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Edited Transcript of CCFS.L earnings conference call or presentation 21-Aug-19 9:45am GMT

Half Year 2019 Charter Court Financial Services Group PLC Earnings Call

Sep 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Charter Court Financial Services Group PLC earnings conference call or presentation Wednesday, August 21, 2019 at 9:45:00am GMT

TEXT version of Transcript


Corporate Participants


* Ian Martin Lonergan

Charter Court Financial Services Group plc - CEO & Director

* Jean-Sabastien Maloney

Charter Court Financial Services Group plc - CFO & Director


Conference Call Participants


* Anthony Da-Costa

Peel Hunt LLP, Research Division - Analyst

* Ian David Gordon

Investec Bank plc, Research Division - Head of Banks Research

* John Cronin

Goodbody Stockbrokers, Research Division - Financials Analyst

* Nicholas Herman

Citigroup Inc, Research Division - Assistant VP and Analyst




Ian Martin Lonergan, Charter Court Financial Services Group plc - CEO & Director [1]


Okay. Thanks for waiting. The waiting is finally over. Good morning. Welcome to the 2019 Interim Results Presentation for Charter Court Financial Services plc.

Charter Court has enjoyed a strong first half of the year as demonstrated by the results presented this morning. We've increased mortgage origination volumes within an otherwise patchy macroeconomic backdrop. We've largely maintained margins. We've maximized the benefits of our agile liability management model to provide funding at optimal moments in the market and to trade residual interest and securitizations to create capital.

Also, we've maintained a disciplined credit management approach and producing exceptional cost of risk. We believe the market opportunities for the business will remain strong through 2019. And finally, the business has not been distracted by the merger process and is set to deliver well against the 2019 objectives.

So if we firstly turn to the highlights before Seb takes us through the detailed financials. We can see that origination volumes grew 10% to GBP 1.5 billion. We'll turn to our markets in more detail shortly as I was particularly pleased with the resilience of our specialist buy to let proposition in an otherwise tight market, and also note that all of our lending segments have recorded growth so far this year.

Our loan book continues to accumulate with growth of 24%, and the gross loan book is GBP 7.1 billion after recorded -- recording the completed securitization sales.

As expected, NIM was largely flat at 3.04%, a slight reduction being largely attributable to the gradual evolution of the book mix towards the low-yielding buy to let production, which, however, has a longer duration.

Underlying operating expense grew GBP 5 million, mostly reflecting our growth in line with the mortgage origination opportunity. Underlying cost-to-income ratio continue -- continues its expected trajectory as balance sheets and income growth outstrip costs and was particularly helped by the GBP 29.8 million income from the sale of the economic interest in 2 securitizations.

Cost of risk remains low at 8 basis points, reflecting that we have 138 cases out of 43,165 that are 3 months in arrears, and then still only lost money on 8 loans ever in the history of the business.

The core credit risk indicators in the business are very healthy and are stable. We have, however, been prudent in our provisioning, and as Seb will detail later, taking a cautious view on the various scenarios that Brexit presents.

Consequently, underlying profit before tax is GBP 86 million in the first half, and underlying RoE is 28.1%.

In light of our robust performance in the first half of 2018 and our positive outlook for the remainder of 2019, we're announcing an interim dividend of 4.3p per share, representing a 25% dividend payout ratio, which is in line with our previously declared target.

I'll be able to turn you on to the market backdrop slides. Okay. So we'll dive into the markets in more detail and the segments we're reporting in a second. But firstly, just to take you through the context. Buy to let has now enjoyed a sustained period without further regulatory or taxation changes. Buy to let landlords remain confident of their existing letting businesses, and consequently, over 70% of the market is remortgaged, which is largely stable year-on-year.

The purchase market, by comparison, has contracted somewhat as casual landlords have restricted adding new stock to their assets.

The specialist segment of the market has seen significant growth with limited company ownership and high-yielding property types increasing in popularity, particularly.

We continue to enhance both our service and product propositions, focused on the professional landlord and no intermediary. And we've consequently seen strong performance in limited company, Multi-Unit and HMO loans. We expect these trends to continue, and hence, the specialist lenders in our sector should benefit alongside ourselves.

