Aldermore Group PLC H1 2015: Continued momentum drives doubling of profit

Transcription

1 27 August 2015 Aldermore Group PLC H1 2015: Continued momentum drives doubling of profit Underlying profit before tax (1) up by 109% to 44m Net interest margin expanded to 3.6% (H1 2014: 3.3%) Underlying cost/income ratio (1) improved by 11pts to 53% (H1 2014: 64%) Excellent credit performance; cost of risk improved by 12bps to 20bps (H1 2014: 32 bps) Reported profit before tax up by 112% to 40m (H1 2014: 19m) On track to deliver net loan growth of c 1.4bn in 2015, equivalent to c30% full year growth Record first half origination of 1.2bn; up 14% on prior year (H1 2014: 1.0bn) Net loans to customers up by 635m or 13% to 5.4bn (31 December 2014: 4.8bn) Lending to SMEs up by 270m or 12% to 2.5bn (31 December 2014: 2.2bn) Residential Mortgages up by 365m or 14% to 2.9bn (31 December 2014: 2.6bn) Innovative online deposit franchise funds lending growth Customer deposits up by 11% to 5.0bn (31 December 2014: 4.5bn) Strong growth in SME deposits, up by 20% to 1.2bn (31 December 2014: 1.0bn) Successful IPO supports robust capital position Total capital ratio (2) of 15.8% (31 December 2014: 14.8%) CET 1 capital ratio (2) of 12.0% (31 December 2014: 10.4%) Leverage ratio (2) of 7.2% (31 December 2014: 6.3%) Delivering strong, sustainable returns to shareholders Underlying return on equity (1) increased to 18.6% (H1 2014: 11.7%) Earnings per share 8.8p (H1 2014: 4.8p) Phillip Monks, CEO, commented: It s been an excellent six months for the Group, we ve generated continued growth, doubled profits, listed on the London Stock Exchange and joined the FTSE 250. We re supporting more customers than ever before with lending to SMEs up by 12% to 2.5bn and Residential Mortgages up by 14% to 2.9bn. Our innovative online deposit business supports this lending and our competitive, transparent products together with the recent launch of our SME Rate Checker have helped drive a 20% increase in SME deposits to 1.2bn. We ve more than doubled underlying profit before tax to 44m compared with 21m for the first half of These excellent results give us great confidence for the rest of 2015 and beyond. We remain committed to delivering strong, sustainable returns to shareholders while generating growth and maintaining our disciplined approach to risk management and increased our underlying return on equity by around 7pts to nearly 19%. We re also making great progress towards our target of delivering a cost/income ratio of less than 40% by the end of We re excited by the significant ongoing growth opportunity presented by SMEs and homeowners, who we believe continue to be underserved by the wider market. Our track record and the great customer feedback we receive demonstrate that we re exceptionally well placed to continue to support these customers and grow the business. (1) (2) Excluding H IPO related costs of 4.1m pre-tax and 3.2m post-tax (H1 2014: 2.2m and 1.7m) Capital ratios as at 30 June 2015 include H profits

2 Enquiries: Analysts Media Claire Cordell Holly Marshall Tel: +44 (0) Tel: +44 (0) Amit Deshpande Andy Homer Tel: +44 (0) Tel: +44 (0) FTI Consulting Neil Doyle/ Paul Marriott Mobile: +44 (0) /+44 (0) A live webcast of the analyst presentation, including the question and answer session, will be broadcast on our IR website at 9:30am today and is available via a listen only conference call by dialling UK Freephone: or International dial in: + 44 (0) An indexed version of the webcast will be available on the website by the end of the day and copies of the slides to be presented at the analyst meeting will be available on the website from 9.00am today. CONTENTS Summary balance sheet 3 Summary income statement 4 CEO review 5 Financial review 8 Principal risks and uncertainties 20 Directors responsibility statement 23 Independent review report to Aldermore Group PLC 24 Consolidated income statement 26 Consolidated statement of comprehensive income 27 Consolidated statement of financial position 28 Consolidated statement of cash flows 29 Consolidated statement of changes in equity 30 Notes to the consolidated interim financial statements 31 Page Note on rounding: The CEO and Financial reviews have been prepared by rounding financial data in thousands to the nearest million to one decimal place. As a result of rounding, some of the tables may not exactly reconcile to the total shown. All percentage movements are calculated using the data shown in thousands in the statutory consolidated financial statements rather than the rounded amounts. Important disclaimer Visit for more information. This press release may contain forward-looking statements with respect to certain of the Group s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. Generally, words such as may, could, will, expect, intend, estimate, anticipate, aim, outlook, believe, plan, seek, continue or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements are inherently predictive and speculative and involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group s control, including amongst other things, UK economic business conditions, market-related risks such as fluctuations in interest rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group operates. As a result, the Group s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Group s forward-looking statements. Forward-looking statements in this press release are current only as of the date on which such statements are made. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release shall be construed as a profit forecast. Aldermore Aldermore is an SME-focused bank which operates with modern, scalable and legacy-free infrastructure. It offers simple financial products and solutions to meet the needs of underserved Small and Medium-sized Enterprises (SMEs) across their business and personal lives, as well as homeowners and savers. Aldermore has no branch network but serves customers and intermediary partners online, by phone and face to face through its network of regional offices located around the UK. Building on its core values of being reliable, expert, dynamic and straightforward, Aldermore aims to deliver banking as it should be. Established in 2009, Aldermore has grown significantly. At the end of June 2015, lending to customers stood at 5.4 billion and customer deposits totalled 5.0 billion. For more information, please visit Aldermore Bank PLC is an operating entity of Aldermore Group PLC. In March 2015, Aldermore Group PLC s shares (ALD.L) listed on the Main Market of the London Stock Exchange. Aldermore Bank PLC is regulated by the Prudential Regulation Authority and the Financial Conduct Authority and is registered under the Financial Services Compensation Scheme. 2

