UKAR Annual Report & Accounts 2016

UK ASSET RESOLUTION LIMITED
RESULTS ANNOUNCEMENT

UKAR BALANCE SHEET REDUCES BY A FURTHER £23 BILLION

UK Asset Resolution Limited (‘UKAR’) today issues its results for the year ended 31 March 2016 (‘2015/16′). UKAR included Bradford & Bingley plc (‘B&B’) and NRAM plc (‘NRAM’) throughout 2015/16. UKAR’s mission is to maximise value for the taxpayer, whilst serving our customers well and treating all our stakeholders fairly.

Key highlights

• Balance Sheet reduced by a further £22.8bn (35%) bringing the total reduction to £72.5bn (63%) since formation of UKAR in 2010.
• Government loan repayments of £6.3bn, bringing total repayments to £20.4bn since UKAR was formed. 42% of the government loans have now been repaid.
• UKAR mortgage accounts three or more months in arrears, including possessions, have reduced by 47% since March 2015 to 6,377 due to asset sales (3,349) and strong underlying performance (2,250). This brings the total reduction to 84% since formation.
• Underlying profit before tax is down 25% to £1,055.4m, which is in line with expectations and primarily reflects a 33% reduction in lending balances driven by loan sales and customer redemptions.

Key Strategic Developments

• Completed the sale of c.£13bn customer loans to affiliates of Cerberus Capital Management LP (‘Cerberus’).
• Balance Sheet significantly simplified with three of the four secured funding structures either repaid or now in a position to be liquidated in the next three months.
• Exploring the possibility of a major sales programme of B&B mortgages – sufficient to repay the £15.65bn debt from the Financial Services Compensation Scheme (‘FSCS’).
• Signed a contract with Computershare, which owns the UK’s largest third-party mortgage administration business, to outsource the servicing of £30bn of customer loans.

Board Changes

• On commencement of the outsourced arrangement around 1,700 colleagues will transfer to Computershare and Richard Banks will become CEO of Computershare Mortgage Services Ltd (‘CMS Ltd’). At that time he will step down as a director and CEO of UKAR. Ian Hares, Finance & Investment Director, will become CEO and continues as an Executive Director on the UKAR Board. Both these appointments ensure consistency of leadership in the two organisations going forward.
• Having chaired UKAR since formation Richard Pym will step down as Chairman in June 2016, and will be replaced by John Tattersall, an existing Non-Executive Director. Richard will, however, remain on the Board for a short period. Kent Atkinson, Senior Independent Director, will also step down from the Board and his role as Chairman of the Audit Committee will be taken by Brendan McDonagh who joined the Board in April 2016. Sue Langley will become Senior Independent Director.

Richard Banks, UKAR Chief Executive, commented on UKAR’s results and the outsourcing:

“Once again UKAR has achieved excellent results driven by our capabilities in debt management and asset sales and reflecting the hard work of all our people. The outsourcing of our mortgage servicing activities to Computershare is good news for customers and for colleagues. I and the mortgage servicing team look forward to continuing to work closely with Ian Hares as he focusses UKAR on the disposal of its mortgage book to maximise value for taxpayers.”

Richard Pym, Chairman of UKAR, commented on the Board changes:

“It has been a privilege to chair the Boards of UKAR, B&B and NRAM plc and I am delighted to hand over the stewardship to John Tattersall who has considerable experience in financial services and risk management. The Board joins me in thanking Richard Banks for his leadership over the past seven years and we look forward to working closely with him and Computershare in the future, whom we are confident will continue to serve our customers well.”

John Tattersall, commented on the future for UKAR:

“Richard Pym has been a tremendous Chairman of all three of our Boards for the past few years, and will be a hard act to follow. I am conscious that I succeed him as Chairman of what will be quite a different group of companies going forward but our objective of repaying the government loans in full remains. The appointment of Ian Hares as CEO ensures we have stability of leadership, expertise in optimising the Balance Sheet and a continued focus on customers; I and my fellow Board members have every confidence that UKAR will achieve its mission of maximising value to the taxpayer whilst treating all stakeholders fairly.”

UPDATE ON PERFORMANCE

1. Financial Information

Since formation in October 2010, the UKAR Balance Sheet has reduced by £72.5bn, including a decrease of £52.0bn in wholesale funding and £20.4bn of government funding.

