Aldermore Banking as it should be UK Challenger Bank Day 09 June 2015
Banking as it should be SME focused bank Customer loans 1 22% Asset Finance Track record of accelerating profitability Invoice Finance Deliberately selected large asset-based lending 4.8bn 4% SME Commercial Mortgages markets with good risk adjusted returns 53% 21% Residential Mortgages (including Buy to Let) Target prime underserved segments Customer deposits 1 Expert underwriters supported by modern, legacy-free, scalable systems 23% Retail Increasing proportion of direct distribution 4.5bn SME Dynamic online deposit franchise 77% (1) As at 31 December 2014 1
Record organic origination Leveraging origination (1) capacity to deliver strong, organic growth (1) 1.2 1.7 2.4 2.1 3.4 4.8 1.4 5 2012 2013 2014 1.2 4 1.0 0.8 3 0.6 2 0.4 0.2 1 0.0 H1 H2 H1 H2 H1 H2 0 H1 H2 H1 H2 H1 H2 Annual organic origination (1) ( bn) Period-end net loans (1) ( bn) 98% of origination generated organically (2) (1) Source: IFRS accounts for annual data; UK GAAP management accounts for semi-annual data, except H1 2014 which constitutes an IFRS figure. (2) From 1 January 2012 to 31 December 2014. (3) Compound annual growth rate calculated as year end 2014 vs. year end 2011. 2
Generating strong financial momentum Net loans ( bn) Net Interest Income ( m) 140 4.8 3.4 81 2.1 36 Cost income ratio (1)(2) (%) Return on Equity (2)(3) (%) 0 26 50 32 90% 18.5% 15.1% 66% 60% 57% 11.6% 8.8% H2 14 0.7% 2012 2013 2013 taxed(4) 2014 H2 14 Profit before tax ( m) (1) Cost income ratio = (administration expenses + depreciation) / operating income. (2) 2014 excludes one-off costs related to IPO of c. 6.0m pre-tax. (3) Return on equity = profit after tax / average shareholders equity. (4) Like for like basis if 2013 taxed at 2014 effective rate. 3
Strategic delivery drives growth Business segment Market size (1) and current market share (2) Loan origination ( m) 2014 initiatives Asset Finance 1.0bn 25bn 3.0% 740 610 25% 23% 77% 75% 2013 2014 Customer numbers up by 62% to c.33,000 Direct accounted for 25% of origination Soft assets now form 5% of portfolio Launched stocking finance in Q4 2014 Invoice Finance 0.2bn 19bn 1.0% 68 23% 77% 45 29% 71% Equivalent to c. 1.4bn of annual working capital financing to UK SMEs Market share at 1% Direct accounted for 29% of 2014 origination 2013 2014 1.0% Market share up to 1% SME Commercial Mortgages 1.0bn 44bn (3) 422 292 9% 9% 91% 91% 2013 2014 Customer numbers up by 32% to c.3,000 Direct remains 9% of origination; grew by 37% Broker distribution grew by 45% Residential Mortgages 2.6bn 206bn 0.6% 1,165 12% 740 9% 88% 91% 2013 2014 Market share up to 0.6% Customer numbers up by 47% to c.19,000 Origination exceeded 1bn Direct origination doubled; now 12% of total Net loans ( bn), as at 31 December 2014 Direct / Vendor Intermediated (1) Based on total market origination for 2014, except Invoice Finance which represents a stock figure as at 30 September 2014. Data from: Finance & Leasing Association (Asset Finance); Asset Based Finance Association (Invoice Finance) and CML (Residential Mortgages). (2) Market share based on 2014 origination for Asset Finance, SME Commercial Mortgages and Residential Mortgages. Market share for Invoice Finance based on September 2014 period-end balance. (3) Market size for SME Commercial Mortgages based on H1 2014 DMU study. H1 2014 market origination annualised to give market size. 4
