
customers were able to take payment holidays was increased from
three to six months, with 31 July 2021 being the last date for an
extension to complete. Customer research has also helped identify
the best solutions for those customers in financial difficulties.
New forbearance treatments were launched in response to this work,
combined with the payment holidays and fee amendments, which have
helped prevent over 100,000 customers from going into arrears.
The Board continually seeks to strike the right balance between
tightening credit criteria as a result of the recession and
uncertain economic outlook and supporting customers and lending
responsibly.
FCA guidance set out measures the FCA expected firms to follow
to support customers with insurance and premium finance products
and this resulted in the Group providing enhanced communications to
customers, proactively contacting customers where financial
distress was indicated, allowing customers to defer payments
without any missed payments being reported as arrears and giving
due consideration to alternative repayment options. The Group
therefore implemented a range of options including reduced
payments, rescheduling the repayment term, waiving fees and
amending repayment dates. These changes were made to better support
customers where their circumstances were impacted.
The Covid-19 pandemic had, and is having, a significant impact
on many of the Group's customers, particularly the elderly and
vulnerable. In collaboration with the Group's partners, customers
were provided with the ability to access cash safely at stores
through implementing social distancing and hourly cleaning of the
ATMs. In May 2020, the Tesco volunteer e-gift card was launched,
allowing customers to stay at home while volunteers shopped on
their behalf using the gift card to pay securely. Other actions
included increasing the contactless payment limit (from GBP30 to
GBP45) and introducing a cash delivery service for the Group's
Personal Current Account customers.
The Covid-19 pandemic drove a nationwide shift towards digital
adoption and, consequentially, the decision was taken to accelerate
investment in the Group's digital transformation strategy,
delivering a two-year plan in one year. This included the launch of
the new Group website, significantly improving the design and
navigation of the website, thereby improving accessibility and the
customer experience. 'Pay by Bank', a market leading Open Banking
feature, which allows Mobile and Online Credit Card customers to
make payments directly from a personal current account via
electronic payment devices. In doing so, TPF became the first UK
bank to introduce this functionality. The Group's digital adoption
has also increased, not only improving the customer experience, but
also reducing the cost to the business to serve customers. IT
resilience continues to be a key consideration for the Group as
part of all business-as-usual activities and project
implementation.
The Group's response to the Covid-19 pandemic included some key
decisions taken to consider colleagues. The Government's furlough
scheme was not utilised. A decision was taken to award a bonus to
those frontline colleagues who were required to be in the office to
serve customers. This bonus mirrored that awarded to Tesco Stores'
frontline colleagues. This recognised the key role that these
colleagues played, working tirelessly to help and serve customers
at such a challenging time. The Group now has the technical
capabilities in place to support 60% of its frontline colleagues
and all office function colleagues working from home. The sudden
shift to remote working surfaced a need to support colleagues in
setting up an effective workspace at home, and therefore a home
working allowance was paid to colleagues. Whilst the Group follows
the government guidance to ensure colleagues can work from home,
there remains an opportunity for certain colleagues to work from
the office if this suits their individual preference and supports
their wellbeing. The Group's three offices have remained open
throughout the Covid-19 pandemic, albeit at different occupancy
levels, with work being undertaken to evaluate how the offices may
function in the future. This work has included seeking feedback
from colleagues and the introduction of some pilot work to help
support the decisions that will require to be made, shifting the
focus from full office building occupancy to hubs that can be used
to support a collaborative approach to working.
The Group's colleague leadership and capability programmes were
refocused on leading and managing teams in remote environments.
Health and wellbeing initiatives, borne out of feedback and
colleague sentiment from continuous listening throughout the year,
were developed and delivered. This included supporting colleagues
with a Tesco gift card at Christmas. In addition, several minor
changes to policies, to support colleague wellbeing, were made
during the year, recognising the impact on colleagues' work life
balance.
27
Optimising the Group's Insurance business
Following a strategic review, the Board recognised the continued
importance of insurance to Tesco shoppers. The opportunity to
increase profitability and better serve Tesco customers through
enhanced product offerings and an optimised operating model was
identified. End-to-end control of the Group's insurance offering,
from sales and service to claims, was identified as the optimal
model to allow the Group to become a market-leading insurer and to
achieve its strategic objectives for insurance. As a result, in
October 2020 the Group announced its intention to acquire Ageas
(UK)'s 50.1% share of TU, giving the Group full control, in a deal
due to complete in May 2021, following regulatory approval received
in March 2021.
In January 2021, the Group also announced its intention to exit
the panel for Home and Motor insurance, leaving TU as the sole
underwriter for these products. Work is progressing to ensure
engagement with, and consideration of, the colleagues and suppliers
involved in delivering the Group's insurance offering.
Simultaneously, the Group is investing in its insurance
propositions to broaden its offering through new products and
changes to its existing products to ensure that these continue to
meet the needs of Tesco customers. The cumulative effect of these
changes will allow customers to benefit from a streamlined
insurance purchase and renewal journey and experience a service and
claims proposition aligned with the Tesco brand values.
Colleagues in TU will transition across to the Group following
completion of the acquisition with harmonised terms and conditions
to maintain alignment of colleagues across the Group. Consultation
with impacted colleagues has been undertaken.
The benefits for the Group include an improved insurance
proposition that deepens Tesco's relationship with its existing
shoppers. It is also a proposition that can attract customers to
Tesco and introduce them to other Group banking products. This will
generate a stable income from a business that can grow quickly and
be relatively predictable as well as generating healthy
profitability and supporting the delivery of good customer
outcomes. Implementation of fair pricing remedies, together with
the opportunities available through alignment with Tesco's strong
brand, customer franchise and loyalty, will help the Group to
deliver on its strategic ambitions for insurance.
The Group engaged with the FCA and PRA on the proposed changes
at an early stage and active dialogue has continued as these have
progressed.
The Strategic Report was approved by the Board of Directors and
signed by order of the Board.
Michael Mustard
Company Secretary
12 April 2021
28
Directors Report
The Directors present their Annual Report, together with the
Company and Consolidated Financial Statements and Independent
Auditor's Report, for the year ended 28 February 2021.
Compliance with the UK Corporate Governance Code
The Group applied the main principles and complied with the
relevant provisions set out in the UK Corporate Governance Code
2018 (2018 Code) throughout the year under review, with the
exception of provision 41. Provision 41 relates to disclosures in
respect of the Remuneration Committee and how it conducts its
business in line with the 2018 Code. The Group has not included a
full Remuneration Report within the Annual Report as it does not
have listed equity and, as such, is not required to comply with
this provision.
Information demonstrating how the main principles and relevant
provisions of the 2018 Code have been applied can be found
throughout the Directors' Report and the Strategic Report.
The primary responsibility of the Board in complying with the
2018 Code is to provide effective leadership to ensure that it
promotes the long-term success of the Group for the benefit of its
members as a whole.
Monitoring compliance with the 2018 Code is the responsibility
of the Board.
The Financial Reporting Council (FRC) is responsible for the
publication and periodic review of the UK Corporate Governance Code
and this can be found on the FRC website http://www.frc.org.uk.
Business Review and Future Developments
The Group's business review and future developments are set out
in the Strategic Report on pages 2 to 8.
Risk Management
The Group's risk management disclosures are set out in the
Strategic Report on pages 9 to 16.
Financial Instruments
The Group's policies for hedging each major type of transaction
are discussed in notes 1 and 18 to the Financial Statements.
Capital Structure
The Group's capital structure is discussed in note 42 to the
Financial Statements.
Events after the Reporting Date
Details of events occurring after the reporting date are
discussed in note 47 to the Financial Statements.
Going Concern
The Directors have made an assessment of going concern, taking
into account both current performance and the Group's outlook,
which considered the impact of the Covid-19 pandemic, and including
consideration of projections incorporating the impact of the
Covid-19 pandemic for the Group's capital and funding position.
29
Going Concern (continued )
As part of this assessment the Board considered:
-- The impact on the Group's profits as income and charges for
ECLs continue to be affected by the Covid-19 pandemic. As part of
this, the Board considered the latest macro-economic scenarios
which were received from the Group's third-party supplier. These
are discussed in note 38;
-- The sufficiency of the Group's capital base throughout the
Covid-19 pandemic. The revised macro-economic scenarios received
were significantly less severe than those used in the ICAAP reverse
stress test. The Group reviewed its stress testing scenarios to
ensure it has sufficient capital and liquidity to trade through a
plausible range of economic outcomes;
-- The adequacy of the Group's liquidity as the Group supports
customers through a period of financial stress;
-- The operational resilience of the Group's critical functions
including call centres, mobile and online channels and the Group's
ability to provide continuity of service to its customers
throughout a prolonged stress;
-- The resilience of the Group's IT systems;
-- A detailed assessment of the Group's supplier base,
considering any single points of failure and focussing on suppliers
experiencing financial stress. This included consideration of
contingency plans should suppliers be deemed at risk;
-- The regulatory and legal environment and any potential conduct risks which could arise;
-- Any potential valuation concerns in respect of the Group's
assets as set out in the Company and Consolidated Statements of
Financial Position;
-- The impact of the Covid-19 pandemic on TU, the Group's joint venture insurance company; and
-- The structural protections of the Group's securitisation vehicles.
The Board also considered the results of stress testing which is
performed as an integral part of both the ICAAP and ILAAP, with the
Group having sufficient capital and liquidity to fund the balance
sheet in each scenario.
As a result of this assessment, the Directors consider that it
is appropriate to adopt the going concern basis of accounting in
preparing the Company and Consolidated Financial Statements.
Engaging with stakeholders
The Group has a number of key stakeholder groups with whom it
actively engages. Listening to, understanding and engaging with
these stakeholder groups is an important role for the Board in
setting strategy and decision-making. The Group recognises its
obligations and requirements to be a well-controlled financial
services business, compliant with regulation and delivering good
customer outcomes. The Regulators are consulted and kept closely
informed in relation to key decisions made by the Board, as
appropriate.
Details of some of the key strategic decisions made during the
year ended 28 February 2021 can be found in the Strategic Report on
pages 26 to 28.
-- Our Customers
The Group is here to help Tesco shoppers manage their money a
little better every day. Developing customer-centric insights is
key to how the Group designs new services and improves existing
services for Customers, bringing the best of Tesco to help shoppers
with their money needs.
The Group has typically interacted with customers in a variety
of ways, including face-to-face, in stores, through surveys and
remotely via telephone and online, all with the common goal to
deepen the Group's understanding of its customers, learn from them
and understand their financial needs. The Covid-19 pandemic has
meant that the Group has had to amend the ways in which it
interacts with customers. Face-to-face interactions have
temporarily stopped but that has not prevented the Group from
connecting with customers on a regular basis. The Group has quickly
changed the way in which it interacts with its customers by using a
series of digital tools to ensure customers can provide timely and
relevant feedback.
30
Our Customers (Continued)
The Group continues to invest and look at ways to connect Tesco
shoppers to the right banking and insurance products for their
needs. Investment continues in technology, data, design and
personalised marketing. This connection ensures the Group develops
its relationship with its customers to serve more of their money
needs, gaining trust and loyalty in return.
Consideration of the Group's vulnerable customers is important
and, working with the Money Advice Trust, the Group's Vulnerable
Customers programme aims to identify vulnerable customers and
enhance support for them. Support is given to colleagues to
identify and record customers with vulnerabilities and to equip
them to have more personalised and consistent support conversations
with vulnerable customers, focusing on those who are impacted by
life events, addictions or ill health.
-- Our Colleagues
The Group has over 3,700 colleagues and is committed to
promoting a diverse and inclusive workplace, reflective of the
communities in which it does business. It approaches diversity in
the broadest sense, recognising that successful businesses flourish
through embracing diversity into their business strategy and
developing talent at every level in the organisation.
The Group's selection, training, development and promotion
policies are designed to provide equality of opportunity for all
colleagues, regardless of age; disability; gender; gender
reassignment; marital and civil partnership status; pregnancy and
maternity; race; religion or belief, or absence of religion or
belief; sexual orientation or trade union affiliation. Decisions
are based on merit.
The Group works with colleagues, including those with
disabilities, to adapt work practices where necessary in order to
help them work effectively within the business.
The Group is committed to developing the skills and knowledge
and supporting the wellbeing of its colleagues in order to help
achieve its objectives and create a great place to work. It ensures
that the Tesco Values are reflected within its employment policies
and practices to encourage engagement, enabling colleagues to be
their best and able to contribute to the delivery of the Group's
core purpose.
The Group's Code of Business Conduct, which defines the
standards and behaviours expected of colleagues, supports its core
values. The Code of Business Conduct is supported by Group policies
and mandatory training which includes anti-bribery and corruption,
competition law, data protection and whistleblowing. Colleagues are
required to complete mandatory training to reinforce the importance
of these standards. For new colleagues, there is a requirement to
complete the suite of mandatory training within 30 days of joining
the Group. Refresher training is required on an annual basis. The
Board and Senior Management are responsible for ensuring that their
activities reflect the culture they wish to instil in the Group's
colleagues and other stakeholders and drive the right behaviours.
They have a responsibility to ensure that the Group's colleagues do
the right things in the right way by setting the tone from the top
and leading by example.
Working closely with Tesco, the Group is committed to actively
supporting its colleagues to live healthier lives and make
healthier choices around their physical and emotional wellbeing.
Through its health and wellness strategy, the Group aims to help
colleagues be at their best both at work and at home. The Group's
colleagues have the support of a diverse community of Mental Health
First Aiders, who play a key role at the point of colleague need
and help signpost the most suitable or relevant services for
ongoing support. Through the Group's Employee Assistance Programme,
Workplace Options, colleagues also have access to online content,
webinars and over the phone support. This is an independent and
unlimited 24/7 telephone support line should colleagues be feeling
anxious, concerned or in need of some extra support or
guidance.
There are processes in place for understanding and responding to
colleagues' needs through surveys and regular performance and
development reviews. Business developments are communicated
frequently to keep colleagues well informed about the progress of
the Group. Ongoing training programmes also seek to ensure that
colleagues understand the Group's objectives and the regulatory
environment in which it operates.
31
-- Our Colleagues (continued)
The Colleague Contribution Panel (CCP) is a panel of elected
colleagues from all across the Tesco group who meet with a
Non-Executive Director (NED) from Tesco twice a year to discuss
experiences of working at Tesco and give the NED an opportunity to
inform the activities of the Group's Board and its Committees. This
will enable the Tesco Board to hear views of colleagues from across
the business. The Group's Colleague Experience Director provides
feedback from the CCP to the Group's Executive Management team and
works directly with the Tesco Board to respond to CCP outputs
relevant to the Group. A CCP meeting was held in November 2020,
with outputs shared with the Tesco Executive team and the Tesco
Board in February 2021. There were no specific actions for the
Group to address following this meeting. In addition, the Board has
designated Amanda Rendle as the non-executive director to support
some colleague engagement activity across the Group.
The Board is responsible for reviewing the annual report on
whistleblowing, in compliance with the Whistleblowing Policy. The
Group's independent and confidential whistleblowing service
provides colleagues with the ability to raise any concerns
regarding misconduct and breach of the Code for Business
Conduct.
Colleagues are encouraged to become involved in the financial
performance of the wider Tesco Group through a variety of schemes,
principally the Tesco savings related share option scheme (Save As
You Earn).
-- Our Suppliers
The Group engages with around 900 active suppliers, who play an
important role in the operation of the Group's business to enable
the delivery of an effective and efficient business model. During
the year ended 28 February 2021 several material contracts were
presented to the Board for approval, covering both new
relationships and contract renewals. In approving these contracts,
the Board considered the strategic value of the relationships as
well as looking at the customer impacts, risk exposure, legal and
compliance considerations and financial implications. The Group has
a framework in place which provides a consistent and proportionate
approach to procurement and the management of suppliers to ensure
that it can effectively engage, manage and terminate, where
appropriate, supplier relationships. To support regulatory
reporting requirements, the Group expects its suppliers to monitor
their own supply chain and be able to provide the Board with
appropriate evidence and assurance of compliance, as required.
-- Our Shareholder
As the Group's only shareholder, the Board relies on its
relationship with Tesco and the differentiating factors of having
rich customer data, a strong brand and a Clubcard loyalty programme
to better serve customers. The Group has a strong relationship with
Tesco, with regular updates and meetings taking place in relation
to performance and strategy. The Group's CEO, Gerry Mallon, is a
member of the Tesco Executive Committee.
-- Our Community
Despite many of the Group's colleagues working from home during
the year, teams have remained committed to supporting the Group's
local charity partners. Charitable support has been impacted by
lockdown but, through a variety of virtual fundraising challenges,
colleagues have raised over GBP23k for local charitable causes.
Dividends
An interim dividend of GBP13.0m (2020: GBP50.0m) in respect of
ordinary share capital was paid to Tesco PLC on 24 February
2021.
Treating Customers Fairly
Treating Customers Fairly is central to the FCA's principles for
businesses and remains central to the Tesco Values which sit at the
heart of the business. These Values are designed to ensure that
customer outcomes match their understanding and expectations.
32
Directors
The present Directors and Company Secretary, who have served
throughout the year and up to the date of signing the Financial
Statements, except where noted below, are listed on page 1.
Since 1 March 2020 to date the following changes have taken
place:
Appointed Resigned
1 February
Julie Currie 2021
1 February
James McConville 2021
Graham Pimlott 17 April 2020
-- Audit Committee (BAC)
Introduction from the BAC Chair
The Group operates in a demanding environment, particularly with
regard to economic, reputational, political and regulatory factors.
The role of the BAC is critical in reviewing the effectiveness of
the Group's internal control framework and assurance processes and
in assessing and acting upon findings from both external and
internal audit. The BAC keeps the current internal control
framework and assurance processes under review to ensure that they
adapt to the changing environment and remain appropriate for the
Group.
BAC composition, skills and experience
The BAC acts independently of Management. This ensures that the
interests of shareholders are properly protected in relation to
financial reporting and internal control.
As detailed in the section of the Strategic Report on the Board,
the BAC comprises four Independent Non-Executive Directors.
Julie Currie is a Chartered Accountant and has over 25 years
experience in the financial services sector, the majority of which
was spent at Lloyds Banking Group. This experience enables her to
fulfil the role as BAC Chair.
Julie's previous appointments included Chief Operating Officer
for the Turnaround Division of Lloyds Banking Group and Chief
Financial and Operating Officer for the Lloyds Bank Foundation for
England and Wales, the largest corporate foundation in the UK.
Julie holds a Non-Executive role with Scotiabank Europe, where she
has chaired the Audit Committee since 2018.
Robert Endersby has spent over 35 years working in the financial
services sector, both within the UK and internationally and is an
Associate of the London Institute of Banking and Finance.
Robert's previous key appointments included Chief Risk Officer
and member of the Executive Board of Danske Bank, Denmark's largest
financial enterprise. Robert was also an independent non-executive
director and chair of the board risk committees of Credit Suisse
International and Credit Suisse Securities (Europe) Limited.
Previously, Robert has also held senior risk management
positions in Barclays, The Royal Bank of Scotland and ING Group and
has a broad international experience of the sector including
assignments based in Denmark, the Netherlands and France.
Jacqueline Ferguson is an experienced Chief Executive from the
technology industry. Jacqueline is the former Chief Executive of
Hewlett Packard Enterprise Services UK, Ireland, Middle East,
Mediterranean and Africa and has extensive global experience
including living and working in Silicon Valley, California for 3
years with Hewlett Packard. Prior to Hewlett Packard Jacqueline
worked for Electronic Data Systems and KPMG.
Jacqueline is also a Non-Executive Director of Wood PLC and
Croda PLC, a Trustee of Engineering UK and a member of the Scottish
First Minister's Advisory Board for Women and Girls, aimed at
tackling Gender Inequality. Jacqueline chaired the public services
strategy board for the Confederation of Business and Industry and
was a member of the Tech Partnership, the industry body aimed at UK
technology skills.
Simon Machell has worked in financial services for over 30 years
and has deep experience in both general and life insurance in the
UK, Europe and Asia. The majority of Simon's experience was gained
from a range of roles with Aviva, including Chief Executive of the
RAC, Chief Executive of the general insurance business in the UK
and running the insurance businesses in 14 markets across Eastern
Europe and Asia. Simon holds Non-Executive roles with Pacific Life
Re, Prudential Corporation (Asia), Suncorp Group and TU.
33
BAC composition, skills and experience (continued)
The Chair, Chief Executive Officer, Chief Financial Officer,
Chief Risk Officer, Internal Audit Director, Director of Financial
Control and Tesco Internal Audit Director attend Committee
meetings. The external auditor also attends.
BAC responsibilities
The key responsibilities of the BAC are set out in the Strategic
Report on page 20.
During the year, the BAC received reports from a number of
business areas including Finance in relation to financial reporting
and Risk in relation to regulatory compliance, fraud, bribery and
corruption and integrated assurance. The BAC also considered a
variety of matters including the internal financial control
framework, data leakage prevention, supplier assurance and business
continuity arrangements.
Financial Statements and related financial reporting
In relation to the Financial Statements, the BAC reviewed and
recommended approval of the half-yearly results and annual
Financial Statements and provided oversight of the statutory audit
process.
During the year ended 28 February 2021, the BAC considered the
following matters:
-- The methods used to account for significant transactions
The BAC reviewed and supported proposals from Management on the
accounting for the redemption of debt securities in issue in
relation to securitisation transactions and retail bonds.
-- Going concern assessment
The BAC considered Management's approach to, and the conclusions
of, the assessment of the Group's ability to continue as a going
concern.
The going concern assessment period covers the period to April
2022, 12 months subsequent to signing the Annual Report and
Financial Statements for the year ended 28 February 2021. The
assessment considered the current capital position of the Group and
liquidity requirements covering the going concern assessment
period, including consideration of the impact of the Covid-19
pandemic. These were then subject to stress testing based on
various scenarios, including scenarios incorporating the impact of
the Covid-19 pandemic. The detailed considerations taken by the
Board in arriving at its going concern assessment are set out on
pages 24 to 25 and 29 to 30.
The BAC recommended that the Board supported the conclusion that
it remained appropriate to adopt the going concern basis in
preparing the Financial Statements.
-- Review of Financial Statements
The BAC considered Management's approach to, and governance
arrangements over, the preparation of the half-yearly results and
annual Financial Statements and recommended to the Board that these
should be approved.
34
BAC responsibilities (continued)
-- Appropriate critical accounting estimates and judgements
The BAC reviewed the nature, basis for and the appropriateness
of, the estimates and judgements proposed by Management in the
Financial Statements.
The key estimates and judgements reflected in the Group's
Financial Statements for the year ended 28 February 2021 are:
o Expected credit loss provision (ECL) (Refer to note 38)
The BAC received regular reports from Management on
provisioning, which assessed the adequacy of provisioning based on
a number of factors. These included levels of arrears, collateral,
past loss experience, defaults based on portfolio trends, and
expected loss rates.
The BAC concluded that an appropriate governance framework
existed to monitor provision adequacy and that the assumptions and
judgements applied by Management were appropriate.
o Provision for customer redress (Refer to note 30)
The Group has a provision for potential customer redress in
relation to PPI.
The BAC reviewed the key assumptions made in arriving at each
element of the provision, with particular focus given to claims
settled and the average amount of redress per claim.
The BAC is satisfied that the provisions and related disclosures
in the Financial Statements in respect of PPI and other customer
redress provisions are appropriate.
o Effective interest rate (Refer to note 2)
IFRS 9 requires the Group to measure the interest earned on its
Credit Cards portfolio by applying the effective interest rate
methodology.
The BAC received regular reports from Management summarising its
approach, with particular focus given to reviewing the expected
attrition rate of balances drawn, including the pay rates
assumption used by Management.
The BAC is satisfied that the carrying value of the assets and
the associated income recognition is appropriate.
o Investment in joint venture (Refer to note 23)
The Group holds an investment in a joint venture, TU, an
authorised insurance company, and recognises the carrying value of
its investment and the Group's share of TU's results using the
equity method of accounting.
TU's results are sensitive to changes in the insurance reserves
it recognises in respect of insurance policies written, net of
reinsurance. Consequently, material increases in these reserves
could have an impact on the carrying value of the investment in the
Company and Consolidated Statements of Financial Position.
The BAC reviewed the key judgements and estimates made by TU in
determining the level of reserves held at the reporting date.
The BAC is satisfied that the carrying amount of the Group's
investment in TU is appropriate.
-- IT controls
The Group utilises a range of information systems to support its
ongoing operations and financial reporting.
During the year, the BAC received a number of reports on the
Group's information systems, including the effectiveness of access
rights to certain operating systems and applications used in the
financial reporting process.
While improvements to access controls have been made, it remains
an area of ongoing focus and the BAC will receive further reports
on the effectiveness of access controls during the next financial
year.
35
Performance and Effectiveness of IA
The IA function supports the BAC in providing an independent
assessment of the adequacy and effectiveness of internal controls
and the system of risk management. The function has the necessary
resources and access to information to enable it to fulfil its
mandate, and is equipped to perform in accordance with the
Institute of Internal Auditors' International Standards of the
Professional Practice of Internal Auditing.
It is essential for the BAC to be able to have an honest and
open relationship with both its external and internal auditors.
This relationship is developed and maintained through private
meetings with both Deloitte and the IA Director.
In compliance with the above standards, the BAC assessed the
effectiveness of the IA function with the results of the annual
assessment for 2020/21 being positive.
Performance and Effectiveness of the BAC
The BAC assesses the need for training on an ongoing basis and
the annual agenda provides time for technical updates, which are
provided by both internal and external experts. During the year,
the BAC received specific training on accounting and reporting
developments. Training is also provided on an ongoing basis to meet
the specific needs of individual committee members.
The effectiveness of the BAC was reviewed as part of the wider
Board effectiveness review which included interviews with all BAC
members. It was concluded that the BAC continued to be
effective.
36
Risk Management and Internal Controls
The Board and its committees are responsible for ensuring the
effective implementation and ongoing monitoring of the RMF. A
detailed overview of the responsibilities of the ERC is set out on
page 22.
Key controls are recorded within an internal database and
regular controls testing takes place to ensure they remain
effective. Additionally, the ERC regularly reviews the RMF to
ensure it remains relevant and appropriate to the risk profile of
the Group.
No material deficiencies in internal controls have been
identified in the year.
Non-audit Fees
Deloitte contributes an independent perspective, arising from
its work, on certain aspects of the Group's internal financial
control systems, and reports to the BAC. The independence of the
external auditor in relation to the Group is considered annually by
the BAC.
The Group has a Non-audit Services Policy for work carried out
by its external auditor. This is split into two categories as
follows:
1. Work for which BAC approval is specifically required -
transaction work and corporate tax services, and certain advisory
services; and
2. Work from which the external auditor is prohibited.
The BAC concluded that it was in the best interests of the Group
for the external auditor to provide a limited number of non-audit
services during the year due to their experience, expertise and
knowledge of the Group's operations. Auditor objectivity and
independence was considered for each engagement and the BAC was
satisfied that audit independence was not, at any point,
compromised.
Deloitte follows its own ethical guidelines and continually
reviews its audit team to ensure its independence is not
compromised. The fees paid to the external auditor in the year are
disclosed in note 9 to the Financial Statements.
Directors' Indemnities
In terms of Section 236 of the Companies Act 2006, all Executive
and Non-Executive Directors have been issued a Qualifying
Third-Party Indemnity Provision by the Company. All Qualifying
Third-Party Indemnities were in force at the date of approval of
the Financial Statements and shall remain in force without any
limit in time. This will not be affected by the expiration or
termination of a Director's appointment, however it may arise.
Cautionary Statement Regarding Forward-looking Information
Where this document contains forward-looking statements, these
are made by the Directors in good faith based on the information
available to them at the time of their approval of this report.
These statements should be treated with caution due to the inherent
risks and uncertainties underlying any such forward-looking
information. The Group cautions users of these Financial Statements
that a number of factors, including matters referred to in this
document, could cause actual results to differ materially from
those contained in any forward-looking statement. Such factors
include, but are not limited to, those discussed under 'Principal
risks and uncertainties' on pages 10 to 16.
37
Statement of Directors' Responsibilities
The following should be read in conjunction with the
responsibilities of the independent auditor set out in their report
on page 167.
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare such financial
statements for each financial year. Under that law the Directors
have prepared the Group and Company Financial Statements in
accordance with International Accounting Standards (IASs) in
conformity with the requirements of the Companies Act 2006 and
International Financial Reporting Standards (IFRSs) as issued by
the International Accounting Standards Board (IASB).
Under company law the Directors must not approve the Financial
Statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and the Company and of
the profit or loss of the Group for that year. In preparing these
Financial Statements, the Directors are required to:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRSs is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the Group's and Company's financial position and
financial performance; and
-- make an assessment of the Group's and Company's ability to
continue as a going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group's
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and the Company and enable them to
ensure that the Financial Statements comply with the Companies Act
2006. They are also responsible for safeguarding the assets of the
Group and the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the Group's website. Legislation in the UK governing the
preparation and dissemination of Financial Statements may differ
from legislation in other jurisdictions.
Each of the Directors, whose names are listed on page 1 of the
Annual Report and Financial Statements, confirms that to the best
of their knowledge:
-- the Financial Statements, which have been prepared in
accordance with IASs in conformity with the requirements of the
Companies Act 2006 and IFRSs as issued by the IASB, give a true and
fair view of the assets, liabilities, financial position and loss
of the Group;
-- the Strategic Report contained in the Annual Report includes
a fair review of the development and performance of the business
and the position of the Group, together with a description of the
principal risks and uncertainties that it faces; and
-- the Annual Report and Financial Statements, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for the Company's shareholder to assess the Group's and
Company's position, performance, business model and strategy.
38
Disclosure in Respect of the Independent Auditor
So far as each Director is aware at the date of approving this
report, there is no relevant audit information, being information
needed by the auditor in connection with preparing this report, of
which the auditor is unaware. All of the Directors have taken all
the steps that they ought to have taken as Directors in order to
make themselves aware of any relevant audit information and to
establish that the auditor is aware of that information.
External Audit Partner
The external audit partner for the year to 28 February 2021 was
Peter Birch who has assumed the role for the first time in the
current year. The audit tender process is conducted by Tesco on
behalf of the entire Tesco group.
Approved by the Board of Directors and signed by order of the
Board.
Michael Mustard
Company Secretary
12 April 2021
39
CONSOLIDATED INCOME STATEMENT
For the year ended 28 February 2021
2021 2020
Note GBPm GBPm
Continuing operations
-------- --------
Interest and similar income 5 562.4 698.4
Interest expense and similar charges 5 (108.9) (180.9)
-------- --------
Net interest income 453.5 517.5
Fees and commissions income 6 208.8 341.0
Fees and commissions expense 6 (32.7) (31.3)
-------- --------
Net fees and commissions income 176.1 309.7
Net loss on financial instruments at fair value through profit or loss (FVPL) 7 (2.5) (4.1)
Net loss on investment securities 8 -- (0.2)
-------- --------
Net other income (2.5) (4.3)
Total income 627.1 822.9
-------- --------
Administrative expenses 9 (382.0) (398.4)
Depreciation and amortisation 25, 26 (56.7) (131.9)
Provision for customer redress 30 -- (45.0)
-------- --------
Operating expenses (438.7) (575.3)
Expected credit loss on financial assets 10 (359.5) (178.6)
-------- --------
Operating (loss)/profit (171.1) 69.0
Share of profit of joint venture 23 16.2 10.2
-------- --------
(Loss)/profit before tax (154.9) 79.2
Analysed as:
------------------------------------------------------------------------------- ------- -------- --------
Underlying (loss)/profit before tax (152.4) 227.9
Non-underlying items (2.5) (148.7)
------------------------------------------------------------------------------- ------- -------- --------
(154.9) 79.2
Income tax credit/(charge) 12 51.2 (32.7)
(Loss)/profit for the year from continuing operations (103.7) 46.5
Discontinued operations
Profit after tax from discontinued operations 14 0.2 56.7
(Loss)/profit for the year attributable to owners of the parent (103.5) 103.2
-------- --------
40
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Year Ended 28 February 2021
2021 2020
Note GBPm GBPm
(Loss)/profit for the year (103.5) 103.2
Items that may be reclassified subsequently to the Income Statement
Debt securities at fair value through other comprehensive income (FVOCI)(1)
Fair value movements 12 (3.2) 2.3
Net losses transferred to the Income Statement on disposal 12 -- 0.2
Expected credit loss transferred to the Income Statement -- 0.4
Taxation 12 0.8 (0.7)
-------- ------
(2.4) 2.2
-------- ------
Cash flow hedges
Fair value movements 12 (0.5) 1.0
Taxation 12 0.2 (0.3)
-------- ------
(0.3) 0.7
-------- ------
Currency basis reserve
Foreign currency movements 12 0.1 0.2
-------- ------
0.1 0.2
-------- ------
Share of other comprehensive (expense)/income of joint venture 23 (1.9) 5.0
-------- ------
(1.9) 5.0
-------- ------
Items that will not be reclassified subsequently to the Income Statement
Equity securities at FVOCI
Fair value movements 12 1.9 0.7
Taxation 12 (0.6) (0.2)
-------- ------
1.3 0.5
-------- ------
Other comprehensive (expense)/income for the year, net of tax (3.2) 8.6
-------- ------
Total comprehensive (expense)/income for the year (106.7) 111.8
-------- ------
Total comprehensive (expense)/income for the year attributable to owners of the parent
Continuing operations (106.9) 55.1
Discontinued operations 0.2 56.7
(1) On 1 March 2020 the Group's portfolio of debt investment
securities held at FVOCI was reclassified to amortised cost
following a change in business model.
41
CONSOLIDATED AND COMPANY STATEMENT OF FINANCIAL POSITION
For the Year Ended 28 February 2021
Company number SC173198
Group Company
2021 2020 2021 2020
Note GBPm GBPm GBPm GBPm
Cash and balances with central banks 15 804.2 1,395.6 14.8 12.7
Loans and advances to customers 16 6,402.2 8,451.3 -- --
Loans and advances to subsidiary companies 17 -- -- 483.5 483.2
Derivative financial instruments 18 6.1 5.7 -- --
Investment securities 19 953.5 1,081.6 -- --
Prepayments and accrued income 20 41.6 55.6 1.3 1.6
Other assets 21 211.2 243.3 -- --
Current income tax asset 36.1 -- -- --
Investment in group undertaking 22 -- -- 1,219.9 1,219.9
Deferred income tax asset 24 67.3 69.4 -- --
Investment in joint venture 23 92.8 86.0 -- --
Intangible assets 25 130.9 138.2 -- --
Property, plant and equipment 26 77.5 73.4 -- --
Assets of the disposal group 14 -- 45.1 -- --
------------------------------------------------------ ----- -------- --------- ---------- ----------
Total assets 8,823.4 11,645.2 1,719.5 1,717.4
------------------------------------------------------ ----- -------- --------- ---------- ----------
Liabilities
Deposits from banks 27 600.0 500.0 -- --
Deposits from customers 28 5,738.0 7,707.0 -- --
Debt securities in issue 29 251.0 1,024.0 249.4 249.2
Derivative financial instruments 18 47.5 50.7 -- --
Provisions for liabilities and charges 30 60.1 58.7 -- --
Accruals and deferred income 31 86.1 100.1 1.3 1.6
Current income tax liability -- 26.3 -- --
Other liabilities 32 184.2 199.0 -- --
Subordinated liabilities and notes 33 235.0 235.0 235.0 235.0
------------------------------------------------------ ----- -------- --------- ---------- ----------
Total liabilities 7,201.9 9,900.8 485.7 485.8
------------------------------------------------------ ----- -------- --------- ---------- ----------
Equity and reserves attributable to owners of parent
Share capital 34 122.0 122.0 122.0 122.0
Share premium account 34 1,098.2 1,098.2 1,098.2 1,098.2
Retained earnings 370.7 487.2 13.6 11.4
Other reserves 35 30.6 37.0 -- --
------------------------------------------------------ ----- -------- --------- ---------- ----------
Total equity 1,621.5 1,744.4 1,233.8 1,231.6
------------------------------------------------------ ----- -------- --------- ---------- ----------
Total liabilities and equity 8,823.4 11,645.2 1,719.5 1,717.4
------------------------------------------------------ ----- -------- --------- ---------- ----------
Profit for the year of GBP15.2m (2020: GBP49.3m) is attributable
to the Company.