Turning to residential. The market, overall, saw modest growth in the period, helped by increased popularity, particularly of the Help to Buy scheme. Our residential origination has been robust in the first half, showing a 3.6% year-on-year growth as brokers continue to value our excellent service and targeted products.

Both bridging and second charge lending operations work across the residential and buy to let markets that we've described, and hence, have been subject to similar market conditions. They remain the smallest components of our production. However, as I've already said, they perform well.

On the funding side of our business, retail deposits have grown 40% year-on-year. And Charter Court has successfully executed a securitization transaction of over GBP 700 million of assets, a point we'll expand on shortly.

Overall, market dynamics remain supportive of our business model with brokers continuing to rank Charter Court Financial Services as the #1 specialist lender.

We continue to focus on meeting the needs of our intermediaries, rolling out incremental product improvements.

We're vigilant in monitoring the credit risks involved in our business, the uncertainties in our market and are agile in our use of the capital markets to optimize funding costs and tenor.

Okay. I'll hand over to Seb.


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [2]


Okay, and good morning, everyone. So moving on to financial performance on -- for an overview slide on Page 5. So starting with the top left-hand chart.

So here, ordinarily, we'd focus on loan book growth and the process of aggregation. So as Ian already outlined, our loan book growth was 24% year-on-year, 34% underlying. But I would say that the standout KPI in the first half of '19 was actually the 10% year-on-year growth in total originations to nearly GBP 1.5 billion.

So there are a few things to outline here. As a reminder, 2018 was a record year for us in terms of originations, and it wasn't completely obvious at the beginning of the year that we'd be running ahead of that trajectory by H1 '19 given the overall climate.

In addition to record H1 originations, we also closed out the first half with a record pre- and post-offer pipeline that is nearly 25% higher than it was when compared to H1 '18.

Furthermore, what's remarkable is that the growth in origination volumes hasn't come at the expense of asset margins. In fact, asset margins have been steadily expanding since March onwards. And it's a trend that so far has carried out or it carried through to the second half of the year.

So we attribute this to a couple of factors. The first one is continued robust demand for our specialist products. We'll cover in the segmental review that. We've outperformed the market, especially in our buy to let production. But clearly, it's the inverse phenomenon at this time last year when swap rates were increasing, eating into asset spreads as our sector wasn't repricing. We're seeing the opposite of that phenomenon today where swap rates, the key swappers, the 3- and the 5-year, are collapsing, and we're hold -- everybody's holding steady on pricing. So clearly, we're having -- we're experiencing expanding asset margins.

So in conclusion, you have one of those rare moments where volumes are very strong, and margins are expanding at the same time, which is a pretty fortunate situation to be in given the current climate.

Credit performance, bottom chart, bottom-left chart, credit performance was strong in the first half. The 1-month arrears ratio stands at 1% in terms of balances. The 3-plus months in arrears ratio stands at 0.4% of balances. Across our entire loan book, we have 429 cases or 1+ MIA and 138 loans that were 3+ MIA.

That said, you will surely notice that the cost of risk drifted upwards in H1 '19 to 8 basis points. That's largely due to the forward-looking nature of IFRS 9 provisioning. I'll come back to that when we do the overview of the income statement.

So moving on to the top right-hand chart, you can see operating leverage at work here with 45% CAGR, largely outpacing the CAGR in underlying expenses of 24%. But while the headline figure for H1 '18 seemingly indicates a reversal of that trend, there are a number of factors that distort year-on-year comparisons that I'll call out when we look at the income statement.

So overall, we delivered a strong first half with GBP 86 million in underlying profit before tax at an underlying RoE of 28.1%.

In conclusion, I'd say that we've had a good first half on most measures and feel that we're well positioned for the rest of the year, while acknowledging, of course, that we're heading into an uncertain and highly unpredictable environment.

So let me draw your attention to a few lines in the P&L on Page 6. So year-on-year, net interest income grew by GBP 31 million or 24%, again, reflecting rather stable NIM and robust loan growth.

On the provisioning side, we took a GBP 2.7 million impairment charge in H1 with a clear pickup in cost of risk to 8 basis points. In absolute terms, I think it's still quite a low cost of risk. But I'll -- you can look at the detail in the interims. What you'll find is that there are 2 things that are driving that cost of risk higher. We're under IFRS 9, so we need to be forward-looking. I think it's no big secret that the environment going forward is highly unpredictable.