3 Summary balance sheet 30 June December 2014 Movement % Net loans 5, , % Cash and investments % Intangible assets % Fixed and other assets (15)% Total assets 6, , % Customer deposits 4, , % Wholesale funding % Other liabilities (17)% Total liabilities 5, , % Ordinary shareholders equity % AT1 capital % Equity % Total liabilities and equity 6, , % Key ratios (%) Non-performing loans ratio (NPL) 0.43% 0.43% -% Loans to deposits ratio 109% 108% 1% CRD IV fully loaded CET 1 ratio (1) 12.0% 10.4% 1.6% CRD IV fully loaded total capital ratio (1) 15.8% 14.8% 1.0% (1) Capital ratios as at 30 June 2015 include H profits 3

4 Summary income statement H H Movement % Interest income % Interest expense (47.1) (42.6) (10)% Net interest income % Net fee and other operating income % Net derivatives income and gains on disposal of debt securities (29)% Operating income % Expenses, depreciation and amortization (56.0) (47.1) (19)% IPO costs (4.1) (2.2) (83)% Operating profit before impairment losses % Impairment losses (5.2) (5.9) 12% Profit before tax % Tax (8.3) (4.4) (90)% Profit after tax % Basic earnings per share (pence) 8.8p 4.8p 4.0p Diluted earnings per share (pence) 8.7p 4.8p 3.9p Underlying profit before tax (1) % Underlying profit after tax (1) % Key ratios H % H % Movement % Gross interest margin (0.2)% Cost of funding % Net interest margin % Cost/income ratio % Underlying cost/income ratio (1) % Cost of risk (annualised) 20bps 32bps 12bps Return on Equity % Underlying return on Equity (1) % (1) Excluding H IPO related costs of 4.1m pre-tax and 3.2m post-tax (H1 2014: 2.2m and 1.7m) 4

5 CEO review I m delighted to be presenting our first set of results since our IPO in March. The transition to life as a listed company has been exciting but busy and I m exceptionally proud of the way in which the business has continued to deliver. Our half year results are excellent and give us great confidence for the full year 2015 and beyond. Our vision is to support UK SMEs across their business and personal lives, as well as homeowners, as we believe both groups are underserved by the wider banking sector. We are confident of achieving our strategic objectives of delivering for customers and shareholders while maintaining a prudent risk appetite and strong capital base. We focus on prime credit quality customers across four lending lines chosen for their large market sizes, high levels of tangible asset security and attractive risk adjusted returns and within which we only need to capture a relatively small market share to deliver on our growth plans. Our DNA is to be Reliable, Expert, Dynamic and Straightforward and this informs everything we do, creating the basis of our culture and brand. We engage with customers through multiple channels and aim to differentiate our service by being easy to do business with and making consistent and transparent credit decisions. We enjoy the advantage of modern, legacy-free and scalable systems which we use to support our expert underwriters in making considered decisions rather than adopting a computer says no approach. At the centre of our funding base is our dynamic online proposition which provides both retail and SME customers with innovative savings products. With our modern systems it is possible for a customer to open and fund an account online, usually in less than fifteen minutes. Market environment During the first six months of 2015, macro-economic conditions were relatively benign and our target market segments have grown. Asset finance new business at a market level grew by around 16% compared with H and I m delighted that we grew our origination by 25% over the same period, gaining market share. The most recent statistics available from the invoice finance industry show client numbers flat and a 3% reduction in advances since the end of Despite this, we have attracted new customers with net lending remaining broadly flat. In commercial mortgages, demand for property development finance continues to grow with planning applications and consents now at their highest level since We grew our origination by 6% compared with the first half of 2014 with more than a quarter of origination coming from our property development proposition. We maintained our market share in residential mortgages where, according to the Council of Mortgage Lenders, gross mortgage lending reached around 97bn in the first half of 2015 with the second quarter 17% higher than the first, potentially due to uncertainty ahead of the general election. As expected, we are seeing some signs of increased competition with a few new entrants in Asset and Invoice Finance and mortgage lenders exhibiting a greater focus on buy-to-let. We see this less in owner-occupied residential mortgages where we continue to target prime credit quality customers who fall outside of the cookie-cutter approach adopted by some larger banks. Differentiating ourselves by delivering exceptional service, every time, to our broker partners and direct customers is a priority. We continue to invest in technology to improve our brokers and customers experience including new web-content in Asset Finance, lead-generation functionality in Invoice Finance, a new buy-to-let website hub, as well as optimising our sites for mobile and tablet visitors who, together, now represent close to half of all visitors to our mortgages site. This approach is working and, as described below, we are holding gross margins broadly stable while remaining on track to achieve our target of growth in net lending of around 1.4bn for