In the year to 31 March 2016 the Balance Sheet reduced by 35% to £43.3bn, a decrease of £22.8bn (2014/15: £8.8bn) which includes the repayment of £6.3bn of government funding (2014/15: £3.7bn). Other cashflows generated for the government in the form of interest, taxes and guarantee fees totalled £0.5bn (2014/15: £0.7bn). Repayments have been funded largely from a 33% reduction in lending balances (£17.2bn) reflecting £11.7bn of asset sales, £5.0bn of residential mortgage redemptions, £0.1bn of commercial redemptions, £0.1bn of unsecured redemptions and £0.3bn of other regular repayments. As at 31 March 2016 lending balances stood at £35.5bn (2014/15: £52.7bn).

Underlying profit before tax for the year fell by 25% to £1,055.4m, a decrease of £342.7m from March 2015 (2014/15: £1,398.1m) in line with expectations and primarily due to lower net interest income as a result of the shrinking Balance Sheet.

Administrative expenses for the year were marginally higher than 2014/15 at £175.0m (2014/15: £174.2m). Costs include investment in our IT infrastructure and a £3.0m provision for voluntary redundancies, which is a consequence of the reducing Balance Sheet and our success in managing down arrears. It is anticipated costs will increase in 2016/17 as VAT will be payable on mortgage servicing fees to Computershare.

In November 2015 we announced the sale of c.£13bn of assets to Cerberus. Completion of the sale was in two stages, with the majority of the sale being finalised on 7 December 2015 but with the second stage (the sale of NRAM plc) having completed post the financial year-end, on 5 May 2016. The sale generated a premium of c.£280m over the book value of the assets at 30 June 2015 and an accounting profit of £59.4m. The difference reflects interest earned on the mortgages between 30 June and 7 December, transaction costs and accounting adjustments. The cash proceeds from the sale were used to repay the outstanding Granite securitisation liabilities and the balance went towards the repayment of the NRAM government loan.

Statutory profit before tax for the year was £1,175.8m (2014/15: £972.3m), £120.4m higher than the underlying profit noted above. The main driver was the reversal of a £268.3m provision for customer redress. As previously announced, in July 2015 the Court of Appeal found in NRAM’s favour that customers with loans greater than £25,000 should not receive remediation in line with Consumer Credit Act (‘CCA’) customers despite receiving the same incorrect documentation. As a result the £268.3m provision relating to this matter was released. Other key movements in statutory profit, in addition to the profit on sale of customer loans, were £88.2m further customer redress provisions largely relating to PPI following the publication of the Financial Conduct Authority’s (‘FCA’) consultation paper regarding a potential time bar and Plevin v Paragon Personal Finance Ltd and costs totalling £73.4m in relation to the outsourcing of mortgage servicing to Computershare. The latter includes the costs of the transformation programme to separate the mortgage servicing capability from the asset management function.

We continue to look for opportunities to optimise our funding structure where this generates value for the taxpayer. In the year to 31 March 2016, UKAR successfully repurchased all the remaining NRAM covered bonds and two B&B covered bonds. Including the impact of collateral and derivatives the UKAR Balance Sheet has reduced by £5.7bn as a result of the buybacks. The transactions have reduced the ongoing funding cost to UKAR and further simplified the Balance Sheet, which facilitates future asset sales.

2. Customers and Conduct

The total number of customers continues to fall in line with our objective to reduce our Balance Sheet. In total UKAR has just over 238,000 customers (2014/15: 389,000), with 298,000 mortgage accounts (2014/15: 455,000) and 42,000 unsecured personal loan accounts (2014/15: 106,000). The majority of these loans continue to perform well with more than 95% of mortgage customers up to date with their monthly payments.

The number of mortgage accounts three or more months in arrears, including those in possession, reduced by 47% to 6,377 as at 31 March 2016. This was driven by asset sales (3,349) and strong underlying performance (2,250). The total value of arrears owed by customers has fallen by £41.3m to £49.3m, a reduction of 46%. This reduction is a direct consequence of the asset sale undertaken in the year and proactive arrears management coupled with the continued low interest rate environment.

Although levels of arrears are reducing we continue to see a number of customers facing financial difficulty including some entering arrears for the first time. We endeavour to contact all customers following a missed payment to understand their situation and consider solutions to help them manage their mortgage. Where appropriate we actively encourage customers to seek help from non-fee charging debt advice agencies. Repossession is always viewed as a last resort but unfortunately in some situations this is inevitable and the best course of action to prevent further indebtedness for the customer. Repossessions continue to decrease and totalled 1,853 in the year (2013/14: 2,856).