We used economic forecast inputs from a third party. We used 4 scenarios. Those are further detailed in the interim report. So there's an upside, a base case, a downside 1, downside 2. We assigned weights to those scenarios, and 2 things are happening at the same time.

Those scenarios in isolation are getting worse as the economic outlook is somewhat darkening. And we're increasing the weights, meaning that we're assigning higher weights to the downside than we are to the base case and the upside. So you're not really seeing a deterioration in credit performance.

So in other words, if we were still under IAS 39, you probably would have not seen quite such a pickup in the cost of risk. But due to the forward-looking nature of IFRS 9, I think that's -- that accounts for the bulk of the increase to 8 basis points.

Like to make a couple of points also regarding the other income line at GBP 25 million, which is largely a combination of 2 things. So we uncovered it, the GBP 29.8 million gains on sale, but that is offset by a charge of GBP 7.2 million for the fair value movements in forward-dated swaps.

So firstly, you'll note that the GBP 29.8 million gain was inferior to the GBP 36.4 million gain that was booked in the same period last year. That's largely reflecting the fact that we sold higher-value asset in 2018, the balances were about the same, than we did in H1 2019. So in 2000 -- H1 2018, we sold 2 resi LCR deals, which tend to be the high-value deals because the -- you have higher asset coupons and lower cost of funds. In H1 '19, we actually derecognized 2 buy to let deals, which generally speaking are slightly higher cost of funds, slightly lower coupon, so you get less of a gain. So that's the first difference between the 2, which affects kind of the top line for the period.

The second one is probably something that you've seen at least a couple of times now in our space is that under IFRS 9, which is a carryover of IAS 39 for fair value hedge accounting, the offer pipeline -- the offers themselves are not considered to be firm commitments. So we cannot enter the swaps that we take against them into a hedged relationship. So if you take out hedges against our offer pipeline, and swaps move very rapidly and against you before they have time to get into a hedging relationship once they become completions, you need to take that hit directly to P&L and whether it be a gain or a loss, by the way. But that gets amortized to P&L for the rest of the weighted average life of the swaps.

So it's really an in and out, and it just creates a timing difference. But given that swaps have collapsed, that means that they went out of the money, and we took a GBP 7.2 million charge for them.

Now some of our peers choose to report that or strip that out of underlying income. We've chosen not to do that. So it's fully reflected in the underlying income numbers.

So in summary, those 2 items accounted for the -- about a GBP 13.8 million gap when comparing to the H1 '19 top line to H1 '18. And therefore, hopefully, that gives you some sense of why there's a negative variance in underlying profit for the period.

Underlying expenses increased by GBP 5 million from GBP 31 million to GBP 36 million in H1 '19, largely driven by an increase in the average number of employees from 557 to 651 in H1 '19. This is somewhat old news in that a good portion of that headcount increase had already happened by the end of H2 2018.

Furthermore, a part of the cost base inflation also reflects the higher fee states in Newcastle Building Society for managing a larger retail book on our behalf.

Finally, the one-off exceptional costs for the period of GBP 3.8 million, which were incurred in relation to the proposed combination with OneSavings Bank.

So again, in summary, strong first half in terms of cost management and top line delivery, which was somewhat mitigated by a combination of lower gains on sale and a reversible net loss on derivatives.

We quickly move on to some balance sheet highlights on Slide 7. So loan book grew by GBP 1.4 billion from GBP 5.7 billion to GBP 7 billion, 24%, and 34% underlying if you strip out the structured sales. The loan book growth in H1 '19 was underpinned by roughly GBP 1.5 billion of originations, net of GBP 692 million in repayments versus GBP 1.36 billion and GBP 572 million in H1 '18.

If you do a quick ratio of repayments and redemptions as divided by the opening book of '18 and '19, you'll find that there's quite a stable repayment rate, which, of course, is quite constructive for loan book growth.