Expert underwriting supported by modern systems Rapid rulesbased decision in principle Automatically converts DIP to full application Intermediary / customer Online portal System builds virtual underwriting file Target prime credit quality customers in underserved market segments Rules-based filters provide rapid online decision in principle Systems link to external sources to complete identity and fraud checks and build virtual underwriting file Accept Decline Refer Targeted review by sector expert underwriters facilitated by modern IT Systems highlight key areas for targeted review Directed to sector expert underwriter Approach allows improved pricing and cost-effective scalability Affordability tested at origination Accept Decline Refer to more senior u/w or credit committee Portfolio regraded monthly and regularly stress-tested 5
Strong credit KPIs Granular Portfolio Seasoning (1) Highly secured (2) Improved cost of risk Asset Finance 12 months 86% 89% 88% 41 bps 47 bps 30 bps c. 32k Invoice Finance c. 130k n/a 72% 73% 69% 290 bps 153 bps 174 bps Group cost of risk 34 bps 42 bps 33bps 23 bps SME Commercial Mortgages 23 months 62% 63% 64% 25 bps 30 bps 25 bps c. 320k Residential Mortgages 21 months 68% 69% 72% c. 137k 9 bps 10 bps 6 bps (1) Weighted average seasoning. (2) % of loan book at origination constituted by secured loans for Asset Finance; prepayment percentage for Invoice Finance, average loan-to-value ratio for SME Commercial Mortgages and Residential Mortgages. Average loan balance (as at 31 December 2014) Underlying cost of risk excluding 3.8m of large recoveries. 6
Funding diversification drives improved NIM Increasingly diversified funding base (1) Deposit-led funding strategy 95% 97% 108% 4.5bn of customer deposits up 29% 2.3 2.1 0.1 0.1 3.9 0.4 0.5 2.9 5.1 0.6 Retail deposits ( bn) SME deposits ( bn) Wholesale funding ( bn) Declining funding costs (3) 3.9% LDR (2) (%) 2.8% 1.0 3.4 2.1% Improving net interest margin (4) Cost of funding (%) 97% increase in SME deposits during 2014 Loans to deposit ratio (2) of 108% Wholesale funding Currently c.12% of total funding Successful inaugural RMBS provides foundation for future issuance Will continue to capitalise on cheap funding opportunity presented by FLS extension Continued diversification of funding mix 2.2% 3.0% 3.4% Loans to deposits ratio could range from 110 115% Lower cost SME deposits grew to 20% of funding in 2014 Net interest margin (%) Entered corporate deposit market in December 2014 (1) Numbers may not exactly sum / reconcile due to rounding. (2) Loans to deposits ratio = net customer loans / customer deposits. (3) Cost of funding = interest expense / average net loans. (4) Net interest margin = net interest income / average net loans. 7
Leveraging scalable and efficient operating model 90% 2,057 66% 4,801 Loan book CAGR (3) : 53% 3,374 60% (2) 99 (2) Increasing operating leverage Modern systems Industry-standard IT infrastructure with bespoke configuration Scalable systems, no volume constraints 52 71 Loan Balances ( m) Cost Base ( m) Cost income ratio (1) Cost base CAGR (3) : 38% 11.5 Legacy-free Able to innovate Shortens time to market Moderate ongoing investment 9.1 9.2 519 4.5 5.5 3.4 0.3 1.2 268 163 0.4 6.7 4.7 3.3 High degree of operating leverage Cost to income ratio reduced to 60% (2) in 2014 despite continued investment Opex ( m) Capitalised - Hardware ( m) (4) Capitalised - Intangibles ( m) IT costs / customer account ( ) (1) Cost income ratio = (Administrative expenses + depreciation) / operating income. (2) Excludes one-off IPO costs of c. 6.0m pre-tax (c. 4.6m post-tax). (3) Compounded annual growth rate between 31 December 2012 and 31 December 2014. (4) Customer accounts comprises: Asset Finance accounts, Invoice Finance accounts, SME Commercial Mortgage accounts, Residential Mortgage accounts and SME savings accounts (i.e. excludes retail savings accounts). IT costs exclude 1.6m in relation to write-off of intangible assets. 8
