Adoption of new and amended International Financial Reporting Standards

During the period to 31 August 2014, the Group has adopted the following new accounting standards and amendments to standards which became effective with relevant EU endorsement for annual periods beginning on or after 1 January 2014:

 

·       IFRS 10, 'Consolidated financial statements'

IFRS 10 redefines the concept of control in relation to the requirement to prepare consolidated financial statements. The adoption of this new standard has not had any impact on the identified subsidiaries or related accounting of the Group.

 

·       IFRS 11, 'Joint arrangements'

IFRS 11 redefines the term 'joint arrangement' and limits the type of joint arrangement to joint operations and joint ventures. The adoption of this new standard has resulted in the reclassification of the Group's investment in Tesco Underwriting Limited as a joint venture. This investment was previously classified as an associate. This change in classification has not resulted in any change to the accounting or disclosures for this investment.

 

 

 

13

 

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

1  Basis of preparation (continued)

 

IFRS 11 has been applied retrospectively.

 

·       IFRS 12, 'Disclosures of interests in other entities'

IFRS 12 contains amended disclosure requirements for all forms of interest in other entities. These amended disclosures will be made in the Group's financial statements for the year ended 28 February 2015.

 

·       IAS 27 (revised 2011), 'Separate financial statements'

The revised IAS 27 contains guidance on the preparation of separate financial statements after the control and consolidation provisions in the previous IAS 27 have been replaced with IFRS 10. There has been no impact on the Group of the adoption of this new standard.

 

·       IAS 28 (revised 2011), 'Associates and joint ventures'

The revised IAS 28 contains the requirements for joint ventures to be equity accounted following the issue of IFRS 11. The adoption of this new standard has not had any impact on the accounting for the Group's joint venture.

 

·       Amendments to IFRS 10, 11 and 12 on transition guidance

This amendment clarifies the transition guidance contained in IFRS 10, IFRS 11 and IFRS 12 and provides additional transition relief. The only impact of the adoption of this amendment is on the disclosure requirements under IFRS 12. These amended disclosures will be made in the Group's financial statements for the year ended 28 February 2015.

 

·       Amendment to IAS 32, 'Financial instruments: Presentation on offsetting financial assets and financial liabilities'

This amendment clarifies some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. There has been no impact on the Group of the adoption of this amendment.

 

·       Amendment to IAS 36, 'Impairment of assets: Recoverable amount disclosures for non-financial assets'

This amendment clarifies the disclosure requirements in respect of the recoverable amount of impaired assets if that amount is based on fair value less costs to sell. There has been no impact on the Group of the adoption of this amendment.

 

·       Amendment to IAS 39 'Financial instruments: Novation of derivatives and continuation of hedge accounting'

This amendment provides an exception to the requirement to discontinue hedge accounting in situations where over the counter derivatives designated in hedging relationships are directly or indirectly novated to a central counterparty as a consequence of laws or regulations. There has been no impact on the Group of the adoption of this amendment.

 

·       IFRIC 21 'Levies'

This IFRIC clarifies the timing of recognition of a liability to pay a levy recognised in accordance with IAS 37 'Provisions, Contingent Liabilities and Contingent Assets'. The adoption of this interpretation will affect the timing of the Group's recognition of the Financial Services Compensation Scheme (FSCS) Levy in the second half of the current financial year as a result of a change in the date at which the liability is measured, but the impact will not be significant to the financial statements of the Group.

 

 

 

 

14

 

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

2  Segmental reporting

 

Following the management approach of IFRS 8, operating segments are reported in accordance with the internal reporting provided to the Chief Executive and the Board of Directors, who are responsible for allocating resources to the reporting segments and assessing their performance. All operating segments used by the Group meet the definition of a reportable segment under IFRS 8.            

 

The Group has two main operating segments:     

 

· Banking - incorporating credit cards, loans, mortgages, savings, personal current accounts, ATMs and money services; and

· Insurance - incorporating motor, home, pet, travel and other insurance products.

 

There were no changes in the reported operating segments during the period.

 

There are no transactions between the operating segments.         