We continue to hold a significant inventory of liquid assets, about GBP 1.1 billion, which is mostly held in our cash reserve at the BoE -- the reserve account at the BoE, rather. Customer deposits grew by GBP 1.7 billion, roughly 40% to nearly GBP 6 billion as we continue to expand our retail -- or online retail proposition.

We also issued a jumbo buy to let RMBS deal in May 2019, securitizing GBP 734 million of prime buy to let mortgages and executed a couple of structured sales earlier in the year.

Shareholder funds grew by GBP 85 million in the period, reflecting the profits generated in the period, offset by just over GBP 30 million in total dividend for 2018 paid to our shareholders.

The loan-to-deposit ratio decreased from 134% in H1 '18 to 118% in the first half of 2019, reflecting the significant growth in our retail deposit book.

So we've got quick overview of segmental performance starting with buy to let on Slide 8. So we've had a strong first half in buy to let origination with origination volumes hitting GBP 909 million, representing 9% year-on-year growth in a broader buy to let market that was essentially flat. So we're quite, quite pleased with the performance in our specialist buy to let segment.

We largely attribute this market outperformance to our focus on the specialist proposition that we bring in this segment, which has proven to be quite resilient in the face of an increasingly uncertain market backdrop.

The loan -- the buy to let loan book grew 19% in the period despite 2 structured sales that otherwise would have been a 33% loan book growth.

The credit performance is comparatively strong in H1 '19 with 18 basis points of balances and 3-plus months in arrears, and the segmental cost of risk remains manageable at 5 basis points on an IFRS 9 basis.

Average loan sizes in H1 '19 were GBP 15,000 lower than the average for the overall book, reflecting an ongoing regional rebalancing from Greater London and the South East to other regions.

Finally, buy to let's profit contribution increased slightly from 56% to 58% in H1 '19, reflecting the continuing importance of this asset class in our portfolio mix.

Moving on to resi on Slide 9. We had a decent first half in resi as well. Specialist resi origination volumes increased by 4%, pretty much in line with the broader resi markets, while the loan book increased by 37% over the period.

Both average loan sizes and average LTVs were somewhat higher than the overall book. There were 96 cases that were 3+ MIA as at H1 '18 -- '19 and a segmental cost of risk of 15 basis points. Again, that's the same phenomenon under an IFRS 9 basis, baking in a future uncertain economic outlook. The contribution remained stable at 31%.

A quick overview of bridging loans on Slide 10. So we experienced a very strong growth in origination volumes of 28% in the period, while the loan book increased by 23%. We continue to focus on low-risk business in this segment with average LTVs of 55% and somewhat lower average loan sizes at GBP 194,000. Credit performance remained exemplary with only 6 accounts in 3+ MIA compared to 2 in H1 '18, but the segmental cost of risk increased to 23 basis points due to about 160,000 of special provisions against 3 cases. As a reminder, we've only made one loss in STL ever of about 7,000.

Segment profit -- the profit contribution of this segment marginally decreased to 8%, simply reflecting the shorter duration of this asset class.

So finally, second charges on Slide 11. Again, a strong first half with an increase in origination of 37%, clearly from a pretty low base. So that was GBP 37 million for the first half.

Loan book grew by 13% over the same period. We had 11 accounts in 3+ MIA at the end of '19 and a segmental cost of risk that actually marginally improved for this segment to 7 basis points.

New origination average LTVs and loan sizes were higher in H1 '19 but still well within our risk appetite in this segment. Profit contribution remained flat at 3%.

So let's cover funding on Slide 12. So firstly, we successfully placed our inaugural SONIA-linked transaction, PMF 2019-1B, in May '19 consisting of GBP 734 million of prime buy to let assets. As well as initially providing the group with term funding, the transaction was structured to provide the group with a significant portfolio of retained slow-paced senior bonds, so the A2s in the transaction. These facilitate the contingent funding options available to the group and can be used to access commercial as well as Central Bank repo facilities.

As you know, 2019-1B was subsequently derecognized in July 2019, generating a further gain of GBP 28.8 million and clearly, additional capital headroom through the shedding of our RWAs.

Earlier in the year, we also executed 2 structured sales by selling the remaining residual certificates in PMF 2018-1B and PMF 2018-2B on very attractive terms, further confirming our ability to execute transactions in challenging market conditions. I'm sure you remember that January was a bit wobbly in the ABS space.