The Consolidated and Company Financial Statements on pages 40 to
45 were approved by the Board of Directors and authorised for issue
on 12 April 2021 and were signed on its behalf by:
Declan Hourican
Director
42
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Year Ended 28 February 2021
Share
Cash flow Currency based
Share Share Retained FV/AFS hedge Basis payment Total
capital premium earnings reserve(1) reserve Reserve reserve equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- ----------- ---------- ----------- ---------- ----------- ---------- --------
Balance at 1
March 2020 122.0 1,098.2 487.2 12.3 (0.3) (0.1) 25.1 1,744.4
Comprehensive
income
Loss for the
year - - (103.5) - - - - (103.5)
Net fair value
movement on
investment
securities
at FVOCI 12 - - - (1.1) - - - (1.1)
Net movement
on cash flow
hedges 12 - - - - (0.3) 0.1 - (0.2)
Share of other
comprehensive
expense of
joint
venture 23 - - - (1.9) - - - (1.9)
--------- ----------- ---------- ----------- ---------- ----------- ---------- --------
Total
comprehensive
income - - (103.5) (3.0) (0.3) 0.1 - (106.7)
--------- ----------- ---------- ----------- ---------- ----------- ---------- --------
Transactions
with owners
Dividends to
ordinary
shareholders 13 - - (13.0) - - - - (13.0)
Share based
payments 45 - - - - - - (3.2) (3.2)
Total
transactions
with owners - - (13.0) - - - (3.2) (16.2)
--------- ----------- ---------- ----------- ---------- ----------- ---------- --------
Balance at 28
February 2021 122.0 1,098.2 370.7 9.3 (0.6) -- 21.9 1,621.5
--------- ----------- ---------- ----------- ---------- ----------- ---------- --------
Cash Share
flow Currency based
Share Share Retained FV/AFS hedge basis payment Total
capital premium earnings reserve(1) reserve reserve reserve equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Balance at 1 March
2019 122.0 1,098.2 434.0 4.6 (1.0) (0.3) 24.1 1,681.6
Comprehensive
income
Profit for the year -- -- 103.2 -- -- -- -- 103.2
Net fair value
movement
on investment
securities
at FVOCI 12 -- -- -- 2.7 -- -- -- 2.7
Net movements on
cash
flow hedges 12 -- -- -- 0.7 0.2 -- 0.9
Share of other
comprehensive
income of joint
venture 23 -- -- -- 5.0 -- -- -- 5.0
Total comprehensive
income -- -- 103.2 7.7 0.7 0.2 -- 111.8
--------- --------- ---------- ------------ --------- --------- --------- --------
Transactions with
owners
Dividends to
ordinary
shareholders 13 -- -- (50.0) -- -- -- -- (50.0)
Share based
payments 45 -- -- -- -- -- -- 1.0 1.0
--------- --------- ---------- ------------ --------- --------- --------- --------
Total transactions
with owners -- -- (50.0) -- -- -- 1.0 (49.0)
--------- --------- ---------- ------------ --------- --------- --------- --------
Balance at 29
February
2020 122.0 1,098.2 487.2 12.3 (0.3) (0.1) 25.1 1,744.4
--------- --------- ---------- ------------ --------- --------- --------- --------
(1) Available-for-sale (AFS)
43
COMPANY STATEMENT OF CHANGES IN EQUITY
For the Year Ended 28 February 2021
Share Total
capital Share premium Retained earnings equity
Note GBPm GBPm GBPm GBPm
Balance at 1 March 2020 122.0 1,098.2 11.4 1,231.6
Comprehensive income
Profit for the year - - 15.2 15.2
--------- -------------- ------------------ --------
Total comprehensive income - - 15.2 15.2
--------- -------------- ------------------ --------
Transactions with owners
Dividends to ordinary shareholders 13 - - (13.0) (13.0)
Total transactions with owners - - (13.0) (13.0)
--------- -------------- ------------------ --------
Balance at 28 February 2021 122.0 1,098.2 13.6 1,233.8
--------- -------------- ------------------ --------
Share Share Retained Total
capital premium earnings equity
Note GBPm GBPm GBPm GBPm
Balance at 1 March 2019 122.0 1,098.2 12.1 1,232.3
Comprehensive income
Profit for the year -- -- 49.3 49.3
Total comprehensive income -- -- 49.3 49.3
--------- --------- ---------- --------
Transactions with owners
Dividends to ordinary shareholders 13 -- -- (50.0) (50.0)
--------- --------- ---------- --------
Total transactions with owners -- -- (50.0) (50.0)
--------- --------- ---------- --------
Balance at 29 February 2020 122.0 1,098.2 11.4 1,231.6
--------- --------- ---------- --------
44
CONSOLIDATED AND COMPANY CASH FLOW STATEMENTS
For the Year Ended 28 February 2021
Group Company
2021 2020 2021 2020
Note GBPm GBPm GBPm GBPm
Operating activities
(Loss)/profit before tax from continuing operations (154.9) 79.2 15.2 49.6
Profit before tax from discontinued operations 0.4 77.7 -- --
-------- -------- ------- --------
Total (loss)/profit before tax (154.5) 156.9 15.2 49.6
Adjusted for:
Non-cash items included in operating profit before taxation and other
adjustments 40 438.5 351.5 12.2 10.9
Changes in operating assets and liabilities 40 (103.7) 163.5 0.3 (0.9)
Income taxes paid (9.1) (68.3) -- --
-------- -------- ------- --------
Cash flows generated from operating
activities 171.2 603.6 27.7 59.6
-------- -------- ------- --------
Investing Activities
Purchase of intangible assets and property, plant and equipment (59.2) (44.7) -- --
Purchase of debt investment securities 38 (84.4) (778.6) -- --
Sale of debt investment securities 201.8 774.3 -- --
Redemption of subordinated debt issued by joint venture 38 -- 7.8 -- --
Dividends received from joint venture 23 7.5 -- -- --
Capital distribution received from joint venture 23 -- 15.6 -- --
-------- -------- ------- --------
Cash flows generated from/(used in)
investing activities 65.7 (25.6) -- --
-------- -------- ------- --------
Financing Activities
Net proceeds received in association with issuance of debt securities -- 249.1 -- 249.1
Principal repayments on debt securities in issue 29 (772.2) (410.0) -- --
Dividends paid to ordinary shareholders 13 (13.0) (50.0) (13.0) (50.0)
Interest paid on debt securities in issue (23.0) (24.3) (8.8) (4.4)
Interest paid on assets held to hedge debt securities in issue (3.9) (13.0) -- --
Subordinated loan to subsidiary company 17 -- -- -- (250.0)
Interest paid on subordinated liabilities and notes (3.8) (5.0) (3.8) (5.0)
Principal repayments on lease liabilities 36 (1.9) (1.8) -- --
Interest paid on lease liabilities 36 (3.6) (2.4) -- --
-------- -------- ------- --------
Cash flows used in from financing
activities (821.4) (257.4) (25.6) (60.3)
-------- -------- ------- --------
Net (decrease)/increase in cash and cash equivalents (584.5) 320.6 2.1 (0.7)
Cash and cash equivalents(1) at beginning of year 1,364.0 1,043.4 12.7 13.4
Cash and cash equivalents(1) at end of year 15 779.5 1,364.0 14.8 12.7
-------- -------- ------- --------
(1) Cash and cash equivalents comprise cash and balances with central
banks, excluding mandatory reserve deposits of GBP24.7m (2020: GBP31.6m)
(refer to note 15).
45
1 . Accounting Policies
Basis of Preparation
The Financial Statements have been prepared in accordance with
International Accounting Standards in conformity with the
requirements of the Companies Act 2006 and International Financial
Reporting Standards (IFRSs) and interpretations issued by the
International Financial Reporting Interpretations Committee of the
International Accounting Standards Board (IASB) and those parts of
the Companies Act 2006 applicable to Companies reporting under
IFRSs.
In these Financial Statements the 'Company' means Tesco Personal
Finance Group plc and the 'Group' means the Company and its
subsidiaries and joint venture. Details of these subsidiaries and
joint venture are provided in notes 22 and 23. These Consolidated
Financial Statements comprise the Financial Statements of the
Group. The Company has elected to take the exemption under section
408 of the Companies Act 2006 not to present the Income Statement
and Statement of Comprehensive Income of the Company.
The Company and Consolidated Financial Statements have been
prepared under the historical cost convention as modified by the
revaluation of derivative financial instruments, equity investment
securities and assets of the disposal group held at fair value.
The Company and Consolidated Financial Statements are presented
in Sterling, which is the functional currency of the Group. The
figures shown in the Financial Statements are rounded to the
nearest GBP0.1 million unless otherwise stated.
Onshoring of European Union (EU) Regulations After Brexit
Following the UK's withdrawal from the EU and the ending of the
transition period, any reference to EU regulations and directives
(including technical standards) should be read as a reference to
the UK's version of such regulation or directive, as onshored into
UK law under the European Union (Withdrawal) Act 2018, as
amended.
Going concern
The Directors have made an assessment of going concern, taking
into account both current performance and the Group's outlook,
which considered the impact of the Covid-19 pandemic, and including
consideration of projections incorporating the impact of the
Covid-19 pandemic for the Group's capital and funding position. As
part of this assessment the Board considered:
-- The impact on the Group's profits as income and charges for
expected credit losses (ECLs) continue to be affected by the
Covid-19 pandemic. As part of this, the Board considered the latest
macro-economic scenarios which were received from the Group's
third-party supplier. These are discussed in note 38;
-- The sufficiency of the Group's capital base throughout the
Covid-19 pandemic The revised macro--economic scenarios received
were significantly less severe than those used in the ICAAP reverse
stress test. The Group reviewed its stress testing scenarios to
ensure it has sufficient capital and liquidity to trade through a
plausible range of economic outcomes;
-- The adequacy of the Group's liquidity as the Group supports
customers through a period of financial stress;
-- The operational resilience of the Group's critical functions
including call centres, mobile and online channels and the Group's
ability to provide continuity of service to its customers
throughout a prolonged stress;
-- The resilience of the Group's IT systems;
-- A detailed assessment of the Group's supplier base,
considering any single points of failure and focussing on suppliers
experiencing financial stress. This included consideration of
contingency plans should suppliers be deemed at risk;
46
1. Accounting Policies (continued)
Going Concern (continued)
-- The regulatory and legal environment and any potential conduct risks which could arise;
-- Any potential valuation concerns in respect of the Group's
assets as set out in the Consolidated Statement of Financial
Position;
-- The impact of the Covid-19 pandemic on Tesco Underwriting
Limited (TU), the Group's joint venture insurance company; and
-- The structural protections of the Group's securitisation vehicles.
The Board also considered the results of stress testing which is
performed as an integral part of both the Individual Capital
Adequacy Assessment Process (ICAAP) and Individual Liquidity
Adequacy Assessment Process (ILAAP), with the Group having
sufficient capital and liquidity to fund the balance sheet in each
scenario.
As a result of this assessment, the Directors consider that it
is appropriate to adopt the going concern basis of accounting in
preparing the Consolidated Financial Statements.
Change in classification
On 1 March 2020, the Group's portfolio of debt investment
securities measured at fair value through other comprehensive
income (FVOCI) was reclassified to amortised cost, measured using
the effective interest rate (EIR) method less allowance for ECLs.
This was following a change in business model resulting from the
sale of the Group's Mortgage business which increased Management's
expectation that these debt investments would be held for the
collection of contractual cash flows only. In the prior year, gains
and losses arising from changes in fair value were recognised
directly in other comprehensive income, except for impairment gains
or losses, interest income and foreign exchange gains and losses,
which were recognised in the Consolidated Income Statement.
Principal accounting policies
A summary of the Group's accounting policies is set out below.
These policies have been consistently applied to all of the years
presented, unless otherwise stated.
(a) Basis of consolidation
The Consolidated Financial Statements of the Group comprise the
Financial Statements of the Company and all consolidated
subsidiaries, including certain securitisation structured entities,
and the Group's share of its interest in a joint venture, as at 28
February 2021.
Investment in Group undertakings
Subsidiaries are all entities (including structured entities)
over which the Group has control. The Group controls an entity when
the Group is exposed to, or has rights to, variable returns from
its involvement with the entity and has the ability to affect those
returns through its power over the entity. The results of
subsidiaries are included in the Consolidated Financial Statements
from the date that control commences until the date that control
ceases. The Company's investments in its subsidiaries are stated at
cost less any impairment.
Intragroup balances, and any unrealised gains and losses or
income and expenses arising from intragroup transactions, are
eliminated in preparing the Consolidated Financial Statements.
Securitisation structured entities
The Group enters into securitisation transactions in which it
assigns Credit Card receivables to a securitisation structured
entity which supports the issuance of securities backed by the cash
flows from the securitised Credit Card receivables. Although none
of the equity of the securitisation structured entities is owned by
the Group, the nature of these entities means that the Group has
the rights to variable returns from its involvement with these
securitisation structured entities and has the ability to affect
those returns through its power over them. As such, they are
effectively controlled by the Group and are consolidated on a line
by line basis in the Consolidated Financial Statements.
47
1. Accounting Policies (continued)
Investment in joint venture
A joint arrangement is an arrangement over which the Group has
joint control. Joint control is the contractually agreed sharing of
control of an arrangement, which exists only when decisions about
the relevant activities require unanimous consent of the parties
sharing control. A joint venture is a joint arrangement whereby the
Group has rights to a share of the net assets of the joint
arrangement.
The Group's share of the results of a joint venture is included
in the Consolidated Income Statement using the equity method of
accounting. The Group's investment in a joint venture is carried in
the Consolidated Statement of Financial Position at cost plus
post-acquisition changes in the Group's share of the net assets of
the entity, less any impairment.
If the Group's share of losses in a joint venture equals or
exceeds its investment in the joint venture, the Group does not
recognise further losses, unless it has incurred obligations to do
so or made payments on behalf of the joint venture.
(b) Revenue recognition
Net interest income recognition
Interest income and expense for all financial instruments
measured at amortised cost are recognised using the effective
interest rate (EIR) method.
The EIR method is a method of calculating the amortised cost of
a financial asset or financial liability (or group of financial
assets or financial liabilities) and of allocating the interest
income or interest expense over the expected life of the financial
asset or financial liability. The EIR is the rate that exactly
discounts estimated future cash flows to the instrument's initial
carrying amount.
Calculation of the EIR takes into account fees receivable that
are an integral part of the instrument's yield, premiums or
discounts on acquisition or issue, early redemption fees and
transaction costs. All contractual and behavioural terms of a
financial instrument are considered when estimating future cash
flows.
Interest income is calculated on the gross carrying amount of a
financial asset unless the financial asset is impaired, in which
case interest income is calculated on the net carrying amount,
after allowance for ECLs.
Net fees and commissions income recognition
The Group generates fees from banking services, primarily Credit
Card interchange fees. Fees in respect of banking services are
recognised in line with the satisfaction of performance
obligations. This can be either at a point in time or over time, in
line with the provision of the service to the customer.
The majority of banking services are performed at a point in
time and payment is due from a customer at the time a transaction
takes place. For services performed over time, payment is generally
due monthly in line with the satisfaction of performance
obligations.
The costs of providing these banking services are incurred as
the services are rendered. The price is usually fixed and always
determinable.
The Group also generates commission from the sale and service of
Motor and Home insurance policies underwritten by TU or, in a
minority of cases, by a third-party underwriter. This is based on
commission rates which are independent of the profitability of
underlying insurance policies. Similar commission income is also
generated from the sale of white label insurance products
underwritten by other third-party providers. This commission income
is recognised on a net basis as such policies are sold, in line
with the satisfaction of performance obligations to customers.
48
1. Accounting Policies (continued)
In the case of certain commission income on insurance policies
managed and underwritten by a third-party, the Group recognises
commission income from policy renewals as such policies are sold.
This is when the Group has satisfied all of its performance
obligations in relation to the policy sold and it is considered
highly probable that a significant reversal in the amount of
revenue recognised will not occur in future periods. This
calculation takes into account both estimates of future renewal
volumes and renewal commission rates. A contract asset is
recognised in relation to this revenue. This is unwound over the
remainder of the contract with the customer, the customer in this
case being the third-party insurance provider.
The end policyholders have the right to cancel an insurance
policy at any time. Therefore, a contract liability is recognised
for the amount of any expected refunds due and the revenue
recognised in relation to these sales is reduced accordingly. This
contract refund liability is estimated using prior experience of
customer refunds. The appropriateness of the assumptions used in
this calculation is reassessed at each reporting date.
Customer loyalty programmes
The Group participates in the customer loyalty programme
operated by Tesco Stores Limited (TSL). The programme operates by
allowing customers to accumulate Clubcard points on purchases for
future redemption against a range of Tesco products and those of
selected partners. Revenue in respect of these points is recognised
at the time of the customer transaction as the Group has no
obligation to customers in respect of Clubcard points once the
points are allocated to a customer account. The revenue is
recognised net of the cost of providing Clubcard points to
customers, which is recharged by TSL to the Group.
Dividend income
Dividends are recognised in the Consolidated Income Statement
when the entity's right to receive payment is established.
(c) Taxation
The tax charge or credit included in the Consolidated Income
Statement consists of current and deferred tax. Tax is recognised
in the Consolidated Income Statement except to the extent that it
relates to items recognised in other comprehensive income or
directly in equity, in which case it is recognised in other
comprehensive income or equity, respectively.
Current tax is the expected tax payable on the taxable income
for the year, using tax rates enacted or substantively enacted by
the reporting date.
Deferred tax is provided using the liability method on temporary
differences arising between the tax bases of assets and liabilities
and their carrying amounts in the Company and Consolidated
Financial Statements. Deferred tax is calculated at the tax rates
that have been enacted or substantively enacted by the reporting
date.
Deferred tax assets are recognised to the extent that it is
probable that future taxable profits will be available against
which deductible temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be realised.
Deferred tax assets and liabilities are offset against each
other when there is a legally enforceable right to set-off current
tax assets against current tax liabilities and it is Management's
intention to settle these on a net basis.
49
1. Accounting Policies (continued)
(d) Foreign currency translation
Foreign currency transactions are translated into the functional
currency using the exchange rate prevailing at the date of the
transaction.
Monetary items denominated in foreign currency are translated at
the closing rate as at the reporting date.
Foreign exchange gains and losses resulting from the settlement
of foreign currency transactions and from the translation at year
end exchange rates of monetary assets and liabilities denominated
in foreign currencies are recognised in the Consolidated Income
Statement, except when deferred in equity as gains or losses from
qualifying cash flow hedging instruments. All foreign exchange
gains and losses recognised in the Consolidated Income Statement
are presented net in the Consolidated Income Statement within the
corresponding item. Foreign exchange gains and losses on other
comprehensive income items are presented in other comprehensive
income within the corresponding item.
In the case of changes in the fair value of monetary assets
denominated in foreign currency classified at FVOCI, a distinction
is made between translation differences resulting from changes in
the amortised cost of the security and other changes in the
carrying amount of the security. Translation differences related to
the changes in the amortised cost are recognised in the
Consolidated Income Statement, and other changes in the carrying
amount, except impairment, are recognised in equity.
(e) Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and demand
deposits with banks together with short-term highly liquid
investments with short-term maturities.
(f) Financial instruments
The Group classifies a financial instrument as a financial
asset, financial liability or an equity instrument in accordance
with the substance of the contractual arrangement. An instrument is
classified as a liability if it creates a contractual obligation to
deliver cash or another financial asset, or to exchange financial
assets or financial liabilities on potentially unfavourable terms.
An instrument is classified as equity if it evidences a residual
interest in the assets of the Group after the deduction of
liabilities.
Financial assets
Classification and measurement
The Group classifies its financial assets in the following
categories:
-- Fair value through profit or loss (FVPL);
-- Fair value through other comprehensive income (FVOCI); and
-- Amortised cost.
Management determines the classification of the Group's
financial assets at initial recognition. Purchases and sales of
financial assets are recognised on the trade date - the date on
which the Group commits to purchase or sell the asset.
All financial assets are measured at initial recognition at fair
value, plus transaction costs for those classified as FVOCI and
amortised cost. Transaction costs on financial assets classified as
FVPL are recognised in the Consolidated Income Statement at the
time of initial recognition.
Classification and subsequent measurement of financial assets
depend on:
-- The Group's business model for managing the financial asset; and
-- The cash flow characteristics of the financial asset.
The business model reflects how the Group manages its financial
assets in order to generate cash flows and is determined by whether
the Group's objective is solely to collect contractual cash flows
from the assets or to collect both contractual cash flows and cash
flows arising from the sale of assets. If neither of these models
applies, the financial assets are classified as FVPL.
50
1. Accounting Policies (continued)
In determining the business model, the Group considers past
experience in collecting cash flows, how the performance of these
financial assets is evaluated and reported to Management and how
risks are assessed.
Where the business model is to hold financial assets to collect
contractual cash flows or to collect contractual cash flows and
sell the assets, the Group assesses whether the financial asset's
cash flows represent solely payments of principal and interest (the
SPPI test). When making this assessment, the Group considers
whether the contractual cash flows are consistent with a basic
lending arrangement.
Financial assets at amortised cost
Financial assets that are held for collection of contractual
cash flows where those cash flows represent solely payments of
principal and interest, and that are not designated as FVPL, are
classified and subsequently measured at amortised cost. The
carrying value of these financial assets is adjusted by any ECL
allowance recognised and measured as described below.
Financial assets at FVOCI
Financial assets that are held for collection of contractual
cash flows and for selling the assets, where those cash flows
represent solely payments of principal and interest, and that are
not designated as FVPL, are classified and subsequently measured at
FVOCI. In the prior year, the Group held investments in debt
securities which were classified as FVOCI. Movements in the
carrying amount of debt securities classified as FVOCI were taken
through other comprehensive income, except the recognition of
impairment gains or losses, interest revenue using the EIR method
and foreign exchange gains and losses, which were recognised
through the Consolidated Income Statement. In the current year,
debt securities are held at amortised cost.
The Group also holds an investment in equity securities which
has been irrevocably designated by Management as FVOCI at original
recognition. Movements in the carrying amount of these equity
securities are taken through other comprehensive income and are not
subsequently reclassified to the Consolidated Income Statement,
including on disposal. Expected credit losses on these securities
are not recognised separately from other changes in fair value.
For financial assets at FVOCI which were in fair value hedge
relationships, the element of the fair value movement which related
to the hedged risk was recycled to the Consolidated Income
Statement.
Financial assets at FVPL
Financial assets that do not meet the criteria for recognition
at amortised cost or at FVOCI are measured at FVPL.
Impairment
The Group assesses on a forward-looking basis the ECLs
associated with its financial assets carried at amortised cost and
FVOCI, and with the exposure arising from loan commitments. The
Group recognises a loss allowance for such losses at each reporting
date. The measurement of ECLs reflects:
-- An unbiased and probability-weighted amount that is
determined by evaluating a range of possible outcomes;
-- The time value of money; and
-- Reasonable and supportable information that is available
without undue cost or effort at the reporting date about past
events, current conditions and forecasts of future economic
conditions.
Refer to note 38 for further details on the calculation of the
allowance for ECLs.
Financial liabilities
Classification and measurement
All of the financial liabilities held by the Group, other than
derivative financial liabilities, are classified and measured at
amortised cost using the EIR method, after initial recognition at
fair value. Fair value is calculated as the issue proceeds, net of
premiums, discounts and transaction costs incurred. For financial
liabilities in fair value hedge relationships, the carrying value
is adjusted by the hedged item (the fair value of the underlying
hedged risk) through the Consolidated Income Statement.
Derivative financial liabilities are classified and measured at
FVPL. Further information on the classification and measurement of
derivative financial instruments is set out at policy 1(g).
51
1. Accounting Policies (continued)
Derecognition
Financial assets are derecognised when the contractual rights to
receive cash flows have expired or where substantially all of the
risks and rewards of ownership have been transferred and the
transfer qualifies for derecognition. Financial liabilities are
derecognised when they have been redeemed or otherwise
extinguished.
Collateral furnished by the Group under standard repurchase
agreements is not derecognised because the Group retains
substantially all the risks and rewards of ownership on the basis
of the predetermined repurchase price, therefore the criteria for
derecognition are not met. Credit Card receivables assigned by the
Group to a securitisation structured entity do not qualify for
derecognition as the Group retains substantially all the risks and
rewards of ownership of the securitised Credit Card
receivables.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the
net amount reported in the Company and Consolidated Statements of
Financial Position when there is a legally enforceable right to
offset the recognised amounts and there is an intention to settle
on a net basis, or to realise an asset and settle a liability
simultaneously.
Loan commitments
All loan commitments provided by the Group are as part of
contracts that include both a loan and an undrawn commitment. As
the Group cannot separately identify the ECLs on the undrawn
commitment component from those on the loan component, the ECLs on
the undrawn commitment are recognised together with the loss
allowance for the loan. Any excess of the ECLs over the gross
carrying amount of the loan is recognised as a separate provision
within provisions for liabilities and charges.
(g) Derivative financial instruments and hedge accounting
The Group uses derivative financial instruments for the purpose
of providing an economic hedge to its exposures to interest rate
and foreign exchange risks as they arise from operating, financing
and investing activities. The Group does not hold or issue
derivative financial instruments for trading purposes. Derivative
financial instruments are initially recognised at fair value on the
contract date and are remeasured at fair value at subsequent
reporting dates.
Hedge accounting
The Group designates certain hedging instruments as either fair
value hedges or cash flow hedges, where it is efficient to do so
and the relevant criteria are met. The Group has implemented IFRS 9
'Financial Instruments' hedge accounting requirements in respect of
its fair value hedges of the Group's investment securities and its
cash flow hedges. As permitted under IFRS 9, the Group has elected
to continue to apply the existing hedge accounting requirements of
International Accounting Standard (IAS) 39 'Financial instruments:
Recognition and measurement' for its portfolio hedge accounting
until the new macro hedge accounting standard is implemented.
The Group applies hedge accounting as follows:
-- Hedge relationships are classified as fair value hedges where
the derivative financial instruments hedge the change in the fair
value of fixed rate financial assets or financial liabilities due
to movements in interest rates.
-- Hedge relationships are classified as cash flow hedges where
the derivative financial instruments hedge the foreign currency
risk on certain foreign currency invoices. Hedge relationships were
also classified as cash flow hedges where the derivative financial
instruments hedged interest rate risk and foreign currency risk on
US Dollar notes issued by one of the Group's securitisation
entities which were redeemed during the year.
To qualify for hedge accounting, the Group documents, at the
inception of the hedge: the hedging risk management strategy; the
relationship between the hedging instrument and the hedged item or
transaction; and the nature of the risks being hedged. The Group
also documents the assessment of the effectiveness of the hedging
relationship, to show that the hedge has been, and will be, highly
effective on an ongoing basis.
52
1. Accounting Policies (continued)
Fair value hedges
Changes in the fair value of derivative financial instruments
that are designated as fair value hedges are recognised in the
Consolidated Income Statement. The hedged item is also adjusted for
changes in fair value attributable to the hedged risk, with the
corresponding adjustment made in the Consolidated Income
Statement.
If the hedge no longer meets the criteria for hedge accounting,
the adjustment to the carrying amount of a hedged item is amortised
to the Consolidated Income Statement over the remaining period to
maturity.
Cash flow hedges
Changes in the fair value of the derivative financial
instruments that are designated as hedges of future cash flows are
recognised directly in other comprehensive income and accumulated
in the cash flow hedge reserve and the ineffective portion is
recognised immediately in the Consolidated Income Statement.
Amounts recognised in other comprehensive income are recycled to
the Consolidated Income Statement when equivalent amounts of the
hedged item are recognised in the Consolidated Income Statement.
Any costs of hedging, such as the change in fair value related to
currency basis adjustment, is separately accumulated in the
currency basis reserve.
When the hedging instrument expires or is sold, terminated or
exercised, hedge accounting is discontinued. Any cumulative gain or
loss existing in the cash flow hedge reserve and/or currency basis
reserve at that time remains until the forecast transaction occurs
or the original hedged item affects the Consolidated Income
Statement. At that point, the cumulative gain or loss is also
recognised in the Consolidated Income Statement. If a forecast
hedged transaction is no longer expected to occur, the cumulative
gain or loss in the cash flow hedge reserve or currency basis
reserve is reclassified to the Consolidated Income Statement.
(h) Derivative financial instruments not in hedge accounting
relationships
Changes in the fair value of derivative financial instruments
that do not qualify for hedge accounting are recognised in the
Consolidated Income Statement as they arise.
(i) Impairment of non-financial assets
Non-financial assets are reviewed for impairment when there are
indications that the carrying value may not be recoverable. In the
event that an asset's carrying amount is determined to be greater
than its recoverable amount, an impairment loss is recognised
immediately in the Consolidated Income Statement and the carrying
value of the asset is written down by the amount of the loss. The
recoverable amount is the higher of the asset's fair value less
costs to sell and its value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there
are separately identifiable cash flows (cash-generating units).
Non-financial assets for which an impairment loss has been
recognised are reviewed for possible reversal of the impairment at
each reporting date.
53
1. Accounting Policies (continued)
(j) Property, plant and equipment
Items of property, plant and equipment are stated at historical
cost less accumulated depreciation and any impairment losses.
Historical cost includes expenditure that is directly attributable
to the acquisition of the items. Subsequent expenditure is included
in the asset's carrying amount or recognised as a separate asset,
as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Group. All other
repairs and maintenance costs are charged to the Consolidated
Income Statement in the period in which they are incurred.
Depreciation is charged to the Consolidated Income Statement on
a straight-line basis so as to allocate the costs less residual
values over the lower of the useful life of the related asset and,
for leasehold improvements, the expected lease term. Depreciation
commences on the date that the assets are brought into use.
Work-in-progress assets are not depreciated until they are brought
into use and transferred to the appropriate category of property,
plant and equipment.
Estimated useful lives are:
-- Plant and equipment 2 to 8 years
-- Fixtures and fittings 4 to 10 years
-- Computer hardware 3 to 10 years
-- Freehold buildings 40 years
-- Leasehold improvements 15 to 20 years
-- Right-of-use assets 15 to 20 years
The assets' residual values and useful lives are reviewed, and
adjusted if appropriate, at each reporting date. Gains and losses
on disposals are determined by comparing proceeds with carrying
amount. These are included in administrative expenses in the
Consolidated Income Statement.
(k) Intangible assets
Acquired intangible assets
Intangible assets that are acquired by the Group are stated at
historical cost less accumulated amortisation and any impairment
losses. Amortisation is charged to the Consolidated Income
Statement on a straight-line basis over the estimated useful lives.
The Group's intangible assets are computer software, for which the
estimated useful lives are 3 to 10 years.
Internally generated intangible assets - research and
development expenditure
Research costs are expensed in the Consolidated Income Statement
as incurred.
Development expenditure incurred on an individual project is
capitalised only if all of the following criteria are
demonstrated:
-- an asset is created that can be identified (such as software);
-- it is probable that the asset created will generate future economic benefits; and
-- the development cost of the asset can be measured reliably.
Following the initial recognition of development expenditure,
the cost is amortised over the estimated useful life of the asset
created. Amortisation commences on the date that the asset is
brought into use. Work-in-progress assets are not amortised until
they are brought into use and transferred to the appropriate
category of intangible assets.
54
1. Accounting Policies (continued)
(l) Leases
The Group has entered into leases for office buildings.
Leases are recognised as a right-of-use asset and corresponding
lease liability at the date on which the leased asset becomes
available for use by the Group.
Right-of-use assets are included within property, plant and
equipment in the Company and Consolidated Statements of Financial
Position.
Right-of-use assets are measured at cost, which comprises:
-- the amount of the initial lease liability;
-- any lease payments made at or before the commencement date;
-- any initial direct costs; and
-- restoration costs.
Right-of-use assets are depreciated over the lease term on a
straight-line basis.
Lease liabilities are initially calculated as the net present
value of expected lease payments, less any lease incentives
receivable. The lease payments are discounted using the interest
rate implicit in the lease, if that rate can be determined, or the
Group's incremental borrowing rate.
Following initial recognition, lease payments are allocated
between the outstanding lease liability and interest expense. The
interest expense is charged to the Consolidated Income Statement
over the lease period through interest expense and similar charges
so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period.
(m) Employee benefits
The Group accounts for pension costs on a contributions basis in
line with the requirements of IAS 19 'Employee Benefits'. The Group
made contributions in the year to a funded defined benefit scheme
and a funded defined contribution scheme. Both of these schemes are
operated by TSL.
IAS 19 requires that, where there is no policy or agreement for
sharing the cost of a defined benefit scheme across the
subsidiaries, the Sponsoring employer recognises the net defined
benefit cost of a defined benefit scheme. The Sponsoring employer
of the funded defined benefit scheme is TSL and the principal
pension plan is the Tesco PLC (Tesco) pension scheme. TSL has
recognised the appropriate net liability of the Tesco pension
scheme in accordance with IAS 19.
(n) Share based payments
Employees of the Group receive part of their remuneration in the
form of share based payment transactions, whereby employees render
services in exchange for Tesco shares or rights over shares
(equity-settled transactions) or in exchange for entitlements to
cash based payments based on the value of the shares (cash-settled
transactions).
The fair value of employee share option plans is calculated at
the grant date using the Black-Scholes model. The resulting cost is
recognised in the Consolidated Income Statement over the vesting
period. The value of the charge is adjusted to reflect expected and
actual levels of vesting.
The grant by Tesco of options over its equity instruments to the
employees of the Group is treated as a capital contribution in
equity. The social security contribution payable in connection with
the grant of the share options is considered an integral part of
the grant itself, and the charge is treated as a cash-settled
transaction.
55
1. Accounting Policies (continued)
(o) Provisions for liabilities and charges and contingent
liabilities
A provision is recognised where there is a present legal or
constructive obligation as a result of a past event; it is more
likely than not that an outflow of economic resources will be
required to settle the obligation; and the amount can be reliably
estimated.
Provisions are measured at the present value of the expenditure
expected to be required to settle the obligation.
A contingent liability is a possible obligation which is
dependent on the outcome of uncertain future events not wholly
within the control of the Group, or a present obligation where an
outflow of economic resources is not likely or the amount cannot be
reliably measured.
Contingent liabilities are not recognised in the Company or
Consolidated Statements of Financial Position but are disclosed in
the notes to the Financial Statements unless the possibility of an
outflow of economic resources is remote.
(p) Dividends paid
Dividends are recognised in equity in the period they are
approved by the Group's Board.
(q) Segmental reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the chief operating decision-maker.
The chief operating decision-maker is the person or group that
allocates resources to and assesses the performance of the
operating segments of an entity. The Group has determined the Board
of Directors as its chief operating decision-maker.
(r) Sale and repurchase agreements
Investment securities sold subject to a commitment to repurchase
them at a predetermined price are retained on the Company and
Consolidated Statements of Financial Position when substantially
all of the risk and rewards of ownership remain with the Group. The
counterparty liability is included in deposits from banks.
Conversely, securities purchased under agreements to resell
(reverse repos), where the Group does not acquire substantially all
of the risks and rewards of ownership, are recorded as loans and
advances from banks.
(s) Encumbered assets
The Group's methodology used to identify encumbered assets is
aligned to definitions used in calculating the Group's Pillar 3
encumbrance disclosures.
(t) Non-current assets of the disposal group and discontinued
operations
Under IFRS 5 'Non-current assets held for sale and discontinued
operations' the Group classifies non-current assets or liabilities
(or disposal groups) as assets held for sale when their carrying
amount is to be recovered principally through a sale transaction
and a sale is considered highly probable, with the asset available
for immediate sale in its present condition.
Non-current assets (or disposal groups) classified as held for
sale are measured under IFRS 5 at the lower of their carrying
amount and fair value less costs to sell, with the exception of
deferred tax balances and financial assets falling within the scope
of IFRS 9. These balances are initially measured in line with their
respective accounting policies and subsequently remeasured as part
of the overall disposal group, in accordance with the requirements
of IFRS 5.
Balances in respect of disposal groups held for sale are
presented separately in the Company and Consolidated Statements of
Financial Position for the current year, with no requirement to
restate the prior year.
The net results of discontinued operations are presented
separately in the Consolidated Income Statement where an entity or
component of an entity of the Group has been disposed of or is
classified as held for sale and:
(a) Represents a separate major line of business or geographical
area of operations; or
(b) Is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of
operations.
56
1. Accounting Policies (continued)
A component of an entity of the Group comprises operations and
cash flows that can be clearly distinguished, operationally and for
financial reporting purposes, from the rest of the Group's
operations and cash flows. If an entity or a component of an entity
of the Group is classified as a discontinued operation, prior years
in the Consolidated Income Statement are restated to present these
on a consistent basis with the current year presentation of
discontinued operations.
(u) Alternative Performance Measures (APMs)
In the reporting of financial information, the Directors have
adopted various APMs. These measures are not defined by IFRSs and
therefore may not be directly comparable with other companies'
APMs, including those in the Group's industry. APMs should be
considered in addition to, and are not intended to be a substitute
for, or superior to, IFRS measurements.
The Directors believe that these APMs assist in providing
additional useful information on the underlying trends, performance
and position of the Group. APMs are also used to enhance the
comparability of information between reporting periods by adjusting
for items which are not reflective of the Group's underlying
results or trading performance and which affect IFRS measures, to
aid users in understanding the Group's performance.
Details of the Group's APMs are set out at note 4 and in the
glossary of terms on pages 173 to 178.
57
2. Critical Accounting Estimates and Judgements in Applying Accounting Policies
In the course of preparing the Financial Statements, no
judgements have been made in the process of applying the Group's
accounting policies, other than those using estimations (which are
presented separately below), that have had a significant effect on
the amounts recognised in the Financial Statements.
The reported results of the Group are sensitive to the
accounting policies, assumptions and estimates that underlie the
preparation of its Financial Statements. The Group's principal
accounting policies are set out in note 1. UK company law and IFRSs
require the Directors, in preparing the Group's Financial
Statements, to select suitable accounting policies, apply them
consistently and make judgements and estimates that are reasonable
and prudent. Where accounting standards are not specific and
Management has to choose a policy, IAS 8, 'Accounting Policies,
Changes in Accounting Estimates and Errors', requires Management to
adopt policies that will result in relevant and reliable
information in the light of the requirements and guidance in IFRSs
dealing with similar and related issues and the IASB Framework for
the Preparation and Presentation of Financial Statements.
The judgements and estimates involved in the Group's accounting
policies that are considered to be the most important to the
portrayal of its financial condition are discussed below. The use
of estimates, assumptions or models that differ from those adopted
by the Group would affect its reported results.
Impairment of financial assets
The measurement of ECLs for financial assets measured at
amortised cost and FVOCI is an area that requires the use of
complex models and significant assumptions about future economic
conditions and credit behaviour, such as the likelihood of
customers defaulting and the resulting losses. Further explanation
of the inputs, assumptions and estimation techniques used at the
reporting date in measuring ECLs, as well as the key sensitivities
of ECLs to change in these elements, are set out at note 38.
Effective interest rate (EIR)
IFRS 9 requires the Group to measure the interest earned on its
Credit Card portfolio by applying the EIR methodology. The main
area of estimation uncertainty in measuring the EIR on the Group's
Credit Card portfolio is the expected attrition of the balances
drawn at the reporting date.
Management uses a pay rates assumption to determine the expected
repayment profile of the balances drawn as at the reporting date to
the expected remaining term (capped at a maximum of 5 years from
origination).
An increase of the pay rates assumption by 10% will reduce the
asset value by GBP4.2m and a corresponding reduction of the pay
rates assumption will increase the asset value by GBP4.8m.