In addition to our contact strategies for customers in arrears, we also engage proactively with other potentially vulnerable customers who may need help with their financial situation to ensure they are ready for the future, for example, those coming to the end of an interest only mortgage term. Our aim is to remind customers of their obligations, provide a range of useful information and help them plan ahead. It is encouraging that about a half of all the interest only customers we contact respond.

UKAR remains committed to doing the right thing for our customers and where we identify issues that have caused customer detriment, we will ensure that they are fully remediated. An additional provision of £73.4m has been recognised following the publication of the FCA’s consultation paper CP15/39 “Rules and guidance on payment protection insurance complaints” which proposes the setting of a deadline date for complaints in 2018 and provides guidance in relation to Plevin v Paragon Personal Finance Ltd. The proposals include an FCA-led communications campaign to raise awareness of the deadline to prompt those who intend to complain to act ahead of the deadline. If the proposals are agreed we expect higher claims volumes in the run up to the implementation of time-barring than we have previously modelled.

3. Releasing our Potential

UKAR was established in 2010 to facilitate the orderly management of the closed mortgage books of both B&B and NRAM to maximise value for taxpayers whilst ensuring that both companies continue to treat customers fairly, deliver consistently high levels of service and support those customers facing financial difficulty. The transfer of UKAR’s mortgage servicing operations to Computershare has been possible because of the exceptional debt management and customer service capabilities that UKAR has developed over the past six years.

As announced on 4 May 2016, on the transfer of servicing to Computershare, UKAR will retain legal and regulatory responsibility for customer outcomes and we take this responsibility seriously. UKAR will require the same contact strategies and arrears management practices highlighted above to continue under the new servicing arrangement.

Working with Computershare provides stability of service for B&B, Mortgage Express and NRAM customers and enables UKAR to focus on the continuing wind down of its mortgage book to maximise value for taxpayers by undertaking further asset sales and continuing to reduce the government debt.

4. Future Asset Sales

As announced in the Chancellor’s Budget on 16 March 2016, UKAR is exploring the possibility of a major sales programme of B&B mortgages. This programme of sales will be designed to raise sufficient proceeds for B&B to repay the £15.65bn debt from the FSCS and for the FSCS to repay its corresponding loan from Her Majesty’s Treasury. Any sales will be subject to market conditions and ensuring value for money. When selling loans UKAR perform due diligence on potential buyers to ensure ongoing fair treatment of customers. Purchasers of loans are not able to change customers’ terms and conditions without the customer’s consent.

Computershare will be able to bid to retain the servicing of any UKAR assets sold in the future, and to take on other new business, which helps safeguard jobs for our mortgage operations colleagues in Sunderland and West Yorkshire.

5. Board Changes

As referred to earlier, at the point of separation of the mortgage servicing activities, expected in early June 2016, the following Board changes will take place:

• Richard Banks will step down as CEO and will assume the role of CEO of CMS Ltd;
• Ian Hares, currently Finance & Investment Director, will become CEO of UKAR;
• John Tattersall will succeed Richard Pym as Chairman; and
• Kent Atkinson will step down as a Non-Executive Director having served on the Board since 2010; Sue Langley will become Senior Independent Director and Brendan McDonagh will become Chairman of the Audit Committee.

At that point the UKAR Board will comprise the Chairman (John Tattersall), four independent Directors (Michael Buckley, Sue Langley, Brendan McDonagh and Richard Pym), two UKFI nominated Directors (David Lunn and Keith Morgan) and one Executive Director (Ian Hares).

Messrs Atkinson and Banks will receive no payments for loss of office and Mr Pym is waiving his fees going forward.

ENDS

NOTES TO EDITORS

Due to the complex nature of the Granite securitisation, the sales transaction was structured in such a way that Cerberus purchased NRAM plc on 5 May 2016.

Assets and liabilities not included in the transaction were transferred from NRAM plc to a newly established subsidiary of UKAR, currently known as NRAM (No.1) Limited, on 30 April 2016. In the coming weeks Cerberus will change the name of NRAM plc and UKAR will change the name of NRAM (No.1) Limited to NRAM Limited.

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