We also continue to enjoy significant inflow of funds through our award-winning digital retail channel. Deposit balances increased by GBP 1.7 billion from nearly GBP 4.3 billion in H1 '18 to nearly GBP 6 billion by the end of the first half in '19.

So in summary, I think we further demonstrated the flexibility of our funding model throughout the first half of '19 and remain confident that we can continue doing so going forward.

Finally for me, a quick word on capital and funding on Slide 13. So we closed out the first half well capitalized with a CET1 ratio of 15.6%, broadly in line with our closing CET1 ratio at the end of 2018 and prudent on-balance sheet liquidity of GBP 1.1 billion.

Bear in mind that when it comes to the -- to capital, the net loss on derivatives, obviously, is a headwind to the capital ratio, but so is the matched hedging on our asset book, so the fair value adjustment for hedge risk. That is actually quite a chunky number with the direction rates have taken, and that carries a risk weight, curiously, not of 35% in line with the mortgage risk weights but of 100%. So the bigger that number becomes, the larger the drag on the CET1 ratio.

With GBP 2.7 billion of preposition assets and full circa BoE liquidity access of GBP 617 million, total access to liquidity stood at GBP 1.7 billion at H1 '19, representing a 28% retail deposit coverage.

Last but not least, we continue to make good progress with our IRB project, which we believe will not only bring capital benefits in the longer term but also increased sophistication to our risk management framework as we develop and implement the IRB infrastructure throughout the business.

With that, I'll turn it back over to Ian for the concluding slides.


Ian Martin Lonergan, Charter Court Financial Services Group plc - CEO & Director [3]


Great. Thanks, Seb. So we've had a successful start to 2019, in line or ahead of our targets that we already set at IPO or at the end of 2018. We're well positioned in the specialist markets where we can deploy expert product, service and analytical skills, as evidenced by the growth you see in our origination performance despite challenging markets. We believe these markets will continue to perform well and are investing to further develop our proposition.

Once again, our funding model has proven to be a key advantage and both providing cost of funds and capital optionality.

Finally, we face the next stage of the Brexit process with excellent underlying credit risk indicators, a highly skilled team and have taken prudent approach to provisioning in the first half.

Great. So that concludes the presentation, and welcome any questions.


Questions and Answers


Anthony Da-Costa, Peel Hunt LLP, Research Division - Analyst [1]


It's Anthony Da-Costa at Peel Hunt. So 3 questions for me. The first is on the fair value adjustment of GBP 7.2 million. Can you give us an indication of more or less how long it takes to unwind, if that's been possible, not knowing what's going to happen with costs, et cetera. Then the second question is on cost of risk. So while you're saying the bulk is coming from these sort of scenarios, is there a high possibility that this could potentially reverse in, say, H2, if the sort of outlook changes or if there is a deal or whatever? And then the third question is on the CET1. You're sort of seeing a 15.6%. And then there was the asset sale announced last month, which probably takes it to about 16%. How high you're prepared to go in terms of the tier 1 ratio?


Ian Martin Lonergan, Charter Court Financial Services Group plc - CEO & Director [2]


They're all for Seb, particularly looking forward to his predictions on the scenarios post-Brexit.


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [3]


So the GBP 7.2 million, look, the -- that relates to the offer pipeline. We're doing a high concentrator. So it obviously only pertains to fixed-term mortgages. And we do a lot of 5-year. So you can infer that the duration is probably going to be in the 4-year type of zones, let's say, 3- to 4-year type of zone. So effectively, you just amortize that back through that period.

I think one probably obvious comment is that, that was the impact for June. I think you need to look at the evolution of the yield curve. So what essentially happens, right, is that you take out the swap, let's say, a 5-year swap at the point you make the offer. And you -- it probably crystallizes into a hedging relationship about 3 months later. If you keep on picking up a delta between the start of the month on a rolling basis, a start of the month swap rate -- the end of the month swap rate, that trend can potentially continue against you. And we've had some pretty rapid compressing swap rates even post H1 '19.

So I don't know if that helps to try to -- fortunately, it's quite a complicated thing to bake in. Of course, in a normal environment, swap rates don't move that fast. And therefore, you don't necessarily crystalize that value on the way up or the way down, but we're in quite exceptional times, which brings me on to your cost of risk question.