6 First half performance This first half of 2015, was another excellent six months for the Group as we generated continued momentum and drove further top and bottom line benefits. As at 30 June 2015, we are supporting more UK SMEs and homeowners than ever before with lending customer numbers up by 15% to over 64,000. Net loans to customers were up by 13% to 5.4bn (31 December 2014: 4.8bn). The balance of the portfolio, as expected, remained broadly consistent over the period with loans to SMEs up by 12% to 2.5bn (31 December 2014: 2.2bn) and Residential Mortgages up by 14% to 2.9bn (31 December 2014: 2.6bn). This growth was driven by a record first half of origination, all of it organic, which was up by 14% compared with the same period in 2014 to 1,186m (H1 2014: 1,041m). Originations to SMEs were up by 16% to 650m (H1 2014: 561m) where, in addition to growth in customer numbers, we saw the benefits from more recently launched soft asset and stocking finance propositions in Asset Finance and good progress within property development in SME Commercial Mortgages. New lending through our Residential Mortgages division was up by 12% to 536m (H1 2014: 480m) with a fairly even spread between owner occupied and buy-to-let mortgages. This positions us well for the second half of 2015, which historically has been the seasonally stronger six months. We adopt a multi-channel approach and have a broad distribution network. We continued to extend our direct distribution which grew by 24% compared to the first half of 2014 and now accounts for 17% of total origination (H1 2014: 15%). We actively manage our funding base, balancing the ongoing diversification of funding sources with maintaining a prudent loan to deposit ratio. We remain predominantly deposit-funded and have grown deposits by 11% to 5.0bn (31 December 2014: 4.5bn) to support our increased lending. We continue to provide innovative savings products to customers and, in response to research we conducted showing that approximately a quarter of SMEs did not know what rate they were receiving on deposits, launched our SME Rate Checker which allows SMEs to compare rates from over 90 providers. The feedback has been excellent and I am delighted that our SME deposits have grown by 20% to 1.2bn (31 December 2014: 1.0bn). We are a straightforward business, lending growth drives increased net interest income and we leverage our cost base to deliver accelerating profitability. Our first half results clearly demonstrate this, as our ongoing momentum drove net interest income up by 50% to 92.0m (H1 2014: 61.2m) and our net interest margin expanded to 3.6% (H1 2014: 3.3%). At the same time, despite continued investment in the business, we improved our underlying cost/income ratio (1) by 11 percentage points to 53% (H1 2014: 64%). As a result, we delivered an 82% increase in operating profit before impairment losses to 44.7m (H1 2014: 24.5m). We take a rigorous approach to credit management, constructing a granular and highly secured portfolio. Our cost of risk was 20bps (H1 2014: 32bps), included no significant recoveries, and was a strong performance aided by our ongoing actions in Invoice Finance, low arrears across the business, as well as being reflective of where we are in the current economic cycle. We stress test affordability at origination and re-score the portfolio each month giving us early sight of any emerging issues. We are committed to delivering strong and sustainable returns for our shareholders. Profit before tax on a reported basis increased by 112% to 39.5m (H1 2014: 18.6m). Excluding IPO related costs, the underlying profit before tax (1) increased by 109% to 43.6m (H1 2014: 20.8m) and we delivered a 7 percentage point improvement on our underlying return on equity (RoE) (1) to 18.6% (H1 2014: 11.7%). In March 2015, we successfully listed on the London Stock Exchange raising 75m of gross primary capital to support our future growth plans. We are strongly capitalised and at 30 June 2015, the Group had a fully loaded CRD IV total capital ratio (2) of 15.8% (31 December 2014: 14.8%), a fully loaded CRD IV CET1 capital ratio (2) of 12.0% (31 December 2014: 10.4%) and a leverage ratio (2) of 7.2% (31 December 2014: 6.3%). (1) (2) Excluding H IPO related costs of 4.1m pre-tax and 3.2m post-tax (H1 2014: 2.2m and 1.7m) Capital ratios as at 30 June 2015 include H profits 6

7 Outlook I am delighted by this excellent set of results which demonstrate that we are on track to deliver on our goals for the full year 2015, namely net loan growth of around 1.4bn, a net interest margin of c3.6% and underlying expense growth of mid-teens %, whilst maintaining a fully loaded CRD IV CET1 capital ratio of around 11%. Management continue to believe that the normalised cost of risk for the portfolio over the medium term remains in the mid to high 30 s basis points. However, if the credit environment remains relatively benign and we continue to see low levels of large losses then I would expect to see a continued good performance on impairments in the second half of Along with the rest of the banking sector, we face a changing regulatory and legislative environment. On 8 July 2015, the Summer Budget introduced an 8% surcharge on UK banking profits above 25m, effective from 1 January 2016, which will increase our corporate tax rate and impact returns. We will look to mitigate the impact on returns to the extent possible and remain committed to delivering strong, sustainable returns to shareholders while generating growth and maintaining our disciplined approach to risk management. Additionally, the Summer Budget introduced plans to restrict relief on mortgage interest for individual buy-to-let landlords to the basic rate of income tax. This change applies from April 2017, and will be phased in over four years giving enough time for those investors who will be impacted to adjust to the new regime. We also lend to landlords who prefer to invest via a corporate structure, these customers are not impacted by the proposed changes. Although it is too early to be completely definitive, we do not believe that this will have a significant impact on the economics of investing in, or demand for, buy-to-let properties. The UK is experiencing a demographic shift, with around 26% of households expected to be renting within the private sector by 2022 (1) which is expected to generate further growth in the buy-to-let sector. Despite the above changes to the regulatory landscape, the growth opportunity available to us remains significant. Indicators show that our target market segments will continue to grow with SMEs reporting increased levels of confidence and planned investment. In the housing market, the number of registered house hunters has reached its highest levels since August I believe we are uniquely positioned to continue our support of underserved UK SMEs and homeowners and am confident that we will continue to build on our strong track record of delivery for both customers and shareholders. Phillip Monks CEO (1) OGLG/IMLA: Reshaping housing tenure in the UK May