                       

Segment assets and liabilities comprise operating assets and liabilities, being the majority of the statement of financial position, but exclude unallocated reconciling items such as taxation. Tax balances are reflected in the adjustments column in part b) of this note.

 

There are no significant seasonal fluctuations that affect the Group's results.

 

a) Segment results of operations

	Banking*		Insurance		Central costs		Total
	£m		£m		£m		£m
Six months ended 31 August 2014
Total income	269.8		86.9		-		356.7
Profit/(loss) before tax **	147.7		52.0		(119.7)		80.0
Total assets (excluding taxation) ***	9,751.2		313.1		-		10,064.3
Total liabilities (excluding taxation)	8,545.1		33.7		-		8,578.8
Six months ended 31 August 2013
Total income	275.8		85.6		-		361.4
Profit/(loss) before tax *	163.3		49.3		(107.9)		104.7
Total assets (excluding taxation) **	8,348.8		346.3		-		8,695.1
Total liabilities (excluding taxation)	7,189.9		31.6		-		7,221.5

^{* The Banking segment includes an additional PPI provision of £27.0m (August 2013: £nil) and losses on financial instruments, movements on derivatives and hedge accounting of £10.0m (August 2013: Gain of £5.9m).}   

^{** 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.}

^{*** The investment of £82.4m (August 2013: £92.6m) in Tesco Underwriting Limited, a joint venture company accounted for using the equity method, is shown within the total assets of the insurance segment.}

 

15

 

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

2  Segmental reporting (continued)

 

b) Reconciliation of segment results of operations to results of operations

 

	Total management reporting		Unallocated reconciling items			Total
	£m		£m			£m
Six months ended 31 August 2014
Total income	356.7		-			356.7
Profit before tax	80.0		-			80.0
Total assets	10,064.3		-			10,064.3
Total liabilities	8,578.8		35.2			8,614.0

 

Six months ended 31 August 2013
Total income	361.4		-			361.4
Profit before tax	104.7		-			104.7
Total assets	8,695.1		6.8			8,701.9
Total liabilities	7,221.5		37.3			7,258.8

3  Net interest income

 

	6 months ended 31 August 2014				6 months ended 31 August 2013
	£m				£m
Interest and similar income
Loans and advances to customers	257.2				238.0
Loans and advances to banks	1.6				2.0
Interest on investment securities	9.2				7.2
	268.0				247.2
Interest expense and similar charges
Deposits from customers	(50.6)			(60.5)
Deposits from banks	(13.1)			(10.1)
Interest rate swap expenses	(10.1)			(10.6)
Subordinated liabilities	(1.7)			(3.0)
	(75.5)			(84.2)

 

Interest income recognised due to the unwinding of the discount on impairment provisions relating to impaired financial assets amounted to £1.3m (August 2013: £2.2m).

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

4  Net fees and commissions income

 

	6 months ended 31 August 2014		6 months ended 31 August 2013
	£m		£m
Fees and commissions income
Banking income	140.5		133.0
Insurance income	69.2		66.9
Other income	6.5		6.4
	216.2		206.3
Fees and commissions expense
Banking expenses	(15.1)		(14.9)

 

 

5  Impairment

 

	6 months ended 31 August 2014		6 months ended 31 August 2013
	£m		£m
Loans and advances to customers
Increase in impairment allowance, net of recoveries (refer note 9)	32.0		24.8
Amounts written off during the year as uncollectible	2.2		3.2
	34.2		28.0

 

 

6  Income tax expense

 

The tax charge in the Consolidated Income Statement is based on management's best estimate of the full year effective tax rate based on expected full year profits to 28 February 2015.

 

 

7  Distributions to equity holders

 

	6 months ended 31 August 2014		6 months ended 31 August 2013
	£m		£m
Interest payable on subordinated notes included within equity	0.6		0.6

There were no dividends paid in the period to 31 August 2014 (August 2013: £nil).

 

Interest payable on the subordinated notes included within equity is based on three month LIBOR plus a spread ranging from 120 to 220 basis points (August 2013: 120 - 220 basis points).