So I think it's a bit of a fool's game trying to predict what's going to happen, right? But just following the thread of your question, of course, if there were to be clarity around Brexit, and if it were to take a form that's much more benign than what potentially the market is concerned about, clearly, we have a Brexit top-up provision that we could release. And the 4 scenarios that we model would improve, and the weights we'd assign to these scenarios would probably be less skewed towards the downside. But I think the only thing that we can do right now is try to have -- to coherently reflect the uncertainty that there is out there in our cost of risk at the moment. We should be forward-looking and reflect the uncertainty.

Sorry, I think your final question was?


Ian Martin Lonergan, Charter Court Financial Services Group plc - CEO & Director [4]


On tier 1.


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [5]


With -- so how far are we willing to let it drift up? I think, look, one thing that we've learned from the great financial crisis is that well-capitalized banks are banks that have options. We're about to combine with OneSavings Bank. We want to bring a very robustly capitalized bank to the merger. And we think that in a variety of different scenarios, it will serve us very well.

So I think that there's a trade-off between efficient deployment of capital and being prudent. I think we struck the right balance as we enter into that combination and as we face off to a increasingly uncertain outlook. I think that we got the balance right.


John Cronin, Goodbody Stockbrokers, Research Division - Financials Analyst [6]


It's John Cronin from Goodbody. Just 2 for me, please. One is on the LDR and the context of balance sheet efficiency. What is your appetite right now at this juncture to drive that back up should opportunities present themselves in the RMBS market perhaps to attract in lower-cost funding? Or is this -- should we think about the H1 move as a structural intention of step down? And then look, secondly on the arrears actually element of the pickup in cost of risk, notably a material uplift across both 1-month and 3-month categories in the resi and the buy to let books, could you just elaborate a little further on the trends that you're experiencing there? And how that -- what kind of momentum you're experiencing in those books at the moment and then through -- into H2 thus far?


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [7]


Shall I kick off, and I'll...


Ian Martin Lonergan, Charter Court Financial Services Group plc - CEO & Director [8]


I'll chip in on the second point.


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [9]


Yes. So -- sorry, were you referring to the loan-to-deposit ratio?


John Cronin, Goodbody Stockbrokers, Research Division - Financials Analyst [10]




Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [11]


And the -- yes. So as I -- hopefully, as I've consistently said in the past, it's -- we're not really guided by a loan-to-deposit ratio target, especially at group level. I think in terms of the funding, it's purely opportunistic, right? I'd say that the RMBS that we issued in May was probably borderline where we see that opportunity. It was -- it wasn't a bad print, but it wasn't our best print either.

I think market conditions are somewhat challenging. The issuers that went after us, you saw kind of the spread widening on their prints. That's probably a zone that -- where we cease to be interested in.

So I can't really give you a deterministic answer in that give me a set of conditions, and I'll give you an answer. I think right now, what we're seeing is a bit of a challenging market conditions in RMBS. It's probably not massively attractive. The minute that changes, we'll change our mind about how much RMBS we want to issue.


Ian Martin Lonergan, Charter Court Financial Services Group plc - CEO & Director [12]


On the arrears trends point, what we're really dealing with here is the maturity of various vintages and cohorts within the book. So through the life cycle of a loan, you'll see naturally the predicted arrears grow as the book mature -- as that cohort matures. Obviously, we start from incredibly low-arrears balances. And what you've seen is the layering of more mature cohorts into the book, providing account number of slightly higher arrears than were previously in the book if you were to ask about the maturity of the vintages and cohorts that we have.


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [13]


And just to augment that answer. I mean I'm not entirely sure what you're referring to, but those same ratios were 0.8% and 0.2% at FY '18. So you've got to remember that we're stripping out new origination via derecognition that has 0 arrears. So to -- sorry, [center] deflating the denominator, and you're keeping -- you're not getting rid of any of the arrears because we're not securitizing them.

So myself, I probably would not qualify that as a significant deterioration. They're just kind of a very minor trend.