8 Financial review Balance sheet Assets - Net loans to customers 30 June December 2014 Movement % Asset Finance 1, , % Invoice Finance (6)% SME Commercial Mortgages 1, , % Net loans to SMEs 2, , % Residential Mortgages 2, , % Net loans to customers 5, , % We continued to support UK SMEs and homeowners, with net loans to customers increasing by 13% in the first half of 2015 to 5.4bn (31 December 2014: 4.8bn). As expected, the portfolio mix has remained broadly consistent with net loans to SMEs up by 12% to 2.5bn (31 December 2014: 2.2bn) driven by strong growth in Asset Finance and SME Commercial Mortgages. Invoice Finance remains a small part of our portfolio and net loans were broadly flat at 0.2bn (31 December 2014: 0.2bn). Net loans to homeowners were up by 14% to 2.9bn (31 December 2014: 2.6bn). We remain on track to deliver on our target of around 1.4bn growth in net lending for the full year. - Gross loans analysis 30 June December 2014 Movement % Neither past due nor individually impaired 5, , % Past due but not individually impaired (22)% Individually impaired % Gross loans 5, , % Impairments (20.3) (22.6) 10% Net loans to customers 5, , % Non-performing loans ratio 0.43% 0.43% - % Allowance for losses individual provisions 10.9m 14.0m (23)% Coverage ratio 46.82% 67.40% (20.58)% We take a rigorous approach to credit management and have deliberately constructed a granular and highly secured portfolio. We have also maintained our prudent risk appetite as we ve grown the portfolio by 13% since the start of the year. This approach, along with the current benign credit environment, has led to continued low levels of arrears and a consistent non-performing loans ratio of 0.43%. We continue to stress test affordability at origination and re-score the portfolio on a monthly basis to give us early sight of any emerging issues. The coverage ratio measures the impairment allowance relating to individual loan balances as a percentage of total individually impaired balances. As at 30 June 2015, this ratio had reduced to 46.82% (31 December 2014: 67.40%) as a result of one SME Commercial Mortgage account which was fully recovered in early July and against which no provision was made at the balance sheet date. In addition, the coverage ratio has also reduced due to a number of fully provided loans being written off within Invoice Finance. 8

9 Liabilities Our funding strategy remains to be predominantly deposit-funded whilst actively managing wholesale sources including the Funding for Lending Scheme (FLS) and Residential Mortgage Backed Securitisation (RMBS) to drive an efficient cost of funds. As at 30 June 2015, our loans to deposits ratio was in line with management expectations at 109% (31 December 2014: 108%). - Deposits 30 June December 2014 Movement % Retail 3, , % SME 1, , % Corporate deposits % 4, , % Our dynamic and innovative online savings franchise provides award winning savings products to customers and grew by 11% to 5.0bn (31 December 2014: 4.5bn) to support our growth in net lending. We are particularly pleased with further growth in SME deposits, up by 20% to 1.2bn (31 December 2014: 1.0bn) which now form 25% of our total customer deposit base. Corporate deposits, launched in December 2014 are another element in our ongoing funding diversification, have grown by 212% and now total 72.5m (31 December 2014: 23.3m). - Wholesale funding 30 June December 2014 Movement % FLS % RMBS (15)% Other wholesale funding % % Wholesale funding grew by 17% to 726.5m (31 December 2014: 621.8m) and predominantly consists of on-balance sheet funding via repurchase agreements of FLS drawings and our RMBS. We took advantage of the cost-effective funding available under the Bank of England s extension of FLS for SME lending, increasing our funding to 444.0m (31 December 2014: 304.2m). In April 2014, we issued our inaugural 333m RMBS transaction priced at LIBOR + 67bps. The outstanding balance as at 30 June 2015 stood at 238.6m (31 December 2014: 279.1m). Other wholesale funding includes Tier 2 capital of 37.4m (31 December 2014: 36.8m) which was issued in May 2012 with a nominal value of 40m, has an effective interest rate of c18% and is callable in May

10 Equity - Movements in ordinary shareholders equity 31 December Profit after tax 31.2 Total other comprehensive income (0.4) Net equity raised at IPO 72.3 Share based payments 1.1 AT1 coupon (net of tax) (2.8) 30 June Ordinary shareholders equity increased to 406.7m (31 December 2014: 305.2m) predominantly as a result of 75m of gross equity raised during the IPO in March 2015 and retained earnings for the period partially offset by the coupon paid on the Additional Tier 1 instrument in April AT1 Capital On 9 December 2014, the Group issued 75m Fixed Rate Reset Additional Tier 1 (AT1) Perpetual Subordinated Contingent Convertible Securities. The securities are listed on the Irish Stock Exchange, pay a coupon of % annually on 30 April, subject to Board approval, and convert to equity if the Group s CET1 ratio falls below 7%. The first call date is 30 April From an accounting perspective, the securities are classified as equity with the coupon payments treated like dividends and deducted from retained earnings when paid. 10