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

8  Capital expenditure and commitments

 

In the 6 months ended 31 August 2014 there were additions to property, plant and equipment and intangible assets of £29.9m (August 2013: £46.5m).  Commitments for capital expenditure contracted for but not provided at 31 August 2014 were £0.2m (February 2014: £0.1m) on property, plant and equipment and £0.4m (February 2014: £1.3m) on intangible assets.

 

At 31 August 2014, the Group had undrawn personal current account overdraft commitments of £0.6m (February 2014: £nil), credit card commitments totalling £10,497.9m (February 2014: £9,620.3m), mortgage commitments of £105.8m (February 2014: £91.0m) and other commitments of £5.6m (February 2014: £5.8m).  

 

 

9  Loans and advances to customers

 

	31 August 2014		28 February 2014		31 August 2013
	£m		£m		£m
Secured mortgage lending	1,027.1		696.5		456.8
Unsecured lending	6,657.5		6,378.2		6,128.5
Fair value hedge adjustment	3.8		4.2		7.4
Gross loans and advances to customers	7,688.4		7,078.9		6,592.7
Less: allowance for impairment	(160.2)		(156.9)		(156.2)
Net loans and advances to customers	7,528.2		6,922.0		6,436.5
Current	3,847.8		3,708.8		3,547.3
Non-current	3,680.4		3,213.2		2,889.2

 

The Group has prepositioned a portion of its unsecured lending balances with the Bank of England for the purposes of accessing contingent liquidity via the discount window facility, and to facilitate the Group's participation in the FLS. 

 

As at the period end, £2,975.1m (February 2014: £2,343.9m) of the credit card portfolio had its beneficial interest assigned to a special purpose entity, Delamare Cards Receivables Trustee Limited, for use as collateral in securitisation transactions.   On 26 April 2013 the Group purchased £1,750.0m of credit card backed bonds issued by Delamare Cards MTN Issuer plc.  Of this, £1,285.0m (February 2014: £1,600.0m) has been pledged with the Bank of England collateralising £789.0m (February 2014: £1,096.0m) of FLS drawings.

 

There were no unsecured personal loans pledged or used as collateral for FLS drawings at the period end.  At February 2014, an amount of £557.0m of unsecured personal loans had been pledged to the Bank of England and  £236.0m had been used to collateralise £118.0m of FLS drawings.

 

Fair value hedge adjustments amounting to £3.8m (February 2014: £4.2m) 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.

 

 

 

 

18

 

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

9  Loans and advances to customers (continued)

 

The following table shows impairment provisions for loans and advances:

 

	6 months to 31 August 2014		6 months to 28 February 2014		6 months to 31 August 2013
	£m		£m		£m
At beginning of period	156.9		156.2		172.2
Amounts written off	(27.3)		(27.6)		(38.6)
Increase in allowance, net of recoveries, charged to the income statement	32.0		30.2		24.8
Foreign currency translation	(0.1)		(0.2)		-
Unwind of discount	(1.3)		(1.7)		(2.2)
At end of period	160.2		156.9		156.2

 

10  Debt securities in issue

 

On 6 June 2014, the Group issued the following bonds on the Irish Stock Exchange: 

	Interest rate	Par value		Term	Maturity date
Floating rate AAA bond (A1)*	1m GBP LIBOR + 0.45%	£150.0m		5 years	2019
Floating rate AAA bond (A2)**	1m GBP LIBOR + 0.65%	£350.0m		7 years	2021

There were no issuances or repayments of debt securities during the prior year.

 

^{*  The scheduled redemption date of this Bond is 2017}   

^{** The scheduled redemption date of this Bond is 2019}

 

11  Provisions for liabilities and charges

 

		Customer Redress Provision			Other Provisions		Total
		£m			£m		£m
6 months to 31 August 2014
At beginning of period		100.3			5.2		105.5
Charged to the income statement		27.0			0.8		27.8
Utilised during the period		(20.0)			-		(20.0)
At end of period		107.3			6.0		113.3

 

 

6 months to 28 February 2014
At beginning of period		59.4						4.2						63.6
Charged to the income statement		63.0						1.2						64.2
Utilised during the period		(22.1)						(0.2)						(22.3)
At end of period		100.3						5.2						105.5