Provision for customer redress
The Group has a provision for potential customer redress in
relation to payment protection insurance (PPI). For further
details, including the key assumptions made in arriving at each
element of this provision and a sensitivity analysis of key
assumptions in the PPI model, refer to note 30.
58
3 . Segmental Reporting
Following the measurement approach of IFRS 8, 'Operating
segments', the Group's operating segments are reported in
accordance with the internal reporting provided to the Board of
Directors, which is responsible for allocating resources to the
operating segments and assessing their performance.
The Group's two operating segments are as follows:
-- Banking - incorporating Credit Cards, Personal Loans,
Savings, Personal Current Accounts, ATMs and Travel Money; and
-- Insurance - incorporating Motor, Home and Pet Insurance
There are no transactions between operating segments.
Segmental assets and liabilities comprise operating assets and
liabilities, being the majority of the Consolidated Statement of
Financial Position, but exclude unallocated reconciling items such
as taxation.
Segmental results of continuing operations and a reconciliation
of segmental results of continuing operations to the total results
of continuing operations are presented below.
Continuing operations Total Management Consolidation
reporting and other
adjustments
Group Central
2021 Banking Insurance Costs Total Consolidated
GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar income 538.4 24.0 -- 562.4 -- 562.4
Interest expense and similar charges (108.9) -- -- (108.9) -- (108.9)
Net interest income 429.5 24.0 -- 453.5 -- 453.5
Fees and commissions income 156.4 52.4 -- 208.8 -- 208.8
Fees and commissions expense (32.7) -- -- (32.7) -- (32.7)
Net fees and commissions income 123.7 52.4 -- 176.1 -- 176.1
Net loss on financial instruments
at FVPL (2.5) -- -- (2.5) -- (2.5)
Net other income (2.5) -- -- (2.5) -- (2.5)
Total income 550.7 76.4 -- 627.1 -- 627.1
------- --------- ------- ---------------- ------------- ------------------
Administrative expenses(1) (53.2) (31.2) (297.6) (382.0) -- (382.0)
Depreciation and amortisation -- -- (56.7) (56.7) -- (56.7)
Operating expenses (53.2) (31.2) (354.3) (438.7) -- (438.7)
Expected credit loss on financial
assets (357.2) (2.3) -- (359.5) -- (359.5)
Operating profit/(loss) 140.3 42.9 (354.3) (171.1) -- (171.1)
Share of profit of joint venture -- 16.2 -- 16.2 -- 16.2
Profit/(loss) before tax from
continuing
operations 140.3 59.1 (354.3) (154.9) -- (154.9)
------- --------- ------- ---------------- ------------- ------------------
Total assets(2,3) 8,609.0 111.0 -- 8,720.0 103.4 8,823.4
------- --------- ------- ---------------- ------------- ------------------
Total liabilities 7,183.3 18.6 -- 7,201.9 -- 7,201.9
------- --------- ------- ---------------- ------------- ------------------
(1) The Banking and Insurance segments include only directly
attributable administrative costs such as marketing and operational
costs. Central overhead costs, which reflect the overhead of
operating both the Insurance and Banking businesses, are not
allocated against an operating segment for internal reporting
purposes.
(2) The investment of GBP92.8m in TU, a joint venture company
accounted for using the equity method, is shown within the total
assets of the Insurance segment.
59
3. Segmental Reporting (continued)
Continuing operations Total Management Consolidation
reporting and other
adjustments
Group Central
2020 Banking Insurance Costs Total Consolidated
GBPm GBPm GBPm GBPm GBPm GBPm
Interest and similar income 673.0 25.4 -- 698.4 -- 698.4
Interest expense and similar
charges (180.9) -- -- (180.9) -- (180.9)
Net interest income 492.1 25.4 -- 517.5 -- 517.5
Fees and commissions income 265.6 75.4 -- 341.0 -- 341.0
Fees and commissions expense (31.3) -- -- (31.3) -- (31.3)
Net fees and commissions
income 234.3 75.4 -- 309.7 -- 309.7
Net loss on financial
instruments at FVPL (4.1) -- -- (4.1) -- (4.1)
Net loss on investment
securities (0.2) -- -- (0.2) -- (0.2)
Net other income (4.3) -- -- (4.3) -- (4.3)
Total income 722.1 100.8 -- 822.9 -- 822.9
-------- --------- --------- ---------------- ------------- ------------------
Administrative expenses(1) (165.3) (24.4) (208.7) (398.4) -- (398.4)
Depreciation and amortisation -- -- (131.9) (131.9) -- (131.9)
Provision for customer
redress (45.0) -- -- (45.0) -- (45.0)
Operating expenses (210.3) (24.4) (340.6) (575.3) -- (575.3)
Expected credit loss on
financial assets (175.9) (2.7) -- (178.6) -- (178.6)
Operating profit/(loss) 335.9 73.7 (340.6) 69.0 -- 69.0
Share of profit of joint
venture -- 10.2 -- 10.2 -- 10.2
Profit/(loss) before tax
from continuing operations 335.9 83.9 (340.6) 79.2 -- 79.2
-------- --------- --------- ---------------- ------------- ------------------
Total assets(2,3) 11,412.2 163.6 -- 11,575.8 69.4 11,645.2
-------- --------- --------- ---------------- ------------- ------------------
Total liabilities 9,854.3 20.2 -- 9,874.5 26.3 9,900.8
-------- --------- --------- ---------------- ------------- ------------------
(1) The Banking and Insurance segments include only directly
attributable administrative costs such as marketing and operational
costs. Central overhead costs, which reflect the overhead of
operating both the Insurance and Banking businesses, are not
allocated against an operating segment for internal reporting
purposes.
(2) The investment of GBP86.0m in TU, a joint venture company
accounted for using the equity method, is shown within the total
assets of the Insurance segment.
(3) Assets and liabilities of the disposal group in respect of
the Group's Mortgage business are included within the Banking
segment.
60
4 . Underlying (Loss)/Profit
The Group's financial performance is presented in the
Consolidated Income Statement on page 40. A summary of the Group's
financial performance in respect of its continuing operations on an
underlying basis, excluding items which are not reflective of
ongoing trading performance, is presented below.
Ogden
Statutory Restructuring Customer rate Financial Underlying
basis activity(1) redress(2) changes(3) instruments(4) basis
GBPm GBPm GBPm GBPm GBPm GBPm
Continuing operations
Year ended 28 February
2021
Net interest income 453.5 -- -- -- -- 453.5
Other income 173.6 -- -- -- 2.5 176.1
--------- ------------- ----------- ----------- --------------- ----------
Total income 627.1 -- -- -- 2.5 629.6
--------- ------------- ----------- ----------- --------------- ----------
Total operating expenses (438.7) -- -- -- -- (438.7)
Expected credit loss
on financial assets (359.5) -- -- -- -- (359.5)
--------- ------------- ----------- ----------- --------------- ----------
Operating loss (171.1) -- -- -- 2.5 (168.6)
--------- ------------- ----------- ----------- --------------- ----------
Share of profit of joint
venture 16.2 -- -- -- -- 16.2
--------- ------------- ----------- ----------- --------------- ----------
Loss before tax (154.9) -- -- -- 2.5 (152.4)
--------- ------------- ----------- ----------- --------------- ----------
Ogden
Statutory Restructuring Customer rate Financial Underlying
basis activity(1) redress(2) changes(3) instruments(4) basis
GBPm GBPm GBPm GBPm GBPm GBPm
Year ended 29 February
2020
Net interest income 517.5 37.5 -- -- -- 555.0
Other income 305.4 -- -- -- 4.1 309.5
--------- ------------- ----------- ----------- --------------- ----------
Total income 822.9 37.5 -- -- 4.1 864.5
--------- ------------- ----------- ----------- --------------- ----------
Total operating expenses (575.3) 65.8 45.0 -- -- (464.5)
Expected credit loss
on financial assets (178.6) -- -- -- -- (178.6)
--------- ------------- ----------- ----------- --------------- ----------
Operating profit 69.0 103.3 45.0 -- 4.1 221.4
--------- ------------- ----------- ----------- --------------- ----------
Share of profit of joint
venture 10.2 -- -- (3.7) -- 6.5
--------- ------------- ----------- ----------- --------------- ----------
Profit before tax 79.2 103.3 45.0 (3.7) 4.1 227.9
--------- ------------- ----------- ----------- --------------- ----------
(1) Comprising:
* in the prior year, interest expense of GBP37.5m in
respect of the discontinued operations' cost of
funding, presented within net interest income on page
40. Since this cost could not be directly attributed
to liabilities of the Group entered into specifically
to fund the Group's Mortgage business, as required by
IFRS 5, it was not possible to present this cost
within statutory profit for the year after tax from
discontinued operations for the prior year. These
costs were in respect of business restructuring and
are considered part of the Mortgage business' results
on a managed basis. There was no such charge in the
current year; and
* in the prior year, a restructuring charge of GBP65.8m
in respect of costs related to the Group's strategic
review, presented within administrative expenses on
page 40. These charges were in respect of business
restructuring and are not considered part of the
Group's underlying results. There was no such charge
in the current year.
(2) Comprising:
* in the prior year, a payment protection insurance
(PPI) provision charge of GBP45.0m presented within
operating expenses on page 40. These costs relate to
historic sales of PPI and are not reflective of the
Group's underlying trading performance. There was no
such charge in the current year.
(3) Comprising:
* in the prior year, a credit of GBP3.7m representing
the Group's share of credits recognised by TU
relating to the impact on TU's insurance reserves of
a change in the Ogden tables, presented within share
of profit of joint venture on page 40. The Ogden
tables were last changed in March 2017, when the
discount rate was changed from 2.5% to -0.75%,
resulting in the Group recognising a charge of
GBP22.8m for the year ended 28 February 2017 in
respect of this rate change, which was excluded from
underlying profit at that date. The credit recognised
in the prior year reflects the change to the current
discount rate of -0.25%. This rate change was
implemented following Government consultation and is
not reflective of the ongoing underlying performance
of TU. There was no such credit in the current year.
(4) Comprising:
* Losses on financial instruments at FVPL of GBP2.5m
(2020: GBP4.1m) presented within total income on page
40. Fair value movements on financial instruments
reflect hedge ineffectiveness arising from hedge
accounting and fair value movements on derivatives in
economic hedges that do not meet the criteria for
hedge accounting. Where these derivatives are held to
maturity, fair value movements represent timing
differences that will reverse over the life of the
derivatives. Therefore, excluding these movements
from underlying profit more accurately represents the
underlying performance of the Group. Where
derivatives are terminated prior to maturity, this
may give rise to fair value movements that do not
reverse.
61
5 . Net Interest Income
2021 2020
GBPm GBPm
Continuing operations
Interest and similar income
On financial assets measured at amortised cost
Loans and advances to customers 543.3 668.5
Cash and balances with central banks 1.5 9.5
Investment securities(1) 14.3 1.0
-------- --------
559.1 679.0
-------- --------
On financial assets measured at fair value
Investment securities(1) -- 12.2
Derivative financial instruments - FVPL 3.3 7.2
-------- --------
3.3 19.4
-------- --------
Total interest and similar income 562.4 698.4
-------- --------
Interest expense and similar charges
On financial liabilities measured at amortised
cost
Deposits from customers (64.7) (128.6)
Deposits from banks (1.2) (12.4)
Debt securities in issue (20.1) (28.5)
Lease liabilities (2.3) (2.5)
Subordinated liabilities and notes (3.5) (5.3)
-------- --------
(91.8) (177.3)
-------- --------
On financial liabilities measured at fair value
Derivative financial liabilities - FVPL (17.1) (3.6)
-------- --------
(17.1) (3.6)
-------- --------
Total interest expense and similar charges (108.9) (180.9)
-------- --------
Net interest income 453.5 517.5
-------- --------
(1) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
62
6 . Net Fees and Commissions Income
2021 2020
GBPm GBPm
Continuing operations
Fees and commissions income
Banking revenue from contracts with customers 155.2 240.6
Insurance revenue from contracts with customers 52.4 75.4
Other revenue from contracts with customers 1.2 25.0
------- -------
Total fees and commissions income 208.8 341.0
------- -------
Fees and commissions expense
Banking expense (32.7) (31.3)
------- -------
Total fees and commissions expense (32.7) (31.3)
------- -------
Net fees and commissions income 176.1 309.7
------- -------
With the exception of other revenue from contracts with
customers, all of the above fees and commissions relate to
financial assets and financial liabilities measured at amortised
cost. These figures exclude amounts incorporated in determining the
EIR on such financial assets and financial liabilities.
7 . Net Loss on Financial Instruments at FVPL
2021 2020
GBPm GBPm
Continuing operations
Foreign exchange loss on financial assets (0.2) --
Net gain/(loss) arising on derivatives not designated as hedging instruments 0.3 (1.2)
Fair value hedge ineffectiveness (refer note 18) (2.5) (3.2)
Cash flow hedge ineffectiveness (refer note 18) (0.1) 0.3
------ ------
Net loss on financial instruments at FVPL (2.5) (4.1)
------ ------
8 . Net Loss on Investment Securities
2021 2020
GBPm GBPm
Continuing operations
Net loss on disposal of investment securities at FVOCI -- (0.2)
------ ------
Net loss on investment securities -- (0.2)
------ ------
63
9 . Administrative Expenses
2021 2020
GBPm GBPm
Continuing operations
Staff costs
Wages and salaries 114.9 103.8
Social security costs 10.8 9.7
Other pension costs 6.6 5.9
Share based payments 3.1 7.9
Other costs including temporary staff 41.3 44.1
------ ------
Total staff costs 176.7 171.4
------ ------
Non-staff costs
Premises and equipment 75.2 72.5
Marketing 35.1 39.8
Auditor's remuneration (refer below) 0.9 0.9
Outsourcing and professional fees 63.6 66.9
Other administrative expenses 30.5 36.6
Restructuring costs(1) -- 10.3
------ ------
Total non-staff costs 205.3 227.0
------ ------
Total administrative expenses 382.0 398.4
------ ------
(1) In the prior year, the Group recognised organisational
restructuring charges within administrative expenses amounting to
GBP10.3m related to a strategic review of the Group's operations.
There was no such charge in the current year.
2021 2020
GBP'000 GBP'000
Audit services
Audit of the Company and Consolidated Financial Statements 55 54
Audit of the Company's subsidiaries 753 768(2)
-------- --------
Total audit services 808 822
-------- --------
Non-audit services
Audit related assurance services 47 45
Other non-audit services not covered above 46 58
-------- --------
Total non-audit services 93 103
-------- --------
Total auditor's remuneration 901 925
-------- --------
The average monthly number of persons (including Executive
Directors) employed by the Group split by employee function during
the year, was:
2021 2020
Number Number
Continuing operations
Head office and administration 1,487 1,361
Operations 2,215 2,226
------- -------
Total average employees 3,702 3,587
------- -------
(2) The audit fee for the year ended 29 February 2020 has been
restated to present this inclusive of GBP70,000 of additional fees
relating to the audit of the impact on the Group of the Covid-19
pandemic which were billed in the current year.
64
10 . Expected Credit Loss on Financial Assets
2021 2020
GBPm GBPm
Continuing operations
Expected credit loss on loans and advances to customers(1) 359.7 177.9
Expected credit loss on investment securities at amortised cost(2) (0.2) --
Expected credit loss on investment securities at FVOCI(2) -- 0.7
------ ------
Total expected credit loss on financial assets 359.5 178.6
------ ------
(1) Included within the expected credit loss on loans and
advances to customers is a credit of GBP0.5m (2020: credit of
GBP30.5m) received through the sale of non-performing debt to third
parties.
(2) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
11 . Directors' Emoluments
The remuneration of the Directors paid by the Group during the
year was as follows:
2021 2020
GBPm GBPm
Continuing operations
Aggregate emoluments 2.6 4.1
Aggregate amounts receivable under long-term incentive schemes 2.1 2.9
Loss of office - 0.5
Share based payments - 0.5
----- -----
Total Directors' emoluments 4.7 8.0
----- -----
2021 2020
Number Number
Continuing operations
Number of Directors to whom retirement benefits are accruing under defined benefit or defined
contribution schemes 3 3
Number of Directors in respect of whose qualifying services shares were received or receivable
under long-term incentive schemes 3 4
The total emoluments of the highest paid Director were GBP1.9m
(2020: GBP2.1m). During the year the highest paid Director did not
exercise any share options (2020: GBPnil).
At 28 February 2021 the accrued pension and lump sum under a
defined benefit scheme for the highest paid Director was GBPnil
(2020: GBPnil).
During the year to 28 February 2021 two Directors (2020: three
Directors) left the Company.
65
12 . Income Tax
Income tax (credit)/charge
2021 2020
GBPm GBPm
Continuing operations
Current tax (credit)/charge for the year (51.4) 46.3
Adjustments in respect of prior years (1.7) (4.6)
Total current tax (credit)/charge for the
year (53.1) 41.7
------- -------
Deferred tax charge/(credit) for the year 6.2 (15.8)
Tax rate change (5.5) 1.8
Adjustments in respect of prior years 1.2 5.0
Total deferred tax charge/(credit) for the
year 1.9 (9.0)
------- -------
Total income tax (credit)/charge (51.2) 32.7
------- -------
The standard rate of corporation tax in the UK was changed from
20% to 19% with effect from 1 April 2017. The March 2016 Budget
Statement included an announcement that the standard rate of
corporation tax in the UK would be further reduced to 17% from 1
April 2020. Subsequently, at the March 2020 Budget Statement, the
Chancellor announced that this reduction to 17% would no longer
take place, with the standard rate of corporation tax instead being
maintained at 19%. The cancellation of the rate reduction resulted
in the Group's deferred tax asset increasing by GBP5.5m during the
year.
The Group's blended corporation tax rate is 19.0% (2020: 19.0%).
In addition, a banking surcharge of 8.0% (2020: 8.0%) is applied to
the Group's results.
In the current year, the tax credit assessed was higher than
that calculated using the overall blended corporation tax rate for
the Group. The tax charge assessed for the prior year was higher
than the overall blended corporation tax rate for the Group. The
differences are explained below:
2021 2020
GBPm GBPm
Continuing operations
(Loss)/profit before taxation from continuing operations (154.9) 79.2
-------- ------
(Loss)/profit on ordinary activities multiplied by blended rate in the UK of
19.0% (2020: 19.0%) (29.5) 15.1
Factors affecting (credit)/charge for the year:
Difference between local and group tax rate (13.1) 3.5
Expenses not deductible for tax purposes(1) 0.7 13.7
Adjustment in respect of prior years - current tax (1.7) (4.6)
Adjustment in respect of prior years - deferred tax 1.2 5.0
Share based payments (0.2) 0.3
Other tax adjustments -- (0.2)
Tax rate change (5.5) 1.8
Share of profit of joint venture (3.1) (1.9)
Total income tax (credit)/charge from continuing operations (51.2) 32.7
-------- ------
(1) The majority of the adjustment in the prior year relates to
the tax impact of the non-deductibility of an additional PPI
provision of GBP45.0m recognised in the prior year. There was no
such charge in the current year.
66
12. Income Tax (continued)
In the March 2021 Budget Statement, the Chancellor announced
that the standard rate of corporation tax in the UK will increase
from 19% to 25% from 1 April 2023.
However, at the reporting date, the 19% rate continued to be the
substantively enacted rate and is therefore the standard rate of
corporation tax applied in calculating the deferred taxation
balances reflected in these Financial Statements.
It was also announced that the level of banking surcharge may be
reduced from 1 April 2023, although the extent of any such
reduction is not expected to be known until late 2021 or early
2022. Further information in respect of the impact of the Group of
this increase in tax rate and potential reduction in the level of
banking surcharge are set out at note 47.
Income tax relating to components of other comprehensive
income
Before tax Net of tax
amount Tax credit/(charge) amount
Continuing operations GBPm GBPm GBPm
2021
Items that may be reclassified to the
income statement
Net losses on debt securities at FVOCI (3.2) 0.8 (2.4)
Net losses on cash flow hedges (0.5) 0.2 (0.3)
Net gains on currency interest rate swaps 0.1 -- 0.1
Items that will not be reclassified to
the income statement
Net gains on equity securities designated
at FVOCI 1.9 (0.6) 1.3
----------- -------------------- -----------
Total income tax relating to components
of other comprehensive income (1.7) 0.4 (1.3)
----------- -------------------- -----------
Before tax Net of tax
amount Tax charge amount
Continuing operations GBPm GBPm GBPm
2020
Items that may be reclassified to the
income statement
Net gains on debt securities at FVOCI(1) 2.9 (0.7) 2.2
Net gains on cash flow hedges 0.9 (0.2) 0.7
Net gains on cross currency interest rate
swaps 0.2 - 0.2
Items that will not be reclassified to
the income statement
Net gains on equity securities designated
at FVOCI 0.7 (0.2) 0.5
----------- ----------- -----------
Total income tax relating to components
of other comprehensive income 4.7 (1.1) 3.6
----------- ----------- -----------
(1) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
67
12. Income Tax (continued)
Deferred tax charged directly to the Statement of Changes in
Equity
Before tax Net of tax
amount Tax charge amount
Continuing operations GBPm GBPm GBPm
2021
Net losses on share based payments reserve (2.5) (0.7) (3.2)
----------- ----------- -----------
(2.5) (0.7) (3.2)
----------- ----------- -----------
Before tax Net of tax
amount Tax charge amount
Continuing operations
2020 GBPm GBPm GBPm
Net gains on share based payments reserve 1.4 (0.4) 1.0
----------- ----------- -----------
1.4 (0.4) 1.0
----------- ----------- -----------
13 . Distributions to Equity Holders
2021 2020
GBPm GBPm
Continuing operations
Ordinary dividend paid 13.0 50.0
----- -----
13.0 50.0
----- -----
On 24 February 2021, an interim dividend of GBP13.0m (GBP0.0107
per ordinary share) was paid. In the prior year, an interim
dividend of GBP50.0m (GBP0.0410 per ordinary share) was paid on 24
February 2020.
68
14 . Assets of the Disposal Group and Discontinued Operations
Assets of the disposal group
2021 2020
Group GBPm GBPm
Assets of the disposal group
Secured Mortgage lending - gross -- 44.7
Less: allowance for impairment -- --
----- ----
Secured Mortgage lending - net -- 44.7
Other assets -- 0.4
Assets of the disposal group -- 45.1
----- ----
During the prior year, secured Mortgage lending balances were
reclassified from loans and advances to customers set out at note
16 to assets of the disposal group following the Group's decision
to sell its Mortgage business. Cash in transit balances in relation
to Mortgages were also reclassified from other assets to assets of
the disposal group as these balances related to amounts to be
applied to Mortgage accounts and therefore formed part of the
Mortgage business being sold. The remaining secured Mortgage
lending balances included in the above table at 29 February 2020
related to a small element of the Mortgage business, representing
new advances to existing Mortgage customers, which continued to be
recognised by the Group until the completion of the migration of
all Mortgage accounts to the purchaser, which took place on 30
March 2020.
At 29 February 2020, the Group had contractual lending
commitments of GBP17.3m in respect of the assets of the disposal
group. There were no such contractual lending commitments at 28
February 2021.
69
14. Assets of the Disposal Group and Discontinued Operations (continued)
Discontinued operations - income statement
The table below shows the results of discontinued operations in
relation to the Group's Mortgage business which are included in the
Consolidated Financial Statements for the year.
Statutory Funding Managed
basis costs(1) basis
GBPm GBPm GBPm
--------- --------- -------
Year ended 28 February 2021
Other income (0.6) -- (0.6)
--------- --------- -------
Total income (0.6) -- (0.6)
Total operating expenses 0.4 -- 0.4
Expected credit loss on financial assets -- -- --
--------- --------- -------
Loss before tax (0.2) -- (0.2)
Income tax credit -- -- --
Loss after tax of discontinued operations (0.2) -- (0.2)
--------- --------- -------
Gain on sale of discontinued operations after
tax (see below) 0.4 -- 0.4
Profit after tax for the year attributable
to owners of the parent arising from discontinued
operations 0.2 -- 0.2
--------- --------- -------
Statutory Funding Managed
basis costs(1) basis
GBPm GBPm GBPm
--------- --------- -------
Year ended 29 February 2020
Net interest income 41.3 (37.5) 3.8
Net fees and commissions income 1.2 -- 1.2
Other income (6.6) -- (6.6)
--------- --------- -------
Total income 35.9 (37.5) (1.6)
Total operating expenses (17.0) -- (17.0)
Expected credit loss on financial assets (0.1) -- (0.1)
--------- --------- -------
Profit/(loss) before tax 18.8 (37.5) (18.7)
Income tax (charge)/credit (5.1) 10.1 5.0
Profit/(loss) after tax from discontinued
operations 13.7 (27.4) (13.7)
--------- --------- -------
Gain on sale of discontinued operations after
tax (see below) 43.0 -- 43.0
Profit/(loss) after tax for the year attributable
to owners of the parent arising from discontinued
operations 56.7 (27.4) 29.3
--------- --------- -------
(1) Comprising:
* in the prior year, interest expense of GBP37.5m in
respect of the discontinued operations' cost of
funding, presented within net interest income on page
40. Since this cost could not be directly attributed
to liabilities of the Group entered into specifically
to fund the Group's Mortgage business, as required by
IFRS 5, it was not possible to present this cost
within statutory profit for the year after tax from
discontinued operations for the prior year. These
costs were in respect of business restructuring and
are considered part of the Mortgage business' results
on a managed basis. There was no such charge in the
current year.
70
14. Assets of the Disposal Group and Discontinued Operations (continued)
Discontinued operations - details of the sale of Mortgage
business
2021 2020
GBPm GBPm
Total cash consideration received 53.8 3,694.6
Carrying amount of net assets sold (53.2) (3,635.7)
Gain on sale before income tax 0.6 58.9
------ ---------
Income tax charge on gain (0.2) (15.9)
Gain on sale after income tax 0.4 43.0
------ ---------
Comprising:
Fair value gain following change in business
model -- 16.7
Gain on disposal 0.4 26.3
------ ---------
Gain on sale after income tax 0.4 43.0
------ ---------
Discontinued operations - statement of cash flows
Group 2021 2020
Statement of Cash Flows GBPm GBPm
Net cash flows from operating activities 44.8 3,764.9
Net cash flows from investing activities -- --
Net cash flows from financing activities -- --
Net cash flows from discontinued operations 44.8 3,764.9
---- -------
15. Cash and Balances with Central Banks
Group Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Cash at bank 106.5 129.9 1.7 1.7
Cash deposits held with Tesco Personal
Finance plc (TPF) -- -- 13.1 11.0
Balances held with the Bank of England
(BoE) other than mandatory reserve
deposits 673.0 1,234.1 -- --
------ -------- ----- -----
Included in cash and cash equivalents 779.5 1,364.0 14.8 12.7
------ -------- ----- -----
Mandatory reserves deposits held
with the BoE 24.7 31.6 -- --
------ -------- ----- -----
Total cash and balances with central
banks 804.2 1,395.6 14.8 12.7
------ -------- ----- -----
Mandatory reserve deposits held with the BoE of GBP24.7m (2020:
GBP31.6m) are not included within cash and cash equivalents for the
purposes of the cash flow statement as these do not have short-term
maturities. These balances are not available in the Group's
day-to-day operations and are non-interest bearing. Other balances
are subject to variable interest rates based on the BoE base
rate.
71
16 . Loans and Advances to Customers
Group 2021 2020
GBPm GBPm
Unsecured lending 7,020.1 8,930.0
-------- --------
Total secured and unsecured lending 7,020.1 8,930.0
-------- --------
Fair value hedge adjustment 6.7 9.7
-------- --------
Gross loans and advances to customers 7,026.8 8,939.7
-------- --------
Less: ECL allowance (refer to note 38) (624.6) (488.4)
Net loans and advances to customers 6,402.2 8,451.3
-------- --------
Current 3,093.3 4,280.5
Non-current 3,308.9 4,170.8
Contractual lending commitments and ECL provision
At 28 February 2021, the Group had contractual lending
commitments of GBP12,668.0m (2020: GBP11,872.0m). An additional ECL
provision of GBP28.3m was also recognised at 28 February 2021
(2020: GBP7.7m). This represents the excess of total ECLs for both
drawn and undrawn balances over the gross carrying balances as
above. Refer to note 30 for further details.
Fair value hedge adjustments
Fair value hedge adjustments amounting to GBP6.7m (2020:
GBP9.7m) are in respect of fixed rate Loans. These adjustments are
largely offset by derivatives, which are used to manage interest
rate risk and are designated as fair value hedges within loans and
advances to customers.
17 . Loans and Advances to Subsidiary Companies
Company 2021 2020
GBPm GBPm
Fixed rate subordinated loan 249.8 249.8
Floating rate subordinated loan 190.0 190.0
Undated floating rate note 45.0 45.0
----- -----
484.8 484.8
----- -----
Less: ECL allowance (See note 38) (1.3) (1.6)
----- -----
Net loans and advances to subsidiary companies 483.5 483.2
----- -----
Current -- --
Non current 483.5 483.2
The investments are in subordinated loans and notes issued by
TPF. Interest receivable on the GBP250.0m notional (2020: GBP250.0m
notional) fixed rate subordinated loan is 3.5%.
Interest receivable on the floating rate subordinated loans and
notes is based on three month SONIA plus a margin of 67 to 227
basis points (2020: three month LIBOR plus a spread ranging from 67
to 227 basis points).
72
18 . Derivative Financial Instruments
Strategy in using derivative financial instruments
The objective when using a derivative financial instrument is to
ensure that the risk to reward profile of a transaction is
optimised, allowing the Group to manage its exposure to interest
rate and foreign exchange rate risk. The intention is to only use
derivatives to create economically effective hedges. There are
specific requirements stipulated under IFRS 9/IAS 39 which must be
met for a derivative to qualify for hedge accounting. As a result,
not all derivatives can be designated as being in an accounting
hedge relationship, either because natural accounting offsets are
expected or because obtaining hedge accounting would be especially
onerous.
For those derivatives where hedge accounting is applied, gains
and losses are offset by hedge adjustments in the Consolidated
Income Statement. For those derivatives held for economic hedging
purposes which cannot be designated as being in an accounting hedge
relationship, the gains and losses are recognised in the
Consolidated Income Statement. In the Company and Consolidated
Statements of Financial Position there is no distinction between
derivatives where hedge accounting is applied and derivatives which
cannot be designated as being in an accounting hedge
relationship.
The following table analyses derivatives held for risk
management purposes by type of instrument and splits derivatives
between those classified in hedge accounting relationships and
those not in hedge accounting relationships.
Group 2021 2020
Notional Notional
amount Assets Liabilities amount Assets Liabilities
GBPm GBPm GBPm GBPm GBPm GBPm
Derivatives in hedge accounting relationships
Derivatives designated as fair value
hedges
Interest rate swaps 3,227.1 5.8 (46.4) 3,004.3 4.2 (50.6)
Derivatives designated as cash flow
hedges
Forward foreign exchange contracts 10.0 -- (0.8) 9.6 - -
Cross currency interest rate swaps -- -- -- 272.2 1.5 -
--------- ------- ------------ --------- ------- ------------
Total derivatives in hedge accounting
relationships 3,237.1 5.8 (47.2) 3,286.1 5.7 (50.6)
--------- ------- ------------ --------- ------- ------------
Derivatives not in hedge accounting
relationships
Interest rate derivatives
Interest rate swaps 114.2 0.2 (0.1) 48.1 - (0.1)
Currency derivatives
Forward foreign exchange contracts 4.3 0.1 (0.2) - - -
--------- ------- ------------ --------- ------- ------------
Total derivatives not in hedge accounting
relationships 118.5 0.3 (0.3) 48.1 - (0.1)
--------- ------- ------------ --------- ------- ------------
Total 3,355.6 6.1 (47.5) 3,334.2 5.7 (50.7)
--------- ------- ------------ --------- ------- ------------
73
18. Derivative Financial Instruments (continued)
Derivatives, whether designated in hedge accounting
relationships or not, are regarded as current where they are
expected to mature within one year. All other derivatives are
regarded as non-current.
Group 2021 2020
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
Current 0.2 (4.0) 4.2 (0.1)
Non-current 5.9 (43.5) 1.5 (50.6)
Hedge accounting
The following disclosures relate to derivatives in hedge
accounting relationships only. The Group applies hedge accounting
in the following hedging strategies:
-- Fair value hedges of interest rate risk
The Group's risk management objective of creating economically
effective hedges is achieved by the use of interest rate contracts
to swap fixed rate exposures back to a benchmark floating rate
where no existing offset is available. This includes the hedging of
fixed rate investment securities and issuances of fixed rate debt,
which protects the Group against the fair value volatility of these
financial assets and financial liabilities due to movements in
interest rates. Each swap is defined as hedging one or more fixed
rate assets or liabilities. The Group applies IFRS 9 hedge
accounting in respect of these hedging instruments.
Sources of hedge ineffectiveness relate to differences in timing
and repricing between execution of the hedging instrument and
hedged item.
-- Portfolio fair value hedges of interest rate risk
The Group's risk management objective of creating economically
effective hedges is achieved by the use of interest rate contracts
to swap fixed rate exposures back to a benchmark floating rate
where no existing offset is available. This includes the hedging of
portfolios of fixed rate Loans and Savings products, which protects
the Group against the fair value volatility of these financial
assets and financial liabilities due to movements in interest
rates. The Group applies IAS 39 portfolio hedge accounting in
respect of these hedging instruments.
Sources of hedge ineffectiveness include, but are not limited
to, differences in timing and repricing between execution of the
hedging instrument and hedged item, differences between actual and
expected prepayment rates of the underlying hedged item and
repricing differences between the portfolio of hedged items and the
associated hedging instruments.
-- Cash flow hedges of debt securities issued
The Group held inflation and interest rate swaps as cash flow
hedges to mitigate the variability in cash flows associated with an
inflation-linked debt security issued by the Group. The cash flows
occurred over the term to maturity in December 2019. The Group
applied IFRS 9 hedge accounting in respect of these hedging
instruments.
Sources of hedge ineffectiveness primarily related to
differences in timing and repricing between execution of the
hedging instrument and hedged item.
The Group also held cross currency interest rate swaps as cash
flow hedges to mitigate the variability in cash flows associated
with the foreign currency debt securities issued. The cash flows
occurred over the term to maturity in November 2020. The Group
applied IFRS 9 hedge accounting in respect of these hedging
instruments.
Sources of hedge ineffectiveness primarily related to
differences in timing and repricing between execution of the
hedging instrument and hedged item.
74
18. Derivative Financial Instruments (continued)
-- Cash flow hedges of expected foreign currency payments
The Group holds forward foreign currency contracts as cash flow
hedges to mitigate the variability in cash flows associated with
expected (and highly probable) foreign currency payments. The
payments, associated cash flows and the forward contracts are
expected to occur and mature over the following 15 months. The
Group applies IFRS 9 hedge accounting in respect of these hedging
instruments.
Sources of hedge ineffectiveness relate to differences between
expected and actual cash flows.
Uncertainty arising from IBOR reform
During the year to 28 February 2021 the Group transitioned the
majority of its exposures from the London Interbank Offered Rate
(LIBOR) to the Sterling Overnight Index Average (SONIA). At 28
February 2021, the Group had a remaining LIBOR interest rate
exposure of GBP21.1m relating to its investment in subordinated
notes issued by TU, which the Group expects to transition to SONIA
by 31 December 2021.
At 29 February 2020, the Group had remaining hedging exposures
to LIBOR impacted by the reform of GBP519.0m designated in fair
value hedge accounting relationships and GBP272.2m designated in a
cash flow hedge relationship.
None of the remaining LIBOR interest rate exposure at 28
February 2021 is in a hedge relationship.
Maturity of Derivatives in Hedge Accounting Relationships
The following tables set out the maturity profile and average
interest rate of the hedging instruments used in the Group's
hedging strategies:
Group Maturity
One year
Up to One to Three months to five More than
2021 one month three months to one year years five years Total
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate
swaps
- Notional amount -- 83.0 1,302.0 1,690.5 151.6 3,227.1
- Average interest
rate - 1.01% 0.28% 1.22% 1.67% -
Cash flow hedges
Foreign currency
Forward foreign
exchange contracts
- Notional amount 0.6 2.2 7.2 -- -- 10.0
- Average exchange
rate 1.29 1.25 1.30 - - -
75
18. Derivative Financial Instruments (continued)
Group Maturity
One year
Up to One to Three months to five More than
2020 one month three months to one year years five years Total
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate
swaps
- Notional amount 10.0 292.6 650.0 1,845.0 206.7 3,004.3
- Average interest
rate 0.63% 0.71% 1.92% 0.75% 3.30% -
Cash flow hedges
Foreign currency
Forward foreign
exchange contracts
- Notional amount - 1.4 7.3 0.9 - 9.6
- Average exchange
rate - 1.28 1.29 1.29 - -
Interest rate/Foreign
currency
Cross currency
interest rate
swaps (GBP:USD)
- Notional amount
(GBPm) - - - 272.2 - 272.2
- Average exchange
rate - - - 1.29 - -
- Average interest LIBOR
rate: pay leg - - - + 0.84% - -
- Average interest
rate: receive USD LIBOR
leg - - - + 0.7% - -
76
18. Derivative Financial Instruments (continued)
The following tables set out details of the hedging instruments
used in the Group's hedging strategies:
Group Carrying amount
Changes in fair value
used for calculating
2021 Notional Assets Liabilities hedge ineffectiveness
GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate swaps 3,227.1 5.8 (46.4) 7.2
Cash flow hedges
Foreign currency
Forward foreign exchange
contracts 10.0 -- (0.8) (0.8)
Total 3,237.1 5.8 (47.2) 6.4
--------- ------- ------------ -----------------------
Group Carrying amount
Changes in fair value
used for calculating
2020 Notional Assets Liabilities hedge ineffectiveness
GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
Interest rate swaps 3,004.3 4.2 (50.6) (47.2)
Cash flow hedges
Foreign currency
Forward foreign exchange
contracts 9.6 - - 0.2
Interest rate/foreign
currency
Cross currency interest
rate swaps (GBP:USD) 272.2 1.5 - 10.6
--------- ------- ------------ -----------------------
Total 3,286.1 5.7 (50.6) (36.4)
--------- ------- ------------ -----------------------
All of the above amounts are included within the Statement of
Financial Position line item Derivative financial instruments.