11 Financial Performance - Net interest income During the first six months of 2015, interest income grew by 34% to 139.1m (H1 2014: 103.8m), driven by continued growth in net loans with the gross interest margin remaining relatively stable at 5.4% (H1 2014: 5.6%). We continued to benefit from our strategy of diversifying our funding base and interest expense increased by only 10% to 47.1m (H1 2014: 42.6m) as we drove the cost of funding down to 1.8% (H1 2014: 2.3%). As a result, the Group s net interest income increased by 50% to 92.0m (H1 2014: 61.2m) while the net interest margin improved by 0.3 percentage points to 3.6% (H1 2014: 3.3%). - Net fee and other operating income H H Movement % Fee and commission income (1)% Fee and commission expense (3.8) (4.4) 14% Other operating income (6)% % Net fee and other operating income were up by 2% to 12.3m (H1 2014: 12.0m) with fee and commission income remaining broadly flat at 12.6m (H1 2014: 12.7m) and a reduction in fee and commission expense by 14% to 3.8m (H1 2014: 4.4m) predominantly driven by Invoice Finance. Other operating income is mainly related to Invoice Finance and is marginally down. - Net derivatives income and gains on disposal of debt securities H H Movement % Net (expense)/income on derivatives (2.0) 0.4 n/a Gains on disposal of debt securities n/a n/a Net income from derivatives and gains on disposal of debt securities was 0.4m (H1 2014: 0.6m) with the net expense from derivatives offset by the gains on disposal of the related debt securities. - Expenses, depreciation and amortisation H H Movement % Other administrative expenses (21)% Provisions % Depreciation and amortisation (23)% % Excluding IPO related costs, underlying administrative expenses increased by 19% to 56.0m (H1 2014: 47.1m). The increase in other administrative expenses was mainly due to an increase in staff costs as we invested in further strengthening our central functions ahead of becoming a listed company and to support the growth of the business. During the first six months of 2015, on average we employed 871 people, including contractors, an increase of 17% on the same period in Provisions predominantly include the full year charge for the Financial Services Compensation Scheme (FSCS) levy which must be accounted for in the first half. Depreciation and amortisation remained broadly flat in nominal terms. 11

12 - Cost/income ratio The underlying cost/income ratio measures administration expenses, excluding IPO related costs but including depreciation and amortisation, as a percentage of operating income. We continue to make excellent progress towards achieving our target of a cost/income ratio of less than 40% by the end of 2017 with the underlying cost/income ratio for H improving by 11 percentage points to 53% (H1 2014: 64%). - Operating profit before impairments Operating profit before impairment losses increased by 82% to 44.7m (H1 2014: 24.5m) as operating income growth of 42% outstripped the growth in our expense base of 19% excluding IPO related costs. - Impairment losses Impairment losses decreased by 12% to 5.2m (H1 2014: 5.9m) despite the growth in the loan book as a result of our rigorous focus on credit management and a relatively benign credit environment. There were no significant one-off recoveries in either period. Across the portfolio, we experienced low levels of arrears and few large losses and this is reflected in the 19% reduction in individual provisions for the period to 3.5m (H1 2014: 4.3m). The collective provision element of the charge for H increased by 5% to 1.7m (H1 2014: 1.6m) reflecting growth in the book. Given current stable conditions, no assumption changes have been made since the end of In the first half of 2014, the collective charge was negatively impacted by an increase in the assumed forced sale discount percentage on the SME Commercial Mortgage portfolio, which was partially offset by a positive collective charge in Residential Mortgages as we reflected our actual experience of loans which were one or two months in arrears becoming three months in arrears, and therefore impaired. Cost of risk, which measures impairment losses as a percentage of average net loans, improved by 12 basis points to 20bps (H1 2014: 32bps). The specific cost of risk was 14bps (H1 2014: 23bps) reflecting the low levels of both arrears and large losses experienced during the first half of The collective cost of risk was 7bps (H1 2014: 9bps). - Profit before tax Profit before tax for the first six months of this year increased by 112% to 39.5m (H1 2014: 18.6m). Excluding pretax IPO related costs of 4.1m (H1 2014: 2.2m), the underlying profit before tax increased by 109% to 43.6m (H1 2014: 20.8m). - Tax The tax charge for the first six months of the year increased by 90% to 8.3m (H1 2014: 4.4m) reflecting the Group s increased profitability. The effective tax rate is 21.0% (H1 2014: 23.5%). On 8 July 2015, the Summer Budget proposed an 8% corporation tax surcharge on all UK banking profits above 25m per annum. This change is expected to be effective from 1 January Profit after tax Profit after tax increased by 119% to 31.2m (H1 2014: 14.2m). Excluding post-tax IPO related costs of 3.2m (H1 2014: 1.7m), the underlying profit after tax increased by 116% to 34.5m (H1 2014: 15.9m). 12