 

 

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NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

11  Provisions for liabilities and charges (continued)

 

		Customer Redress Provision			Other         Provisions			Total
		£m			£m			£m
6 months to 31 August 2013
At beginning of period		97.7		4.3			102.0
Charged to the income statement		-		-			-
Utilised during the period		(38.3)		(0.1)			(38.4)
At end of period		59.4		4.2			63.6

 

Customer redress provision - Payment Protection Insurance

 

Of the total provision balance at 31 August 2014, £46.5m (February 2014: £32.9m) relates to a provision for customer redress in respect of potential customer complaints arising from historic sales of Payment Protection Insurance (PPI). The balance is classified as current at period end.

 

The Group handles claims and customer redress in accordance with provisions of the regulatory policy statement PS 10/12. The estimated liability for redress is calculated based on the total premiums paid by the customer plus interest inherent in the product and an additional interest of 8.0% per annum.

 

During the period, the Group completed the programme of proactive customer contact to those customers sold PPI during a specific time period where there were concerns about the way in which the product was sold. As a result an overall population of approximately 41,000 personal loan and 42,700 credit card customers have been mailed. At the reporting date customer responses totalled 24,700 for personal loans and 22,400 for credit cards. Of the responding customers the vast majority have now received a complaint decision and redress where applicable. In the case of responding credit card customers 350 were in receipt of redress offers that were pending acceptance as at 31 August 2014.

 

A significant degree of uncertainty remains with regard to the ultimate cost of settling PPI complaints, in particular the volume of complaints arising from customers not subject to proactive contact.  A detailed review of new complaints has resulted in a revised view of future expected complaint volumes. The duration over which claims are expected to emerge has been increased and a revised estimate of future compensation has been prepared. This revised assessment increased the total estimated cost of redress by a further £27.0m during the period.  This provides redress capacity at current run rates (average of last 3 months) for a total of 28 months.

 

   

 

20

 

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

11  Provisions for liabilities and charges (continued)

 

The table below details, for each key assumption, actual data to 31 August 2014, forecast assumptions used in assessing the PPI provision adequacy and a sensitivity assessment demonstrating the impact on the provision of a variation in the future experience.

 

			Sensitivity
Assumption	Cumulative actual	Future expected	Change in assumption	Consequential change in provision £m
Customer initiated complaints settled	50,900	18,600	+/- 1,000   complaints	+/- 1.8
Average redress per valid claim	£1,880	£1,800	+/- £100	+/- 1.9

 

Customer redress provision - Credit Card Protection

 

The Group holds a further provision of £18.2m (February 2014: £24.4m) in respect of customer redress relating to the historic sale of certain cardholder protection products to credit card customers. The balance is classified as current at period end.

 

As at 31 August 2014 an amount of £6.2m (February 2014: £0.6m) had been paid in respect of these historic sales.

 

An industry-wide Scheme of Arrangement dealing with customers who purchased products underwritten by CPP plc ("CPP") has operated during the period.  At the reporting date customer responses totalled approximately 38,500 (equivalent to 32.5% of the customer population). The Scheme features a court and regulatory approved closure date for new complaints (subject to certain exceptions) of 31 August 2014.

 

The Group is currently working to undertake a redress programme which will compensate those customers who were sold a similar product in earlier years.  The specific structure of any such programme remains under discussion with the regulator and product provider.  The level of provision held is based on assumptions relating to the number and value of cases for which compensation may be paid. In arriving at these assumptions management have exercised their judgement based on earlier redress programmes (including the CPP Scheme of Arrangement) and historic customer payment information. The level of the provision allows for the repayment of charges paid by the customer together with simple interest of 8.0%.

 

The table below details for each key assumption; actual data to 31 August 2014; forecast assumptions used in assessing the Scheme of Arrangement provision adequacy; and a sensitivity assessment demonstrating the impact on the provision of a variation in the future experience.