77
18. Derivative Financial Instruments (continued)
The following tables set out details of the hedged exposures
covered by the Group's hedging strategies:
Accumulated amounts Changes in value
of fair value adjustments for calculating
Group Carrying amount on the hedged item ineffectiveness
2021 Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
- Fixed rate Loans(1) 3,652.9 -- 6.7 -- (3.0)
- Fixed rate investment
securities(2) 500.4 - 10.4 - 8.1
- Fixed rate Savings(3) - (1,865.7) - (0.4) 0.3
- Fixed rate retail
bond(4) -- (251.0) -- (2.8) 1.5
-------- ------------ ---------- ----------------- -----------------
Total fair value hedges 4,153.3 (2,116.7) 17.1 (3.2) 6.9
-------- ------------ ---------- ----------------- -----------------
Accumulated amounts Changes in value
of fair value adjustments for calculating
Group Carrying amount on the hedged item ineffectiveness
2020 Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm GBPm
Fair value hedges
Interest rate
- Fixed rate Loans(1) 4,416.4 -- 9.7 - 12.4
- Fixed rate investment
securities(2) 649.5 - 2.3 - 7.4
- Fixed rate Savings(3) - (3,003.1) - (0.7) (0.8)
- Fixed rate retail
bond(4) - (451.7) - (4.1) (1.0)
-------- ------------ ---------- ----------------- -----------------
Total fair value hedges 5,065.9 (3,454.8) 12.0 (4.8) 18.0
-------- ------------ ---------- ----------------- -----------------
The accumulated amount of fair value hedge adjustments remaining
in the Statement of Financial Position for hedged items that have
ceased to be adjusted for hedging gains and losses is an asset of
GBP2.4m (2020: GBP5.5m asset).
(1) Included within Statement of Financial Position line item
Loans and advances to customers.
(2) Included within Statement of Financial Position line item
Investment securities.
(3) Included within Statement of Financial Position line item
Deposits from customers.
(4) Included within Statement of Financial Position line item
Debt securities in issue.
78
18. Derivative Financial Instruments (continued)
Cash flow hedge
Group reserve
Change in value
of hedged item
used for calculating
2021 hedge ineffectiveness Continuing hedges
GBPm GBPm
Cash flow hedges
Foreign currency
- Accounts payable(1) (0.8) (0.8)
Interest rate/foreign currency
- Securitisation bond(2) (1.5) -
----------------------- ------------------
Total cash flow hedges (2.3) (0.8)
----------------------- ------------------
Cash flow hedge
Group reserve
Change in value
of hedged item
used for calculating
2020 hedge ineffectiveness Continuing hedges
GBPm GBPm
Cash flow hedges
Interest rate
- RPI bond(2) (12.7) -
Foreign currency
- Accounts payable(1) 0.2 -
Interest rate/foreign currency
- Securitisation bond(2) 10.2 (0.3)
----------------------- ------------------
Total cash flow hedges (2.3) (0.3)
----------------------- ------------------
There are no amounts remaining in the cash flow hedge reserve
for which hedge accounting is no longer applied.
(1) Included within Statement of Financial Position line item
Other liabilities.
(2) Included within Statement of Financial Position line item
Debt securities in issue.
79
18. Derivative Financial Instruments (continued)
The following tables set out information regarding the
effectiveness of the hedging relationships designated by the Group,
as well as the impacts on profit or loss and other comprehensive
income:
Hedge ineffectiveness
recognised in profit or
Group loss
2021 GBPm
Fair value hedges
Interest rate
- Interest rate swaps (2.5)
-------------------------
Total fair values hedges (2.5)
-------------------------
Hedge ineffectiveness
recognised in profit or
Group loss
2020 GBPm
Fair value hedges
Interest rate
- Interest rate swaps (3.2)
-------------------------
Total fair values hedges (3.2)
-------------------------
Hedge ineffectiveness is included in the Income Statement line
Net gain/(loss) on financial instruments at FVPL.
Cumulative
Cumulative amount reclassified
hedging gains from cash
and (losses) Hedge ineffectiveness flow hedge
recognised recognised reserve to
Group in other comprehensive in profit profit or
2021 income or loss loss
GBPm GBPm GBPm
Cash flow hedges
Interest rate/foreign currency
- Forward foreign exchange contracts (0.8) -- --
- Cross currency interest rate swaps
(GBP:USD) -- (0.1) --
------------------------ ---------------------- ---------------------
Total cash flow hedges (0.8) (0.1) --
------------------------ ---------------------- ---------------------
80
18. Derivative Financial Instruments (continued)
Cumulative
Cumulative amount reclassified
hedging gains from cash
and (losses) Hedge ineffectiveness flow hedge
recognised recognised reserve to
Group in other comprehensive in profit profit or
2020 income or loss loss
GBPm GBPm GBPm
Cash flow hedges
Interest rate/foreign currency
- Cross currency interest rate swaps
(GBP:USD) (0.5) 0.3 -
------------------------ ---------------------- ---------------------
Total cash flow hedges (0.5) 0.3 -
------------------------ ---------------------- ---------------------
Hedge ineffectiveness is included in the income statement line
Net gain/(loss) on financial instruments at FVPL.
The following table sets out further details of the cumulative
cash flow hedge reserve:
2021 2020
Group GBPm GBPm
Hedging gains and losses recognised in other comprehensive
income (0.8) (10.3)
Amount reclassified from cash flow hedge reserve
to profit or loss -- 10.0
Tax 0.2 -
----- ------
Cash flow hedge reserve (0.6) (0.3)
----- ------
81
18. Derivative Financial Instruments (continued)
The following table presents a reconciliation by risk category
of the cash flow hedge reserve and an analysis of other
comprehensive income in relation to hedge accounting:
Cash flow hedge reserve
2021 2020
Group GBPm GBPm
Balance at beginning of year (0.3) (1.0)
Interest rate swaps
- Effective portion of changes in fair value -- (12.5)
- Amount reclassified to profit or loss in the year -- 12.9
- Tax -- (0.2)
Cashflow hedge - foreign exchange risk
- Effective portion of changes in fair value (0.8) 0.3
Cross currency interest rate swaps
- Effective portion of changes in fair value (1.4) 10.2
- Amount reclassified to profit or loss in the year 1.9 (10.0)
Balance at end of year (0.6) (0.3)
------------ ------------
82
19. Investment Securities
Group 2021 2020
GBPm GBPm
Investment securities measured at FVOCI - debt(1) -- 1,057.4
Investment securities designated at FVOCI - equity 5.1 3.2
Investment securities measured at amortised cost 948.4 21.0
------ --------
Total investment securities 953.5 1,081.6
------ --------
Debt investment securities measured at FVOCI(1)
Group 2021 2020
GBPm GBPm
Government backed investment securities -- 315.9
Gilts -- 40.7
Supranational investment securities -- 393.9
Other investment securities -- 306.9
------ --------
Total debt securities measured at FVOCI -- 1,057.4
------ --------
On 1 March 2020, the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model. A GBP3.2m cumulative loss
relating to these assets, previously recognised in other
comprehensive income, was adjusted against the carrying value of
the assets. A fair value gain of GBP4.9m would have been recognised
in other comprehensive income in the current year had the financial
assets not been reclassified.
Included in investment securities at 29 February 2020 were
fixed-interest investment securities totalling GBP651.8m, and
variable-interest investment securities amounting to GBP405.6m.
Equity investment securities designated at FVOCI
The Group has elected to designate equity instruments held in
VISA Inc. at FVOCI as permitted by IFRS 9.
During the year, a proportion of these shares converted to
ordinary shares, resulting in an unrealised gain of GBP1.7m which
was recognised in the fair value reserve. The remaining stock may
be convertible into Class A Common Stock of VISA Inc. at certain
future dates, the earliest point at which is June 2021. Conversion
is contingent upon future events, principally related to the
outcome of interchange litigation against VISA Europe Limited. As
such, the valuation of GBP5.1m (2020: GBP3.2m) reflects both an
illiquidity discount and the risk of a reduction in the conversion
rate to VISA Inc. common stock. The reduction in the conversion
rate is the most significant unobservable input to the
valuation.
(1) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
83
19. Investment Securities (continued)
Investment securities measured at amortised cost
2021 2020
Group GBPm GBPm
Government backed investment securities 126.9 --
Gilts 39.2 --
Supranational investment securities 438.4 --
Other investment securities 323.6 --
Investment in subordinated debt issued by TU 21.1 21.1
------ ------
Gross investment securities measured at amortised cost 949.2 21.1
------ ------
Less: allowance for ECLs (refer note 38) (0.8) (0.1)
Net investment securities measured at amortised cost 948.4 21.0
------ ------
On 1 March 2020, the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
Included in investment securities at 28 February 2021 were
fixed-interest investment securities totalling GBP502.5m, and
variable-interest investment securities amounting to GBP424.8m.
The investment in subordinated notes issued by TU relates to
subordinated notes with a gross carrying value of GBP21.1m (2020:
GBP21.1m). Interest receivable on these notes is based on a rate of
three month LIBOR plus a spread ranging from 350-450 basis points
(2020: LIBOR plus a spread ranging from 350-450 basis points).
20. Prepayments and Accrued Income
Group Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Prepayments 14.0 11.1 - -
Accrued income 27.6 44.5 - -
Amounts accrued from Tesco
Personal Finance plc - - 1.3 1.6
----- ----- ----- -----
Total prepayments and accrued
income 41.6 55.6 1.3 1.6
----- ----- ----- -----
All amounts are classified as current at the year end.
84
21. Other Assets
Group 2021 2020
GBPm GBPm
Amount due from insurance commissions receivable 13.2 13.8
Contract asset - insurance renewal income 30.4 37.6
Accounts receivable and sundry debtors 166.9 191.4
Amounts due from Tesco Group subsidiaries 0.7 0.5
------ ------
Total other assets 211.2 243.3
------ ------
All amounts are classified as current at the year end, with the
exception of GBP22.4m (2020: GBP32.3m) of the contract asset, which
is expected to be received after more than one year.
Contract asset - insurance renewal income
Of the prior year contract asset balance, GBP14.6m has been
reclassified in the year as commissions receivable (2020: GBP10.4m
has been reclassified in the prior year relating to the contract
asset balance at 28 February 2019) as insurance policies have been
renewed and commission due to the Group has become payable. The
remainder of the movement in the balance relates to accelerated
income of GBP7.4m (2020: GBP19.9m) in respect of certain insurance
renewal commission income where the Group has satisfied all of its
performance obligations in relation to the policies sold and it is
considered highly probable that a significant reversal in the
amount of revenue recognised will not occur in future periods.
85
22. Investment in Group Undertakings
The Company's investment in group undertakings in the year was
as follows:
Name of company Nature of business Place of incorporation Ownership interest Registered address
Tesco Personal Banking and UK 100% 2 South Gyle Crescent,
Finance plc general insurance Edinburgh, EH12 9FQ
services
The Company's Investment in Group undertaking amounts to
GBP1,219.9m (2020: GBP1,219.9m).
The following companies are accounted for as subsidiaries of the
Group. These are securitisation structured entities established in
connection with the Group's Credit Card securitisation
transactions. Although none of the equity of the securitisation
structured entities is owned by the Group, the nature of these
entities means that the Group has the rights to variable returns
from its involvement with these securitisation structured entities
and has the ability to affect those returns through its power over
them. As such they are effectively controlled by the Group.
Nature of Place
Name of company business of incorporation Registered address
--------------------------- --------------- ------------------ -----------------------
Delamare Cards Holdco Securitisation UK 6th Floor, 125 London
Limited entity Wall,
London, England, EC2Y
5AS
Delamare Cards MTN Issuer Securitisation UK 6th Floor, 125 London
plc entity Wall,
London, England, EC2Y
5AS
Delamare Cards Receivables Securitisation UK 6th Floor, 125 London
Trustee Limited entity Wall,
London, England, EC2Y
5AS
Delamare Cards Funding Securitisation UK 6th Floor, 125 London
1 Limited entity Wall,
London, England, EC2Y
5AS
Delamare Cards Funding Securitisation UK 6th Floor, 125 London
2 Limited entity Wall,
London, England, EC2Y
5AS
All of the above companies have a financial year end of 31
December. The management accounts of these entities are used to
consolidate the results to 28 February 2021 within these
Consolidated Financial Statements.
86
23. Investment in Joint Venture
The following table shows the aggregate movement in the Group's
investment in its joint venture in the year:
Group 2021 2020
GBPm GBPm
At beginning of year 86.0 86.4
Dividends received (7.5) -
Capital distribution received - (15.6)
Share of profit of joint venture 16.2 10.2
Share of other comprehensive (expense)/income of joint venture (1.9) 5.0
------ -------
At end of year 92.8 86.0
------ -------
Details of the Group's joint venture
Ownership interest
Nature Place of
Name of company Registered address of business Incorporation 2021 2020
------------------- -------------------------- ------------- --------------- --------------- -------------
Tesco Underwriting Ageas House, Hampshire Insurance England 49.9% of 49.9%
Limited Corporate Park, Ordinary of Ordinary
Templars Way, Eastleigh, Share Capital Share
Hampshire, SO53 Capital
3YA
TU is an authorised insurance company which provides the
insurance underwriting service for a number of the Group's general
insurance products. TU is a private company and there is no quoted
market price available for its shares.
The Group uses the equity method of accounting for its
investment in TU, which has a financial year end of 31 December.
The accounting year end date for TU differs from that of the Group
as it is in line with the other joint venture partner. The
management accounts of TU are used to consolidate the results to 28
February 2021 within these Consolidated Financial Statements.
TU has taken advantage of the optional temporary exemption from
applying IFRS 9 for entities whose predominant activity is issuing
contracts within the scope of IFRS 4 'Insurance contracts' (the
'deferral approach'). This will remove the impact of potential
temporary volatility in reported results for TU until the date of
adoption of the new insurance standard IFRS 17 'Insurance
contracts' on 1 January 2023.
The Group has similarly elected to take a temporary exemption
available from the requirements of IAS 28 'Investments in
associates and joint ventures' regarding the use of uniform
accounting policies in equity accounting for a joint venture. This
exemption allows the Group to equity account for the results of TU
without any adjustments to reflect the impact of IFRS 9 within
these Consolidated Financial Statements. The additional disclosures
required as a result of taking this temporary exemption are
included within the following sections.
Following completion of the Group's acquisition of TU, which is
expected to take place in May 2021, following regulatory approval
received in March 2021, this exemption will no longer be available
to the Group and IFRS 9 will be applied to TU's in-scope balances
in the Group's consolidated results.
87
23. Investment in Joint Venture (continued)
Summarised financial information for the joint venture
This information reflects the amounts presented in the
management accounts of the joint venture (and not the Group's share
of those amounts):
2021 2020
GBPm GBPm
Non-current assets 771.4 799.3
Current assets 219.7 152.7
Current liabilities (674.0) (693.1)
Non-current liabilities (136.9) (92.3)
-------- --------
Net assets 180.2 166.6
-------- --------
Cash and cash equivalents 73.9 49.4
Current financial liabilities (excluding trade
and other payables and provisions) (18.5) (17.8)
Non-current financial liabilities (excluding
trade and other payables and provisions) (136.9) (92.3)
2021 2020
GBPm GBPm
Income Statement
Revenue 187.4 253.6
Expenses including claims costs (155.0) (233.1)
-------- --------
Profit for the year 32.4 20.5
-------- --------
Other comprehensive (expense)/income (3.8) 10.1
Total comprehensive income 28.6 30.6
-------- --------
The above profit includes the following:
Depreciation and amortisation (1.7) (2.1)
Interest income 12.2 13.1
Interest expense (1.8) (2.0)
Income tax charge (6.9) (6.9)
88
23. Investment in Joint Venture (continued)
Reconciliation of the summarised financial position
A reconciliation of the summarised financial information
presented to the carrying amount of the investment in joint venture
is as follows:
Group 2021 2020
GBPm GBPm
Net assets of the joint venture 180.2 166.6
------ ------
Group share at 49.9% 90.0 83.2
Capitalised legal costs included in investment
carrying value 2.8 2.8
Carrying value of investment in joint venture
at end of year 92.8 86.0
------ ------
Fair value disclosures
The following table provides information on the fair value of
TU's financial assets at 28 February 2021:
2021 Change in
fair value
Fair value during year
GBPm GBPm
Financial assets that give rise to solely
payments of principal and interest 677.7 4.0
Other financial assets 18.4 (1.1)
696.1 2.9
----------- -------------
2020 Change in
fair value
Fair value during year
GBPm GBPm
Financial assets that give rise to solely
payments of principal and interest 674.2 (67.2)
Other financial assets 19.0 0.8
693.2 (66.4)
----------- -------------
Credit risk disclosures
The following table provides information regarding the credit
risk exposures of TU at 28 February 2021 by classifying financial
assets according to the credit ratings of counterparties:
2021 AAA AA A BBB Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Investments 81.1 129.5 270.3 122.9 18.4 622.2
Cash and cash equivalents 25.4 48.5 -- -- -- 73.9
Insurance and other receivables 1.5 1.1 3.8 2.4 13.8 22.6
108.0 179.1 274.1 125.3 32.2 718.7
------ ------ ------ ------ ------ ------
2020 AAA AA A BBB Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
Investments 112.0 131.1 257.8 124.0 19.0 643.9
Cash and cash equivalents 25.3 24.0 - - - 49.3
Insurance and other receivables 1.5 1.2 3.4 3.1 10.8 20.0
138.8 156.3 261.2 127.1 29.8 713.2
------ ------ ------ ------ ------ ------
Other information
The Group has no contingent liabilities or commitments in
respect of the joint venture. The investment in the joint venture
is classified as non-current.
89
24. Deferred Income Tax Asset/(Liability)
The net deferred income tax asset/(liability) can be analysed as
follows:
2021 Accelerated Share
capital Financial based
allowances instruments payments Other Total
Group GBPm GBPm GBPm
At beginning of year 23.0 43.1 3.2 0.1 69.4
Credited/(charged) to the Consolidated
Income Statement in the current
year 0.2 (6.0) (0.4) -- (6.2)
(Charged)/credited to the Consolidated
Income Statement for prior years (1.3) -- -- 0.1 (1.2)
Credited/(charged) to equity -- 0.5 (0.7) -- (0.2)
Change in tax rate 1.8 3.5 0.2 -- 5.5
------------ ------------- ---------- ------ ------
At end of year 23.7 41.1 2.3 0.2 67.3
------------ ------------- ---------- ------ ------
Deferred tax asset to be recovered
within one year 57.6
Deferred tax asset to be recovered
after more than one year 11.1
------
Total deferred income tax asset 68.7
------
Deferred tax liability to be
recovered within one year (0.5)
Deferred tax liability to be
recovered after more than one
year (0.9)
------
Total deferred income tax liability (1.4)
------
Deferred tax assets (net) 67.3
------
2020 Accelerated Share
capital Financial based
allowances instruments payments Other Total
Group GBPm GBPm GBPm
At beginning of year 3.4 50.9 3.3 2.0 59.6
Credited/(charged) to the Consolidated
Income Statement in the current
year 21.5 (5.9) 0.3 (0.1) 15.8
Charged to the Consolidated
Income Statement for prior years (2.5) (0.7) -- (1.8) (5.0)
Charged to equity -- (1.0) (0.4) -- (1.4)
Change in tax rate (1.6) (0.2) -- -- (1.8)
Discontinued operations 2.2 -- -- -- 2.2
------------ ------------- ---------- ------ ------
At end of year 23.0 43.1 3.2 0.1 69.4
------------ ------------- ---------- ------ ------
Deferred tax asset to be recovered
within one year 60.8
Deferred tax asset to be recovered
after more than one year 10.2
------
Total deferred income tax asset 71.0
------
Deferred tax liability to be
recovered within one year (1.6)
------
Total deferred income tax liability (1.6)
------
Deferred tax assets (net) 69.4
------
90
25. Intangible Assets
Computer
Group Work-in-Progress Software Total
GBPm GBPm GBPm
Cost
At 1 March 2020 27.8 722.4 750.2
Additions 33.5 6.8 40.3
Transfers (16.3) 16.1 (0.2)
Disposals (0.6) (27.7) (28.3)
----------------- ---------- --------
At 28 February 2021 44.4 717.6 762.0
----------------- ---------- --------
Accumulated amortisation
At 1 March 2020 -- (612.0) (612.0)
Charge for the year -- (45.8) (45.8)
Disposals -- 26.7 26.7
----------------- ---------- --------
At 28 February 2021 -- (631.1) (631.1)
----------------- ---------- --------
Net carrying value
At 28 February 2021 44.4 86.5 130.9
----------------- ---------- --------
Cost
At 1 March 2019 24.6 685.4 710.0
Additions 41.0 2.9 43.9
Transfers (37.8) 37.8 -
Disposals - (3.7) (3.7)
------- -------- --------
At 29 February 2020 27.8 722.4 750.2
------- -------- --------
Accumulated amortisation
At 1 March 2019 -- (485.8) (485.8)
Charge for the year -- (129.9) (129.9)
Disposals -- 3.7 3.7
------- -------- --------
At 29 February 2020 -- (612.0) (612.0)
------- -------- --------
Net carrying value
At 29 February 2020 27.8 110.4 138.2
------- -------- --------
Work-in-progress relates primarily to the internal development
of IT software assets. Intangible asset balances are
non-current.
91
25. Intangible Assets (continued)
In the prior year, the Group reassessed the useful life of
certain of its intangible fixed assets, reducing the expected life
to end by 29 February 2020. This reduction in useful life reflected
the impact of the sale of the majority of the Group's Mortgage
business in September 2019 and closure of the Group's Personal
Current Account offering to new customers in January 2020. The
impact of this change was to increase the amortisation charge by
GBP55.5m to fully amortise these intangible fixed assets by 29
February 2020.
The amortisation and impairment charge is analysed as
follows:
2021 2020
GBPm GBPm
Continuing operations 45.8 120.9
Discontinued operations -- 9.0
Total amortisation charge 45.8 129.9
----- ------
92
26. Property, Plant and Equipment
Plant Right
Work-in- and Fixtures Computer Freehold Leasehold of Use
Group Progress Equipment and Fittings Hardware Buildings Improvements Assets Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 March
2020 9.1 3.0 19.4 124.6 32.4 20.2 29.4 238.1
Additions 12.3 -- 1.1 1.5 -- -- -- 14.9
Transfers (3.0) -- 1.2 2.0 -- -- -- 0.2
Disposals -- -- -- (1.8) -- -- -- (1.8)
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
At 28
February
2021 18.4 3.0 21.7 126.3 32.4 20.2 29.4 251.4
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Accumulated
depreciation
At 1 March
2020 -- (3.0) (13.9) (112.3) (7.3) (12.5) (15.7) (164.7)
Charge for
the
year -- -- (2.0) (5.3) (0.8) (1.3) (1.5) (10.9)
Disposals -- -- -- 1.7 -- -- -- 1.7
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
At 28
February
2021 -- (3.0) (15.9) (115.9) (8.1) (13.8) (17.2) (173.9)
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Net carrying
value
At 28
February
2021 18.4 -- 5.8 10.4 24.3 6.4 12.2 77.5
---------- ------------- -------------- ---------- ----------- -------------- -------- --------
Cost
At 1 March 2019 4.1 3.0 18.2 123.5 32.3 20.0 29.4 230.5
Additions 5.4 - 1.2 0.7 0.1 0.2 - 7.6
Transfers (0.4) - -- 0.4 - - - -
------ ------ ------- -------- ------ ------- ------- --------
At 29 February
2020 9.1 3.0 19.4 124.6 32.4 20.2 29.4 238.1
------ ------ ------- -------- ------ ------- ------- --------
Accumulated depreciation
At 1 March 2019 - (3.0) (12.2) (106.6) (6.5) (11.2) (14.2) (153.7)
Charge for the
year - - (1.7) (5.7) (0.8) (1.3) (1.5) (11.0)
At 29 February
2020 -- (3.0) (13.9) (112.3) (7.3) (12.5) (15.7) (164.7)
------ ------ ------- -------- ------ ------- ------- --------
Net carrying value
At 29 February
2020 9.1 -- 5.5 12.3 25.1 7.7 13.7 73.4
------ ------ ------- -------- ------ ------- ------- --------
Work-in-progress at 28 February 2021 relates predominantly to
the development of IT assets. Property, plant and equipment
balances are non-current.
93
27. Deposits from Banks
Group 2021 2020
GBPm GBPm
Deposits from banks 600.0 500.0
------ ------
600.0 500.0
------ ------
Current 500.0 -
Non-current 100.0 500.0
Deposits from banks include balances of GBP500.0m (2020:
GBP500.0m) drawn under the BoE's Term Funding Scheme (TFS) and
GBP100.0m (2020: GBPnil) drawn under the BoE's TFS with incentives
for Small and Medium Sized Entities (TFSME).
28. Deposits from Customers
Group 2021 2020
GBPm GBPm
Retail deposits 5,737.6 7,706.3
Fair value hedge adjustment 0.4 0.7
-------- --------
5,738.0 7,707.0
-------- --------
Current 4,821.0 6,377.2
Non-current 917.0 1,329.8
Fair value hedge adjustments
Fair value hedge adjustments amounting to GBP0.4m (2020: 0.7m)
are in respect of fixed rate Savings products. These adjustments
are largely offset by derivatives, which are used to manage
interest rate risk and are designated as fair value hedges within
deposits from customers.
94
29. Debt Securities in Issue
Interest rate Par value Term Maturity 2021 2020
Group GBPm (years) date GBPm GBPm
Fixed rate retail bond(1) 5.0% 200.0 8.5 2020 -- 201.8
1M GBP LIBOR
Floating rate AAA bond (A1)(2) + 0.53% 300.0 5 2022 -- 299.2
1M USD LIBOR
Floating rate AAA Bond (A1)(3) + 0.836% 272.2 2 2025 -- 273.1
MREL(4) 3.50% 250.0 6 2025 251.0 249.9
Total debt securities in
issue 251.0 1,024.0
----- -------
Company
MREL(4,5) 249.4 249.2
----- -------
Total debt securities in
issue 249.4 249.2
----- -------
(1) This bond was issued on 21 May 2012 and redeemed on its
scheduled redemption date in November 2020.
(2) This Bond was issued on 7 November 2017 and redeemed on its
scheduled redemption date in October 2020.
(3) This Bond was issued on 27 November 2018 and redeemed on its
scheduled redemption date in November 2020.
(4) This bond was issued on 26 July 2019. The scheduled
redemption date is July 2024.
(5) On a Company basis, GBP0.6m (2020: GBP0.7m) of issue costs
absorbed by TPF are excluded.
All Floating Rate Bonds were issued by Delamare Cards MTN Issuer
plc and were listed on the Irish Stock Exchange. The retail bond
was listed on the London Stock Exchange. All balances were
classified as current at the prior year end.
The Company undertook an initial issuance of MREL-compliant debt
of GBP250.0m in July 2019 and subsequently invested the proceeds in
TPF via an intercompany subordinated loan maturing in 2025.
95
30. Provisions for Liabilities and Charges
Customer
Redress Restructuring Expected Credit Other
Group Provision Provision Loss Provision Provisions Total
2021 GBPm GBPm GBPm GBPm GBPm
At beginning of
year 41.6 1.2 7.7 8.2 58.7
Provided during
the year 0.5 -- -- 3.6 4.1
Utilised during
the year (19.2) (0.4) -- (2.7) (22.3)
Transfer from
loans and advances
ECL allowance - - 20.6 -- 20.6
Released during
the year (0.5) - -- (0.5) (1.0)
----------- -------------- ---------------- ------------ -------
At end of year 22.4 0.8 28.3 8.6 60.1
----------- -------------- ---------------- ------------ -------
Customer redress provision - Payment protection insurance
(PPI)
Of the total customer redress provision balance at 28 February
2021, GBP22.4m (2020: GBP41.1m) has been provided for customer
redress in respect of potential customer complaints arising from
historic sales of PPI.
In March 2017, the FCA issued a Policy Statement (PS17/3,
'Payment protection insurance complaints: feedback on CP16/20 and
final rules and guidance') which confirmed a deadline for PPI
claims of August 2019, supported by an FCA led communications
campaign.
The Policy Statement also set out rules and guidance on the
handling of PPI claims in light of the Supreme Court's decision in
Plevin v Paragon Personal Finance Limited (Plevin), confirming that
both up-front commission arrangements and profit share arrangements
should also be considered in the calculation of total commission
for Plevin claims.
The general claims deadline passed on 29 August 2019, albeit
legal claims continue to be received. In response to the high level
of claims received by the Group during the prior year in advance of
the PPI complaint deadline, the Group increased its PPI provision
by GBP45.0m during the year ended 29 February 2020 to reflect an
updated assessment of the claim rate and average redress.
Although a significant degree of uncertainty remains with regard
to the ultimate cost of settling PPI claims, the provision balance
represents Management's best estimate at the reporting date of that
cost and is based on historical uphold rates, average redress and
the associated administrative expenses. The PPI provision and the
impact of regulatory changes will continue to be monitored as
Management finalises its assessment of the significant level of
claims received in advance of the claims deadline, ongoing legal
claims and levels of redress thereon.
96
30. Provisions for Liabilities and Charges (continued)
Customer redress provision - Payment protection insurance
(continued)
The table below details, for each key assumption, actual data to
28 February 2021 and a sensitivity assessment demonstrating the
impact on the provision of a variation in the key assumptions. The
key sensitivity in relation to PPI claims received is the
conversion rate into an upheld complaint.
Sensitivity
------------ ------------------------------------------
Cumulative Outstanding Change in Consequential
Assumption actual claims assumption change in provision
GBPm
Valid general PPI claims +/- 100 successful
settled 168,488 3,900 claims 0.2
Average redress per valid
general PPI claim GBP1,780 GBP1,659 +/- GBP100 0.4
+/- 100 successful
Valid legal PPI claims settled 187 2,746 claims 0.2
Average redress per valid
legal PPI claim GBP2,173 GBP2,173 +/- GBP100 0.3
Customer redress provision - Consumer credit act (CCA)
In the prior year, the Group held a provision of GBP0.5m in
respect of customer redress relating to instances where certain
requirements of the CCA for post-contract documentation were not
fully complied with. The redress programme was concluded during the
year ended 28 February 2021.
Restructuring provision
The restructuring provision is in respect of costs related to
the Group's strategic review.
Expected credit loss provision
The ECL provision represents the amount of ECL allowance
recognised under IFRS 9 which exceeds the gross carrying amount of
the financial asset as set out at note 38.
Other provisions
Other provisions predominantly reflect:
-- a dilapidations provision related to the anticipated costs of
restoring leased assets to their original condition. Management
expects that the provision will be utilised at the end of the lease
terms, the longest of which is due to end in 2029;
-- a warranty provision in respect of debt sales. This
represents post-determination date customer receipts payable to
debt purchasers and provision for any accounts which may need to be
bought back under the terms of the debt sale agreements. This
balance is classified as current at the year end; and
-- a provision in respect of the potential cost of refunding
fees to customers. This balance is classified as current at the
year end.
31. Accruals and Deferred Income
Group Company
2021 2020 2021 2020
GBPm GBPm
Amounts accrued to Tesco Group
subsidiaries 18.0 11.8 - -
Amounts accrued to Tesco PLC 0.5 0.8 0.5 0.8
Other accruals 52.6 74.7 0.8 0.8
Deferred income 15.0 12.8 - -
----- ------ ----- -----
Total accruals and deferred
income 86.1 100.1 1.3 1.6
----- ------ ----- -----
All amounts are classified as current at the year end.
97
32. Other Liabilities
2021 2020
Group GBPm GBPm
Accounts payable and sundry creditors 122.6 134.2
Insurance creditor 14.6 13.2
Taxation and social security payable 2.7 5.7
Contract liabilities - insurance refunds 1.5 2.0
Lease liabilities (refer note 36) 29.6 32.8
Amounts owed to Tesco Group subsidiaries 13.2 11.1
------ ------
Total other liabilities 184.2 199.0
------ ------
All amounts are classified as current at the year end, with the
exception of GBP26.1m (2020: GBP29.6m) of the lease liabilities
which are due after more than one year.
Contract liabilities - insurance refunds
Revenue recognised in the year in respect of the opening
contract liability balance was GBP0.2m (2020: GBP0.2m).
33. Subordinated Liabilities and Notes
Group and Company 2021 2020
GBPm GBPm
Amortised cost:
Floating rate subordinated loans 190.0 190.0
Undated floating rate notes 45.0 45.0
------ ------
Total subordinated liabilities and notes 235.0 235.0
------ ------
Subordinated liabilities and notes comprise loan capital issued
to Tesco PLC. This includes GBP190.0m (2020: GBP190.0m) of
subordinated loans maturing in 2030 and GBP45.0m (2020: GBP45.0m)
of undated notes with no fixed maturity date. All balances are
classified as non-current at the year end.
Interest payable on the floating rate subordinated loans and
notes is based on three month SONIA plus a margin of 67 to 227
basis points (2020: three month LIBOR plus a spread ranging from 67
to 227 basis points).
98
34. Share Capital and Share Premium Account
Group and Company 2021 2021 2020 2020
Number GBPm Number GBPm
Authorised
A Ordinary shares of 10p each Unlimited Unlimited
B Ordinary shares of 10p each Unlimited Unlimited
C Ordinary shares of 10p each 1 1
Allotted, called up and fully paid
A Ordinary shares of 10p each 991,090,000 99.1 991,090,000 99.1
B Ordinary shares of 10p each 229,089,000 22.9 229,089,000 22.9
C Ordinary shares of 10p each 1 - -
-------------- -------- -------------- --------
1,220,179,001 122.0 1,220,179,001 122.0
-------------- -------- -------------- --------
2021 2020
GBPm GBPm
Share premium reserve 1,098.2 1,098.2
-------- --------
1,098.2 1,098.2
-------- --------
99
35. Other Reserves
Group
2021 2020
GBPm GBPm
AFS - share of joint venture 5.6 7.5
Fair value reserve 3.7 4.8
------ ------
Total AFS/FV reserves 9.3 12.3
------ ------
Cash flow hedge reserve (0.6) (0.3)
Currency basis reserve -- (0.1)
Share based payment reserve 21.9 25.1
------ ------
Total reserves 30.6 37.0
------ ------
AFS reserve
The consolidated AFS reserve includes the Group's share of the
AFS reserve of its joint venture, TU. As described in note 23, TU
has taken an exemption to defer the adoption of IFRS 9 until the
financial year beginning on 1 January 2023.
Fair value reserve
The cumulative net change in the fair value of equity investment
securities measured at FVOCI is included in the fair value reserve,
less the impairment allowance recognised in the Consolidated Income
Statement.
On 1 March 2020 the Group's portfolio of debt investment
securities held at FVOCI was reclassified to amortised cost
following a change in business model. This resulted in the full
amount previously recognised in the fair value reserve in respect
of these debt securities being reclassified against the amortised
cost carrying amount of these assets. The remaining balance in the
fair value reserve relates to the Group's equity investment
securities which continue to be held at FVOCI.
Cash flow hedge reserve
The effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow hedges are
included in the cash flow hedge reserve. The gain or loss relating
to the ineffective portion is recognised immediately in the
Consolidated Income Statement.
Currency basis reserve
Cash flow hedge accounting allows all fair value movements on
the hedging instrument (the derivative) to be charged or credited
to the cash flow hedge reserve in respect of the designated risk.
The non-designated portion of the hedging instrument, being the
element related to the foreign currency basis, is recognised
separately in the currency basis reserve.
Share based payment reserve
The fair value of Tesco equity-settled share options granted to
employees of the Group is included in the share based payment
reserve.
100
36 . Leases
Leasing activities
The Group has entered into leases for office buildings. These
lease contracts contain a wide range of terms and conditions,
including extension options. These options are exercisable only by
the Group and not by the respective Lessor.
Consolidated Income Statement Amounts Relating to Leases
The Consolidated Income Statement includes the following amounts
relating to releases:
2021 2020
GBPm GBPm
Group
Depreciation charge on right-of-use assets(1) 1.5 1.5
Interest expense on lease liabilities(2) 2.3 2.5
Total 3.8 4.0
---- ----
Consolidated Statement of Financial Position Amounts Relating to
Leases
The Consolidated Statement of Financial Position includes the
following amounts relating to leases:
2021 2020
GBPm GBPm
Group
Right-of-use assets(3)
Office buildings 12.2 13.7
Total right-of-use assets 12.2 13.7
---- ----
Lease liabilities(4)
Current 3.5 3.2
Non-current 26.1 29.6
Total lease liabilities 29.6 32.8
---- ----
Consolidated Cash Flow Statement amounts relating to leases
The Consolidated Cash Flow Statement includes the following
amounts relating to leases:
2021 2020
GBPm GBPm
Group
Interest paid on lease liabilities 3.6 2.4
Principal payments on lease liabilities 1.9 1.8
Total cash outflow for lease liabilities 5.5 4.2
---- ----
Possible future cash outflows not included in lease
liability
Potential future lease payments (undiscounted) in relation to
extension options not included in the reasonably certain lease
term, and hence not included in lease liabilities, total GBP64.4m
(2020: GBP64.4m).
(1) Included in total depreciation and amortisation charge in
the Consolidated Income Statement (refer to note 9).
(2) Included in Net interest income in the Consolidated Income
Statement (refer to note 5).
(3) Included in Property, plant and equipment in the
Consolidated Statement of Financial Position (refer to note
26).
(4) Included in Other liabilities in the Consolidated Statement
of Financial Position (refer to note 32).