13 - Return on equity Return on equity as reported is 16.8% (H1 2014: 10.4%) and is calculated as the profit after tax attributable to ordinary shareholders expressed in relation to average shareholders funds attributable to ordinary shareholders, i.e. the AT1 coupon is deducted from profit after tax. Excluding post-tax IPO costs of 3.2m (H1 2014: 1.7m), the underlying return on equity is 18.6% (H1 2014: 11.7%). The proposed 8% tax surcharge would impact the Group s returns going forward as we are already making profits in excess of the 25m annual allowance. We will look to mitigate the impact on returns to the extent possible and remain committed to delivering strong, sustainable returns to shareholders while generating growth and maintaining our disciplined approach to risk management. - Earnings per share Basic earnings per share (EPS) of 8.8p (H1 2014: 4.8p) is calculated as net profit attributable to ordinary shareholders of the Group divided by the weighted average number of ordinary shares in issue during the period. On a fully diluted basis, the EPS was 8.7p (H1 2014: 4.8p). The weighted average number of ordinary shares in issue during the period was 322,075 thousand (H1 2014: 296,178 thousand) and 326,659 thousand (H1 2014: 299,056 thousand) on a diluted basis. 13

14 Regulatory capital position (1) The fully loaded regulatory capital position of the Group under CRD IV is set out below: 30 June December 2014 Movement % Fully loaded CRD IV CET 1 ratio (1) (%) % Fully loaded CRD IV Tier 1 capital ratio (1) (%) % Tier 2 capital ratio (%) (0.2)% Fully loaded CRD IV total capital ratio (1) (%) % Risk Weighted Assets () 3, , % As at 30 June 2015, the Group s fully loaded CRD IV total capital ratio (1) was 15.8% (31 December 2014: 14.8%) and its CET1 ratio (1) was 12.0% (31 December 2014: 10.4%). These increases were driven by the issue of 75m of gross primary equity during the IPO and retained earnings generated during the period partially offset by growth in Risk Weighted Assets (RWAs). Leverage ratio (1) The Group s leverage ratio under CRD IV is set out below: 30 June 31 December Movement % % % Leverage ratio (1) % The Group s leverage ratio improved by 0.9 percentage points to 7.2% (31 December 2014: 6.3%) mainly due to the issue of 75m of gross primary equity during the IPO and retained earnings generated during the period partially offset by growth in lending assets. (1) Capital ratios as at 30 June 2015 include H profits 14

15 Segmental analysis Asset Finance 30 June December 2014 Movement % Net loans to customers 1, , % NPL ratio 0.29% 0.25% (0.04)% H H Movement % Organic origination % Net interest income % Net fees and other income % Operating income % Administrative expenses (5.6) (5.5) (2)% Impairment losses (2.2) (0.9) (137)% Segmental result % Net interest margin (%) 4.5% 4.1% 0.4% Cost of risk (bps) 40bps 24bps (16)bps Aldermore supports capital investment in a wide range of business-critical assets from hard assets such as vehicles and agricultural machinery to printing equipment, digital technologies, renewables and a wide array of soft assets. We aim to be our partners funder of first choice by being easy to do business with, quick to respond and consistent in our credit decisions. The Asset Finance business delivered strong growth in the first half, with net loans growing by 15% to 1.2bn (31 December 2014: 1.0bn) as we grew customer numbers by 18% to around 38,000 (31 December 2014: c33,000). This growth was also driven by excellent organic origination which increased by 25% to 424m (H1 2014: 339m). As a result of our service focus, we saw particularly strong origination from our broker distribution channel which grew by 29%. We also continued our focus on soft assets, which now comprise around 6% of the portfolio and saw good progress with our stocking proposition which we launched toward the end of Redemptions performed as expected given the amortising nature and average contract duration of these loans and the growing size of the portfolio. Net interest income grew by 56% to 25.2m (H1 2014: 16.2m) driven mainly by growth in net loans. The net interest margin improved to 4.5% (H1 2014: 4.1%) as a result of a reduction in cost of funds and a broadly stable gross asset margin. Administrative expenses were broadly stable at 5.6m (H1 2014: 5.5m) as we continue to invest to support growth and leverage our efficient operating platform. Impairment charges for the first half totalled 2.2m (H1 2014: 0.9m) leading to a cost of risk of 40bps (H1 2014: 24bps). This charge includes a more normal level of specific provisions in H1 2015, compared with a reduced level in the same period in 2014, together with a lower collective provision reflecting low levels of arrears. Asset Finance delivered an excellent bottom line performance with the segmental result increasing by 73% to 19.5m (H1 2014: 11.3m). 15