 

			Sensitivity
Assumption	Cumulative actual	Future expected	Change in assumption	Consequential change in provision £m
Future customer responses	0	46,700	+/- 1,000    complaints	+/- 0.3
Average redress per valid claim	-	£325	+/- £10	+/- 0.5

 

 

21

 

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

11  Provisions for liabilities and charges (continued)

 

Customer redress provision - Consumer Credit Act

 

The Group holds a provision of £42.6m (February 2014: £43.0m) in respect of customer redress relating to instances where certain of the requirements of the Consumer Credit Act (CCA) for post contract documentation have not been fully complied with.

 

As at 31 August 2014 an amount of £0.4m (February 2014: £nil) had been incurred in respect of costs of delivering the redress programme.

 

During the course of the prior financial year the Group instigated a review of certain historic operational issues that had resulted in instances where certain of the requirements of the Consumer Credit Act (CCA) for post contract documentation had not been fully complied with. In November 2013 the Office of Fair Trading (OFT) wrote to lenders in the industry seeking confirmation of their compliance with the requirements of the CCA. The Group extended its earlier investigation to undertake further assurance work relating to compliance with the CCA. As a result, the Group has determined that it is appropriate to redress certain customers affected by these breaches.

 

Extensive analysis has been undertaken of the relevant issues to identify where customers have been affected and to determine if the Group should take further action.  The requirements of the CCA in respect to these issues are not straightforward and have not been subject to significant judicial consideration to date.  In arriving at the provision required, the Group considered the legal and regulatory position with respect to these matters and has sought external legal advice which it took into account when it made its judgement.  The provision represents management's best estimate at the reporting date of the cost of providing redress to those loan and credit card customers. The balance is classified as current at the reporting date and, in making the estimate, management have exercised judgement as to both the timescale for implementing the redress campaign and the final scope of any amounts payable

 

The OFT and FCA have been advised of the Group's approach to determining the proposed customer redress.  Oversight of CCA-related matters passed from the OFT to the FCA on 1 April 2014.

 

It is not clear what regulatory position, if any, the FCA will take and as highlighted above, there is no judicial certainty in the legal position. The actual cost of customer redress could therefore differ materially from this estimate.

 

Management expect that customer redress payments will commence during the second half of the financial year and will continue into the first half of the next financial year.

  

 

 

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NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

11  Provisions for liabilities and charges (continued)

 

Other provisions

 

Other provisions comprise amounts in respect of insurance policy cancellation and warranty costs following the sale of non-performing debt.

 

The insurance provision relates to insurance policy cancellation by customers.  This balance is classified as current at the period end as all insurance policies expire in a maximum of one year.

 

The warranty provision relates to warranty costs provided for following the sale of non-performing debt which took place during the year to 28 February 2014.  This balance is classified as current at period end as the warranty period of 12 months expired in September 2014.

 

12  Share capital and share premium account

 

The Company did not issue any shares during the period to 31 August 2014.

 

During the period ended 31 August 2013, the Company issued 140,000,000 £0.10 ordinary shares to the parent company, Tesco Personal Finance Group Limited, in a conversion from £140.0m of dated subordinated debt.

 

31 August 2014

31 August 2014

28 February 2014

28 February 2014

31 August 2013

31 August 2013

Number

£m

Number

£m

Number

£m

Authorised

Ordinary shares of 10p each

Unlimited

Unlimited

Unlimited

Allotted, called up and fully paid

Ordinary shares of 10p each

1,219,900,000

122.0

1,219,900,000

122.0

1,219,900,000

122.0

The following table shows the aggregate movement in share capital and share premium in the period:

 

	Share capital 31 August 2014		Share capital 28 February 2014		Share capital 31 August 2013		Share premium account 31 August 2014		Share premium account 28 February 2014		Share premium account 31 August 2013
	£m		£m		£m		£m		£m		£m
At beginning of period	122.0		122.0		108.0		1,097.9		1,097.9		971.9
Shares issued in the period	-		-		14.0		-		-		126.0
At end of period	122.0		122.0		122.0		1,097.9		1,097.9		1,097.9

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

13  Fair values

 

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.