Strengthened capital position Total capital ratio (1)(2) (%) 14.2% 14.8% 2.1% 4.4% 12.1% 10.4% 16.4% 4.1% 12.3% CRR compliant capital structure Majority of capital held is CET 1 supported by Additional Tier 1 and a small amount of Tier 2 capital 75m of AT1 capital issued in December 2014 11.875% coupon payable annually in April Accounted for as equity First call date 30 April 2020 2013 2014 Q1 2015 CET1 capital AT1 and Tier 2 capital Leverage ratio (1)(3) versus regulatory requirement (%) 75m gross primary equity raised via IPO in March 2015 Aldermore is not currently subject to counter-cyclical and systemic SIFI buffers under CRD IV 5.3% 6.3% 7.4% Standardised RWA model used Leverage ratio comfortably exceeds industry minimum requirements indicated by the PRA 2013 2014 Q1 2015 Source: Company information. (1) All Q1 2015 capital ratios include Q1 2015 profits. (2) Total capital ratio Total capital / risk weighted assets. (3) Leverage ratio Tier 1 capital / total exposures. 9
Accelerating momentum in H2 2014 Cost of funding (%) Net interest margin (%) 3.9% 3.0% 3.4% 3.6% 2.8% 2.1% 2.0% 2.2% H2 14 H2 14 Profit before tax (1) ( m) RWA growth and capital growth (%) 50 62% 26 19 32 40% 15% 36% 37% 24% 20% 30% 25% H1 14 H2 14 H1 14 H2 14 RWA growth Organic CET1 capital growth (1) As reported. 10
Confidence reflected in targets Metric Guidance / target 2014 Performance Net loan growth guidance Nominal growth in net loans in line with current run rate 1.4bn Cost income ratio target Cost income ratio (1) targeted to be less than 40% by the end of 2017 60% for FY 14 57% for H2 14 Return on equity target Targeting a return on equity of close to 20% by the end of 2016 15% (1) for FY 14 19% (1) for H2 14 Capital ratio targets CRD IV fully loaded CET1 ratio of around 11% CRD IV leverage ratio of >5% 10.4% 6.3% Dividend policy The Company will consider paying an initial dividend from 2017, taking into account the growth opportunities available to the Company at the time N/A (1) Excludes one-off 2014 IPO costs of c. 6.0m pre-tax (c. 4.6m post-tax). 11
Key strengths 1 UK SME bank with proven track record of accelerating profitability 2 Modern digital platform supports superior customer service and innovation 3 Significant and sustainable organic growth opportunity 4 Attractive margins underpinned by consistent, robust credit risk management 5 Strong and diversified online deposit franchise 6 Leveraging scalable, efficient and legacy-free operating model Delivering strong earnings growth and H2 2014 RoE approaching 20% 12
Appendices 13
Asset Finance: 22% of portfolio Focused industry expertise (%) Asset split (%) Product description 7% 5% 7% 2% 12% 19% 14% 2% 8% 5% 7% 11% 37% Hire purchase and Leasing Typical term of 36 to 48 months Average loan size of c. 32k 13% 11% Logistics 9% Construction Wholesale and retail trade Agriculture Utilities Manufacturing Plant hire Financial intermediation Community activities Other 30% Plant & machinery Receivables Cars - new Other Commercial vehicles Cars - used IT equipment Strategic initiatives Growing portfolio Revenue growth ( m) Increase repeat business from existing brokers 10.2 20.2 32.6 1,044 720 739 610 350 378 3.8% 4.2% 4.2% 60 39 2 22 57 1 37 21 3 Product innovation e.g. soft assets, stocking finance Further develop vendor proposition Annual organic origination ( m) Net loans ( m) Gross interest income ( m) Non-interest income ( m) Clients # s ( 000s) Net interest margin (%) 14