16 Invoice Finance 30 June December 2014 Movement % Net loans to customers (6)% NPL ratio 1.48% 3.13% 1.65% H H Movement % Organic origination (27)% Net interest income (9)% Net fees and other income (14)% Operating income (13)% Administrative expenses (7.4) (7.7) 5% Impairment losses (0.6) (2.2) 73% Segmental result % Net interest margin (%) 3.0% 2.8% 0.2% Net revenue margin (%) 11.6% 11.3% 0.3% Cost of risk (bps) 69bps 213bps 144bps Invoice Finance is an important working capital tool for SMEs. Aldermore will usually lend up to 85% of the value of approved outstanding invoices issued by the borrower to its customers. Our customers are typically owner-managed SMEs and we focus on key sectors including Manufacturing, Wholesale, Recruitment and Logistics. We employ specialist service teams that spend time understanding our clients business and design appropriate financing solutions. Although distributed mainly via intermediaries, our direct distribution has grown rapidly in recent years and in the first six months of 2015, represented around 42% of origination. Invoice Finance is the smallest part of the business at around 3% of the total net loan portfolio. At 30 June 2015, net loans were broadly flat at 0.2bn (31 December 2014: 0.2bn) as we focused on improving the segmental result. Customer numbers increased marginally, although remain around 1,200. Our trade and construction finance propositions which were launched toward the end of 2014 are starting to gain traction. Given the short term nature of these loans, with the underlying invoices on average converting to cash within 60 days, our average loan balance is equivalent to providing over 1bn in working capital finance to UK SMEs per annum. Net interest income decreased marginally to 2.6m (H1 2014: 2.9m). The net interest margin improved to 3.0% (H1 2014: 2.8%) with an improvement in cost of funds more than compensating for a marginal reduction in gross interest margin. Net fee income was down 14% to 7.5m (H1 2014: 8.8m) due to smaller average facility sizes and improvements in the credit performance of the portfolio leading to lower collect out fees, with the latter offset by improvements generated on impairments. The net revenue margin improved to 11.6% (H1 2014: 11.3%). Expenses decreased by 5% to 7.4m (H1 2014: 7.7m) due to efficiency improvements. In addition to a number of fully provided loans being written off within Invoice Finance, we continue to benefit from actions previously taken to enhance credit and fraud controls and our NPL ratio has reduced by 1.65% to 1.48% since the start of the year. These actions have also led to the improved credit performance of the business with impairments down by 73% to 0.6m (H1 2014: 2.2m) leading to a 144bps improvement in the cost of risk to 69bps (H1 2014: 213bps). The segmental result improved by 25% to 2.2m (H1 2014: 1.8m). 16

17 SME Commercial Mortgages 30 June December 2014 Movement % Net loans to customers 1, , % NPL ratio 1.02% 0.62% (0.4)% H H Movement % Organic origination % Net interest income % Net fees and other income % Operating income % Administrative expenses (3.8) (3.3) (14)% Impairment losses (1.2) (3.0) 59% Segmental result % Net interest margin (%) 4.5% 4.4% 0.1% Cost of risk (bps) 23bps 72bps 49bps We offer a full range of mortgages from property development through to purchase and refinancing as well as bridging loans. Our SME Commercial Mortgages business focuses on mortgages for shops, warehouses, industrial units and offices as well as professional buy-to-let, where the customer is a corporate entity or may have more specialist lending requirements. In property development, we ve created flexible funding solutions for experienced housebuilders working on residential and mixed-use developments. We work closely with our brokers to ensure we are easy to do business with and responsive, providing direct access to our underwriters in more complex cases. In the first half of 2015, our SME Commercial Mortgage business grew net loans to customers by 13% to 1.1bn (31 December 2014: 1.0bn) as we grew customer numbers by 13% to around 3,600 (31 December 2014: c3,200). Growth was supported by good organic origination, up by 6% to 207m (H1 2014: 195m). We are particularly pleased by the growth in the property development portfolio, with brokers attracted by our high quality service and national coverage, and the increase in direct distribution, due to repeat business driven by our small dedicated direct team, which accounted for c19% of total origination in H1 and grew by 148%. The continued balance sheet momentum is reflected in the increasing net interest income, up by 35% to 24.4m (H1 2014: 18.0m). The gross interest margin remained broadly stable while we reduced the cost of funding and as a result the net interest margin improved by 0.1 percentage points to 4.5% (H1 2014: 4.4%). Administrative expenses were up by 14% to 3.8m (H1 2014: 3.3m) as we invested in front line capabilities particularly to support growth in property development. As at 30 June 2015, the NPL ratio was 1.02% and included one account which was fully recovered in early July and which was therefore not provided for at the balance sheet date. Impairment losses were down by 59% to 1.2m (H1 2014: 3.0m) as a result of lower levels of both specific and collective provisions than the same period in 2014 despite the growth in the portfolio. Specific provisions in H included an additional charge for one account which was then fully recovered in the second half of the year. The H collective charge was impacted by an increase in the assumed forced sale discount percentage on the whole SME Commercial Mortgage portfolio. There have been no changes to methodology or underlying assumptions since the year end As a result, the cost of risk has reduced by 49bps to 23bps (H1 2014: 72bps). The segmental result was excellent, growing by 69% to 20.5m (H1 2014: 12.1m). 17