101
37. Employee Benefit Liability
Defined benefit plans
The Group made contributions in the year to a closed funded
defined benefit scheme operated by TSL. The principal pension plan
is the Tesco pension scheme, a funded defined benefit pension
scheme in the UK, the assets of which are held as a segregated fund
and administered by the Trustee. TSL has recognised the appropriate
net liability of the Tesco pension scheme in accordance with IAS
19.
Following the sale by Tesco of its operations in Thailand and
Malaysia, Tesco has contributed GBP2.5bn to the Tesco pension
scheme to eliminate the current funding deficit and significantly
reduce the prospect of having to make further pension deficit
contributions in the future.
Defined contribution plans
A defined contribution scheme operated by TSL is open to all
Group employees in the UK.
Detailed disclosures, in line with the requirements of IAS 19,
are included in the Tesco PLC 2021 Financial Statements.
38. Risk Management
There are no differences in the manner in which risks are
managed and measured between the Group and the Company. Therefore,
the explanations of the management, the control responsibilities
and the measurement of risk described in this section are those for
the Group. The amounts included in this note are those for the
Group unless otherwise stated.
Through its normal operations, the Group is exposed to a number
of risks, the most significant of which are credit risk,
operational risk, liquidity and funding risk, market risk,
insurance risk, residual price risk and legal and regulatory
compliance risk. The key risk management processes and tools are
described in detail on pages 17 to 24 within the Strategic
Report.
(a) Credit Risk
Types of credit risk
Retail credit risk
Retail credit risk is the risk that a borrower, who is a
personal customer, will default on a debt or obligation by failing
to make contractually obligated payments. The Group is following
FCA guidance, recently updated due to the Covid-19 pandemic, in
relation to those Credit Card customers defined as being in
Persistent Debt.
Controls and risk mitigants
To minimise the potential for the Group to be exposed to levels
of bad debt that are outside Risk Appetite, processes, systems and
limits have been established that cover the end-to-end retail
credit risk customer life cycle, the key components of which are
outlined below:
Credit scoring: The quality of new lending is controlled using
appropriate credit scoring and associated rules. Judgemental
analysis is used for more complex cases.
Affordability: The Group aims to be a responsible lender and
accordingly employs affordability models, including minimum free
income thresholds based on customers' income and outgoings, to
confirm that they have the ability to repay the advances they are
seeking.
Credit policies and guides: A suite of retail credit risk
policies and supporting guides are maintained by the Credit Risk
function. These policies define the minimum requirements for the
management of credit activities across the credit life cycle. The
guides also comprise specific product and customer related
thresholds that in turn seek to ensure that the Group is operating
within agreed retail credit Risk Appetite parameters.
102
38. Risk Management (continued)
Controls and risk mitigants (continued)
Monitoring and reporting: Management information is produced
covering all lending portfolios which is tailored to meet the
requirements of different audiences within the overall governance
framework. Risk Appetite Measures (RAMs) with supporting limits and
tolerances allow the Group to track performance against Risk
Appetite and identify any emerging trends that could act as an
early warning that performance could move outside approved Risk
Appetite thresholds, thereby allowing mitigating actions to be
taken to address such trends.
Wholesale credit risk
Wholesale credit risk is the risk that the counterparty to a
transaction will default before the final settlement of the
transaction cash flows. Such transactions relate to contracts for
derivative financial instruments, securities financing transactions
and long-dated settlement transactions.
The Group does not operate in the mainstream commercial or
corporate lending market. However, the Group is exposed to
wholesale credit risk primarily through Treasury activities, as a
result of cash management, liquidity and market risk management,
with the inherent risk that these counterparties could fail to meet
their obligations.
Controls and risk mitigants
Daily monitoring of exposures is undertaken, with oversight from
the Market and Liquidity Risk (MLR) team. Monthly reporting of RAMs
is provided to the Executive Risk Committee (ERC). Escalation
processes are in place for the reporting of any breached limits
directly to the ERC.
The RAM limits are set out in the Wholesale Credit Risk Policy
which is approved by the Financial and Credit Risk Director as
Policy owner. The limits contained in the Policy are approved by
the ERC or Board as appropriate. The Treasury Director is
responsible for ensuring that Treasury complies with counterparty
credit risk limits. The MLR team reports to the Financial and
Credit Risk Director, providing independent oversight that these
limits are adhered to.
The Group's approach to investing funds focuses on
counterparties with strong capacity to meet financial commitments
and requires approved counterparties to have investment grade
ratings. Counterparty types include financial institutions,
sovereigns and supranationals, with approved instrument types
including cash, certificates of deposit, bonds, treasury bills,
gilts, repurchase agreements and interest rate and foreign exchange
derivatives. Ratings issued by external credit assessment
institutions are taken into account as part of the process to set
limits.
Wholesale Credit Risk Limits restrict the amounts that can be
invested based on counterparty credit-worthiness by country,
instrument type and remaining tenor. As part of the credit
assessment process for wholesale credit risk exposures, the Group
uses the external credit ratings issued by Fitch (as the nominated
external credit assessment institution) to help determine the
appropriate risk-weighting to apply under the Standardised Approach
(SA) to credit risk exposures. The Wholesale Credit Risk Policy is
set by the Board and any new counterparty limits, Policy exceptions
or overrides must follow agreed delegated authorities that require
as a minimum explicit sign-off by the Chief Financial Officer and
Chief Risk Officer (CRO).
The Wholesale Credit Risk Policy also provides that credit risk
mitigation techniques are applied to reduce wholesale credit risk
exposures. International Swaps Derivatives Association (ISDA)
master agreements are in place with all derivative counterparties,
Global Master Repurchase Agreements are in place for all repurchase
counterparties and ISDA Credit Support Annexes have been executed
with all of the Group's derivative counterparties. The Group uses
central counterparties in order to clear specified derivative
transactions (predominantly interest rate swaps) thereby mitigating
counterparty risk. Positions are continuously marked-to-market and
margin in the form of collateral is exchanged on at least a daily
basis. As at 28 February 2021, no additional credit risk mitigation
was deemed necessary.
103
38. Risk Management (continued)
Credit risk: ECL measurement
The Group assesses, on a forward-looking basis, the ECLs
associated with its financial assets carried at amortised cost and
FVOCI, and with the exposure arising from loan commitments. The
Group has not recognised an ECL allowance for cash or other
financial assets balances at 28 February 2021 due to the short-term
nature of these balances, the frequency of origination and
settlement of balances and taking account of collateral held.
ECLs are calculated in line with the requirements of IFRS 9
using the three stage model for impairment:
Stage 1 Financial asset is not credit impaired and has not had a
significant increase in credit risk since initial recognition
Stage 2 Financial asset is not credit impaired but has had a
significant increase in credit risk since initial recognition
Stage 3 Financial asset is credit impaired
The measurement of ECLs is dependent on the classification stage
of the financial asset. For financial assets in Stage 1, loss
allowances are calculated based on ECLs arising from default events
that are possible within 12 months from the reporting date. For
financial assets in Stages 2 and 3, loss allowances are calculated
based on lifetime ECLs.
The measurement of ECLs for financial assets measured at
amortised cost or FVOCI is an area that requires the use of complex
models and significant assumptions about future economic conditions
and credit behaviour. A number of significant judgements are also
required in applying the accounting requirements for measuring
ECLs.
The sections below provide further explanations of the factors
taken into account in the measurement of ECLs.
Significant increase in credit risk
At each reporting date, the change in credit risk of the
financial asset is observed using a set of quantitative and
qualitative criteria, together with a backstop based on arrears
status.
Quantitative criteria:
For each financial asset, the Group compares the lifetime
probability of default (PD) at the reporting date with the lifetime
PD that was expected at the reporting date at initial recognition
(PD thresholds). The Group has established PD thresholds for each
type of product which vary depending on initial term and term
remaining.
Qualitative criteria:
A number of qualitative criteria are in place such as:
Forbearance offered to customers in financial difficulty;
Risk-based pricing post-origination;
Credit indebtedness;
Credit limit decrease; and
Pre-delinquency information.
Backstop
As a backstop, the Group considers that if an account's
contractual payments are more than 30 days past due then a
significant increase in credit risk has taken place.
The Group has used the low credit risk exemption in respect of
its portfolio of investment securities in both the current and
prior year.
Definition of default
An account is deemed to have defaulted when the Group considers
that a customer is in significant financial difficulty and that the
customer meets certain quantitative and qualitative criteria
regarding their ability to make contractual payments when due.
104
38. Risk Management (continued)
This includes instances where:
the customer makes a declaration of significant financial
difficulty;
the customer or third-party agency communicates that it is
probable that the customer will enter bankruptcy or another form of
financial restructuring such as insolvency or repossession;
the account has been transferred to recoveries and the
relationship is terminated;
an account's contractual payments are more than 90 days past
due; or
where the customer is deceased.
An account is considered to no longer be in default when it no
longer meets any of the default criteria and has remained
up-to-date on its contractual payments for a period of at least
three months.
Inputs, assumptions and techniques used for estimating
impairment
The ECL is determined by multiplying together the PD, exposure
at default (EAD) and loss given default (LGD) for the relevant time
period and for each collective segment and by discounting back to
the balance sheet date. Each of these inputs is explained further
below.
Probability of default: Represents the likelihood a customer
will default over the relevant period, being either 12 months or
the expected lifetime.
Exposure at default: Represents the expected amount due from the
customer at the point of default. The Group derives the EAD from
the current exposure to the counterparty and future changes to that
exposure to the point of default.
Loss given default: Represents the Group's expectation of the
extent of the loss if there is a default. The LGD assumes that once
an account has defaulted, the portion of the defaulted balance will
be recovered over a maximum period of 60 months from the point of
default. LGD models take into account, when relevant, the valuation
of collateral, collection strategies and receipts from debt
sales.
These inputs are adjusted to reflect forward-looking information
as described below.
Expected lifetime
The expected lifetime of a financial asset is generally the
contractual term. In the case of Loans, the expected lifetime is
the behavioural life. In the case of revolving products, the Group
measures credit losses over the period that it will be exposed to
credit risk. This is estimated using historic customer data. The
current expected lifetime of the Group's Credit Card portfolio is 6
years.
Incorporation of forward-looking information
The ECL calculation and the measurement of significant
deterioration in credit risk both incorporate forward-looking
information using a range of macro-economic scenarios. The key
economic variables are based on historical patterns observed over a
range of economic cycles.
The Group has engaged a third-party supplier to provide relevant
economic data for this purpose which, prior to incorporation into
the ECL calculation, is subject to internal review and challenge
with reference to other publicly available market data and
benchmarks.
At 29 February 2020, the Group used five economic scenarios.
These included a Base scenario, an Upside scenario and three
Downside scenarios. Downside 1 was an unfavourable European Union
(EU) trade deal, Downside 2 was a more severe recession and in
addition, to reflect the increased risk at that date of an adverse
economic impact from the Covid-19 pandemic, a fifth scenario which
used Downside 2 as a proxy was introduced. The scenarios were
assigned weightings of 40%, 20%, 30%, 5% and 5% respectively.
105
38. Risk Management (continued)
At 28 February 2021, the Group commissioned four scenarios from
its third-party provider, all of which were based on an economic
outlook that sought to take account of the potential ramifications
of the current COVID-19 pandemic. These scenarios include a Base
scenario, an Upside scenario and two different Downside scenarios.
These scenarios have been assigned weightings of 40%, 30%, 25% and
5% respectively. As the economic outlook remains uncertain, the
Group's scenarios are based on the success of the Covid-19 vaccine
roll out against emerging strains of the virus and, as the
restrictions are lifted, the speed at which consumer and business
confidence will support the recovery in GDP and the labour
market:
The Base scenario anticipates GDP in Q4 2021 will be 3.7% lower
than Q4 2019 and it takes until Q3 2023 to recover the loss of
output. Unemployment is expected to peak in Q3 2021 at 8.0%.
The Upside scenario involves a sharper economic recovery with
the loss of output due to the Covid-19 pandemic fully recovered by
Q4 2021. Unemployment is expected to peak in Q2 2021 at 6.7%.
Downside 1 scenario assumes a longer delay, with GDP not
expected to recover from its pre-Covid-19 pandemic level until Q3
2024. Unemployment is expected to peak in Q4 2021 at 9.6%.
Downside 2 scenario assumes an even longer recovery, with
pre-Covid-19 pandemic output only recovered by Q3 2025.
Unemployment is expected to peak in Q4 2021 at 10.8%.
These scenarios are also reviewed to ensure an unbiased estimate
of ECL by ensuring the credit loss distribution under a larger
number of scenarios is adequately captured using these four
scenarios and their respective weightings.
106
38. Risk Management (continued)
The table below shows the key macro-economic variables in each
scenario, averaged over a five-year period.
The economic scenarios used include the following ranges of key
indicators:
2021
Scenario Weighting Sensitivity Economic measure 2021 2022 2023 2024 2025
(100% weighted)(3)
GBPm % % % % %
Bank of England base
Base 40% (1.1) rate(1) 0.1 0.1 0.1 0.1 0.2
Gross domestic product(2) 4.7 3.2 1.8 1.6 1.6
Unemployment rate 7.7 6.4 4.9 4.3 4.1
Unemployment rate
peak in year 8.0 7.2 5.3 4.5 4.1
Bank of England base
Upside 30% (65.8) rate(1) 0.1 0.1 0.1 0.2 0.4
Gross domestic product(2) 9.5 2.6 1.6 1.8 1.8
Unemployment rate 6.4 4.7 4.2 4.1 4.0
Unemployment rate
peak in year 6.7 5.2 4.2 4.1 4.1
Downside Bank of England base
1 25% 56.8 rate(1) -- -- 0.1 0.1 0.1
Gross domestic product(2) 2.0 3.5 1.9 1.8 1.8
Unemployment rate 8.6 8.6 6.8 5.3 4.4
Unemployment rate
peak in year 9.6 9.3 7.5 5.8 4.7
Downside Bank of England base
2 5% 116.8 rate(1) -- (0.1) 0.1 0.1 0.1
Gross domestic product(2) (1.0) 4.4 2.2 1.8 1.8
Unemployment rate 9.4 10.4 9.3 7.8 6.2
Unemployment rate
peak in year 10.8 10.7 9.7 8.4 6.8
Bank of England base
Weighted scenarios rate(1) 0.1 0.1 0.1 0.1 0.3
Gross domestic product 5.2 3.2 1.8 1.7 1.7
Unemployment rate 7.6 6.6 5.4 4.7 4.3
Unemployment rate
peak in year 8.2 7.3 5.7 4.9 4.4
(1) Simple average.
(2) Annual growth rates.
(3) Represents the impact on ECL provision if 100% weighting
applied to each macro-economic scenario.
107
38. Risk Management (continued)
2020
Scenario Weighting Sensitivity Economic measure 2020 2021 2022 2023 2024
(100% weighted)(3)
GBPm % % % % %
Bank of England base
Base 40% (27.7) rate(1) 0.5 0.5 0.6 0.7 0.7
Gross domestic product(2) 1.3 1.7 1.8 1.8 1.8
Unemployment rate 3.9 3.9 3.9 3.8 3.8
Unemployment rate
peak in year 4.0 4.0 3.9 3.8 3.8
Bank of England base
Upside 20% (41.1) rate(1) 0.2 0.2 0.2 0.3 0.3
Gross domestic product(2) 1.7 2.1 2.2 2.2 2.2
Unemployment rate 3.9 3.9 3.8 3.8 3.8
Unemployment rate
peak in year 4.0 3.9 3.8 3.8 3.8
Downside Bank of England base
1 30% 39.6 rate(1) 0.5 0.6 1.4 2.2 2.3
Gross domestic product(2) 1.3 0.5 1.0 1.1 1.2
Unemployment rate 4.0 4.5 5.8 5.9 5.8
Unemployment rate
peak in year 4.1 4.9 6.0 6.0 5.8
Downside Bank of England base
2 5% 102.9 rate(1) 0.5 1.5 2.9 3.0 3.0
Gross domestic product(2) (0.5) (0.9) 1.7 1.7 1.7
Unemployment rate 4.0 5.5 6.9 6.8 6.5
Unemployment rate
peak in year 4.2 6.4 7.0 6.9 6.7
Bank of England base
Covid-19 5% 102.9 rate(1) 0.5 1.5 2.9 3.0 3.0
Gross domestic product(2) (0.5) (0.9) 1.7 1.7 1.7
Unemployment rate 4.0 5.5 6.9 6.8 6.5
Unemployment rate
peak in year 4.2 6.4 7.0 6.9 6.7
Bank of England base
Weighted scenarios rate(1) 0.4 0.6 1.0 1.3 1.3
Gross domestic product 1.2 1.2 1.6 1.6 1.7
Unemployment rate 4.0 4.3 4.7 4.7 4.7
Unemployment rate
peak in year 4.0 4.5 4.8 4.8 4.7
(1) Simple average.
(2) Annual growth rates.
(3) Represents the impact on ECL provision if 100% weighting
applied to each macro-economic scenario.
108
38. Risk Management (continued)
Sensitivity analysis
As the calculation of ECLs is complex and involves use of
judgement, sensitivity analysis has been performed to illustrate
the impact on ECLs of any changes to the main components of the
calculation. The effect of applying a 100% weighting to each of the
macro-economic scenarios, as well as the impact on ECLs as a result
of changes in LGD, staging, PD and expected lifetime, have been
assessed.
Most of the sensitivities have been calculated as single-factor
sensitivities and any impact on ECL reflects the sensitivity of the
estimate to each key component in isolation. However, the PD and
macro-economic sensitivities also include a rebasing of the staging
allocation and thresholds. The impact of these is therefore
incorporated within the impact disclosed for these
sensitivities.
The most significant assumptions affecting the ECL calculation
are as follows:
PD;
LGD;
Macro-economic scenarios;
PD threshold (staging); and
Expected lifetime of revolving credit facilities.
Changes in the ECL allowance that would arise from reasonably
possible changes in these assumptions over the next 12 months from
those used in the Group's calculations at 28 February 2021 are set
out in the table below.
Impact on loss
allowance
2021 2020
GBPm GBPm
Closing ECL allowance 624.6 488.4
Macro-economic (100% weighted) Upside (65.8) (41.1)
Base (1.1) (27.7)
Downside 1 56.8 39.6
Downside 2 116.8 102.9
Increase of
PD 2.5% 7.5 11.1
Decrease of
2.5% (7.5) (10.9)
Increase of
LGD 2.5% 10.3 12.1
Decrease of
2.5% (10.4) (12.3)
Increase of
Staging - change in threshold 20% (7.4) (17.3)
Decrease of
20% 10.6 21.4
Increase of
Expected lifetime (revolving credit facilities) 1 year 9.3 2.1
Decrease of
1 year (8.7) (2.1)
109
38. Risk Management (continued)
Management Overlays
The Covid-19 pandemic has had a significant impact on the global
economy and there remains a large degree of uncertainty around the
scale and stress of the peak of the economic downturn and the speed
and shape of any subsequent recovery. The extension of government
support measures such as furlough has been unprecedented and this,
coupled with the granting of payment holidays by the Group, has
broken the historically observed relationship between unemployment
and default.
Although projected levels of unemployment remain high, the Group
is yet to see significant defaults emerge in its lending portfolio
and, as such, Covid-19 specific adjustments to the Group's modelled
ECL provision to capture the estimated impact of the stress within
the Group's ECL provision have been recognised as follows:
Management has assessed that the beneficial impact of lower
consumer spending through the Covid-19 pandemic, which has resulted
in an improvement in credit scores, as well as other inputs to ECL
such as lower EADs on the credit cards portfolio, will have
suppressed ECLs. A post-model adjustment (PMA) of GBP129.5m is held
in this respect, calculated from pre-Covid-19 pandemic coverage
rates and based upon credit limits but reduced in line with the
reduction in portfolio utilisation observed during the year. An
increase or decrease of 10% on the adjustment for lower drawn
balances would increase or decrease this overlay by GBP11m. This
PMA reflects Management's belief that the level of risk prior to
the emergence of Covid-19 is more reflective of future ECLs.
Management has assessed that the impact of government support
measures such as furlough and the various temporary customer
support measures the Group has put in place has suppressed arrears
and defaults during the year. Management has judged this to be
temporary in nature and a PMA of GBP63.6m is held to recognise the
expected emergence of defaults once support measures are removed.
The maximum suppressed defaults have been estimated at
GBP82.2m.
A review of arrears emergence from those customers who sought an
extension to their initial payment holiday has suggested there has
been an increase in credit risk in respect of these customers and,
as such, these accounts have been moved to Stage 2 with a PMA of
GBP21.1m held to reflect the estimated increase in ECLs for these
customers.
110
38. Risk Management (continued)
Grouping of instruments for losses measured on a collective
basis
For ECL provisions modelled on a collective basis, a grouping of
exposures is performed on the basis of shared credit risk
characteristics that include instrument type and credit risk
gradings. The groupings are subject to regular review to ensure
that these remain appropriate.
Credit risk: Credit risk exposure
Maximum exposure to credit risk
The table below represents the Group's maximum exposure to
credit risk, by IFRS 9 stages at the reporting date, in respect of
financial assets held.
For financial assets, the balances are based on gross carrying
amounts as reported in the Consolidated Statement of Financial
Position. For loan commitments, the amounts in the table represent
the amounts for which the Group is contractually committed.
Stage Stage
1 Stage 2 3 Total
<30 days >30 days
Not past past past
2021 due due due Total
Group(1) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross Exposure
Loans and advances
to customers 5,748.5 980.5 24.9 24.6 1,030.0 241.6 7,020.1
Investment securities
at FVOCI(2) 5.1 -- -- -- -- -- 5.1
Investment securities
at amortised cost 949.2 -- -- -- -- -- 949.2
Loan commitments -
Loans and advances
to customers(3) 12,378.9 282.9 2.3 0.3 285.5 3.6 12,668.0
Total gross exposure 19,081.7 1,263.4 27.2 24.9 1,315.5 245.2 20,642.4
-------- -------- -------- -------- ------- ----- --------
Loss allowance
Loans and advances
to customers(3) 132.3 312.5 11.1 15.7 339.3 153.0 624.6
Investment securities
at FVOCI -- -- -- -- -- -- --
Investment securities
at amortised cost 0.8 -- -- -- -- -- 0.8
Total loss allowance 133.1 312.5 11.1 15.7 339.3 153.0 625.4
-------- -------- -------- -------- ------- ----- --------
Net Exposure
Loans and advances
to customers 5,616.2 668.0 13.8 8.9 690.7 88.6 6,395.5
Investment securities
at FVOCI 5.1 -- -- -- -- -- 5.1
Investment securities
at amortised cost 948.4 -- -- -- -- -- 948.4
Total net exposure 6,569.7 668.0 13.8 8.9 690.7 88.6 7,349.0
-------- -------- -------- -------- ------- ----- --------
Coverage
Loans and advances
to customers 2.3% 31.9% 44.6% 63.8% 32.9% 63.3% 8.9%
-------- -------- -------- -------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP484.8m are considered to be low risk and stage 1.
The related loss allowance of GBP1.3m is also considered to be
stage 1.
(2) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
(3) The loss allowance in respect of loan commitments is
included within the total loss allowance for loans and advances to
customers as above to the extent that it is below the gross
carrying amount of loans and advances to customers. Where the loss
allowance exceeds the gross carrying amount, any excess is included
within provisions as set out at note 30.
111
38. Risk Management (continued)
2020 Stage 1 Stage 2 Stage 3 Total
Not past due <30 days past due >30 days past due Total
Group(1) GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross Exposure
Loans and advances to
customers 7,687.9 869.4 51.8 32.1 953.3 288.8 8,930.0
Investment securities at
FVOCI 1,060.6 - - - - - 1,060.6
Investment securities at
amortised cost 21.1 - - - - - 21.1
Loan commitments - Loans and
advances to customers(2) 11,754.7 116.3 - - 116.3 1.0 11,872.0
-------- ------------ ----------------- ----------------- ------- ------- --------
Total gross exposure 20,524.3 985.7 51.8 32.1 1,069.6 289.8 21,883.7
-------- ------------ ----------------- ----------------- ------- ------- --------
Loss allowance
Loans and advances to
customers(2) 84.1 177.5 21.5 19.6 218.6 185.7 488.4
Investment securities at
FVOCI(3) 0.9 - - - - - 0.9
Investment securities at
amortised cost 0.1 - - - - - 0.1
-------- ------------ ----------------- ----------------- ------- ------- --------
Total loss allowance 85.1 177.5 21.5 19.6 218.6 185.7 489.4
-------- ------------ ----------------- ----------------- ------- ------- --------
Net exposure
Loans and advances to
customers 7,603.8 691.9 30.3 12.5 734.7 103.1 8,441.6
Investment securities at
FVOCI 1,059.7 - - - - - 1,059.7
Investment securities at
amortised cost 21.0 - - - - - 21.0
-------- ------------ ----------------- ----------------- ------- ------- --------
Total net exposure 8,684.5 691.9 30.3 12.5 734.7 103.1 9,522.3
-------- ------------ ----------------- ----------------- ------- ------- --------
Coverage
Loans and advances to
customers 1.1% 20.4% 41.5% 61.1% 22.9% 64.3% 5.5%
------------ ----------------- ----------------- -------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP484.8m are considered to be low risk and stage 1.
The related loss allowance of GBP1.6m is also considered to be
stage 1.
(2) The loss allowance in respect of loan commitments is
included within the total loss allowance for loans and advances to
customers as above to the extent that it is below the gross
carrying amount of loans and advances to customers. Where the loss
allowance exceeds the gross carrying amount, any excess is included
within provisions as set out at note 30.
(3) The loss allowance for investment securities at FVOCI is not
recognised in the carrying amount of investment securities as the
carrying amount is their fair value.
112
38. Risk Management (continued)
The table below provides details of financial assets held at
FVPL which are not subject to impairment.
Group Maximum exposure to credit
risk
2021 2020
GBPm GBPm
Derivative financial assets 6.1 5.7
Assets of the disposal group -- 45.1
Cash and balances with central banks 13.2 26.3
Total 19.3 77.1
------------- -------------
Credit quality of loans and advances to customers
The table below provides details of the credit quality of loans
and advances to customers and loan commitments for which an ECL
allowance is recognised.
The Group defines four classifications of credit quality for all
credit exposures; High, Satisfactory, Low and Below Standard.
Credit exposures are segmented according to the IFRS 9 12 month PD,
with credit impaired reflecting a PD of 100%. The classifications
are the same for the current and prior year.
IFRS 9
12 Month PD
(%)
High quality <=3.02%
Satisfactory quality >3.03% - 11.10%
Low quality and below => 11.11%
standard
Credit impaired 100%
Group(1) 2021
Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Loans and advances to customers
High quality 5,312.9 443.4 -- 5,756.3
Satisfactory quality 392.3 389.4 -- 781.7
Low quality and below standard 43.3 197.2 -- 240.5
Credit impaired -- -- 241.6 241.6
Total 5,748.5 1,030.0 241.6 7,020.1
-------- ------- ------- --------
Loan Commitments
High quality 12,263.1 198.5 -- 12,461.6
Satisfactory quality 90.1 65.7 -- 155.8
Low quality and below standard 25.7 21.3 -- 47.0
Credit impaired -- -- 3.6 3.6
Total 12,378.9 285.5 3.6 12,668.0
-------- ------- ------- --------
Total exposure 18,127.4 1,315.5 245.2 19,688.1
-------- ------- ------- --------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP484.8m are considered to be low risk, high quality
and stage 1.
113
38. Risk Management (continued)
Credit quality of loans and advances to customers
(continued)
Group(1) 2020
Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Loans and advances to customers
High quality 6,608.9 37.4 - 6,646.3
Satisfactory quality 1,036.9 485.4 - 1,522.3
Low quality and below standard 42.1 430.5 - 472.6
Credit impaired -- - 288.8 288.8
Total 7,687.9 953.3 288.8 8,930.0
-------- ------- ------- --------
Loan Commitments
High quality 11,544.2 1.9 - 11,546.1
Satisfactory quality 206.3 86.0 - 292.3
Low quality and below standard 4.2 28.4 - 32.6
Credit impaired - - 1.0 1.0
Total 11,754.7 116.3 1.0 11,872.0
-------- ------- ------- --------
Total exposure 19,442.6 1,069.6 289.8 20,802.0
-------- ------- ------- --------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP484.8m are considered to be low risk, high quality
and stage 1.
Counterparty credit rating
2021 2020
Long-term Rating GBPm GBPm
Investment securities at amortised
cost AAA to BBB 927.3 -
Investment securities at FVOCI AAA to BBB 5.1 1,060.6
932.4 1,060.6
----- -------
Concentration risk
Concentration risk is the risk of losses arising as a result of
concentrations of exposures to a specific counterparty, economic
sector, segment or geographical region.
The Group could become exposed to this risk were it to become
concentrated in certain geographic areas or product profiles e.g. a
disproportionate level of high value unsecured Personal Loans. Such
concentrations could produce unacceptable bad debts in some adverse
but plausible situations.
Controls and risk mitigants
The Group mitigates these potential concentration risks by
establishing appropriate limits and trigger thresholds that are
regularly monitored and reported to the appropriate Senior
Management team and risk committees. An assessment of credit
concentration is also undertaken as part of the ICAAP. The Group
does not consider itself to be overly concentrated, other than its
geographic concentration as a UK business.
Concentration profiles
The following tables provide concentration profiles in terms of
the geographic distribution of the Group's exposures and analysis
of material asset class by industry type.
114
38. Risk Management (continued)
Geographical distribution profile
The Group is primarily focused on providing financial services
and products to UK personal customers.
The table below provides the geographical distribution of the
Group's total credit risk exposures. For on balance sheet assets,
the balances set out below are based on net carrying amounts as
reported in the Consolidated Statement of Financial Position.
2021 2020
Group GBPm GBPm
UK 20,430.1 22,534.1
Europe (excluding UK) 149.1 303.3
Other 466.2 274.6
-------- --------
Total 21,045.4 23,112.0
-------- --------
Industry type profile
The table below represents the distribution of exposures by
industry type. The Group is primarily focused on providing
financial services and products to personal customers in the UK,
although it also has exposure to wholesale counterparties as
detailed below. For on balance sheet assets, the balances set out
below are based on net carrying amounts as reported in the
Consolidated Statement of Financial Position.
2021 2020
Group GBPm GBPm
Financial institutions 1,112.1 1,170.5
Government 840.8 1,540.7
Individuals 19,083.1 20,397.7
Wholesale and retail trade 9.4 3.1
-------- --------
Total 21,045.4 23,112.0
-------- --------
Credit risk: Collateral held
During the year the Group pledged collateral in respect of
repurchase liabilities.
115
38. Risk Management (continued)
Credit risk: Loss allowance
The following table provides a reconciliation of the movements
in the loss allowance in the year:
2021 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2020 84.1 218.6 185.7 488.4
Transfers (2,4)
Transfers from stage 1 to stage
2 (20.0) 20.0 - --
Transfers from stage 2 to stage
1 8.5 (8.5) - -
Transfers to stage 3 (2.4) (42.1) 44.5 --
Transfers from stage 3 1.6 2.0 (3.6) --
Income statement charge
Net remeasurement(3) following
transfer of stage(4) (5.9) 34.9 71.6 100.6
New financial assets originated(5) 25.4 4.7 1.7 31.8
Financial assets derecognised
during year (7.2) (9.3) (3.1) (19.6)
Changes in risk parameters and
other movements(6) 56.5 133.6 83.5 273.6
Other movements
Write-offs and asset disposals(7) -- (2.3) (227.3) (229.6)
Transfer to provisions for liabilities
and charges(8) (8.3) (12.3) -- (20.6)
-------- -------- -------- --------
ECL allowance at 28 February 2021 132.3 339.3 153.0 624.6
-------- -------- -------- --------
Investment securities at FVOCI
At 1 March 2020 0.9 - - 0.9
Other movements
Transfer to investment securities
at amortised cost(9) (0.9) - - (0.9)
-------- -------- -------- --------
ECL allowance at 28 February 2021 -- - - --
-------- -------- -------- --------
Investment securities at amortised
cost
At 1 March 2020 0.1 - - 0.1
Income statement charge
New financial assets originated(5) 0.1 - - 0.1
Financial assets derecognised
during the year (0.1) - - (0.1)
Changes in risk parameters and
other movements(6) (0.2) - - (0.2)
Other movements
Transfer from investment securities
at FVOCI 0.9 - - 0.9
ECL allowance at 28 February 2021 0.8 - - 0.8
-------- -------- -------- --------
Reconciliation to income statement
Net expected credit loss charge 68.6 163.9 153.7 386.2
Recoveries and write-offs -- -- (26.7) (26.7)
-------- -------- -------- --------
Total income statement charge 68.6 163.9 127.0 359.5
-------- -------- -------- --------
(1) On a Company basis, the movements in loss allowance for the
year ended 28 February 2021 of GBP0.3m relating to loans and
advances to subsidiary companies arise entirely due to changes in
risks parameters and is considered to be stage 1.
(2) Transfers - The opening loss allowance on financial assets
which transferred stage during the year.
(3) Net remeasurement - The increase/(decrease) in the opening
loss allowance as a result of a stage transfer.
(4) Includes a charge in stages 1 and 2 ECL of GBP194.1m due to
a change in the macro-economic scenarios assumptions.
(5) New financial assets originated or purchased - The loss
allowance on new financial assets originated or purchased during
the year, representing their stage at 28 February 2021.
(6) Changes in risk parameters and other movements - The change
in loss allowance due to changes in macro-economic scenarios, PD,
LGD and EAD during the year.
(7) Write-offs and asset disposals - The release of the loss
allowance following the write-off and/or disposal of a financial
asset during the year.
(8) Transfer from provisions for liabilities and charges - The
movement in loss allowance which exceeds the gross carrying amount
of the financial asset.
(9) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
116
38. Risk Management (continued)
2020 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2019 84.6 228.6 172.0 485.2
Transfers (2)
Transfers from stage 1 to stage
2 (10.5) 10.5 - -
Transfers from stage 2 to stage
1 63.5 (63.5) - -
Transfers to stage 3 (3.1) (49.9) 53.0 -
Transfers from stage 3 1.9 2.2 (4.1) -
Income statement charge
Net remeasurement(3) following
transfer of stage(4) (37.9) 23.3 92.7 78.1
New financial assets originated(5) 27.0 20.8 10.2 58.0
Financial assets derecognised
during year (8.7) (12.1) (3.4) (24.2)
Changes in risk parameters and
other movements(6) (31.6) 63.2 59.9 91.5
Other movements
Write-offs and asset disposals(7) - (3.3) (194.5) (197.8)
Transfer from provisions for
liabilities and charges(8) 0.4 0.4 - 0.8
Reclassification of assets of
the disposal group(9) (1.5) (1.6) (0.1) (3.2)
-------- -------- -------- --------
ECL allowance at 29 February
2020 84.1 218.6 185.7 488.4
-------- -------- -------- --------
Investment securities at FVOCI
At 1 March 2019 0.2 - - 0.2
Income statement charge
New financial assets purchased(5) 0.4 - - 0.4
Financial assets derecognised
during the year (0.7) - - (0.7)
Changes in risk parameters and
other movements(6) 1.0 - - 1.0
-------- -------- -------- --------
ECL allowance at 29 February
2020 0.9 - - 0.9
-------- -------- --------
Investment securities at amortised
cost
At 1 March 2019 0.1 - - 0.1
Income statement release
Changes in risk parameters and
other movements(6) - - - -
-------- -------- --------
ECL allowance at 29 February
2020 0.1 - - 0.1
-------- -------- -------- --------
Reconciliation to income statement
Net expected credit loss (release)/charge (50.5) 95.2 159.4 204.1
Recoveries and write-offs - - (25.4) (25.4)
-------- -------- --------
Total income statement (release)/charge (50.5) 95.2 134.0 178.7
-------- -------- -------- --------
Comprising:
- In respect of continuing operations (50.0) 94.6 134.0 178.6
- In respect of discontinued
operations (0.5) 0.6 - 0.1
-------- -------- --------
Total income statement (release)/charge (50.5) 95.2 134.0 178.7
-------- -------- -------- --------
(1) On a Company basis, the movements in loss allowance for the
year ended 29 February 2020 of GBP0.3m relating to loans and
advances to subsidiary companies arise entirely due to changes in
risks parameters of (GBP0.6m) and new financial assets purchased of
GBP0.9m and is considered to be stage 1.
(1) Transfers - The opening loss allowance on financial assets
which transferred stage during the year.
(2) Net remeasurement - The increase/(decrease) in the opening
loss allowance as a result of a stage transfer.
(3) Includes a release in stages 1 and 2 ECL of GBP8.0m due to a
change in the macro-economic scenarios assumptions.
(4) New financial assets originated or purchased - The loss
allowance on new financial assets originated or purchased during
the year, representing their stage at 29 February 2020.
(5) Changes in risk parameters and other movements - The change
in loss allowance due to changes in macro-economic scenarios, PD,
LGD and EAD during the year.
(6) Write-offs and asset disposals - The release of the loss
allowance following the write-off and/or disposal of a financial
asset during the year.
(7) Transfer from provisions for liabilities and charges - The
movement in loss allowance which exceeds the gross carrying amount
of the financial asset.
(8) During the prior year, the Group classified its Mortgage
Business as a disposal group.