Invoice Finance: 4% of portfolio Product split (%) Industry focus (%) Key working capital tool 12% 4% c. 1.4bn in annual financing given 60 day rollover 51% 49% 14% 37% Product description Simple and clearly priced products Factoring Discounting 16% 17% Manufacturing Wholesale Recruitment Logistics Other Business Activities Other Factoring able to run the customer s debtor ledger Discounting clients with turnover > 500k Portfolio 1.2 1.3 1.2 212 179 181 82 68 45 Stable revenues ( m) 13.2% 11.7% 12.0% 27 27 27 18 18 18 8 9 9 Strategic initiatives Leverage strategic partnerships with national brokers Develop distribution via accounting practices Product innovation: construction, import / export finance launched Annual organic origination ( m) Net loans ( m) Gross interest income ( m) Non-interest income ( m) Clients # s ( 000s) Net revenue margin (%) 15
Residential Mortgages: 53% of portfolio Product split (%) Customer split (%) Product description 38% 9% 4% 5% 44% Buy to Let Landlords with < 5 properties Underserved prime owner occupied segments (1) 62% 38% Full product range including fixed and variable rates Buy to let Owner occupied Employed Director / Partner Other Self-employed Retired Maximum loan size of 1m; average loan size of c. 137k Growing portfolio Revenue growth ( m) Strategic initiatives 7.3 12.8 18.8 2,565 1,680 954 1,165 537 740 Annual organic origination ( m) Net loans ( m) 1.5% 2.4% 3.0% 111 4 70 3 38 107 1 67 36 Gross interest income ( m) Non-interest income ( m) Continued strong demand in residential mortgages and private rental sector Ongoing product development e.g. bridging finance Further develop direct distribution Proactive retention strategy Clients # s ( 000s) Net interest margin (%) (1) Self employed, first time buyers, professionals who may fall outside large clearers automated criteria. 16
SME Commercial Mortgages: 21% of portfolio Customers (%) Property type (%) Product description 7% 43% 3% 7% 11% 7% 2% 52% Full lifecycle from development through property purchase and refinancing Maximum loan size 2m on single property, 5m over multiple securities 50% SME commercial mortgages Professional buy to let Property development 18% Residential Office Industrial Unit Other Shop Warehouse Property development 75% maximum LTV; 64% average LTV Growing portfolio 1.7 2.4 3.2 1,011 762 546 422 232 292 Revenue growth ( m) 2.8% 3.9% 4.7% 58 40 2 26 <1 56 <1 40 26 Strategic initiatives House builders responding to demand for new housing Invest in sales and distribution capacity Expand broker panel and leverage existing relationships Further develop direct proposition Annual organic origination ( m) Net loans ( m) Gross interest income ( m) Non-interest income ( m) Clients # s ( 000s) Net interest margin (%) 17
Mortgage portfolios Residential Mortgages (1) SME Commercial Indexed LTV 13% Help to Buy and Family Guarantee 5% 9% 14% 30% 17% 12% 0% 3% 7% 20% 25% 45% 85%+ 80-85% 75-80% 70-75% 60-70% 50-60% 0-50% 80%+ 75-80% 70-75% 60-70% 50-60% 0-50% 5% 8% 25% Greater London South East 14% 20% Greater London South East Geographic split 6% 6% 9% 10% 10% 21% East Anglia North West South West West Midlands Yorkshire East Midlands 6% 7% 7% 7% 10% 14% 16% North West South West West Midlands East Anglia Yorkshire and Humberside Scotland Other Other (1) Maximum LTV in Residential Mortgages is 85% except for Help to Buy mortgage guarantee and Family Guarantee products which are 95% and 100% respectively. 18
Deposits Business overview Retail SME 2.9 3.4 1.0 2.1 0.5 Balance 0.1 Retail deposits ( bn) SME deposits ( bn) Product suite 1% 9% 17% 13% 10% 3.4bn (2) 12% 23% 15% Notice (incl. ISA Notice) <1 year ISA 1 year 2 year 3 year 4 year 5 year 2% 45% Notice <1 year 1.0bn (2) 1 year 53% 1% Distribution and operations 5% 19% Online Phone (3) (3) Online Phone Post (3) 76% 99% (1) Source: Company data and RFI research as of December 2013. (2) Retail deposit balances breakdown by initial contract term as at 31 December 2013. (3) Based on accounts opened from 1 January 2014 to 31 December 2014. Retail deposits 19