 

	31 August 2014				28 February 2014
	Carrying value		Fair value		Carrying value		Fair value
	£m		£m		£m		£m
Financial assets:
Loans and advances to customers	7,528.2		7,513.6		6,922.0		6,852.3
Investment securities - loans and receivables	34.1		35.3		34.1		36.1
	7,562.3		7,548.9		6,956.1		6,888.4
Financial liabilities:
Deposits from customers	6,631.7		6,592.7		6,082.4		6,048.3
Debt securities in issue	894.4		906.7		394.8		405.1
Subordinated liabilities	190.0		200.8		190.0		211.8
	7,716.1		7,700.2		6,667.2		6,665.2

 

The only financial assets and liabilities which are carried at fair value on the Statement of Financial Position are available for sale investment securities and derivative financial assets and liabilities.  The valuation techniques and inputs used to derive fair values at 31 August 2014 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 based on LIBOR rather than Overnight Index Swaps (OIS) as using OIS would have no significant impact.  This is kept under review.

  

 

24

 

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

13  Fair values (continued)

 

The table below classifies all financial instruments held or disclosed at fair value according to the method used to establish the fair value.

 

	Level 1	Level 2	Level 3	Total
As at 31 August 2014	£m	£m	£m	£m
Financial assets classified as available for sale	952.5	10.0	-	962.5
Derivative financial instruments:
Interest rate swaps	-	15.6	-	15.6
Forward foreign currency contracts	-	0.2	-	0.2
Cross currency swaps	-	10.7	-	10.7
Index linked swaps	-	5.4	-	5.4
Loans and advances to customers	-	7,513.6	-	7,513.6
Investment securities - loans and receivables	-	35.3	-	35.3
	952.5	7,590.8	-	8,543.3
Derivative financial instruments:
Interest rate swaps	-	57.3	-	57.3
Forward foreign currency swaps	-	0.1	-	0.1
Deposits from customers	-	6,592.7	-	6,592.7
Debt securities in issue	402.9	503.8	-	906.7
Subordinated liabilities	-	200.8	-	200.8
	402.9	7,354.7	-	7,757.6

 

	Level 1	Level 2	Level 3	Total
As at 28 February 2014	£m	£m	£m	£m
Financial assets classified as available for sale	850.3	-	-	850.3
Derivative financial instruments:
Interest rate swaps	-	27.9	-	27.9
Forward foreign currency contracts	-	0.3	-	0.3
Cross currency swaps	-	8.4	-	8.4
Loans and advances to customers	-	6,852.3	-	6,852.3
Investment securities - loans and receivables	-	36.1	-	36.1
	850.3	6,925.0	-	7,775.3
Derivative financial instruments:
Interest rate swaps	-	41.8	-	41.8
Deposits from customers	-	6,048.3	-	6,048.3
Debt securities in issue	405.1	-	-	405.1
Subordinated liabilities	-	211.8	-	211.8
	405.1	6,301.9	-	6,707.0

 

There are three levels to the hierarchy as follows:

 

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). 

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

13  Fair values (continued)

 

Derivative financial instruments which are categorised as Level 2 are those which either:

 

a)   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 currency exchange rates; or

 

b)   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.

 

Available for sale investment securities which are categorised as Level 2 are those where no active market exists or where there are quoted prices available for similar instruments in active markets.

 

Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs). 

 

There were no transfers between Level 1 and Level 2 (28 February 2014: none).

 

 

14  Cash and cash equivalents

 

For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with short term maturities from the date of acquisition:

 

	31 August 2014		31 August 2013
	£m		£m
Cash and balances with central banks *	663.2		475.0
Certificates of deposit	10.0		-
	673.2		475.0

 

^{* Mandatory reserve deposits held within the Bank of England of £10.1m (August 2013: £8.9m) are not included within cash and cash equivalents for the purposes of the cash flow statement as these do not have short term maturities.}

   

 

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NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

15  Capital resources

 

On 27 June 2013 the final Capital Requirements Directive (CRD) IV rules were published in the Official Journal of the European Union.  Following the publication of the CRD IV rules, the Prudential Regulation Authority (PRA) issued a policy statement on 19 December 2013 detailing how the rules will be enacted within the UK with corresponding timeframes for implementation.  The CRD IV rules will be phased in over the course of the next 5 years.