117
38. Risk Management (continued)
The following table provides a reconciliation of the movements
in the gross carrying amounts of financial instruments to help
explain their significance to the changes in the loss allowance
during the year as set out in the above table:
2021 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
Gross carrying amount
At 1 March 2020 7,687.9 953.3 288.8 8,930.0
Transfers (2)
Transfers from stage 1 to stage
2 (555.6) 555.6 - --
Transfers from stage 2 to stage
1 46.3 (46.3) - --
Transfers to stage 3 (90.0) (122.3) 212.3 --
Transfers from stage 3 3.8 5.0 (8.8) --
Other movements
New financial assets originated(3) 1,212.0 16.9 2.4 1,231.3
Net decrease in lending(4) (2,540.5) (328.8) (22.5) (2,891.8)
Write-offs and asset disposals(5) -- (2.3) (237.6) (239.9)
Changes in interest accrual and
other movements (15.4) (1.1) 7.0 (9.5)
At 28 February 2021 5,748.5 1,030.0 241.6 7,020.1
---------
Investment securities at FVOCI
Gross carrying amount
At 1 March 2020 1,060.6 - - 1,060.6
Transfer to investment securities
at amortised cost(6) (1,057.4) - - (1,057.4)
Other movements 1.9 - - 1.9
At 28 February 2021 5.1 - - 5.1
---------
Investment securities at amortised
cost
Gross carrying amount
At 1 March 2020 21.1 - - 21.1
Transfer from investment securities
at FVOCI(6) 1,057.4 - - 1,057.4
New financial assets originated(3) 84.4 - - 84.4
Financial assets derecognised
during the year (201.8) - - (201.8)
Other movements (11.9) - - (11.9)
At 28 February 2021 949.2 - - 949.2
---------
(1) On a Company basis, loans and advances to subsidiary
companies of GBP484.8m are considered to be low risk and stage
1.
(2) Transfers - The opening gross carrying amount of financial
assets held which transferred stage as at year end.
(3) New financial assets originated or purchased - The gross
carrying amount of financial assets originated or purchased during
the year, representing their stage as at 28 February 2021.
(4) Net decrease in lending - The changes in gross carrying
amount of financial assets after taking account of additional
borrowing and/or payments received from customers.
(5) Write-offs and asset disposals - The write-off of the gross
carrying amount when a financial asset is deemed uncollectible
and/or has been disposed of.
(6) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
118
38. Risk Management (continued)
2020 Stage 1 Stage 2 Stage 3 Total
Group(1) GBPm GBPm GBPm GBPm
Loans and advances to customers
Gross carrying amount
At 1 March 2019 11,463.6 1,179.1 270.9 12,913.6
Transfers (2)
Transfers from stage 1 to stage
2 (523.3) 523.3 - -
Transfers from stage 2 to stage
1 431.3 (431.3) - -
Transfers to stage 3 (110.2) (154.8) 265.0 -
Transfers from stage 3 4.6 5.0 (9.6) -
Other movements
New financial assets originated(3) 2,611.0 106.9 13.9 2,731.8
Net decrease in lending(4) (2,652.9) (146.9) (11.4) (2,811.2)
Write-offs and asset disposals(5) - (3.3) (242.4) (245.7)
Changes in interest accrual and
other movements (0.8) (0.6) 3.4 2.0
Reclassification of assets of
the disposal group(6) (3,535.3) (124.1) (1.1) (3,660.5)
At 29 February 2020 7,688.0 953.3 288.7 8,930.0
Investment securities at FVOCI
Gross carrying amount
At 1 March 2019 1,042.7 - - 1,042.7
New financial assets purchased 778.6 - - 778.6
Financial assets derecognised
during the year (774.5) - - (774.5)
Other movements 13.8 - - 13.8
At 29 February 2020 1,060.6 - - 1,060.6
Investment securities at amortised
cost
Gross carrying amount
At 1 March 2019 28.9 - - 28.9
Financial assets derecognised
during the year (7.8) - - (7.8)
At 29 February 2020 21.1 - - 21.1
(1) On a Company basis, loans and advances to subsidiary
companies of GBP484.8m are considered to be low risk and stage 1.
GBP250.0m of new financial assets were recognised in the year.
(2) Transfers - The opening gross carrying amount of financial
assets held which transferred stage as at year end.
(3) New financial assets originated or purchased - The gross
carrying amount of financial assets originated or purchased during
the year, representing their stage as at 29 February 2020.
(4) Net decrease in lending - The changes in gross carrying
amount of financial assets after taking account of additional
borrowing and/or payments received from customers.
(5) Write-offs and asset disposals - The write-off of the gross
carrying amount when a financial asset is deemed uncollectible
and/or has been disposed of.
(6) In the prior year, the Group classified its Mortgage
Business as a disposal group.
119
38. Risk Management (continued)
Credit risk: Write off policy
When a loan is deemed uncollectable it is written off against
the related provision after all of the necessary procedures have
been completed and the amount of the loss has been determined.
The Group may write off loans that are still subject to
enforcement activity. The outstanding contractual amount of such
assets written off during the year ended 28 February 2021 was
GBP154.1m (2020: GBP140.0m). Expected recoveries from written off
financial assets subject to enforcement activity are recognised in
the Consolidated Statement of Financial Position.
Credit risk: Forbearance
The Group provides support to customers who are experiencing
financial difficulties. Forbearance is relief granted by a lender
to assist customers in financial difficulty, through arrangements
which temporarily allow the customer to pay an amount other than
the contractual amounts due. These temporary arrangements may be
initiated by the customer or the Group where financial difficulty
would prevent repayment within the original terms and conditions of
the contract. The main aim of forbearance is to support customers
in returning to a position where they are able to meet their
contractual obligations.
The Group has adopted the definition of forbearance as published
in Regulation EU 2015/227. The Group reports all accounts meeting
this definition, providing for them appropriately.
Controls and risk mitigants
The Group has well defined forbearance policies and processes. A
number of forbearance options are made available to customers by
the Group. These routinely, but not exclusively, include the
following:
Arrangements to repay arrears over a period of time, by making
payments above the contractual amount, that ensure the loan is
repaid within the original repayment term.
Short-term concessions, where the borrower is allowed to make
reduced repayments (or in exceptional circumstances, no repayments)
on a temporary basis to assist with short-term financial
hardship.
The table below details the values of secured and unsecured
advances that are subject to forbearance programmes, in accordance
with the European Banking Authority (EBA) definition.
Gross loans and advances subject Forbearance programmes as a Proportion of forbearance
to forbearance programmes proportion of total loans and programmes covered by impairment
advances by category provision
Group 2021 2020 2021 2020 2021 2020
GBPm GBPm % % % %
Credit Cards UK 118.8 107.6 3.7 2.5 50.2 49.7
Credit Cards
commercial 0.1 0.1 4.9 4.7 96.0 94.1
Loans 48.0 48.9 1.3 1.1 56.0 41.1
120
38. Risk Management (continued)
(b) Operational risk
Operational risk is the risk of loss resulting from inadequate
or failed internal processes, people and systems or from external
events. The Group is subject to the SA method to calculate Pillar 1
operational risk capital, as outlined in the Capital Requirements
Regulation (CRR).
Financial crime and fraud are significant drivers of operational
risk and the external threat continues to grow across the Financial
Services industry. The industry remains under significant threat
from cyber attacks. This includes various organised groups
targeting institutions through phishing, malware, denial of service
and other sophisticated methods. The Group has an appropriate risk
framework and continually monitors emerging risks and threats.
Controls and risk mitigants
The Group's risks are assessed utilising a risk management
framework methodology which is aligned to the Three Lines of
Defence model.
The CRO and the Head of Operational Risk, together with a
dedicated Operational Risk team, are responsible for:
developing and maintaining the operational risk framework;
working with relevant business areas to make sure that first
line responsibilities are understood and that those
responsibilities should be executed within the framework;
supporting relevant business areas to embed policies and
frameworks and instil a positive risk management culture; and
independently monitoring, assessing and reporting on operational
risk profiles and losses.
The Operational Risk function maintains policies defining the
minimum requirements for the management of operational risk and
financial crime.
Business units and functions assess their operational risks on
an ongoing basis via a prescribed Risk and Control Self-Assessment
(RCSA) process and Operational Risk Scenario Analysis (ORSA). The
RCSA analysis is reviewed and updated on a timely basis by first
line business areas to reflect changes to the risk and control
environment arising from changes in products, processes and
systems. The RCSA outputs are reported to relevant governance
bodies. This is supplemented further by an event management process
and regular reporting of the Operational Risk profile to the ERC.
The ORSA builds on RCSA and event management to identify the
forward-looking risk profile and the results are used to inform the
Board's decision on any additional requirement for operational risk
capital under Pillar II.
The ERC provides oversight of the Group's operational risk
profile and provides regular reports and recommendations to the
Board Risk Committee (BRC) and the Board.
(c) Liquidity and funding risk
Liquidity risk is the risk that the Group is not able to meet
its obligations as they fall due. This includes the risk that a
given security cannot be traded quickly enough in the market to
prevent a loss if a credit rating falls. Funding risk is the risk
that the Group does not have sufficiently stable and diverse
sources of funding.
The Group operates within a Liquidity Risk Management Framework
(LRMF) to ensure that sufficient funds are available at all times
to meet demands from depositors; to fund agreed advances; to meet
other commitments as they fall due; and to ensure the Board's Risk
Appetite is met.
121
38. Risk Management (continued)
Controls and risk mitigants
Liquidity and funding risk is assessed through the ILAAP on at
least an annual basis. The ILAAP process involves detailed internal
consideration of the following:
-- identification of sources of liquidity risk;
-- quantification of those risks through stress testing;
-- consideration of management processes and controls to manage the risk;
-- assessment of the type and quality of liquid asset holdings to mitigate the risk; and
-- consideration of the levels of contingent funding required to mitigate the risk.
The Group sets formal limits within the LRMF to maintain
liquidity risk exposures within the liquidity Risk Appetite set by
the Board. The key liquidity and funding measures monitored on a
daily basis are:
-- the internal liquidity requirement;
-- the individual liquidity guidance;
-- the net stable funding ratio;
-- the loan to deposit ratio;
-- the encumbrance ratio;
-- the wholesale funding ratio;
-- the annual wholesale refinancing amount; and
-- the unencumbered assets to retail liabilities ratio.
The Group measures and manages liquidity adequacy in line with
the above metrics and maintains a liquidity and funding profile to
enable it to meet its financial obligations under normal and
stressed market conditions.
The Group monitors and reports on the composition of its funding
base against defined thresholds to avoid funding source and
maturity concentration risks.
The Group prepares both short-term and long-term forecasts to
assess liquidity requirements and takes into account factors such
as Credit Card payment cycles, expected utilisation of undrawn
credit limits, investment maturities, customer deposit patterns,
and wholesale funding (including TFS and TFSME) maturities. These
reports support daily liquidity management and are reviewed daily
by Senior Management, along with early warning indicators.
Stress testing of current and forecast financial positions is
conducted to inform the Group of required liquidity resources.
Reverse stress testing is conducted to inform the Group of the
circumstances that would result in liquidity resources being
exhausted. Liquidity stress tests are presented to the Treasury
Committee (TCo) and Asset and Liability Management Committee (ALCo)
on a regular basis to provide evidence that sufficient liquidity is
held to meet financial obligations in a stress.
122
38. Risk Management (continued)
The Treasury Director is responsible for formulating, and
obtaining Board approval for, an annual funding plan as part of the
overall business planning process. The Group is predominantly
funded by its retail deposit base which reduces reliance on
wholesale funding and, in particular, results in minimal short-term
wholesale funding.
A significant part of these retail deposits are repayable on
demand on a contractual basis. The Group continuously monitors
retail deposit activity so that it can reasonably predict expected
maturity flows. These instruments form a stable funding base for
the Group's operations because of the broad customer base and the
historical behaviours exhibited.
The table below shows the Group's primary funding sources:
2021 2020
Group GBPm GBPm
On balance sheet
Deposits from banks 600.0 500.0
Deposits from customers 5,738.0 7,707.0
Subordinated liabilities and notes 235.0 235.0
Debt securities in issue 251.0 1,024.0
------- -------
Total on balance sheet funding 6,824.0 9,466.0
------- -------
123
38. Risk Management (continued)
The tables below show cash flows payable up to a period of 20
years on an undiscounted basis. These differ from the Statement of
Financial Position values due to the effects of discounting on
certain Statement of Financial Position items and due to the
inclusion of contractual future interest flows.
Derivatives designated in a hedging relationship are included
according to their contractual maturity.
Group Within Between Between Between Between
2021 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at
central banks 804.3 -- -- -- -- -- 804.3
Loans and advances
to customers 4,643.7 1,099.4 807.7 483.8 224.5 168.8 7,427.9
Investment securities
- FVOCI 5.8 -- -- -- -- -- 5.8
- Amortised cost 310.9 281.1 377.2 76.4 139.5 161.4 1,346.5
Other assets 211.2 -- -- -- -- -- 211.2
Total financial
assets 5,975.9 1,380.5 1,184.9 560.2 364.0 330.2 9,795.7
Financial liabilities:
Deposits from banks 500.5 0.2 100.1 -- -- -- 600.8
Deposits from customers 4,884.4 488.4 253.0 113.6 24.0 0.2 5,763.6
Debt securities
in issue 8.8 8.8 8.8 254.4 -- -- 280.8
Derivatives settled
on a net basis
- Derivatives in
economic but not
accounting hedges 0.9 -- -- -- -- -- 0.9
- Derivatives in
accounting hedge
relationships 14.8 10.6 6.5 4.0 4.4 2.6 42.9
Other liabilities
- Lease liabilities 3.5 3.8 4.1 3.9 2.8 11.6 29.7
- Other liabilities
excluding lease
liabilities 154.6 -- -- -- -- -- 154.6
Subordinated liabilities 4.6 5.0 4.7 5.1 5.2 262.3 286.9
Total financial
liabilities 5,572.1 516.8 377.2 381.0 36.4 276.7 7,160.2
Off balance sheet
Contractual lending
commitments 12,668.0 -- -- -- -- -- 12,668.0
Total off balance
sheet 12,668.0 -- -- -- -- -- 12,668.0
124
38. Risk Management (continued)
Company Within Between Between Between Between
2021 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at central banks 14.8 -- -- -- -- -- 14.8
Other assets 1.3 -- -- -- -- -- 1.3
Loans and advances
to subsidiary companies 13.4 13.8 13.5 259.5 5.2 262.3 567.7
Total financial
assets 29.5 13.8 13.5 259.5 5.2 262.3 583.8
Financial liabilities:
Debt securities
in issue 8.8 8.8 8.8 254.4 -- -- 280.8
Other liabilities 1.3 -- -- -- -- -- 1.3
Subordinated liabilities 4.6 5.0 4.7 5.1 5.2 262.3 286.9
Total financial
liabilities 14.7 13.8 13.5 259.5 5.2 262.3 569.0
125
38. Risk Management (continued)
Group Within Between Between Between Between
2020 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at central banks 1,396.1 -- -- -- -- -- 1,396.1
Loans and advances
to customers 5,911.3 1,253.4 992.9 678.3 355.8 280.9 9,472.6
Investment securities
- FVOCI 217.0 187.7 86.3 308.4 77.9 201.3 1,078.6
- Amortised cost 0.9 0.9 1.0 0.9 1.0 27.1 31.8
Other assets 205.7 -- -- -- -- -- 205.7
Assets of the disposal
group 45.1 -- -- -- -- -- 45.1
Total financial
assets 7,776.1 1,442.0 1,080.2 987.6 434.7 509.3 12,229.9
Financial liabilities:
Deposits from banks 2.7 1.4 501.1 -- -- -- 505.2
Deposits from customers 6,426.1 797.1 232.8 186.9 115.1 0.4 7,758.4
Debt securities
in issue 795.0 8.8 8.8 8.8 254.4 -- 1,075.8
Derivatives settled
on a net basis
- Derivatives in
accounting hedge
relationships 6.7 11.2 9.1 7.1 5.3 9.1 48.5
Derivatives settled
on a gross basis
- outflows (276.3) -- -- -- -- -- (276.3)
- inflows 274.9 -- -- -- -- -- 274.9
Other liabilities
- Lease liabilities 5.5 5.5 5.5 5.5 5.5 16.8 44.3
- Other liabilities
excluding lease
liabilities 164.2 -- -- -- -- -- 164.2
Subordinated liabilities 4.8 4.6 5.0 4.7 5.1 267.5 291.7
Total financial
liabilities 7,403.6 828.6 762.3 213.0 385.4 293.8 9,886.7
Off balance sheet
Contractual lending
commitments 11,872.0 -- -- -- -- -- 11,872.0
Total off balance
sheet 11,872.0 -- -- -- -- -- 11,872.0
126
38. Risk Management (continued)
Company Within Between Between Between Between
2020 1 1 and 2 and 3 and 4 and Beyond
year 2 years 3 years 4 years 5 years 5 years Total
On balance sheet GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets:
Cash and balances
at central banks 12.7 -- -- -- -- -- 12.7
Loans and advances
to subsidiary companies 13.5 13.4 13.8 13.5 259.4 267.5 581.1
Other assets 1.7 -- -- -- -- -- 1.7
Total financial
assets 27.9 13.4 13.8 13.5 259.4 267.5 595.5
Financial liabilities:
Debt securities
in issue 8.8 8.8 8.8 8.8 254.4 -- 289.6
Other liabilities 1.7 -- -- -- -- -- 1.7
Subordinated liabilities 4.8 4.6 5.0 4.7 5.1 267.5 291.7
Total financial
liabilities 15.3 13.4 13.8 13.5 259.5 267.5 583.0
127
38. Risk Management (continued)
The table below summarises the Group's assets which are
available to support future funding and collateral needs and shows
the extent to which these assets are currently pledged for this
purpose.
The Group has adopted the definition of encumbered and
unencumbered in the EBA's final guidelines on disclosure of June
2014. Asset encumbrance represents a claim to an asset by another
party usually in the form of a security interest such as a pledge.
Encumbrance reduces the assets available in the event of default by
a bank and therefore the recovery rate of its depositors and other
unsecured bank creditors.
Group Encumbered Unencumbered Total
2021 GBPm GBPm GBPm
Encumbered asset summary
Investment securities - FVOCI -- 5.1 5.1
Investment securities - amortised cost 61.2 887.2 948.4
Loans and advances to customers 862.4 5,539.8 6,402.2
Other assets 83.1 128.1 211.2
---------- ------------ -------
1,006.7 6,560.2 7,566.9
---------- ------------ -------
Encumbered investment securities -
amortised cost
Debt securities at amortised cost(1) 61.2
----------
61.2
----------
Encumbered loans and advances to customers
Personal Loans 862.4
----------
862.4
----------
Encumbered other assets
Cash ratio deposit 24.7
Initial margin held at Clearing Houses 15.7
Variation margin held at Clearing Houses 41.8
Collateral held at counterparties 0.9
----------
83.1
----------
(1) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
128
38. Risk Management (continued)
Group Encumbered Unencumbered Total
2020 GBPm GBPm GBPm
Encumbered asset summary
Investment securities - FVOCI 62.0 998.6 1,060.6
Loans and advances to customers 1,492.9 6,958.4 8,451.3
Other assets 96.8 146.5 243.3
---------- ------------ -------
1,651.7 8,103.5 9,755.2
---------- ------------ -------
Encumbered investment securities -
FVOCI
Debt securities at FVOCI 62.0
----------
62.0
----------
Encumbered loans and advances to customers
Securitisation - Delamare Master Trust 788.9
Personal Loans 704.0
----------
1,492.9
----------
Encumbered other assets
Cash ratio deposit 31.6
Initial margin held at Clearing Houses 20.0
Variation margin held at Clearing Houses 45.1
Collateral held at counterparties 0.1
96.8
129
38. Risk Management (continued)
Loans and advances assigned for use as collateral in
securitisation transactions
At 28 February 2021, GBP2,959.5m (2020: GBP3,462.7m) of the
Credit Card portfolio had its beneficial interest assigned to a
securitisation special purpose entity, Delamare Cards Receivables
Trustee Limited, for use as collateral in securitisation
transactions. The total encumbered portion of this portfolio is
GBPnil (2020: GBP788.9m).
At 28 February 2021, Delamare Cards MTN Issuer plc had
GBP1,840.0m (2020: GBP2,012.2m) notes in issue in relation to
securitisation transactions, of which GBPnil (2020: GBP572.2m)
related to the par value of externally issued notes (refer to note
29). At 28 February 2021 the Group owned GBP1,840.0m (2020:
GBP1,440.0m) of class A and class D Credit Card backed notes issued
by Delamare Cards MTN Issuer plc.
All of the GBP1,550.0m (2020: GBP1,150.0m) class A retained
Credit Card backed notes are held within their single collateral
pool.
Loans and advances prepositioned with the BoE
Group 2021 2020
GBPm GBPm
Credit Card backed notes(1) 1,550.0 1,150.0
Unsecured personal Loans 2,243.2 2,484.2
-------- --------
Total assets prepositioned as collateral with the BoE 3,793.2 3,634.2
-------- --------
Collateralised TFS drawings 500.0 500.0
Collateralised TFSME drawings 100.0 --
-------- --------
Total 600.0 500.0
-------- --------
(1) Issued by Delamare Cards MTN Issuer plc.
Undrawn Committed Facilities
The Group has the following undrawn committed facilities:
2021 2020
Group GBPm GBPm
Expiring in less than one year -- --
Expiring between one and two years -- 200.0
Expiring in more than two years 200.0 --
Total 200.0 200.0
-----
The undrawn committed facilities includes a GBP200.0m (2020:
GBP200.0m) committed repurchase facility. All facilities incur
commitment fees at market rates and would provide funding at
floating rates. There were no withdrawals from the facilities
during the year.
130
38. Risk Management (continued)
(d) Market risk
Market risk is the risk that movements in market prices (such as
interest rates, foreign exchange rates and the market value of
financial instruments) lead to a reduction in either the Bank's
earnings or capital.
Market risk arises in the following ways in the Group:
Interest rate risk is the risk to earnings and economic value
from movements in interest rates, hereafter referred to as Interest
Rate Risk in the Banking Book (IRRBB);
Credit spread risk is the risk to the value of treasury assets
driven by changes in the market perception about the price of
credit risk, liquidity premium and other components not explained
by IRRBB; hereafter referred to as Credit Spread Risk in the
Banking Book (CSRBB);
Foreign exchange risk arises from non-domestic currency
investments, non-domestic currency loans, deposits, income and
other non-domestic currency contracts;
Interest rate risk associated with TU's investment portfolio;
and
Pension obligation risk.
Control and risk mitigants
With the exception of portfolio management in respect of TU,
which is undertaken by the TU Investment Committee, with oversight
and challenge provided by the Group's Finance function, control of
market risk exposure is managed by the ALCo and the TCo. These
bodies provide oversight of the Group's market risk position at a
detailed level, providing regular reports and recommendations to
the BRC and the Board.
131
38. Risk Management (continued)
Interest rate risk in the Banking Book
IRRBB is the risk of value changes to both earnings and capital
arising from timing differences in the re-pricing of the Group's
balance sheet and unexpected changes to the level and/or shape of
the yield curve.
The Group offers lending and savings products with varying
interest rate features and maturities which create re-pricing
mismatches and therefore potential interest rate risk exposures.
The Group is therefore exposed to interest rate risk through its
dealings with retail banking products as well as through its
limited wholesale market activities.
IRRBB is the main market risk that could affect the Group's net
interest income.
Control and risk mitigants
The Group has established limits for its Risk Appetite in this
area and stress tests are performed using sensitivity to
fluctuations in underlying interest rates in order to monitor this
risk.
The Group has established a specific Risk Appetite for IRRBB
which is implemented via the Market Risk Policy, a range of
specific risk limits and market risk controls. The Treasury
function is responsible for regular stress testing of risk
positions against multiple interest rate scenarios to determine the
sensitivity of earnings and capital valuations to ensure compliance
with Board Risk Appetite and limits.
IRRBB management information is produced by the Balance Sheet
Management team and is reviewed by the ALCo at each of its monthly
meetings. IRRBB primarily arises from the retail lending portfolios
and retail deposits. The Balance Sheet Management team is
responsible for ensuring hedging strategies are implemented as
required to ensure that the Group remains within its stated Risk
Appetite and limits.
The main hedging instruments used are interest rate swaps and
the residual exposure against the two Board Risk Appetite metrics
is reported monthly to the ALCo and Board.
Capital at Risk (CaR): The CaR approach assesses the sensitivity
of the Group's capital to movements in interest rates. The
scenarios considered include both parallel and non-parallel
movements of the yield curve and have been designed to assess
impacts across a suitable range of severe but plausible movements
in interest rates. The CaR measure is an aggregate measure of three
separate risk components, each being a distinct form of interest
rate risk - repricing risk (including basis risk), pipeline risk
and prepayment risk. A fourth risk, CSRBB, has been added to the
CaR measure in preparation for the EBA guidelines on the management
of interest rate risk arising from non-trading book activities.
The table below shows the Group's CaR. At 28 February 2021 the
Group was exposed to net residual risk via an upward rate scenario
(2020: downward rate scenario).
2021 2020
Upward rate Downward rate
Group scenario scenario
Capital at Risk Sensitivity GBPm GBPm
Repricing risk (13.6) (21.3)
Pipeline risk (0.2) (0.1)
Prepayment risk (6.7) (0.7)
CSRBB -- (8.6)
Total (20.5) (30.7)
Annual Earnings at Risk Sensitivity: This measures the
sensitivity of the Group's earnings to movements in interest rates
over the next 12 months based on expected cash flows. The Group
assesses the impact of a +/- 0.25%, 0.50%, 0.75%, 1% shock in rates
versus the base case scenario (2020: +/- 0.25%, 0.50%, 0.75%, 1%).
The most adverse scenario is measured against Risk Appetite. At 28
February 2021, the most adverse scenario was a downward rate shock,
with an impact of 1.71% (29 February 2020: (1.17%) with an upward
rate shock). Any adverse effects of the current macro-economic
environment on IRRBB metrics will be mitigated with hedging to
limit the Group's exposure to movements in interest rates and to
ensure compliance with Board Risk Appetite and limits.
132
38. Risk Management (continued)
(e) Foreign exchange risk
Foreign exchange risk is the risk that the value of transactions
in currencies other than Sterling is altered by the movement of
exchange rates.
The Group's Risk Appetite permits investment in non-sterling
denominated bonds and the Group may raise funding from the
wholesale markets in currencies other than sterling. Foreign
exchange exposure arises if these are not hedged. Foreign exchange
exposure may also arise through the Group's 'Click and Collect'
Travel Money provision and invoices received which are denominated
in foreign currencies.
Control and risk mitigants
Substantially all non-domestic currency exposure is hedged to
reduce exposure to a minimum level, within Board-approved limits.
The residual exposure is not material and, as such, no sensitivity
analysis is disclosed.
The Group's maximum exposure to foreign exchange risk at 28
February 2021 was GBP6.7m (2020: GBP(274.8)m), representing the
Group's net assets (2020: net liabilities) denominated in foreign
currencies.
(f) TU investment portfolio
The TU insurance portfolio assets are invested with a number of
counterparties. These investments are predominantly comprised of
government securities, corporate bonds and short-term cash
investments.
The main risks relate to changes in:
interest rates affecting fair values as a proportion of the
bonds are fixed rate in nature; and
credit quality, as the range of assets held are issued by a
variety of institutions with different credit characteristics.
Controls and risk mitigants
Portfolio management is undertaken by the TU investment
committee. The Group's Finance function provides oversight and
challenge.
(g) Pension obligation risk
Pension obligation risk is the risk to a company caused by its
contractual or other liabilities to or with respect to a pension
scheme (whether established for its employees or those of a related
company or otherwise). The Group is a participating employer in the
Tesco Pension Scheme (operated by TSL) and is exposed to pension
risk through its obligation to the scheme. TSL has recognised the
appropriate net liability of the Tesco pension scheme in accordance
with IAS 19 (refer to note 37).
Controls and risk mitigants
The Group undertakes an assessment of the impact of its share of
the pension scheme under a stress as part of its annual ICAAP.
(h) Insurance risk
The Group is exposed to insurance risk through its 49.9%
ownership of TU, an authorised insurance company.
The Group defines insurance risk as the risks accepted through
the provision of insurance products in return for a premium. These
risks may or may not occur as expected and the amount and timing of
these risks are uncertain and determined by events outside of the
Group's control (e.g. flood or vehicular accident). The Group's aim
is to actively manage insurance risk exposure, with particular
focus on those risks that impact profit volatility.
Insurance risk is typically categorised in the following
way:
-- Underwriting risk - Related to the selection and pricing (or
quantification) of the risk currently being transferred from
customers to an insurer; and
-- Reserving risk - Related to valuation and management of
financial resources sufficient to pay claims for the risk already
transferred from customers to an insurer.
133
38. Risk Management (continued)
Controls and risk mitigants
The Group's oversight of TU is primarily provided by its
representation on the TU Board. TU operates a separate risk
framework with dedicated risk and compliance teams and a suite of
TU risk policies to ensure that the TU insurance portfolio is
operating within agreed Risk Appetite.
(i) Residual price risk
Residual price risk is the risk that the fair value of a
financial instrument and its associated hedge will fluctuate
because of changes in market prices, for reasons other than
interest rate or credit risk.
At the prior year end the Group had debt and equity investment
securities which were held at fair value in the Consolidated
Statement of Financial Position. On 1 March 2020 the Group's
portfolio of debt investment securities held at FVOCI was
reclassified to amortised cost following a change in business
model. Equity investment securities continue to be held at fair
value as set out at note 19.
Controls and risk mitigants
The Group has established appropriate hedging strategies to
mitigate interest rate and foreign exchange risks. Residual price
risk remains.
The table below demonstrates the Group's exposure to residual
price risk at the year end. Included in the table is the expected
impact of a 10% shock in market prices on the Group's FVOCI
investment securities. The figures shown are prior to hedging
activities which mitigate the interest rate and foreign exchange
risks.
Fair value Impact of 10% Value after 10%
shock shock
2021 2020 2021 2020 2021 2020
Group GBPm GBPm GBPm GBPm GBPm GBPm
Government-backed investment
securities -- 315.9 -- (31.6) -- 284.3
Gilts -- 40.7 -- (4.1) -- 36.6
Supranational investment
securities -- 393.9 -- (39.4) -- 354.5
Other investment securities -- 306.9 -- (30.7) -- 276.2
Equity securities 5.1 3.2 (0.5) (0.3) 4.6 2.9
5.1 1,060.6 (0.5) (106.1) 4.6 954.5
(j) Legal and regulatory compliance
Regulatory risk is the risk of reputational damage, liability or
material loss from failure to comply with the requirements of the
financial services regulators or related codes of best practice
applicable to the business areas within which the Group operates.
The risk of business conduct leading to poor outcomes can arise as
a result of an over-aggressive sales strategy; poor management of
sales processes, credit assessments and credit processes; or
failure to comply with other regulatory requirements. The Group's
Risk Appetite is to comply with the relevant rules, regulations and
data protection legislation. Where breaches occur, the Group will
take appropriate rectifying action. The Group seeks to deliver fair
outcomes for customers.
Controls and risk mitigants
As part of the Group's Policy Framework, a dedicated Compliance
Advisory (CA) team is responsible for the Compliance Policy which
is approved by the Group's Board, as well as for monitoring,
challenge and oversight of regulatory risk and compliance across
the Group's business. Guidance and advice to enable the business to
operate in a compliant manner is provided by the CA team and the
Legal team.
The CA team is also responsible for the detailed regulatory
policies which underpin the Compliance Policy. These are further
supported by Operational and Product Guides that provide relevant
practical guidance to business and operational areas to enable them
to comply with the regulatory policies.
The Group has also established the Regulatory Change Forum which
is responsible for the oversight of communications from all
external regulators and monitoring regulatory change, including
impact analysis and action tracking.
134
38. Risk Management (continued)
The Group's Legal function has responsibility for commercial
legal work, regulatory legal compliance, litigation/dispute
resolution matters, advising on competition law and supporting the
Group's Treasury activity. The Legal team also comprises the
Company Secretarial function which, in addition to its role
supporting the Board and maintaining statutory books, ensures the
Group complies with all applicable governance codes.
Business areas manage conduct risk and use a range of management
information to monitor the fair treatment of customers. A framework
of product-led conduct management information has been developed
and is reviewed by Senior Management in the business lines.
Customer outcomes are also assessed as part of the development and
design of new products and through annual product reviews of
existing products. The ERC and the Board review and challenge
delivery of fair outcomes for customers.
135
39. Financial Instruments
Classification of financial assets and liabilities
The following tables analyse the financial assets and financial
liabilities in accordance with the categories of financial
instruments in IFRS 9.
Amortised Designated FVOCI -
Group(1) cost as at FVPL equity instruments Total
2021 GBPm GBPm GBPm GBPm
Financial assets
Cash and balances with central
banks 791.1 13.2 -- 804.3
Loans and advances to customers 6,402.2 -- -- 6,402.2
Derivative financial instruments -- 6.1 -- 6.1
Investment securities(2) :
- FVOCI -- -- 5.1 5.1
- Amortised cost 948.4 -- -- 948.4
Other assets 211.2 -- -- 211.2
Total financial assets 8,352.9 19.3 5.1 8,377.3
Financial liabilities
Deposits from banks 600.0 -- -- 600.0
Deposits from customers 5,738.0 -- -- 5,738.0
Debt securities in issue 251.0 -- -- 251.0
Derivative financial instruments -- 47.5 -- 47.5
Other liabilities 184.2 -- -- 184.2
Subordinated liabilities 235.0 -- -- 235.0
Total financial liabilities 7,008.2 47.5 -- 7,055.7
(1) On a Company basis, cash and balances with central banks is
GBP14.8m and loans and advances to subsidiary companies is
GBP483.5m, both of which are held at amortised cost.
(2) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
All derivative financial instruments are held for economic
hedging purposes, although not all derivatives are designated as
hedging instruments under the terms of IFRS 9.
136
39. Financial Instruments (continued)
Amortised Designated FVOCI - FVOCI -
Group(1) cost as at FVPL debt instruments equity instruments Total
2020 GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash and balances with
central banks 1,369.3 26.3 -- -- 1,395.6
Loans and advances to
customers 8,451.3 -- -- -- 8,451.3
Derivative financial
instruments -- 5.7 -- -- 5.7
Investment securities:
- FVOCI -- -- 1,057.4 3.2 1,060.6
- Amortised cost 21.0 -- -- -- 21.0
Other assets 243.3 -- -- -- 243.3
Assets of the disposal
group -- 45.1 -- -- 45.1
Total financial assets 10,084.9 77.1 1,057.4 3.2 11,222.6
Financial liabilities
Deposits from banks 500.0 -- -- -- 500.0
Deposits from customers 7,707.0 -- -- -- 7,707.0
Debt securities in issue 1,024.0 -- -- -- 1,024.0
Derivative financial
instruments -- 50.7 -- -- 50.7
Other liabilities 199.0 -- -- -- 199.0
Subordinated liabilities 235.0 -- -- -- 235.0
Total financial liabilities 9,665.0 50.7 -- -- 9,715.7
(1) On a Company basis, cash and balances with central banks is
GBP12.7m and loans and advances to subsidiary companies is
GBP483.2m, both of which are held at amortised cost.
137
39. Financial Instruments (continued)
Offsetting
The following tables show those financial assets and liabilities
subject to offsetting, enforceable master netting arrangements and
similar agreements.
Group Related amounts
not offset
2021 Gross and net Financial Collateral Net amounts
amounts instruments pledged
presented in
Statement
of Financial
Position
GBPm GBPm GBPm GBPm
Financial assets
Derivative financial instruments 6.1 (6.1) -- --
------------
Total financial assets 6.1 (6.1) -- --
------------
Financial liabilities
Derivative financial instruments (47.5) 6.1 42.7 1.3
------------
Total financial liabilities (47.5) 6.1 42.7 1.3
------------
Group Related amounts
not offset
2020 Gross and net Financial Collateral Net
amounts instruments pledged amounts
presented in
Statement
of Financial
Position
GBPm GBPm GBPm GBPm
Financial assets
Derivative financial instruments 5.7 (4.3) -- 1.4
------------
Total financial assets 5.7 (4.3) -- 1.4
Financial liabilities
Derivative financial instruments (50.7) 4.3 45.2 (1.2)
------------
Total financial liabilities (50.7) 4.3 45.2 (1.2)
------------
138
39. Financial Instruments (continued)
For the financial assets and financial liabilities subject to
enforceable master netting arrangements above, each agreement
between the Group and the counterparty allows for net settlement of
the relevant financial assets and financial liabilities when both
elect to settle on a net basis. In the absence of such an election,
financial assets and financial liabilities will be settled on a
gross basis. However, each party to the master netting agreement or
similar agreement will have the option to settle all such amounts
on a net basis in the event of default of the other party.
Fair values of financial assets and financial liabilities
Except as detailed in the following table, the Directors
consider that the carrying value amounts of financial assets and
financial liabilities recorded on the Statement of Financial
Position are approximately equal to their fair values.
Group(1,2) 2021 2020
Carrying Fair Carrying Fair
value Value value value
GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to customers 6,402.2 6,617.6 8,451.3 8,626.9
Investment securities - amortised
cost(3) 948.4 959.1 21.0 27.6
7,350.6 7,576.7 8,472.3 8,654.5
Financial liabilities
Deposits from customers 5,738.0 5,744.4 7,707.0 7,710.7
Debt securities in issue 251.0 263.7 1,024.0 1,040.2
Subordinated liabilities 235.0 215.9 235.0 214.5
6,224.0 6,224.0 8,966.0 8,965.4
(1) On a Company basis, loans and advances to subsidiary
companies have a carrying value of GBP483.5m (2020: GBP483.2m),
with a fair value of GBP458.3m (2020: GBP449.5m). On a Company
basis, subordinated liabilities and debt securities in issue have
the same carrying value and fair value as set out in the Group
table above.
(2) Fair value disclosures are not required for lease
liabilities.
(3) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model
139
39. Financial Instruments (continued)
The only financial assets and financial liabilities which are
carried at fair value in the Consolidated Statement of Financial
Position at year end are cash balances relating to the Group's
Travel Money offering, FVOCI equity investment securities and
derivative financial instruments. At the prior year end the Group
also held debt securities at FVOCI. These were reclassified to
amortised cost on 1 March 2020 following a change in business
model. The valuation techniques and inputs used to derive fair
values at the year end are described below.
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. Where an active market
is considered to exist, fair values are based on quoted prices. For
instruments which do not have active markets, fair value is
calculated using present value models, which take individual cash
flows together with assumptions based on market conditions and
credit spreads, and are consistent with accepted economic
methodologies for pricing financial instruments.
