2009 Financial Results

Continued resilience

Yorkshire Building Society has demonstrated continued resilience and has made significant progress in the second half of the year in what has been another challenging year for the financial markets. The results show that the Society maintained one of the strongest capital positions of any major UK lender, whilst delivering value and protection to members.

Exceptional market conditions during the year also presented strategic opportunities and in December 2009 Yorkshire announced its intention to merge with Chelsea Building Society. The enlarged Society will create a second major force in the building society sector, strengthening Yorkshire's ability to deliver value to members and its position as a strong competitor to UK retail banks. Integration planning is well advanced.

Key highlights in 2009:

  • Savers protected from full impact of base rate cuts, delivering an estimated £85m additional interest benefit to loyal investing members throughout the year
  • Almost nine out of 10 of the Society's variable rate savings accounts pay interest above base rate compared to just 40% on average of similar accounts offered by the major UK banks
  • 250,000 new savings accounts were opened during the year
  • Over 140,000 new members attracted in the year, taking total membership to over 2.1m
  • Strengthened capital position during the year, giving Yorkshire one of the strongest capital ratios of any major UK bank or building society
  • High level of quality liquid assets maintained
  • Continued expansion of retail network, with 10 additional high street agencies
  • Reduced reliance on wholesale markets with over 90% of mortgages funded by member savings
  • Focus on low risk, prime residential mortgages
  • Appropriate provisioning for potential mortgage losses
  • Improved efficiency and underlying cost management

Merger activity

  • Announced proposed merger with Chelsea Building Society, the UK's fifth largest society, thus considerably strengthening Yorkshire's ability to compete effectively as a secure alternative to the retail banks. Members of both societies voted overwhelmingly in favour of the merger and good progress has been made on integration planning. Chelsea's full year results performance, announced today, is ahead of expectations
  • Completed integration of Barnsley Building Society, which now operates as a distinct brand offering an improved product range and maintaining its own branch network and online channel, supporting over 60,000 members

Financial Performance

The Society remains one of the UK's strongest financial institutions and improved on its capital position during 2009.

  • Despite severe competition from government backed financial institutions, member savings balances increased to £13.8bn
  • Strong balance sheet with Group assets at £22.7bn - a slight reduction reflecting our conservative approach to lending in an uncertain environment
  • Solvency ratio increased to 15.6%, with Tier 1 at 14.2% (of which 12.2% is Core Tier 1)
  • Liquid assets increased to 31.9% of Shares, Deposits and Loans
  • Group operating profit before provisions of £48.7m, an increase of 11% on last year
  • Core operating profit after provision of £7.7m after an improved second half of the year
  • Statutory pre-tax loss, including mortgage loan losses provisioning, at £12.5m - an improvement from a loss of £22m at 30 June 2009 as a result of a £10m profit in the second half of the year
  • Member savings balances funded 92% of the Group's total mortgage assets
  • Mortgage assets decreased by £1.3bn. Gross mortgage lending of £0.9bn reflected low demand and conservative approach to lending in current climate
  • Group's averaged indexed loan to value on mortgage lending remains low at just 52%
  • Credit quality improving with arrears levels reducing from their peak in the year. Group mortgage accounts greater than 3 months in arrears was below the industry average at 30 September and, at 1.84%, we believe remains below the industry average at the year end

Operating performance

The core operating profit after provisions of £7.7m is an improvement on the £1m performance for the six months to 30 June 2009. During the year we continued to focus on efficiency and cost management resulting in the management expense ratio (excluding merger costs) reducing to just 0.54%. Non interest income was broadly maintained at £30.7m.

The results for the year have been affected by a number of factors, many of which were deliberate decisions taken to deliver value and increased financial security to members. These include:

  • Reduced net interest margin as a result of;
    • Protecting savers from the full impact of the base rate cuts whilst at the same time continuing to offer competitive mortgage products to our existing members
    • Maintaining a high level of high quality liquid assets, which provide greater member security but generate a low return
    • Reducing lending volumes and restricting to low risk borrowers
  • Charge through the Financial Services Compensation Scheme (FSCS) for failed financial institutions
  • Increase in provisioning for mortgage loan losses, an appropriate step taken in response to the harsh economic conditions

Other highlights in 2009:

  • The average interest rate paid on Yorkshire variable rate savings accounts at the end of 2009 was 1.69%, more than double the average rate paid by the major UK banks
  • Over 1,100 independent best buy product mentions in national newspapers for Yorkshire and Barnsley products
  • Share Plan activity continued to grow with 13 new corporate clients acquired
  • The Society's Charitable Foundation supported 2,400 local charity and community groups with donations of over £450,000. Almost 70% of this funding was generated by members through the Society's innovative Small Change Big Difference® Scheme
  • Industry Awards including Best Long Term Fixed Rate Mortgage Provider and Best Commitment to Employee Share Ownership Schemes
  • Customer satisfaction survey shows that nine out of 10 members would continue to recommend the Society to their friends and family

Unfair Treatment of Building Societies

Yorkshire is lobbying for a review of a number of issues where building societies are being treated unfairly relative to the banking sector. These include:

  • Competition from institutions with an explicit or implicit state guarantee (in particular National Savings & Investments and Northern Rock) which has a significant impact on the ability of societies to fund new lending. We welcome the Treasury's announcement yesterday that Northern Rock's guarantee will be lifted in three months time. Yorkshire is also continuing to lobby for the level of protection savers have under the Financial Services Compensation Scheme (FSCS) to be increased from £50,000 per individual to a figure closer to £100,000
  • The slow pace of progress in reviewing the current funding model for the Financial Services Compensation Scheme (FSCS), where allocation does not reflect risk and the burden falls disproportionately on building societies
  • The absence of a capital instrument which building societies can access, although we welcome the action being taken to create Mutual Ordinary Deferred Shares (Mods). Whilst Yorkshire has a very strong capital position, provision of an instrument where societies can raise fresh (private sector) capital would enhance the sector's ability to compete with banks to the benefit of all consumers

Yorkshire believes that all these issues can be addressed without recourse to the public purse, and that the changes would add to the benefits for all consumers of a healthy, vibrant mutual sector that provides a strong source of competition to the banking sector.

Iain Cornish, Chief Executive of Yorkshire Building Society said:

I am pleased to report that the Yorkshire has demonstrated continued resilience throughout 2009 and has maintained a strong underlying performance.

Throughout the year our actions have been driven by our primary focus to provide financial security and long-term value to our members. This has been clearly demonstrated by a number of specific actions we have taken. We have strengthened our capital position and continue to hold high levels of liquid assets - both factors that provide extra protection for our members. We have also protected our loyal, long-standing savers by not passing on the full impact of the base rate cuts, an action that we believe has resulted in a benefit of over £85m in additional interest payments in 2009. At the same time, we have continued to offer competitive mortgage products to our existing borrowers, proactively helping them to manage their finances in what have been difficult conditions.

We are seeing green shoots in the housing and mortgage markets and we are very optimistic about the future prospects of the Group and plan to prudently increase our lending in core prime residential mortgages. Our agenda, through the merger with Chelsea Building Society, is to provide a compelling alternative to banks and a real choice to consumers across the UK.

Financial Summary

Reconciliation of Core Operating Profits

Profit before tax 2009 £m 2008 £m
Net interest income 147.8 164.5
Other income and charges 31.2 31.9
Net gains arising on realisation 11.5 4.0
Costs - excluding non-recurring items (123.8) (122.4)
Mortgage impairment provisions (59.0) (25.0)
Core Operating Profit 7.7 53.0
Net losses from fair value volatility (10.3) (28.8)
Other losses realised/other impairment provisions (0.9) (7.0)
Other non recurring items (6.3) 5.8
(9.8) (23.0)
Financial Services Compensation Scheme (2.7) (14.7)
Profit/(loss) before tax (12.5) (8.3)
Taxation 9.2 0.5
Profit/(loss) for the year (3.3) 8.8

Group Income Statement for the year ended 31 December 2009

2009 £m 2008 £m
Net interest income 147.8 164.5
Net losses from fair value volatility (10.3) (28.8)
Net realised profits/(losses) 11.5 1.0
Other income and charges 30.7 31.5
179.7 166.2
Administrative expenses (124.3) (122.4)
Chelsea Building Society merger costs (6.7) -
Operating profit before provisions 48.7 43.8
Provisions (58.5) (24.0)
(9.8) 19.8
Financial Services Compensation Scheme levy (2.7) (14.7)
Operating profit/(loss) (12.5) 5.1
Negative goodwill - 3.2
Profit/(loss) before taxation (12.5) (8.3)
Taxation 9.2 0.5
Profit/(loss) for the year 3.3 8.8

Group statement of comprehensive income for the year ended 31 December 2009

2009 £m 2008 £m
Available-for-sale investments:
Valuation gains taken to equity, net of releases 43.9 57.3
Cash Flow hedges:
Profits/(losses) taken to equity (6.4) (33.6)
Actuarial gain/(loss) on retirement benefit obligations (50.4) 17.8
Tax on items taken directly to or transferred from equity 6.7 11.1
Net income/(expense) not recognised directly in the income statement (6.2) (62.0)
Net profit/(loss) for the financial year (3.3) 8.8
Total comprehensive income/(loss) for the year (9.5) (53.2)

Group statement of financial position as at 31 December 2009

2009 £m 2008 £m
Liquid assets 6,700.4 5,327.7
Mortgages 14,979.4 16,291.8
Derivative financial instruments 904.5 1,226.7
Other assets 137.7 185.6
Total Assets 22,722.0 23,031.8
Shares 13,793.4 13,683.1
Borrowings 7,183.1 7,329.6
Derivative financial instruments 468.1 672.2
Other liabilities 106.6 157.5
Subordinated liabilities 111.7 112.9
Subscribed capital 159.3 167.2
Reserves 899.8 909.3
Total Liabilities 22,722.0 23,031.8

Key Ratios

2009 % 2008 %
Group net interest margin 0.65 0.76
Group management expenses/mean assets 0.57 0.56
- excluding merger costs 0.54 0.56
Group asset growth (1.3) 12.4
Group loans and advances growth (7.2) 3.7
Member balances growth 0.8 9.9
Liquidity ratio 31.9 25.4
Funding ratio 32.5 33.0
Gross capital ratio 5.6 5.7
Free capital ratio 5.1 5.2
Solvency ratio 15.6 14.8