 

Within the following tables capital resources at 31 August 2013 have been amended to reflect profits earned up to that date.  This presents capital resources on a consistent basis with the current year presentation.  In line with the Capital Requirements Regulation, which was applicable from 1 January 2014, current year capital resources also reflect a deduction for foreseeable dividends.

 

"Transitional" disclosure sets out the capital resources of the Company (being the regulated entity) based on those rules currently applicable at the period end.  "End Point" disclosure sets out capital resources based on the full CRD IV rule set which will come into force.

 

	Transitional 6 months to 31 August 2014			6 months to 28 February 2014		6 months to 31 August 2013*
	£m			£m		£m
Movement in common equity tier 1 capital:
At the beginning of the period	913.6			916.6		705.4
Ordinary shares issued	-			-		140.0
Profit attributable to shareholders	60.3			37.7		77.1
Gains and losses on liabilities arising from own credit	(0.2)			-		-
Other reserves	2.0			-		1.2
Ordinary dividends	-			(100.0)		-
Foreseeable dividends		(59.9)		-		-
Movement in intangible assets net of related deferred tax liabilities		10.5		9.0		(7.1)
Movement in material holdings		-		11.2		-
Material holdings		-		39.1		-
At the end of the period		926.3		913.6		916.6

  

 

 

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NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

15  Capital resources (continued)

 

	End Point			Transitional
	31 August 2014			31 August 2014		28 February 2014	31 August 2013*
	£m			£m		£m		£m
Common equity tier 1
Shareholders' equity (accounting capital)	1,439.0			1,439.0		1,375.2		1436.4
Regulatory adjustments
Subordinated notes not qualifying as tier 1	(45.0)			(45.0)		(45.0)		(45.0)
Gains and losses on liabilities arising from own credit	(0.2)			(0.2)		-		-
Unrealised losses on available for sale debt securities	-			(7.2)		(5.9)		(5.5)
Unrealised losses on cash flow hedge reserve	(1.9)			(1.9)		(1.7)		(1.0)
Foreseeable dividends	(59.9)			(59.9)		-		-
Intangible assets net of related deferred tax liabilities	(385.0)			(385.0)		(395.5)		(404.5)
Material holdings in financial sector entities	-			(13.5)		(13.5)		(63.8)
Common equity tier 1 capital	947.0			926.3		913.6		916.6
Tier 2 capital (instruments and provisions)
Undated subordinated notes		45.0		45.0		45.0		45.0
Dated subordinated notes net of regulatory amortisation		190.0		190.0		190.0		182.3
Collectively assessed impairment provisions		32.4		32.4		32.8		23.9
Tier 2 capital (instruments and provisions) before regulatory adjustments		267.4		267.4		267.8		251.2
Regulatory adjustments
Material holdings in financial sector entities		(34.1)		(20.6)		(20.6)		(63.8)
Total regulatory adjustments to tier 2 capital (instruments and provisions)		(34.1)		(20.6)		(20.6)		(63.8)
Total tier 2 capital (instruments and provisions)		233.3		246.8		247.2		187.4
Total capital		1,180.3		1,173.1		1,160.8		1104.0
Total risk weighted assets (unaudited)		6,875.5		6,875.5		6,546.8		6036.4

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

15  Capital resources (continued)

 

	End Point		Transitional
	31 August 2014		31 August 2014		28 February 2014		31 August 2013*
Common equity tier 1 ratio (unaudited)	13.8%		13.5%		14.0%		15.2%
Tier 1 ratio (unaudited)	13.8%		13.5%		14.0%		15.2%
Total capital ratio (unaudited)	17.2%		17.1%		17.7%		18.3%

 

 

The table below reconciles shareholders' equity of the Group to shareholders' equity of the Company:

 

	6 months to 31 August 2014		6 months to 28 February 2014		6 months to 31 August 2013
	£m		£m		£m
Tesco Personal Finance plc (Group) shareholders' equity	1,450.3		1,381.4		1,443.1
Share of joint venture's retained earnings	(12.9)		(10.1)		(10.9)
Subsidiaries' retained earnings	-		-		(0.2)
Share of joint venture's available for sale reserve	1.6		3.9		4.4
Tesco Personal Finance plc (Company) shareholders' equity	1,439.0		1,375.2		1,436.4

 

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 PRA. 