In each case the fair value is calculated by discounting future
cash flows using benchmark, observable market interest rates.
140
39. Financial Instruments (continued)
The table below categorises all financial instruments held at
fair value (recurring measurement) and the fair value of financial
instruments held at amortised cost according to the method used to
establish the fair value disclosed.
Group(1) Level 1 Level 2 Level 3 Total
2021 GBPm GBPm GBPm GBPm
Financial assets carried at fair value
Cash and balances with central banks -- 13.2 -- 13.2
Investment securities - FVOCI(1) -- 3.4 1.7 5.1
Derivative financial instruments:
- Interest rate swaps -- 6.0 -- 6.0
- Forward foreign currency contracts -- 0.1 -- 0.1
Financial assets carried at amortised cost
Loans and advances to customers -- -- 6,617.6 6,617.6
Investment securities - amortised cost(2) 932.3 26.8 -- 959.1
Total 932.3 49.5 6,619.3 7,601.1
Financial liabilities carried at fair value
Derivative financial instruments:
- Interest rate swaps -- 46.5 -- 46.5
- Forward foreign currency contracts 1.0 1.0
Financial liabilities carried at amortised cost
Deposits from customers -- -- 5,744.4 5,744.4
Debt securities in issue 263.7 -- -- 263.7
Subordinated liabilities -- 215.9 -- 215.9
Total 263.7 263.4 5,744.4 6,271.5
(1) On a Company basis, loans and advances to subsidiary
companies of GBP458.3m, are categorised as level 2. On a Company
basis, subordinated liabilities and debt securities in issue have
the same fair value and categorisation as set out in the Group
table above.
(2) On 1 March 2020 the Group's portfolio of debt investment
securities measured at FVOCI was reclassified to amortised cost
following a change in business model.
141
39. Financial Instruments (continued)
Group(1) Level 1 Level 2 Level 3 Total
2020 GBPm GBPm GBPm GBPm
Financial assets carried at
fair value
Cash and balances with central
banks -- 26.3 -- 26.3
Investment securities - FVOCI 1,057.4 -- 3.2 1,060.6
Derivative financial instruments:
- Interest rate swaps -- 5.7 -- 5.7
- Forward foreign currency
contracts -- -- -- --
Assets of the disposal group -- -- 45.1 45.1
Financial assets carried at
amortised cost
Loans and advances to customers -- -- 8,626.9 8,626.9
Investment securities - amortised
cost -- 27.6 -- 27.6
Total 1,057.4 59.6 8,675.2 9,792.2
Financial liabilities carried
at fair value
Derivative financial instruments:
- Interest rate swaps -- 50.7 -- 50.7
Financial liabilities carried
at amortised cost
Deposits from customers -- -- 7,710.7 7,710.7
Debt securities in issue 1,040.2 -- -- 1,040.2
Subordinated liabilities -- 214.5 -- 214.5
Total 1,040.2 265.2 7,710.7 9,016.1
(1) On a Company basis, loans and advances to subsidiary
companies of GBP449.5m, are categorised as level 2. On a Company
basis, subordinated liabilities and debt securities in issue have
the same fair value and categorisation as set out in the Group
table above.
142
39. Financial Instruments (continued)
There are three levels to the hierarchy as follows:
Level 1
Fair values of debt investment securities classified as
amortised cost are based on quoted prices.
Level 2
Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (for
example, as prices) or indirectly (for example, derived from
prices).
Fair values of cash balances relating to the Group's Travel
Money offering are considered to equate to their carrying value as
they are short-term in nature.
Derivative financial instruments which are categorised as Level
2 are those which either:
Have future cash flows which are on known dates and for which
the cash flow amounts are known or calculable by reference to
observable interest and foreign exchange rates; or
Have future cash flows which are not pre-defined, but for which
the fair value of the instrument has very low sensitivity to
changes in estimate of future cash flows.
In each case the fair value is calculated by discounting future
cash flows using benchmark, observable market interest rates.
Fair values of investment in subordinated debt classified as
amortised cost are calculated using discounted cash flows applying
market rates.
The estimated fair value of subordinated liabilities is
calculated using a discounted cash flow model based on a current
yield curve appropriate for the remaining term to maturity.
143
39. Financial Instruments (continued)
Level 3
Inputs for the asset or liability are not based on observable
market data (unobservable inputs).
Loans and advances to customers are net of charges for
impairment. The estimated fair value of loans and advances
represents the discounted amount of estimated future cash flows
expected to be received. Expected cash flows are discounted at
current market rates to determine fair value.
At the prior year end the fair value of assets of the disposal
group was based on the contract price agreed in respect of the sale
of the Group's Mortgage business.
The estimated fair value of deposits from customers represents
the discounted amount of estimated future cash flows expected to be
paid. Expected cash flows are discounted at current market rates to
determine fair value.
The estimated fair value of financial assets classified as
FVOCI, being the Group's interest in VISA Inc., is described in
note 19.
Transfers
There were no transfers between Levels 1 and Level 2 in the year
to 28 February 2021 (2020: no transfers).
There were no transfers between Level 2 and Level 3 in the year
to 28 February 2021 (2020: no transfers).
144
40. Cash Flows from Operating Activities
Group Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Non cash and other items included in operating
profit before taxation
Expected credit loss on loans and advances
(refer notes 10 & 38) 359.7 178.0 (0.3) 0.5
Expected credit loss on investment securities
at amortised cost (0.2) -- -- --
Depreciation and amortisation (refer notes
25 & 26) 56.7 140.9 -- --
Loss on disposal of investment securities
(refer note 8) -- 0.2 -- --
Loss on disposal of non-current assets
(refer notes 25 & 26) 1.7 -- -- --
Gain on disposal of assets of the disposal
group (refer note 14) (0.4) (43.0) -- --
Provisions for liabilities and charges
(refer note 30) 3.1 50.5 -- --
Share of profit of joint venture (refer
note 23) (16.2) (10.2) -- --
Equity settled share based payments (refer
note 12) (2.5) 1.4 -- --
Interest paid on debt securities in issue 20.1 28.5 9.0 5.1
Interest paid on assets held to hedge debt
securities in issue 3.3 9.5 -- --
Interest on subordinated liabilities 3.5 5.3 3.5 5.3
Interest on lease liabilities (refer note
36) 2.3 2.5 -- --
Research and development tax claim (0.5) (0.3) -- --
Fair value movements 7.9 (11.8) -- --
---------- ---------- ----- ------
Total 438.5 351.5 12.2 10.9
---------- ---------- ----- ------
Changes in operating assets and liabilities
Net movement in mandatory balances with
central banks 6.9 (2.9) -- --
Net movement in loans and advances to banks -- 324.2 -- --
Net movement in loans and advances to customers 1,707.0 3,808.0 -- --
Net movement in prepayments and accrued
income 14.0 (6.1) 0.3 (0.9)
Net movement in other assets 32.1 (7.1) -- --
Net movement in assets of the disposal
group 44.9 4.4 -- --
Net movement in deposits from banks 100.0 (1,163.2) -- --
Net movement in deposits from customers (1,968.4) (2,759.1) -- --
Net movement in accruals and deferred income (6.2) (3.6) -- --
Provisions utilised (22.3) (46.0) -- --
Net movement in other liabilities (11.7) 14.9 -- --
---------- ---------- ----- ------
Total (103.7) 163.5 0.3 (0.9)
---------- ---------- ----- ------
145
41. Reconciliation of Liabilities Relating to Financing Activities
Non-cash movements
Group At 1 March Financing Fair value Accrued Other At 28 February
2020 Cash flows change Interest 2021
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in issue (1,024.0) 772.2 3.2 (0.2) (2.2) (251.0)
Subordinated liabilities
and notes (235.0) -- -- -- -- (235.0)
Interest payable (4.7) 26.8 -- (23.2) -- (1.1)
Assets held to hedge fixed
rate bonds(1) 4.1 3.9 (5.4) (0.6) -- 2.0
Lease liabilities (2) (32.8) 5.5 -- (2.3) -- (29.6)
Total liabilities from
financing activities (1,292.4) 808.4 (2.2) (26.3) (2.2) (514.7)
Non-cash movements
Company At 1 March Financing Fair value Accrued Other At 28 February
2020 Cash flows change Interest 2021
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in issue (249.2) -- -- (0.2) -- (249.4)
Subordinated liabilities
and notes (235.0) -- -- -- -- (235.0)
Interest payable (1.6) 12.6 -- (12.3) -- (1.3)
Total liabilities from
financing activities (485.8) 12.6 -- (12.5) -- (485.7)
Non-cash movements
Group At 1 March Financing Fair value Accrued Other At 29 February
2019 Cash flows change Interest 2020
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in issue (1,185.5) 160.9 1.3 (0.1) (0.6) (1,024.0)
Subordinated liabilities
and notes (235.0) -- -- -- -- (235.0)
Interest payable (4.0) 29.3 -- (30.0) -- (4.7)
Assets held to hedge fixed
rate bonds(1) 16.4 13.0 (25.5) 0.2 -- 4.1
Lease liabilities(2) (34.5) 4.2 -- (2.5) -- (32.8)
Total liabilities from
financing activities (1,442.6) 207.4 (24.2) (32.4) (0.6) (1,292.4)
Non-cash movements
Company At 1 March Financing Fair value Accrued Other At 29 February
2019 Cash flows change Interest 2020
GBPm GBPm GBPm GBPm GBPm GBPm
Debt securities in issue -- (249.1) -- (0.1) -- (249.2)
Subordinated liabilities
and notes (235.0) -- -- -- -- (235.0)
Interest payable (0.7) 9.4 -- (10.4) -- (1.7)
Total liabilities from
financing activities (235.7) (239.7) -- (10.5) -- (485.9)
(1) Assets held to hedge fixed rate bonds and securitisation
bonds are included within derivative financial instruments in the
Consolidated Statement of Financial Position on page 42.
(2) Lease liabilities are included within total other
liabilities in the Consolidated Statement of Financial Position on
page 42.
146
42. Capital Resources
IFRS 9 'Financial Instruments' became effective for annual
periods beginning on or after 1 January 2018 and is reflected in
the Group disclosures. The Group has elected to use the
transitional arrangements available under Article 473a of the
Capital Requirements Regulations (CRR). These arrangements allow
the IFRS 9 impact on capital to be phased in over a period of 5
years. On 27 June 2020, the CRR was further amended to accelerate
specific CRR2 measures and implement a new IFRS 9 transitional
relief calculation which applies additional relief to increases in
ECL provisions arising as a result of the Covid-19 pandemic. As a
result, the IFRS 9 transitional arrangements have been extended by
two years and a new modified calculation has been introduced. Full
relief will be applied to increases in stage 1 and stage 2
provisions from 1 January 2020 throughout 2020 and 2021, reducing
to 75% in 2022, 50% in 2023 and 25% in 2024, with no relief applied
from 2025. The phasing out of transitional relief on the 'day 1'
impact of IFRS 9 as well as increases in stage 1 and stage 2
provisions between 1 March 2018 and 31 December 2019 under the
modified calculation remain unchanged and continue to be subject to
70% transitional relief throughout 2020, 50% relief for 2021 and
25% for 2022, with no relief applied from 2023.
The following tables analyse the regulatory capital resources of
the Group applicable as at the year end on a 'transitional' and
'end point' position for the current year as related to the IFRS 9
transitional period:
Transitional End Point Transitional
2021 2021 2020
GBPm GBPm GBPm
Common equity tier 1
Shareholders' equity (accounting capital) 1,589.1 1,589.1 1,719.0
Regulatory adjustments
Unrealised losses on cash flow hedge reserve 0.6 0.6 0.3
Adjustment to own credit/additional value
adjustments -- -- (1.1)
Intangible assets (130.9) (130.9) (138.2)
IFRS 9 transitional add back 262.9 -- 141.6
Common equity tier 1 capital 1,721.7 1,458.8 1,721.6
Tier 2 capital (instruments and provisions)
Undated subordinated notes 45.0 45.0 45.0
Dated subordinated notes net of regulatory
amortisation 190.0 190.0 190.0
Tier 2 capital (instruments and provisions)
before regulatory adjustments 235.0 235.0 235.0
Regulatory adjustments
Material holdings in financial sector entities (21.1) (21.1) (21.0)
Total regulatory adjustments to tier 2 capital
(instruments and provisions) (21.1) (21.1) (21.0)
Total tier 2 capital (instruments and provisions) 213.9 213.9 214.0
Total capital 1,935.6 1,672.7 1,935.6
Total risk-weighted assets (unaudited) 6,805.0 6,675.1 8,310.1
Common equity tier 1 ratio (unaudited) 25.3% 21.9% 20.7%
Tier 1 ratio (unaudited) 25.3% 21.9% 20.7%
Total capital ratio (unaudited) 28.4% 25.1% 23.3%
Total capital requirement (TCR) refers to the amount and quality
of capital the Group must maintain to comply with the CRR Pillar 1
and 2A capital requirements. The TCR for TPFG as at 28 February
2021 is 11.59% plus GBP52m as a static add-on for pension
obligation risk.
147
42. Capital Resources (continued)
The table below reconciles shareholders' equity of the Group to
shareholders' equity of the Company for regulatory purposes:
2021 2020
GBPm GBPm
Tesco Personal Finance Group plc (Group) shareholders'
equity 1,621.5 1,744.4
Share of joint venture's retained earnings (26.6) (17.9)
Subsidiaries' retained earnings (0.2) --
Share of joint venture's AFS reserve (5.6) (7.5)
--------
Tesco Personal Finance Group plc shareholders'
equity for regulatory purposes 1,589.1 1,719.0
--------
It is the Group's policy to maintain a strong capital base, to
expand it as appropriate and to utilise it efficiently throughout
its activities to optimise the return to shareholders while
maintaining a prudent relationship between the capital base and the
underlying risks of the business. In carrying out this policy, the
Group has regard to the supervisory requirements of the Prudential
Regulatory Authority (PRA).
The Group is required to submit ICAAP reports to the PRA which
set out future business plans, the impact on capital availability,
capital requirements and the risk to capital adequacy under stress
scenarios.
The Group also maintains a Recovery Plan that provides the
framework and a series of recovery options which could be deployed
in a severe stress event impacting capital or liquidity positions.
The Recovery Plan is reviewed and approved by the Board on at least
an annual basis.
The Group has met all relevant capital requirements throughout
the year.
Leverage ratio (unaudited)
The Basel III reforms include the introduction of a capital
leverage measure as defined as the ratio of tier 1 capital to total
exposure. This is intended to reinforce the risk-based capital
requirements with a simple, non-risk based 'backstop' measure.
The Group has published the leverage ratio on a Capital
Requirements Directive IV basis using the existing exposure
approach:
Exposures for leverage ratio (unaudited) Transitional End point Transitional
2021 2021 2020
GBPm GBPm
Total balance sheet exposures 8,823.4 8,823.4 11,645.2
Adjustments for entities which are consolidated
for accounting purposes but outside scope
of regulatory consolidation (32.6) (32.6) (25.4)
Removal of accounting value of derivatives
and SFTs (6.1) (6.1) (5.7)
Exposure value for derivatives and SFTs 4.4 4.4 9.3
Off balance sheet: unconditionally cancellable
(10%) 1,266.8 1,266.8 1,187.2
Off balance sheet: other (20%) -- -- --
Regulatory adjustment - intangible assets (130.9) (130.9) (138.2)
Regulatory adjustment - other, including
IFRS 9 212.9 (50.0) 89.2
Total 10,137.9 9,875.0 12,761.6
Common equity tier 1 1,721.7 1,458.8 1,721.6
Leverage ratio 17.0% 14.8% 13.5%
148
42. Capital Resources (continued)
Capital Management
The Group operates an integrated risk management process to
identify, quantify and manage risk in the Group. The quantification
of risk includes the use of both stress and scenario testing. Where
capital is considered to be an appropriate mitigant for a given
risk, this is identified and reflected in the Group's internal
capital assessment. The capital resources of the Group are
regularly monitored against the higher of this internal assessment
and regulatory requirements. Capital adequacy and performance
against the Group's capital plan is monitored daily, with monthly
reporting provided to the Board, ALCo and TCo.
Pillar 2 capital methodologies
The PRA updated its Pillar 2 capital methodologies in July 2016
following the publication of prudential requirements for
implementation of ring-fencing and issued a policy statement in
October 2017 refining the Pillar 2A framework.
These proposals are aimed at promoting the safety and soundness
of PRA-regulated firms, to facilitate a more effective banking
sector and to make the PRA's Pillar 2A capital assessment more
proportionate by addressing some of the concerns over the
differences between SA and internal ratings-based risk weights.
This will continue to be managed as part of the Group's ICAAP in
line with the PRA policy statement issued in October 2017. The PRA
general safety and soundness objectives in relation to continuity
of core services in the UK and ring-fencing of banking activities
where core deposits are in excess of GBP25bn came into effect from
1 January 2019. The Group has not exceeded this threshold and was
not therefore automatically required to ring-fence the Group's core
activities by the 2019 implementation date.
Credit Risk
In December 2017 the Basel Committee on Banking Supervision
(BCBS) finalised Basel III reforms for credit risk, including
revisions to the calculation of risk-weighted assets and
enhancements to the risk-sensitivity of the SAs to credit risk,
constraining the use of internal model approaches by placing limits
on certain inputs and replacing the existing Basel II output floors
with a risk-sensitive floor based on the Committee's Basel III
standardised approaches. The final Basel III reforms will be
implemented in January 2023.
Operational risk
In December 2017, the BCBS finalised Basel III reforms for
operational risk by replacing all existing approaches in the Basel
II framework with a single risk-sensitive SA to be used by all
banks. The new SA increases the sensitivity by combining a refined
measure of gross income with the bank's internal historical losses.
The final Basel III reforms will be implemented in January
2023.
Leverage
At present the Group has no minimum UK leverage requirement as
it is currently exempt from the UK Leverage Framework Regime (LFR),
which only applies to institutions with retail deposits of GBP50
billion or more. In December 2017, the BCBS finalised Basel III
reforms for the leverage ratio. The final Basel III reforms will be
implemented in January 2023.
The Group is subject to reporting and disclosure requirements
under the CRR and is not currently subject to temporary
modifications of the UK LFR.
149
42. Capital Resources (continued)
The European Commission's minimum requirements for own funds and
eligible liabilities (MREL)
Upon full implementation, MREL targets will be set on a
bank-specific basis and calculated as the sum of two components: a
loss absorption amount, being the amount needed to absorb losses up
to and in resolution; and a recapitalisation amount, which reflects
the capital that a firm would be likely to need
post-resolution.
The Group became subject to MREL on an interim basis from 1
January 2020, with full implementation applicable from 1 January
2023. The interim target remains at 18% of risk-weighted assets
until 31 December 2022. The requirements are factored into the
Group's funding and capital plans. The Company undertook an initial
GBP250.0m issuance of MREL-compliant debt in July 2019 in support
of the interim requirements and subsequently invested the proceeds
in TPF via an intercompany subordinated loan. Further issuances may
be required to support end-state requirements.
At 28 February 2021, the MREL ratio was 31.9% (2020: 26.1%).
43. Related Party Transactions
During the year the Group had the following transactions with
related parties:
Transactions involving Directors and other key connected
persons
For the purposes of IAS 24, 'Related Party Disclosures', the
Group's key Management personnel comprises Directors of the Group.
The captions in the Group's primary Financial Statements include
the following amounts attributable, in aggregate, to key connected
persons of both the Group and Tesco, the Company's ultimate parent
undertaking.
Group 2021 2020
GBPm GBPm
Loans and advances to customers(1)
At the beginning of the year -- 0.3
Loan repayments during the year -- (0.1)
Loans outstanding at the end of the year -- 0.2
Interest income earned -- --
Deposits from customers(1)
Deposits at the beginning of the year 0.1 0.2
Deposits received during the year -- 1.2
Deposits repaid during the year (0.1) (0.5)
Deposits at the end of the year -- 0.9
Interest expense on deposits -- --
In line with the requirements of IFRS 9, an ECL allowance
amounting to 0.0% of the loans outstanding was recognised at 29
February 2020. There was no such allowance at 28 February 2021.
(1) The opening and closing balances reported are in respect of
related parties of the Group during and at the reporting date in
each year.
150
43. Related Party Transactions (continued)
Remuneration of key Management personnel
The amount of remuneration incurred by the Group in relation to
the Directors is set out below in aggregate. Further information
about the remuneration of Directors is provided in note 11.
Group 2021 2020
GBPm
Short-term employee benefits 2.6 4.1
Termination benefits -- 0.5
Other long-term benefits 2.1 2.9
Share based payments -- 0.5
Total emoluments 4.7 8.0
Trading transactions
Group 2021 2021 2021 2020 2020 2020
Tesco Tesco
Tesco Tesco Underwriting Tesco Tesco Underwriting
PLC subsidiaries Limited PLC subsidiaries Limited
GBPm GBPm GBPm GBPm GBPm GBPm
Interest received
and other income -- 3.8 28.2 -- 20.8 32.6
Dividend income -- -- 7.5 -- -- 15.6
Interest paid (3.5) -- -- (5.3) -- --
Provision of services -- (47.6) 3.0 -- (76.6) 3.7
Company 2021 2021 2021 2020 2020 2020
Tesco Tesco
Tesco Tesco Underwriting Tesco Tesco Underwriting
PLC subsidiaries Limited PLC subsidiaries Limited
GBPm GBPm GBPm GBPm GBPm GBPm
Interest received
and other income -- 12.3 -- -- 10.5 --
Dividend income -- 15.0 -- -- 50.0 --
Interest paid (3.5) -- -- (5.3) -- --
Provision of services -- -- -- -- -- --
Balances owing to/from related parties are identified in notes
21, 23, 31, 32, 33, 34 and 35.
For the year ended 28 February 2021 the Group generated 44%
(2020: 45%) of its insurance commission from the sale and service
of Motor and Home insurance policies underwritten by TU, a joint
venture company and therefore a related party. Customer premiums on
such sales are collected directly by the Group and the net premium
is remitted to TU. Investment transactions with TU are identified
in note 23.
Ultimate parent undertaking
The Company's parent undertaking and controlling party is Tesco
PLC which is incorporated in England. The Financial Statements for
Tesco PLC can be obtained from its registered office at Tesco
House, Shire Park, Kestrel Way, Welwyn Garden City, AL7 1GA.
151
44. Contingent Liabilities and Commitments
Contingent liabilities
Contingent liabilities are possible obligations arising from
past events, whose existence will be confirmed only by uncertain
future events, or present obligations arising from past events that
are not recognised because either it is not probable that an
outflow of economic benefits will be required or the amount of the
obligation cannot be reliably estimated.
Contingent liabilities are not recognised but information about
them is disclosed unless the possibility of any outflow of economic
benefits is remote. There are a number of contingent liabilities
that arise in the normal course of business which, if realised, are
not expected to result in a material liability to the Group.
Lending commitments
Under an undrawn Credit Card commitment, the Group agrees to
make funds available to a customer in the future. Undrawn Credit
Card commitments may be unconditionally cancelled or may continue,
providing all facility conditions are satisfied or waived.
Under a Personal Current Account overdraft commitment, the Group
agrees to make funds available to a customer in the future.
Personal Current Account overdraft commitments are usually for a
specified term and may be unconditionally cancelled or may
continue, providing all facility conditions are satisfied or
waived.
Further detail on undrawn lending commitments is included in the
liquidity and funding risk disclosure in note 38.
The contractual amounts do not represent the amounts at risk at
the reporting date but the amounts that would be at risk should the
available facilities be fully drawn upon.
Capital commitments
At 28 February 2021 the Group had capital commitments related to
property, plant and equipment of GBP0.5m (2020: GBP1.2m) and
intangible assets of GBP2.1m (2020: GBP5.7m). This is in respect of
IT software development and IT hardware. The Group's Management is
confident that future net revenues and funding will be sufficient
to cover these commitments.
152
45. Share Based Payments
The Group charge for the year recognised in respect of share
based payments is GBP3.1m (2020: GBP7.9m), which is made up of
share option schemes and share bonus payments. Of this amount,
GBP3.1m (2020: GBP7.0m) will be equity-settled and GBPnil (2020:
GBP0.9m) cash-settled.
Share option schemes
The Group had three share option schemes in operation during the
year, all of which are equity-settled schemes using Tesco
shares:
-- The Savings-related Share Option Scheme (1981) permits the
grant to colleagues of options in respect of ordinary shares linked
to a building society/bank save-as-you-earn contract for a term of
three or five years with contributions from colleagues of an amount
between GBP5 and GBP500 per four-weekly period. Options are capable
of being exercised at the end of the three or five-year period at a
subscription price of not less than 80% of the average of the
middle-market quotations of an ordinary share over the three
dealing days immediately preceding the offer date.
-- The Group Bonus Plan permitted the grant of options in
respect of ordinary shares to selected senior executives as a
proportion of annual bonus following the completion of a required
service period and is dependent on the achievement of corporate
performance and individual targets. Options are normally
exercisable between three and 10 years from the date of grant for
nil consideration. No further options will be granted under this
scheme.
-- The Performance Share Plan (2011) permits the grant of
options in respect of ordinary shares to selected executives.
Options are normally exercisable between the vesting date(s) set at
grant and ten years from the date of grant for GBPnil
consideration. The exercise of options will normally be conditional
upon the achievement of specified performance targets over a
three-year period and/or continuous employment.
153
45. Share Based Payments (continued)
The following table reconciles the total number of share options
outstanding under each share option scheme and the weighted average
exercise price (WAEP):
Savings- Savings-
related related Approved Approved
share share share share Unapproved Unapproved
option option option option share options share options
scheme scheme scheme scheme scheme scheme
Options WAEP (pence) Options WAEP (pence) Options WAEP (pence)
Outstanding at 1
March 2020 3,453,607 182.00 - - - -
Granted 1,423,533 198.00 - - - -
Forfeited (244,248) 201.05 - - - -
Exercised (773,252) 152.75 - - - -
Outstanding at 28
February 2021 3,859,640 192.89 - - - -
Exercisable at 28
February 2021 55,142 152.33 - - - -
Exercise price range
(pence) - 152.33 - - - -
Weighted average
remaining contractual
life (years) - 0.40 - - - -
Savings- Savings-
related related Approved Approved
share share share share Unapproved Unapproved
option option option option share options share options
scheme scheme scheme scheme scheme scheme
Options WAEP (pence) Options WAEP (pence) Options WAEP (pence)
Outstanding at 1
March 2019 3,583,962 172.10 87,911 338.40 82,647 338.40
Granted 845,599 219.00 - - - -
Forfeited (489,563) 185.80 (87,911) 338.40 (82,647) 338.40
Exercised (486,391) 166.81 - - - -
Outstanding at 29
February 2020 3,453,607 182.39 - - - -
Exercisable at 29
February 2020 43,559 190.00 - - - -
Exercise price range
(pence) - 190.00 - - - -
Weighted average
remaining contractual
life (years) - 0.42 - - - -
Share options were exercised on a regular basis throughout the
financial year. The average Tesco share price during the year ended
28 February 2021 was 227.07p (2020: 237.69p).
154
45. Share Based Payments (continued)
The fair value of savings related share options schemes are
estimated at the date of grant using the Black-Scholes option
pricing model. The following table gives the assumptions applied to
the options granted in the respective periods shown. No assumption
has been made to incorporate the effects of expected early
exercise.
Group 2021 2020
Savings Savings
- related - related
share options share options
schemes schemes
Expected dividend yield (%) 4.9% - 5.1% 3.7% - 4.3%
Expected volatility (%) 23% - 26% 23% - 28%
Risk free interest rate (%) 0.2% - 0.3% 0.81% -0.83%
Expected life of option (years) 3 or 5 3 or 5
Weighted average fair value (WAFV) of options 35.68 to
granted (pence) 27.13 43.57
Probability of forfeiture (%) 6% - 10% 7% - 10%
Share price (pence) 217.80 243.00
WAEP (pence) 198.00 219.00
Volatility is a measure of the amount by which a price is
expected to fluctuate in the period. The measure of volatility used
in Tesco's option pricing models is the annualised standard
deviation of the continuously compounded rates of return on the
share over a period of time. In estimating the future volatility of
Tesco's share price, the Tesco Board considers the historical
volatility of the share price over the most recent period that is
generally commensurate with the expected term of the option, taking
into account the remaining contractual life of the option.
Share Bonus Schemes
Selected executives participate in the Group Bonus Plan, a
performance-related bonus scheme. The amount paid to colleagues is
based on a percentage of salary and is paid partly in cash and
partly in shares. Bonuses are awarded to selected executives who
have completed a required service period and depend on the
achievement of corporate and individual performance targets.
Selected executives participate in the Performance Share Plan
(2011). Awards made under this plan will normally vest on the
vesting date(s) set on the date of the award for nil consideration.
Vesting will normally be conditional on the achievement of
specified performance targets over a three-year performance period
and/or continuous employment.
The fair value of shares awarded under these schemes is their
market value on the date of the award. Expected dividends are not
incorporated into the fair value.
The number of Tesco shares and WAFV of share bonuses awarded
during the year were:
2021 2021 2020 2020
WAFV WAFV
Shares (number) (pence) Shares (number) (pence)
Group Bonus Plan 1,103,685 246.70 1,207,697 237.80
Performance Share Plan 2,401,609 222.02 3,408,234 237.47
155
46. Adoption of New and Amended International Financial
Reporting Standards
Standards, amendments and interpretations issued which became
effective in the current year
During the year the Group did not adopt any new accounting
standards or amendments to standards which became effective in the
current year which had any impact on the Group.
Early adoption of new standards
During the year the Group has early adopted the following
amendments to standards:
Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 'IBOR
reform - Phase 2'
These amendments add to the phase 1 amendments issued in 2019
and address the effects on the financial statements when changes
are made to contractual cash flows and hedging relationships as a
result of the reform. They permit entities to continue to apply the
hedge accounting requirements in IAS 39 and IFRS 9 to all hedging
relationships directly affected by interest rate benchmark
reform.
Additional disclosures required from these amendments on the
impact of IBOR reform are included in note 18.
Standards, amendments and interpretations issued but not yet
effective
Standards, amendments and interpretations issued and effective
on or after 1 January 2021 that are expected to have an impact on
the Group are as follows:
IFRS 17 'Insurance contracts'
IFRS 17 is effective for annual periods beginning on or after 1
January 2023, subject to endorsement. Early adoption is permitted
provided IFRS 9 and IFRS 15 are also applied.
IFRS 17 is a replacement for IFRS 4. IFRS 17 requires insurance
liabilities to be measured at a current fulfilment value and
provides a more uniform measurement and presentation approach for
all insurance contracts.
IFRS 17 is relevant to the Group's joint venture, TU, which
provides the insurance underwriting service for a number of the
Group's general insurance products. The full impact on the Group is
currently being assessed.
47. Events After the Reporting Date
Change in Corporation Tax Rate
In the March 2021 Budget Statement, the Chancellor announced
that the standard rate of corporation tax in the UK will increase
from 19% to 25% from 1 April 2023. This increase in the corporation
tax rate would result in the Group's deferred tax asset increasing
by GBP15m.
However, at the reporting date, the 19% rate continued to be the
substantively enacted rate and is therefore the standard rate of
corporation tax applied in calculating the deferred taxation
balances reflected in these Financial Statements.
It was also announced that the level of banking surcharge may be
reduced from 1 April 2023, although the extent of any such
reduction is not expected to be known until late 2021 or early
2022. For every 1% decrease in the level of banking surcharge, the
Group's deferred tax asset would reduce by GBP2.5m.
Tesco Underwriting
During the year, the Group reached an agreement with Ageas (UK)
Limited to acquire its stake in TU, which will become a 100%--owned
subsidiary of the Group. The deal is expected to complete in May
2021, following regulatory approval received in March 2021.
TU paid TPF a dividend of GBP10.0m on 31 March 2021. The
consolidated carrying value of the Group's investment in TU reduced
by an equivalent amount. There was no impact on the Company's
carrying value of its investment in TU as a result of this
dividend.
Payment Holidays
Since 28 February 2021, the Group has granted further payment
holidays of GBP13.2m to 1,656 Credit Card and Personal Loan
customers.
156
INDEPENT AUDITORS REPORT TO THE MEMBER OF TESCO PERSONAL FINANCE
GROUP PLC
1. Opinion
In our opinion:
-- the Financial Statements of Tesco Personal Finance Group plc
(the parent Company) and its subsidiaries (the Group) give a true
and fair view of the state of the Group's and of the parent
Company's affairs as at 28 February 2021 and of the Group's loss
for the year then ended;
-- the Group Financial Statements have been properly prepared in
accordance with International Accounting Standards (IASs) in
conformity with the requirements of the Companies Act 2006 and
International Financial Reporting Standards (IFRSs) as issued by
the International Accounting Standards Board (IASB); and
-- the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
We have audited the Financial Statements which comprise:
-- the Consolidated Income Statement;
-- the Consolidated Statement of Comprehensive Income;
-- the Consolidated and Company Statements of Financial Position;
-- the Consolidated and Company Statements of Changes in Equity;
-- the Consolidated and Company Cash Flow Statements; and
-- the related notes 1 to 47.
The financial reporting framework that has been applied in their
preparation is applicable law and IASs in conformity with the
requirements of the Companies Act 2006 and IFRSs as issued by the
IASB. The financial reporting framework that has been applied in
the preparation of the parent Company Financial Statements is
applicable law and IASs in conformity with the requirements of the
Companies Act 2006.
2 Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the financial
statements section of our report.
We are independent of the Group and the parent Company in
accordance with the ethical requirements that are relevant to our
audit of the financial statements in the United Kingdom (UK),
including the Financial Reporting Council's (FRC's) Ethical
Standard as applied to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance with
these requirements. We confirm that the non-audit services
prohibited by the FRC's Ethical Standard were not provided to the
Group or the parent Company.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
157
3. Summary of our audit approach
Key audit matters The key audit matters that we identified in the current year were:
* expected credit loss (ECL) provisions;
* the valuation of the payment protection insurance
(PPI) provision;
* insurance reserving in Tesco Underwriting Limited
(TU); and
* recognition of revenue.
Within this report, key audit matters are identified as follows:! Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality The materiality that we used for the Group Financial Statements was GBP9m, which represents 0.6% of
net assets.
Scoping Our audit scoping provides full scope audit coverage of 100% of revenue, loss before tax and net
assets. There is one component, TU, which is a joint
venture with Ageas (UK) Limited (Ageas (UK)), and is audited by another audit firm.
Significant In the prior year, in response to the rapid spread of Covid-19, we identified a new key audit
changes in our matter relating to the parent Company's and Group's ability
approach to continue to adopt the going concern basis over a period of at least twelve months from the date
of approval of the Financial Statements, and over
the disclosure of post balance sheet events. As at the date of approval of the current period
Financial Statements, the level of uncertainty relating
to the Covid-19 pandemic has diminished and as such we no longer consider this to be a key audit
matter.
In the current year materiality has been determined using a net assets benchmark balance. In 2020
materiality was based on 5% of profit before tax,
we revised our benchmark in the period due to the Group being loss making for the year.
158
4. Conclusions relating to going concern
In auditing the Financial Statements, we have concluded that the
Directors' use of the going concern basis of accounting in the
preparation of the Financial Statements is appropriate.
Our evaluation of the Directors' assessment of the Group's and
Company's ability to continue to adopt the going concern basis of
accounting included:
-- Obtaining an understanding of the relevant controls around
Management's going concern assessment;
-- Assessing Management's considerations regarding whether they
consider it appropriate to adopt the going concern basis of
accounting;
-- Assessing the Group's and parent Company's compliance with
regulation including capital and liquidity requirements;
-- Assessing the assumptions, such as cash flows, capital and
liquidity, used in the forecasts prepared by Management;
-- Assessing historical accuracy of forecasts prepared by Management;
-- Involving prudential risk specialists in assessing the
information supporting the liquidity and capital forecasts; and
-- Assessing the appropriateness of the going concern disclosures.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
Group's and parent Company's ability to continue as a going concern
for a period of at least twelve months from the date of the
approval of the Financial Statements.
In relation to the reporting on how the Group has applied the UK
Corporate Governance Code, we have nothing material to add or draw
attention to in relation to the Directors' statement in the
Financial Statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors
with respect to going concern are described in the relevant
sections of this report.
159
5. Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the Financial
Statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the
Financial Statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
5.1 Expected credit loss provisions
Key audit matter As disclosed in note 10 (Expected Credit Loss on Financial Assets) and note 16 (Loans and Advances
description to Customers), the Group held an ECL provision of
GBP624.6m at 28 February 2021 (29 February 2020: GBP488.4m). The ECL on loans and advances to
customers was GBP359.7m in the year to 28 February 2021
(29 February 2020: GBP177.9m). The increase in provision compared to the prior year is primarily due
to the deterioration in the macro-economic outlook.
Loan impairment remains one of the most significant judgements made by Management, particularly in
light of the continued uncertain economic outlook
in the UK as a result of the Covid-19 pandemic and the United Kingdom's withdrawal from the European
Union.
We consider the most significant areas of judgement within the Group's collective provisioning
methodologies, and therefore the key audit matters within
loan impairment, to be:
* Macro-economic scenarios - ECL provisions are
required to be calculated on a forward-looking basis
under IFRS 9. Management apply significant judgement
in determining the forecast macro-economic scenarios
and the probability-weighting of each scenario that
are incorporated into the ECL model. Management also
applied a number of methodology refinements in the
current period to optimise model performance during
this period of economic stress.
* Post-model adjustments (PMAs) - Management has
included a number of PMAs to capture the potential
downside risks and model limitations arising as a
result of the continued macro-economic uncertainty.
This includes PMAs to address the uncertainty
associated with the future behaviour of customers who
have been granted payment holidays and the impact of
government support schemes on arrears and behavioural
scores.