Ian David Gordon, Investec Bank plc, Research Division - Head of Banks Research [14]


Ian Gordon, Investec. Sorry, I need to wash my ears out, but could I ask you just to repeat what you said in your prepared remarks about the buy to -- the pipeline going into the third quarter? And I'm assuming it's buy to let led. I thought I heard up 25% year-on-year?


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [15]


Well, your ears are working perfectly. That is correct. I mean it's -- I think as I tried to articulate during those opening remarks, we are experiencing a very robust amount for our specialist products. And we exited H1 with a record pipeline, which was 25% larger than it was at the exact same time last year, which, to be perfectly frank, it's not something that we would have necessarily anticipated at the beginning of the year given the overall climate, but here we are.


Ian David Gordon, Investec Bank plc, Research Division - Head of Banks Research [16]


Yes. 25% on widening spreads? Okay. And then, so I'm just curious on the hedge mismatch. You said you haven't stripped out of your definition of underlying, which is, I suggest, unusual. Is there any sort of specific thinking, logic to that?


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [17]


Well, other than we've had a debate at audit committee as to how to position it, and that's where it landed. I completely accept that looking -- stripping that out from underlying income because of the noise that it creates and given that it reverts back to 0 is a perfectly acceptable way of presenting it as well. So I don't have a strong view on that one. It's just the decision that we made as a committee.


Nicholas Herman, Citigroup Inc, Research Division - Assistant VP and Analyst [18]


Yes. It's Nicholas Herman from Citigroup. Just one quick question. You mentioned that you benefited from low swap rates. Clearly, that helps your asset margins widen. Have you calculated how much of a benefit to your NIM that actually resulted because of that in this -- in the past -- in the half period?


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [19]


So no, I -- to answer your question, I did not quantify that. But that's not exactly what I said. So clearly -- well, first of all, NIM, there was a marginal deterioration from H1 '18 and full year '18 of 4 basis points. Clearly, NIM doesn't just come from asset margins.

What I said was that as swap rates deteriorated, which was a phenomenon that happened later in H1, all of this on an application -- well, to a certain extent, completion also, but mostly application spreads started widening, and that's skewed towards the back end of H1. So it would have had minimal impact actually on the 3.04% for H1.

What I'd say is that, that trend is even more live in the -- leading into the second half than it was at the back end of H1, simply because swaps have gone down even further. So it's very much a live time.


Unidentified Analyst, [20]


Wonder if I -- wanted to follow-on to that question. I mean how do you think about, presumably, that's also another natural hedge as it were in terms of mitigating against that hit to fair value you're taking through the underlying when you're getting the benefits of the wider spread on the mortgage book, especially given the trends you've called out on pricing? I mean how do you expect on the back of these multiple impacts that prices will remain stable on a forward-looking basis. Or can you give any specific sense on that at this point?


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [21]


Well, what I can tell you is that this is a really nice problem to have, right? I mean we have kind of very robust demand coming at us with widening spreads. I think operationally, we've actually had to use pricing tactically to restore our service levels and operational capacity. So a degree of margin improvement results with a tactical pricing to manage operational capacity. I mean we maintained excess operational capacity, but there's only so much that any originator will maintain.

In terms of the expectation, Mark, I think global central banks put Brexit to one side, which clearly reflecting yields in the U.K. Global central banks tend to be minded to go on another round of monetary easing.

So could it be that we see quite full yields for quite a long time? That's very possible. How the competitive landscape will react to that? Well, for now, we're not really seeing those swap rates being passed through to product pricing. And it's very difficult to estimate how long that's going to last. But clearly, the moves are very significant, right? You're not talking about 5, 10 basis points of margin improvement. You look at the difference in swap rates, it's significant improvements, right?


Ian Martin Lonergan, Charter Court Financial Services Group plc - CEO & Director [22]


In a similar line, I suppose, I'd have added to Ian's question earlier on that whilst the volumes have been good in the first half, application pipeline is strong. What the second half will hold for that trajectory, we're not making any statements about. We're just saying that we are where we are off the back of good first half.

Any further questions? I don't think we've got any on the line. Okay, we'll be around for coffee if anybody wants to catch us. Otherwise, thanks very much.


Jean-Sabastien Maloney, Charter Court Financial Services Group plc - CFO & Director [23]


Thank you.