18 Residential Mortgages 30 June December 2014 Movement % Net loans to customers 2, , % NPL ratio 0.19% 0.23% 0.04% H H Movement % Organic origination % Net interest income % Net fees and other income % Operating income % Administrative expenses (5.4) (4.4) (22)% Impairment losses (1.1) 0.2 (673)% Segmental result % Net interest margin (%) 3.2% 2.9% 0.3% Cost of risk (bps) 8bps (2)bps 10bps Our Residential Mortgages business provides residential buy-to-let and owner-occupied mortgages with around 60% (31 December 2014: 62%) of the portfolio being buy-to-let. In the owner-occupied sector we target underserved prime customers including the self-employed, professionals and first time buyers. As in our other divisions, we aim to be easy to do business with, transparent and quick to respond. We benefit from our modern technology. In Residential Mortgages, our brokers are able to apply via an online portal and obtain a decision in principle within 90 seconds. This portal takes the application and links to external systems, automatically completing basic identity, fraud and credit checks and builds an underwriting file highlighting any specific issues to our underwriters. This technology allows us to use targeted human underwriting in a cost-effective manner to make considered and consistent credit decisions. The Residential Mortgages portfolio delivered another strong performance, growing by 14% to 2.9bn (31 December 2014: 2.6bn) driven by a 12% increase in customers to c21,000 (31 December 2014: c19,000). Organic origination was up by 12% to 536m (H1 2014: 480m) with more than half being generated in the owner occupied segment as we extended our product range and supported the government s Help to Buy schemes. Our recently launched bridging proposition is also making good progress. The continued growth in the portfolio drove a strong increase in net interest income, up by 63% to 44.4m (H1 2014: 27.2m). The gross interest margin remained flat compared with the first half of 2014 with the reduction in the cost of funding leading to a 0.3% expansion in the net interest margin to 3.2% (H1 2014: 2.9%). Administrative expenses increased by 22% to 5.4m (H1 2014: 4.4m) as we continued to invest to ensure that the platform is able to support our growth plans. Impairments of 1.1m (H1 2014: 0.2m release) reflect an increased specific charge, in line with the growth of the portfolio and a collective provision in line with the second half of There was a reduction in the collective provision in H as we reflected our actual experience of loans which were one or two months in arrears becoming three months in arrears, and therefore impaired. Overall, both the NPL ratio at 0.19% (31 December 2014: 0.23%) and the cost of risk at 8 bps (H1 2014: 2 bps release) remain low. The business delivered an excellent bottom line performance with the segmental result increasing by 62% to 39.6m (H1 2014: 24.5m). 18

19 Central Functions H H Movement % Net interest income (4.6) (3.1) 50% Net fees and other income % Operating income (4.2) (2.6) 58% Administrative expenses (excluding IPO costs) (34.0) (26.2) (30)% IPO related costs (4.1) (2.2) (83)% Segmental result (42.2) (31.1) (36)% Central Functions includes the Group s Treasury and Saving functions as well as common costs which are not directly attributable to the operating segments. Common costs include support function costs such as Finance, IT, Legal & Compliance, Risk and Human Resources. Net interest income includes the interest expense relating to the Tier 2 subordinated notes and the net interest income or expense from derivatives held at fair value, neither of which are recharged to the segments. Net fees and other income predominantly includes the net expense or income from derivatives (apart from the interest components of hedging derivatives that are included in net interest income) and other financial instruments at fair value through profit or loss (which represents the market movements) and gains on disposal of available for sale debt securities. Central administrative expenses, excluding IPO costs, increased by 30% to 34.0m (H1 2014: 26.2m) mainly driven by a 27% increase in average head office employees (including contractors) to 279 (H1 2014: 220) as we invested in the central support functions ahead of the IPO and to support the growth of the business. Total IPO costs incurred in 2015 were 6.8m of which 4.1m was charged to the P&L with the remainder deducted from proceeds. The segmental result was a charge of 42.2m (H1 2014: charge of 31.1m) 19

20 Principal risks and uncertainties There has been no significant change to the Group s business model, risk management framework or risk appetite during the six month period ended 30 June The following section summarises the principal risks and uncertainties to which the Group is exposed, along with the Group s approach to mitigating these risks. A more detailed review of these principal risks is set out in Note 41 of the 2014 Annual Report on pages 97 to 119 which can be accessed via the Group s website at (a) Principal risks The principal risks and uncertainties which the Group may face in the remaining six months of the financial year are summarised below: Risk Strategic risk - The risk which can affect the Group s ability to achieve its corporate and strategic objectives. Mitigation of risk The Group seeks to mitigate strategic risk by focusing on a sustainable business model which is aligned to the Group s business strategy. Credit risk - The risk of financial loss arising from a borrower failing to meet their financial obligations to the Group in accordance with agreed terms. The Group seeks to mitigate credit risk by operating in business sectors where it has specific expertise. The Group uses detailed lending policies tailored to each business area combined with performing due diligence on borrowers and pledged security, reviewing credit reference agency reports and reviewing financial information and credit scores to assess credit risk. Capital risk - The risk that the Group has insufficient capital to cover regulatory requirements and growth plans. The Group seeks to mitigate capital risk primarily by regulating the volume of asset origination. The Group also performs stress testing and sensitivity analysis along with monthly capital forecasting over a period of months to provide a current and forward view of the Group s capital. Capital requirements under stressed conditions are considered as part of the Group s Internal Capital Adequacy Assessment Process ( ICAAP ). During the period the Group completed its initial public offering and consequently enhanced its capital position as a result. Liquidity risk - The risk that the Group is not able to meet its financial obligations as they fall due, or can do so only at excessive cost. The Group uses the Individual Liquidity Adequacy Assessment ( ILAA ) process to mitigate liquidity risk. As part of the process, the Group determines the appropriate liquidity buffer and assesses the level of liquidity necessary to prudently cover systemic and idiosyncratic risks. The liquidity buffer is monitored on a daily basis in order to ensure there are sufficient liquid assets at all times to cover cash flow movements and fluctuations in funding. Interest rate risk - The risk of financial loss through un-hedged or mismatched asset and liability positions sensitive to changes in interest rates. Where possible the Group seeks to match the interest rate structure of assets with liabilities or deposits creating a natural hedge. Where this is not possible the Group will enter into swap agreements to convert fixed interest rate liabilities into variable rate liabilities, which are then matched with variable interest rate assets. 20