Other material judgements include the determination of the expected life of exposures, the
definition of a significant increase in credit risk, the
determination of probability of default and exposure at default, the identification of loss events
and the determination of loss given default.
Given the material impact of the significant judgements taken by Management in the measurement of
the ECL provision, we also consider there is an inherent
risk of fraud through manipulation of this balance.
Management's associated accounting policies are detailed in note 1 with detail about the judgements
in applying accounting policies and critical accounting
estimates in note 2 .
160
5.1 Loan impairment provisions (continued)
How the scope Our audit procedures included obtaining an understanding of relevant controls which relate to the
of our audit determination of ECL provisions.
responded to We have obtained an understanding of, and assessed, the relevant controls including model governance
the key audit forums, model monitoring and calibrations including
matter the determination of PMAs, the review and approval of macro-economic scenarios, the flow of data
from the Group's information systems into the model,
and the flow of the output of the model to the general ledger.
Our audit work to address the key audit matter included the procedures noted below.
Macro-economic scenarios and related model refinements
With support from internal economic modelling specialists, we challenged the macro-economic scenario
forecasts that were incorporated into the ECL model,
including Management's selection of the relevant macro-economic variables. We assessed Management's
forecasts and their probability against external
sources to assess their reasonableness, considering the forecasts in light of any contradictory
information.
We also assessed the competence, capabilities and objectivity of Management's expert, who supplies
the macro-economic forecasts to Management and considered
whether the methodology adopted by the expert was reasonable.
With regards to the related model refinements, with support from internal credit risk modelling
experts, we assessed the changes against the requirements
of IFRS 9, tested the completeness and accuracy of the data which support Management's conclusions
regarding the appropriateness of the changes and
tested that the methodology changes had been appropriately reflected in the models through review of
the underlying computer code.
We also evaluated whether there was adequate disclosure regarding the macro-economic scenarios
selected by Management, their probability-weighting,
and the related sensitivities.
Post-model adjustments (PMAs)
With support from internal credit risk specialists, we challenged the appropriateness of each
significant PMA recorded by Management as well as the
completeness of PMAs with reference to our observations in the broader market and understanding of
the risk profile of the portfolio.
We evaluated the accuracy of the calculation of the PMAs, which included an assessment of the
completeness and accuracy of the underlying data used
by Management in their calculation.
We also evaluated whether there was adequate disclosure regarding the significant PMAs including how
they were determined and the range of possible
outcomes.
Key observations Based on our audit procedures above, we concluded that Management's ECL provision is reasonably
stated, and is supported by a methodology that is consistently
applied and compliant with IFRS 9.
161
5.2 The valuation of the payment protection insurance (PPI)
provision
Key audit matter The high level of public and regulatory scrutiny of banks continues, as does the magnitude of legal
description and regulatory claims. The most significant conduct
issue relates to Payment Protection Insurance (PPI) for which a provision of GBP22.4m was recorded
as at 28 February 2021 (29 February 2020: GBP41.1m).
Given the material impact of the significant judgements taken by Management in the measurement of
the provision, we considered that there was an inherent
risk of fraud through manipulation of this balance. We have specifically focussed our testing to the
material judgements around forecast average redress
of claims remaining to be paid out. We also consider the anticipated impact of any litigation claims
received or expected to be received, this includes
the forecast volumes and forecast average redress.
Further details are included within the critical accounting estimates and judgements in note 2 and
note 30 to the Financial Statements.
How the scope We have obtained an understanding of, and assessed, the relevant controls relating to the valuation
of our audit of the PPI provision, specifically the internal
responded to review and challenge of Management's valuation assumptions.
the key audit We challenged the adequacy of the provision recognised by assessing the key assumptions used in the
matter model, such as those relating to forecast average
redress, by comparing the assumptions to available peer data, referring to the guidance published by
the Financial Conduct Authority (FCA), assessing
historical redress experience as well as Management's past forecasting accuracy. In order to assess
the methodology around calculating the provision
for litigation claims, we inquired with internal legal counsel and reviewed the results of PPI
litigation cases to date. We also tested the arithmetical
accuracy of the PPI model.
We also tested the completeness and accuracy of the underlying data that supports Management's
assumptions and the current year utilisation of the provision
and assessed the appropriateness of disclosures.
Key observations Based on the procedures performed, we concur with Management that the provision as at 28 February
2021 of GBP22.4m represents a reasonable best estimate
of the probable economic outflow.
162
5.3 Insurance reserving in Tesco Underwriting Limited (TU)
Key audit matter The Group is indirectly affected by the risks in insurance reserving through its 49.9% investment in
description the TU joint venture with Ageas UK. The Group accounts
for its investment in TU as a joint venture and therefore recognises a share of TU's profit/loss in
its Consolidated Income Statement, with a corresponding
movement in the value of the investment in the Consolidated Statement of Financial Position, which
has a carrying value of GBP92.8m as at 28 February
2021 (29 February 2020: GBP86.0m). TU's results are sensitive to changes in the insurance reserves
it recognises in respect of insurance policies written,
net of reinsurance. Consequently, material increases in these reserves could have an impact on the
carrying value of the investment in the Consolidated
Statement of Financial Position.
Given the material impact of the significant judgements taken by Management in the measurement of
TU's reserves, we considered there was an inherent
risk of fraud through manipulation of this balance.
Management's associated accounting policies are detailed on page 48.
How the scope We have obtained an understanding of, and assessed, the relevant controls within the process to
of our audit determine insurance contract liabilities.
responded to Meetings were held with senior Management involved in the reserving process to discuss the reserving
the key audit methodology, changes in assumptions from the previous
matter year-end, and questions arising from the review of internal and external reserving reports.
With support from actuarial specialists we challenged the actuarial assumptions used and performed
projections on selected classes of business. Classes
selected included Motor BI Capped and Motor third-party property damage. For these classes of
business, the projected claims liabilities were compared
to those projected by Management and any significant differences were investigated. For the
remaining classes of business, the methodology and assumptions
selected by Management were evaluated.
Key observations Based on the procedures performed we concluded that the valuation of TU's insurance contract
reserves are reasonably stated.
163
5.4 Recognition of revenue
Key audit matter In accordance with IFRS 9, the revenue streams from financial products that are considered 'integral
description to the yield' must be recognised using the effective
interest rate method (EIR) over the behavioural life of the financial products.
The judgements taken in estimating the cash flows which drive the expected lives used in the
calculation of the EIR can be sensitive to change, and
could significantly impact the income recognised in any financial period, particularly in relation
to introductory rate offers and similar structures.
Accordingly, we have identified the judgement on expected lives of Credit Cards, specifically the
repayment assumptions, to be the key audit matter
over revenue recognition. In this respect, the most significant model relates to the Credit Card
portfolio, which supports an EIR asset of GBP28.9m
at 28 February 2021 (GBP42.3m at 29 February 2020).
Given the material impact of the significant judgements taken by Management in calculating the EIR
asset, we consider that there is an inherent risk
of fraud through manipulation of this balance.
Management's associated accounting policies are detailed on page 48 with detail about the judgements
in applying accounting policies and critical accounting
estimates, including sensitivities to the pay rates assumptions, in note 2.
How the scope We have obtained an understanding of, and assessed, relevant controls that the Group has established
of our audit in relation to recognition of revenue using EIR.
responded to We reviewed the underlying code used to calculate the repayment rate assumptions that drive the
the key audit expected lives used in the model to ensure that it is
matter consistent with the methodology adopted by Management in order to assess the expected lives. The
methodology was also reviewed to ensure that it is
in compliance with the requirements of IFRS 9. We then assessed Management's assessment of whether
any overlays were required to historic payment rates
to reflect regulatory headwinds and macro-economic factors.
We performed substantive testing over the completeness and accuracy of the underlying data inputs
into the model that is used to support the repayment
rate assumptions and we reviewed the arithmetic accuracy of the EIR model.
Key observations Based on the work performed, we consider Management's assumptions reasonable and supportable in the
Credit Cards' revenue recognition model, including
those relating to the repayment rates assumptions of Credit Cards. We are satisfied that
Management's methodology and model is appropriate and that
it supports the EIR asset.
164
6. Our application of materiality
6.1 Materiality
We define materiality as the magnitude of misstatement in the
Financial Statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the Financial Statements as a whole as follows:
Group Financial Statements Parent Company Financial
Statements
Group materiality GBP9.0m (2020: GBP11.0m) GBP8.9m (2020: GBP10.9m)
Basis for determining Materiality has been determined Parent Company materiality
materiality as 0.6% of net assets has been determined as
(2020: 5% of underlying 0.6% of net assets (2020:
profit before tax). 5% of underlying profit
before tax), which is
capped at 99% of Group
materiality.
Rationale for We believe that the use We believe that the use
the benchmark of net assets is appropriate of net assets is appropriate
applied given the overall capital given the overall capital
base is a key focus area base is a key focus area
for the stakeholders and for the stakeholders and
regulators. Therefore, regulators. Therefore,
net assets has been considered net assets has been considered
the most appropriate base the most appropriate base
on which to determine on which to determine
materiality in the current materiality in the current
year due to the loss in year due to the loss in
the year. the year.
http://www.rns-pdf.londonstockexchange.com/rns/3702V_1-2021-4-13.pdf
6.2 Performance materiality
We set performance materiality at a level lower than materiality
to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the Financial
Statements as a whole. Group performance materiality was set at 70%
of Group materiality for the 2021 audit (2020: 70%). In determining
performance materiality, we considered the following factors:
The impact of Covid-19 on the control environment;
The quality of the control environment and that we were able to
rely on controls for a number of business cycles; and
The low number of corrected and uncorrected misstatements
identified in previous audits.
6.3 Error reporting threshold
We agreed with the Board Audit Committee (BAC) that we would
report to the Committee all audit differences in excess of GBP0.45m
(2020: GBP0.5m), as well as differences below that threshold that,
in our view, warranted reporting on qualitative grounds. We also
report to the BAC on disclosure matters that we identified when
assessing the overall presentation of the Financial Statements.
165
7. An overview of the scope of our audit
7.1 Identification and scoping of components
Our Group audit was scoped by obtaining an understanding of the
Group and its environment, including Group-wide controls, and
assessing the risks of material misstatement at the Group level.
Audit work to respond to the risks of material misstatement was
performed by the Group engagement team. Our audit scoping provides
full scope audit coverage of 100% of the Group's revenue, loss
before tax and net assets.
7.2 Our consideration of the control environment
We obtained an understanding and tested the relevant controls on
the following areas: Credit Cards, Savings, Loans, Insurance and
the common operations processes (products, payments and
reconciliations).
We involved our IT specialists in the testing of the IT systems
surrounding the above core banking products.
7.3 Working with other auditors
Work on TU, the Group's joint venture with Ageas (UK), was
performed by component auditors. The timing of our engagement with
the component auditors was planned to enable us to be involved
during the planning and risk assessment process in addition to the
execution of detailed audit procedures. We attended key meetings
with TU Management and the component auditor, visited the component
auditor, and reviewed the audit files of the component auditor to
understand the audit approach adopted, with specific focus over the
claims reserves recognised. We also had a dedicated senior member
of the audit team focussed on overseeing the role of the component
auditors. The materiality level applied by the component auditor of
TU was GBP3.6m (2020: GBP4.4m).
166
8. Other information
The other information comprises the information included in the
Annual Report, other than the Financial Statements and our
auditor's report thereon. The Directors are responsible for the
other information contained within the Annual Report.
Our opinion on the Financial Statements does not cover the other
information and, except to the extent otherwise explicitly stated
in our report, we do not express any form of assurance conclusion
thereon.
Our responsibility is to read the other information and, in
doing so, consider whether the other information is materially
inconsistent with the Financial Statements or our knowledge
obtained in the course of the audit, or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether this
gives rise to a material misstatement in the Financial Statements
themselves. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we
are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of Directors
As explained more fully in the Directors' responsibilities
statement, the Directors are responsible for the preparation of the
Financial Statements and for being satisfied that they give a true
and fair view, and for such internal control as the Directors
determine is necessary to enable the preparation of Financial
Statements that are free from material misstatement, whether due to
fraud or error.
In preparing the Financial Statements, the Directors are
responsible for assessing the Group's and the parent Company's
ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going concern basis
of accounting unless the Directors either intend to liquidate the
Group or the parent Company or to cease operations, or have no
realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the Financial
Statements
Our objectives are to obtain reasonable assurance about whether
the Financial Statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these Financial
Statements.
A further description of our responsibilities for the audit of
the Financial Statements is located on the FRC's website at:
http://www.frc.org.uk/auditorsresponsibilities. This description
forms part of our auditor's report.
167
11. Extent to which the audit was considered capable of
detecting irregularities including fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements
in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including
fraud is detailed below.
11.1 Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance with
laws and regulations, we considered the following:
-- the nature of the industry and sector, control environment
and business performance including the design of the Group's
remuneration policies, key drivers for Directors' remuneration,
bonus levels and performance targets;
-- results of our enquiries of Management, Internal Audit and
the BAC about their own identification and assessment of the risks
of irregularities;
-- any matters we identified having obtained and reviewed the
Group's documentation of their policies and procedures relating
to:
o identifying, evaluating and complying with laws and
regulations and whether they were aware of any instances of
non-compliance;
o detecting and responding to the risks of fraud and whether
they have knowledge of any actual, suspected or alleged fraud;
o the internal controls established to mitigate risks of fraud
or non-compliance with laws and regulations;
-- the matters discussed among the audit engagement team and
involving relevant internal specialists, including tax, IT, and
industry specialists regarding how and where fraud might occur in
the Financial Statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities
and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas:
ECL provisions, the valuation of the PPI provision, insurance
reserving in TU and recognition of revenue. In common with all
audits under ISAs (UK), we are also required to perform specific
procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory
frameworks that the Group operates in, focusing on provisions of
those laws and regulations that had a direct effect on the
determination of material amounts and disclosures in the Financial
Statements. The key laws and regulations we considered in this
context included the UK Companies Act, UK Pensions Act and the HM
Revenue and Customs (HMRC) Tax Legislation.
In addition, we considered provisions of other laws and
regulations that do not have a direct effect on the Financial
Statements but compliance with which may be fundamental to the
Group's ability to operate or to avoid a material penalty. These
included the requirements of the United Kingdom's Prudential
Regulation Authority (PRA) and FCA.
168
11.2 Audit response to risks identified
As a result of performing the above, we identified ECL
provisions, the valuation of the PPI provision, insurance reserving
in TU and recognition of revenue as key audit matters related to
the potential risk of fraud. The key audit matters section of our
report explains the matters in more detail and also describes the
specific procedures we performed in response to those key audit
matters.
In addition to the above, our procedures to respond to risks
identified included the following:
-- reviewing the Financial Statement disclosures and testing to
supporting documentation to assess compliance with provisions of
relevant laws and regulations described as having a direct effect
on the Financial Statements;
-- enquiring of Management, the BAC, in-house and external legal
counsel concerning actual and potential litigation and claims;
-- performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud;
-- reading minutes of meetings of those charged with governance,
reviewing Internal Audit reports and reviewing correspondence with
HMRC, the PRA and the FCA; and
-- in addressing the risk of fraud through Management override
of controls, testing the appropriateness of journal entries and
other adjustments; assessing whether the judgements made in making
accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions
that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members including
internal specialists, and remained alert to any indications of
fraud or non-compliance with laws and regulations throughout the
audit.
169
Report on other legal and regulatory requirements
12. Opinions and other matters prescribed by the Companies Act
2006
In our opinion, based on the work undertaken in the course of
the audit:
-- the information given in the Strategic Report and the
Directors' Report for the financial year for which the Financial
Statements are prepared is consistent with the Financial
Statements; and
-- the Strategic Report and the Directors' Report have been
prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and
the parent Company and their environment obtained in the course of
the audit, we have not identified any material misstatements in the
Strategic Report or the Directors' Report.
13. Corporate Governance Statement
The Listing Rules require us to review the directors' statement
in relation to going concern, longer-term viability and that part
of the Corporate Governance Statement relating to the group's
compliance with the provisions of the UK Corporate Governance Code
specified for our review.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the financial
statements and our knowledge obtained during the audit:
-- the Directors' statement with regards to the appropriateness
of adopting the going concern basis of accounting and any material
uncertainties identified set out on pages 29 and 30;
-- the Directors' explanation as to its assessment of the
Group's prospects, the period this assessment covers and why the
period is appropriate set out on pages 29 to 30;
-- the Directors' statement on fair, balanced and understandable set out on page 38;
-- the Board's confirmation that it has carried out a robust
assessment of the emerging and principal risks, set out on page
29;
-- the section of the Annual Report that describes the review of
effectiveness of risk management and internal control systems set
out on pages 17 to 24; and
-- the section describing the work of the BAC set out on pages 33 to 35.
14. Matters on which we are required to report by exception
14.1 Adequacy of explanations received and accounting
records
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- we have not received all the information and explanations we require for our audit; or
-- adequate accounting records have not been kept by the parent
Company, or returns adequate for our audit have not been received
from branches not visited by us; or
-- the parent Company Financial Statements are not in agreement
with the accounting records and returns.
We have nothing to report in respect of these matters.
14.2 Directors' remuneration
Under the Companies Act 2006 we are also required to report if
in our opinion certain disclosures of Directors' remuneration have
not been made.
We have nothing to report in respect of these matters.
15. Other matters
15.1 Auditor tenure
Following the recommendation of the BAC, we were appointed by
the Board of Directors on 30 June 2015 to audit the Financial
Statements for the year ending 29 February 2016 and subsequent
financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm is six
years, covering the years ending 29 February 2016 to 28 February
2021.
170
15.2 Consistency of the audit report with the additional report
to the BAC
Our audit opinion is consistent with the additional report to
the BAC we are required to provide in accordance with ISAs
(UK).
16. Use of our report
This report is made solely to the Company's member, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company's member those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's member as a body,
for our audit work, for this report, or for the opinions we have
formed.
Peter Birch ACA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Leeds, United Kingdom
12 April 2021
171
ABBREVIATIONS
AFS Available-for-sale
AGEAS
UK AGEAS (UK) Limited
ALCo Asset and Liability Management Committee
APM Alternative Performance Measure
BAC Board Audit Committee
BCBS Basel Committee on Banking Supervision
BoE Bank of England
BRC Board Risk Committee
CA Compliance Advisory
CaR Capital at risk
CCA Consumer Credit Act
CCB Capital conservation buffer
CCP Colleague Contribution Panel
CCyB Countercyclical capital buffer
CEO Chief executive officer
CRD Capital Requirements Directive
CRO Chief Risk Officer
CRR Capital Requirements Regulation
CSRBB Credit spread risk in the Banking Book
DisCo Disclosure Committee
EAD Exposure at default
EBA European Banking Authority
ECLs Expected credit losses
EEA European Economic Area
EIR Effective interest rate
ERC Executive Risk Committee
ES Ethical Standard
EU European Union
ExCo Executive Committee
FCA Financial Conduct Authority
FRC Financial Reporting Council
FVOCI Fair value through other comprehensive income
FVPL Fair value through profit or loss
HMRC HM Revenue and Customs
IA Internal Audit
IAS International Accounting Standard
IAS 19 IAS 19 'Employee Benefits'
IAS 39 IAS 39 'Financial instruments: Recognition and measurement'
IASB International Accounting Standards Board
ICAAP Internal capital adequacy assessment process
IFRS International Financial Reporting Standard
IFRS 4 IFRS 4 'Insurance contracts'
IFRS 5 IFRS 5 'Non-current assets held for sale and discontinued operations'
IFRS 9 IFRS 9 'Financial instruments'
IFRS 15 IFRS 15 'Revenue from contracts with customers'
IFRS 16 IFRS 16 'Leases'
IFRS 17 IFRS 17 'Insurance contracts'
ILAAP Internal liquidity adequacy assessment process
IRC Investment Review Committee
IRRBB Interest rate risk in the Banking Book
ISAs (UK) International Standards on Auditing (UK)
ISDA International Swaps Derivatives Association
LFR Leverage Framework Regime
LGD Loss given default
LIBOR London Interbank Offered Rate
LRMF Liquidity Risk Management Framework
MLR Market and Liquidity Risk
MREL Minimum requirements for own funds and eligible liabilities
MRT Material Risk Taker
NomCo Nomination Committee
NED Non-Executive Director
NSFR Net stable funding ratio
OEC Operating Executive Committee
ORSA Operational risk scenario analysis
PCA Personal Current Account
PD Probability of default
Plevin Plevin v Paragon Personal Finance Limited
PMA Post-model adjustment
PPI Payment protection insurance
PRA Prudential Regulation Authority
PSD2 Second Payment Services Directive
RAM Risk Appetite measure
RemCo Remuneration Committee
RCSA Risk and control self-assessment
RMF Risk management framework
RMFu Risk Management Function
SA Standardised approach
SFTs Securities financing transactions
SONIA Sterling Overnight Index Average
TCo Treasury Committee
TCR Total capital requirement
Tesco Tesco PLC
TFS Term Funding Scheme
TFSME TFS for small and medium sized entities
TPF Tesco Personal Finance plc
TPFG Tesco Personal Finance Group plc
TPP Third-party provider
TSL Tesco Stores Limited
TU Tesco Underwriting Limited
UK United Kingdom
WAEP Weighted average exercise price
WAFV Weighted average fair value
2018 UK Corporate Governance
Code Code 2018
172
GLOSSARY OF TERMS
A
Alternative In the reporting of financial information, the Directors
performance have adopted various Alternative performance measures
measure (APMs). These measures are not defined by IFRSs and therefore
may not be directly comparable with other companies' APMs,
including those in the Group's industry. APMs should be
considered in addition to, and are not intended to be
a substitute for, or superior to, IFRS measurements.
Amortised cost The amount at which the financial asset or financial liability
is measured at initial recognition minus principal repayments,
plus or minus the cumulative amortisation using the EIR
method of any difference between the initial amount and
the maturity amount and minus any reduction (directly
or through the use of an allowance account) for impairment
or uncollectability.
Annual earnings Changes in interest rates affect the Bank's earnings by
at risk altering interest rate-sensitive income and expenses.
Excessive interest income sensitivity can pose a threat
to the Bank's current capital base and/or future earnings.
The Annual Earnings at Risk model measures the sensitivity
of the Bank's earnings to movements in interest rates
over the next 12 months based on expected cashflows. The
Bank assesses the impact of a +/- 0.25%, 0.50%, 0.75%,
1% shock in rates versus the base case scenario (2018:
+1.0%; -0.75%). The most adverse scenario is measured
against Risk Appetite.
Annual wholesale The annual wholesale refinancing amount is the value of
refinancing funds requiring to be refinanced in a rolling 12 month
amount period end.
Asset encumbrance A claim to an asset by another party. Encumbrance usually
impacts the transferability of the asset and can restrict
its free use until the encumbrance is removed.
B
Basel II Basel II is a set of international banking regulations
put forth by the Basel Committee on Bank Supervision,
which levelled the international regulation field with
uniform rules and guidelines. Basel II expanded rules
for minimum capital requirements established under Basel
I and provided the framework for regulatory review, as
well as set disclosure requirements for assessment of
capital adequacy of banks.
Basel III Basel III is an international regulatory accord that introduced
a set of reforms designed to improve the regulation, supervision
and risk management within the banking sector.
Bad debt:asset The bad debt:asset ratio is calculated by dividing the
ratio impairment loss by the average balance of loans and advances
to customers.
Basis risk Basis risk is the financial risk that offsetting investments
in a hedging strategy will not experience price changes
in entirely opposite directions from each other.
Black-Scholes A financial model used to price options.
model
Brexit The process by which the United Kingdom (UK) left the
European Union (EU).
C
Capital at Capital at risk is an economic-value measure and assesses
risk sensitivity to a reduction in the Group's capital to movements
in interest rates. When interest rates change, the present
value and timing of future cash flows change. This changes
the underlying value of a bank's assets, liabilities and
off-balance sheet items and its economic value which in
turn poses a threat to the capital base.
Capital conservation A capital buffer designed to ensure that banks are able
buffer to build up capital buffers outside of periods of stress
which can then be drawn upon as losses are incurred.
Capital Requirements The Capital Requirements Directive IV (CRD IV) is an EU
Directive legislative package that contains prudential rules for
banks, building societies and investment firms. Most of
the rules in the legislation have applied since 1 January
2014.
Capital Requirements The Capital Requirements Regulation (EU) No. 575/2013
Regulation (CRR) is an EU law that aims to decrease the likelihood
that banks become insolvent, reflecting Basel III rules
on capital measurement and capital standards.
Capital resources Eligible capital held in order to satisfy capital requirements.
Capital risk The risk that the Group holds regulatory capital which
is of insufficient quality and quantity to enable it to
absorb losses.
173
C (continued)
Common equity The highest form of regulatory capital under CRR, comprising
tier 1 capital common shares issued, related share premium, retained
earnings and other reserves less regulatory adjustments
Common equity The common equity tier 1 ratio is calculated by dividing
tier 1 ratio total tier 1 capital at the end of the year by total risk-weighted
assets and is calculated in line with the CRR.
Company Tesco Personal Finance plc.
Concentration The risk of losses arising as a result of concentrations
risk of exposures to a specific counterparty, economic sector,
segment or geographical region.
Cost:income The cost:income ratio is calculated by dividing operating
ratio expenses by total income.
Countercyclical A capital buffer which aims to ensure that capital requirements
capital buffer take account of the macro-economic financial environment
in which banks operate. This aims to provide the banking
sector with additional capital to protect it from potential
future losses. In times of adverse financial or economic
circumstances, when losses tend to deplete capital and
banks are likely to restrict the supply of credit, the
countercyclical capital buffer should be released to help
avoid a credit crunch.
Covid-19 An infectious disease, caused by a newly discovered coronavirus.
CRD IV Legislation published in June 2013 (in force from 1 January
2014) by the European Commission, comprising the CRD and
CRR and together forming the CRD IV package.
Implements the Basel III proposals in addition to new
proposals on sanctions for non-compliance with regulatory
rules, corporate governance and remuneration.
The rules have been implemented in the UK via Prudential
Regulatory Authority (PRA) policy statement PS7/13, with
some elements subject to transitional phase-in.
Credit risk Credit risk is the risk that a borrower will default on
a debt or obligation by failing to make contractually
obligated payments, or that the Group will incur losses
due to any other counterparty failing to meet their financial
obligations.
Credit risk Techniques (such as collateral agreements) used to reduce
mitigation the credit risk associated with an exposure.
Credit spread The risk of adverse effects resulting from a change in
risk credit spreads, arising from a bank's non-trading assets
and liabilities.
D
Derivatives Financial instruments whose value is based on the performance
of one or more underlying assets.
E
Encumbrance The encumbrance ratio is calculated as (total encumbered
ratio assets + total collateral received which has been re-used
for financing transactions) divided by (total assets +
total collateral received which is available for encumbrance).
Equity method A method of accounting whereby the investment is initially
recognised at cost and adjusted thereafter for the post-acquisition
change in the investor's share of the investee's net assets.
The investor's profit or loss includes its share of the
investee's profit or loss and the investor's other comprehensive
income includes its share of the investee's other comprehensive
income.
Exposure A claim, contingent claim or position which carries a
risk of financial loss.
Exposure at The amount expected to be outstanding after any credit
default or risk mitigation, if and when the counterparty defaults.
exposure value Exposure at default reflects both drawn down balances
as well as an allowance for undrawn commitments and contingent
exposures.
External Credit These include external credit rating agencies such as
Assessment Standard & Poor's, Moody's and Fitch.
Institutions
F
Fair value 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.
Financial Conduct The statutory body responsible for conduct of business
Authority regulation and supervision of UK authorised firms from
1 April 2013. The Financial Conduct Authority also has
responsibility for the prudential regulation of firms
that do not fall within the PRA's scope.
Forbearance A temporary postponement or alteration of contractual
repayment terms in response to a counterparty's financial
difficulties
174
F (continued)
Foreign exchange The risk that the value of transactions in currencies
risk other than Sterling is altered by the movement of exchange
rates.
Funding risk The risk that the Group does not have sufficiently stable
and diverse sources of funding.
G
General Data The General Data Protection Regulation 2016/679 is a regulation
Protection in EU law on data protection and privacy for all individuals
Regulation within the EU and the European Economic Area (EEA). It
also addresses the export of personal data outside the
EU and EEA areas.
Group The Company and its subsidiaries and joint venture.
I
Impairment Provisions held on the balance sheet as a result of the
charge and raising of an impairment charge against profit for the
impairment incurred loss inherent in the lending book. Impairment
provisions provisions may be individual or collective.
Impairment The reduction in value that arises following an impairment
losses review of an asset which has determined that the asset's
value is lower than its carrying value. For impaired financial
assets measured at amortised cost, impairment losses are
the difference between the carrying value and the present
value of estimated future cash flows, discounted at the
asset's original effective interest rate.
Insurance risk The risks accepted through the provision of insurance
products in return for a premium. These risks may or may
not occur as expected and the amount and timing of these
risks are uncertain and determined by events outside of
the Group's control.
Interest rate The risk arising from the different repricing characteristics
risk of the Group's non-trading assets and liabilities.
Internal capital The Group's own assessment of the level of capital needed
adequacy assessment in respect of its regulatory capital requirements (for
process credit, market and operational risks) and for other risks
including stress events.
Internal liquidity An ongoing exercise as part of the PRA's regulatory framework
adequacy assessment to ensure that the Group maintains adequate liquid assets
process to survive a defined stress scenario for a sufficient
period as defined by Risk Appetite.
Internal liquidity In place to ensure that the Group maintains adequate liquid
requirement assets to survive a defined stress scenario for a sufficient
period as defined by Risk Appetite.
International A standardised contract developed by the International
Swaps and Derivatives Swaps and Derivatives Association which is used as an
Association umbrella contract for bilateral derivative contracts.
master agreement
L
Leverage ratio Tier 1 capital divided by total exposure.
Liquidity coverage Liquidity buffer divided by net liquidity outflows over
ratio a 30 day calendar day stress period.
Liquidity risk Liquidity risk is the risk that the Group is not able
to meet its obligations as they fall due. This includes
the risk that a given security cannot be traded quickly
enough in the market to prevent a loss if a credit rating
falls.
Loan to deposit The loan to deposit ratio is calculated by dividing loans
ratio and advances to customers by deposits from customers.
Loss given Represents the Group's expectation of the extent of the
default loss if there is a default. The loss given default (LGD)
assumes that once an account has defaulted, the portion
of the defaulted balance will be recovered over a maximum
period of 60 months from the point of default. LGD models
take into account, when relevant, the valuation of collateral,
collection strategies and receipts from debt sales.
M
Mark-to-market The method used to calculate exposure values for Counterparty
approach Credit risk. The method adjusts daily to account for profits
and losses in the value of related assets and liabilities.
175
M (Continued)
Market risk The risk that movements in market prices (such as interest
rates, foreign exchange rates and the market value of
financial instruments) lead to a reduction in either the
Bank's earnings or capital.
Minimum capital The minimum regulatory capital that must be held in accordance
requirement with Pillar 1 requirements for credit, market and operational
risk. This is currently 8%.
Minimum requirements A requirement for minimum loss-absorbing capacity institutions
for own funds must hold.
and eligible
liabilities
MREL ratio The MREL ratio is calculated by dividing total capital
plus MREL debt by risk-weighted assets.
N
Net interest Net interest margin is calculated by dividing net interest
margin income from continuing operations by average interest
bearing assets, excluding assets held for sale.
Net stable The net stable funding ratio is calculated under the CRD
funding ratio IV methodology.
O
Ogden tables Tables which are used to calculate the cost of any claim
that involves compensation for loss of future benefits.
The tables provide an estimate of the return to be expected
from the investment of a lump sum damages award.
Operational The risk of loss resulting from inadequate or failed internal
risk processes, people and systems or from external events.
P
Past due loans Loans are past due when a counterparty has failed to make
a payment in line with their contractual obligations.
PD threshold The maximum lifetime probability of default (PD) for each
financial asset that was expected at the reporting date
at initial recognition before a significant increase in
credit risk is deemed to have occurred.
Pension obligation The risk to the Group caused by contractual or other liabilities
risk to or with respect to a pension scheme.
Pillar 1 The first pillar of the Basel II framework sets out the
minimum regulatory capital requirements (8%) for credit,
market and operational risks.
Pillar 2 The second Pillar of the Basel II framework, known as
the Supervisory Review Process, sets out the review process
for a bank's capital adequacy; the process under which
supervisors evaluate how well banks are assessing their
risks and the actions taken as a result of these assessments.
Pillar 2A Pillar 2A addresses risks to an individual firm which
are either not captured, or not fully captured, under
the Pillar 1 capital requirements applicable to all banks.
Pillar 3 The third pillar of the Basel II framework aims to encourage
market discipline by setting out disclosure requirements
for banks on their capital, risk exposures and risk assessment
processes. These disclosures are aimed at improving the
information made available to the market.
Pipeline risk The lender's risk that, between the time a lock commitment
is given to the borrower and the time the loan is closed,
interest rates will rise and the lender will take a loss
on selling the loan.
Post-model Post--model adjustments reflect the use of Management
adjustment judgment to address perceived limitations in models or
data.
Prepayment Prepayment risk is the risk associated with the early
risk unscheduled return of principal on a fixed-income security.
Probability Represents the likelihood a customer will default over
of default the relevant period, being either 12 months or the expected
lifetime.
Prudential The statutory body responsible for the prudential regulation
Regulation and supervision of banks, building societies, credit unions,
Authority insurers and major investment firms in the UK.
Second Payment The Second Payment Services Directive (PSD2) is an EU
Services Directive Directive that regulates payment services and payment
service providers throughout the European Union and European
Economic Area. PSD2 updates and replaces the Payment Services
Directive 2008.
176
R
Recovery plan The framework and recovery options which could be deployed
in a severe stress event impacting capital or liquidity
positions.
Regulatory The capital that a bank holds, determined in accordance
capital with the relevant regulation arising from Basel III.
Regulatory The risk of reputational damage, liability or material
risk loss from failure to comply with the requirements of the
financial services regulators or related codes of best
practice applicable to the business areas within which
the Group operates.
Repricing risk Repricing risk is the risk of changes in interest rate
charged (earned) at the time a financial contract's rate
is reset. It emerges if interest rates are settled on
liabilities for periods which differ from those on offsetting
assets.
Residual price The risk that the fair value of a financial instrument
risk and its associated hedge will fluctuate because of changes
in market prices, for reasons other than interest rate
or credit risk.
Retail credit Retail credit risk is the risk that a borrower, who is
risk a personal customer, will default on a debt or obligation
by failing to make contractually obligated payments.
Risk Appetite The level and types of risk that the Group is willing
to assume to achieve its strategic objectives.
Risk Appetite Measures designed to monitor the Group's exposure to certain
Measures risks to ensure that exposure stays within approved Risk
Appetite.
Risk-weighted Calculated by assigning a degree of risk expressed as
assets a percentage (risk-weight) to an exposure value in accordance
with the applicable Standardised Approach (SA) rules.
S
Securitisation A securitisation is defined as a transaction where the
payments are dependent upon the performance of a single
exposure or pool of exposures, where the subordination
of tranches determines the distribution of losses during
the life of the transaction.
Securities The act of lending, or borrowing, a stock, derivative,
financing transactions or other security to or from an investor or firm. For
the Group, this represents market repo transactions and
does not represent securities financing for clients.
Stress testing The term used to describe techniques where plausible events
are considered as vulnerabilities to ascertain how this
will impact the capital resources which are required to
be held by the Group.
Securitisation A corporation, trust, or other non-bank entity, established
structured for the purpose of carrying on securitisation activities.
entity Structured entities are designed to isolate their obligations
from those of the originator and the holder of the beneficial
interests in the securitisation.
Standardised In relation to credit risk, the method for calculating
approach credit risk capital requirements using risk-weightings
that are prescribed by the regulator. SAs following prescribed
methodologies also exist for calculating market and operational
risk capital requirements.
Subordinated Liabilities which, in the event of insolvency or liquidation
liabilities of the issuer, are subordinated to the claims of depositors
and other creditors of the issuer.
T
Temporary payment Temporary deferral of contractual repayments due from
holiday customers in respect of lending balances.
Tier 1 capital A component of regulatory capital, comprising common equity
tier 1 capital and other tier 1 capital. Other tier 1
capital includes qualifying capital instruments such as
non-cumulative perpetual preference shares and other tier
1 capital securities.
Tier 2 capital A component of regulatory capital, comprising qualifying
subordinated loan capital and related non-controlling
interests.
Total capital The total capital ratio is calculated by dividing total
ratio regulatory capital by total risk-weighted assets.
Total capital The amount and quality of capital the Bank must maintain
requirement to comply with the CRR Pillar 1 and the 2A capital requirements.
U
UK Leverage The UK leverage ratio framework currently applies to firms
Framework regime with retail deposits equal to or greater than GBP50 billion
on an individual or consolidated basis
177
U (continued)
Underlying The underlying cost:income ratio, which is an APM, is
cost:income calculated by dividing underlying operating expenses by
ratio total underlying income.
Underlying The underlying loan to deposit ratio, which is an APM,
loan:deposit is calculated by dividing loans and advances to customers,
ratio including assets of the disposal group, by deposits from
customers.
Underlying Underlying net interest margin, which is an APM, is calculated
net interest by dividing net interest income from continuing and discontinued
margin operations by average interest bearing assets.
Unencumbered The minimum unencumbered assets to retail liabilities
assets to retail ratio is the surplus of unencumbered assets relative to
liabilities the total amount of retail liabilities.
ratio
W
Wholesale credit Wholesale credit risk is the risk that the counterparty
risk to a transaction will default before the final settlement
of the transaction cash flows. Such transactions relate
to contracts for derivative financial instruments, securities
financing transactions and long dated settlement transactions.
Wholesale funding The wholesale funding ratio is calculated by dividing
ratio total wholesale funding by total funding.
178
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FR FFFSLSLIVLIL
(END) Dow Jones Newswires
April 14, 2021 02:02 ET (06:02 GMT)
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