Clean balance sheet untainted by legacy issues CAGR (6) 31 December ( m) 12 '14 Key balance sheet items Net loans 1 2,057 3,374 4,801 53% Cash and cash equivalents 107 430 197 36% Investments 342 356 510 22% Intangible assets 22 23 23 Fixed and other assets (7) 16 20 35 48% Total assets 2,544 4,203 5,565 48% Deposits 2,162 3,464 4,459 44% FLS 2 115 383 304 63% RMBS 279 NA Tier II capital 35 36 37 3% Other Wholesale funding 1 3 2 95% Other Liabilities 53 52 105 38% Total liabilities 2,365 3,938 5,186 48% Share capital and share premium 198 261 24 (65%) 3 Retained earnings (24) 2 278 NA AT1 Capital 4 74 NA Other 5 3 4 (18%) Total equity 179 265 379 46% Key ratios Liquid assets / deposits (3) 21% 23% 16% Loans to deposits ratio 5 95% 97% 108% Net loan growth ( bn) 0.9 1.3 1.4 CRD IV fully loaded RWAs (4) N/A 1,993 2,702 RWAs / total assets N/A 47% 49% CRD IV fully loaded CET1 capital (5) N/A 242 281 CRD IV fully loaded CET1 ratio (5) N/A 12.1% 10.4% Leverage ratio N/A 5.3 6.3 Commentary 1. 1 53% CAGR in lending assets since 2012 2. 2 Funding remains deposit-led FLS extended will continue to flex usage to benefit from cheap funding RMBS issued in Q2 2014 supports ongoing funding diversification 3. 3 Share premium transferred to retained earnings prior to corporate restructuring in September 2014 4. 4 75m nominal AT1 issued in December 2014; supports medium term growth and strengthens total capital position 5. 5 Loans to deposits ratio to range from 110%-115% reflecting funding mix Note: Numbers may not exactly sum / reconcile due to rounding. (4) RWA = Risk weighted assets. (1) Includes bank deposits. (5) CET1 = Common equity tier 1 capital. (2) Shown as the carrying value of repurchase transactions. Gross drawings under FLS as at 31 December 2014 of 485m (2013: 485m). (6) (7) Compounded annual growth rate between 31 December 2012 and 31 December 2014. Includes derivatives held for risk management, fair value adjustments for portfolio hedged (3) Liquid assets = cash and cash equivalents + investments. risk, other assets, prepayments and accrued income, deferred tax and property, plant and equipment. 20
Underlying (1) PBT more than doubled to 56m CAGR Year ended 31 December ( m) 12 '14 Key P&L items Interest income 99 156 228 51% Funding costs (63) (76) (88) 18% Net interest income 1 36 81 140 97% Net fees 14 16 19 15% Other operating income 10 8 10 2% Derivative income (2) 2 3 (4) 45% Operating income 58 108 166 69% 3 Operating expenses (ex. IPO costs) (52) (71) (99) 38% IPO related costs 0 0 (6) NA Pre-provision profit 6 37 60 224% Loan loss provisions (5) (11) (10) 33% Profit before tax 4 0 26 50 1257% Tax 1 0 (12) NA Profit after tax 1 26 38 463% Key ratios (1) Net interest margin 2.2% 3.0% 3.4% Cost income (1) ratio 3 90% 66% 60% Cost of risk 5 34 bps 42 bps 23 bps Return on assets (post-tax) 0.1% 0.8% 0.9% Return on equity (1) (post-tax) 6 0.7% 11.6% 15.1% Commentary 1. 1 97% CAGR in net interest income Growth in lending drives 51% CAGR in interest income Funding costs benefit from ongoing diversification 2. 2 Financial markets volatility in Q4 drives derivatives cost 3 Revenues outpace operating expense growth Cost income ratio (1) declines to 60% and 57% for H2 2014 4 Underlying PBT of 56m more than double 2013 2. 5 Improved cost of risk at 23bps 3. 6 RoE (1) on track at 15.1% and approaching 20% in H2 2014 (1) Excludes one-off IPO costs incurred during 2014 of c. 6.0m pre-tax (c. 4.6m post-tax). 21
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