   

 

29

 

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

15  Capital resources (continued)

 

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 Basel Committee have proposed that final adjustments to the definition and calibration of the leverage ratio be carried out in 2017, with a view to migrating to a Pillar 1 treatment in 2018.

 

In the interim, the Group has published the estimated leverage ratio on a fully transitional CRD IV basis. 

 

Exposures for leverage ratio (unaudited)		End Point		Transitional		Transitional
2014		31 August 2014		31 August 2014		28 February 2014
		£m		£m		£m
Total balance sheet exposures		10,057.0		10,057.0		9,243.3
Removal of insurance assets		(105.1)		(105.1)		(105.1)
Removal of accounting value of derivatives and Securities Financing Transactions (SFTs)		(28.8)		(28.8)		(33.6)
Exposure value for derivatives and SFTs		58.9		58.9		62.8
Off balance sheet: unconditionally cancellable (10%)		1,050.3		1,050.3		962.6
Off balance sheet: other (100%)		105.8		105.8		91.0
Financial sector entities not included within regulatory consolidation		411.6		411.6		400.1
Regulatory adjustment - intangible assets		(417.2)		(417.2)		(427.7)
Total		11,132.5		11,132.5		10,193.4
Common equity tier 1		947.0		926.3		913.6
Leverage ratio		8.5%		8.3%		9.0%

 

The Company's estimated end point leverage ratio is 8.5% (February 2014: 9.2%).  The Basel Committee's minimum ratio of 3.0% is proposed to become a Pillar 1 requirement by 1 January 2018.  Higher leverage ratio requirements could be set by the European Union or Prudential Regulatory Authority in due course.

 

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 both this internal assessment and regulatory requirements.  Capital adequacy is monitored daily by the Treasury department and is reported monthly to the Asset and Liability Management Committee and the Board. 

 

 

 

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NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (continued)

 

16  Contingent liabilities

 

The Financial Services Compensation Scheme

The FSCS is the UK statutory fund of last resort for customers of authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS meets its obligations by raising management expense levies and compensation levies which will be capped based on limits advised by the PRA and FCA. These include amounts to cover the interest on its borrowings and compensation levies on the industry. The FSCS has borrowed from HM Treasury to fund compensation costs associated with institutions that failed in 2008 and will receive receipts from asset sales, surplus cash flow and other recoveries from these institutions in the future.

 

The interest rate applied on outstanding borrowings from HM Treasury, in calculating the compensation levy, increased from 12 month LIBOR plus 30 basis points to 12 month LIBOR plus 100 basis points from 1 April 2012.

 

In February 2014, the FSCS updated its expected shortfall to approximately £1,161.0m (July 2013: £1,089.0m) and it expects to recover that amount by raising compensation levies on all deposit-taking participants over a three year period. The first of these three instalments was paid on 30 August 2013; the remaining instalments falling due in September 2014 and September 2015 respectively.

 

Each deposit-taking institution contributes in proportion to its share of total protected deposits. As at

31 August 2014 the Group has accrued £6.9m (February 2014: £6.7m) in respect of its current obligation to meet expenses levies, based on indicative costs published by the FSCS.

 

The ultimate levy to the industry cannot currently be estimated reliably as it is dependent on various uncertain factors including participation in the market at 31 December 2014, the level of protected deposits, the population of deposit-taking participants and potential recoveries of assets by the FSCS.

 

 

17  Related party transactions

 

The Group's related party transactions during the interim period were entered into in the normal course of business.  Transactions for this period are not significant to an understanding of the Group's financial position or performance, and are similar in nature to those for the year ended 28 February 2014.

 

 

18  Ultimate parent undertaking

 

The Group's ultimate parent undertaking and controlling party is Tesco PLC which is incorporated in England.