Paragon Banking Group PLC

INTERIM MANAGEMENT REPORT

The Group's operations are organised into three divisions, based on product types and origination and servicing capabilities. Customer loan balances at 31 March 2021 and advances in the period for each of those divisions are summarised below:

The first six months of the financial year have seen a 1.5% growth in the total loan book with a 2.5% year-on-year increase. This increase was despite the continuing impact of Covid on the UK economy. New advances were lower than their level in the comparative period but saw a 45.1% increase compared to the second half of the 2020 financial year as the impacts of the pandemic began to ease.

The core products of the Group's Mortgage Lending division are buy-to-let residential property mortgages, targeted at specialist landlords in the UK. During the period the Group also offered limited numbers of owner-occupied first and second charge mortgages on residential property. However, following the period end it withdrew from the second charge market entirely, to increase its buy-to-let focus. In all its offerings, the Group targets niche markets where its focus on detailed case-by-case underwriting and its robust and informed approach to property risk differentiate it from both mass market and other specialist lenders.

Housing and mortgage market

During the period the UK housing market continued to be impacted by the Covid pandemic and the associated relief schemes including payment holidays, effective prohibitions on some forms of enforcement action and the continuing availability of stamp duty holidays, which were extended until June 2021 in the March 2021 budget. While the period over which payment holidays were available was extended, the maximum relief was capped at six months and the impact of such holidays began to reduce as borrowers reached their maximum allocation. Lockdowns and social distancing requirements also put practical constraints on the operation of the housing market.

Despite this adverse climate, transaction volumes improved considerably with HM Land Registry reporting 775,000 residential property transactions in the six months, compared to 416,000 in the preceding half year. At the extreme, April 2020 saw 37,000 transactions, which had increased to 181,000 in March 2021. In their March 2021 Residential Market Survey RICS also note increased activity levels in the market and a positive outlook for property sales.

House prices rose steadily in the period, in contrast to the previous expectations of some forecasters, with the Nationwide House Price Index recording a year-on-year improvement of 5.7% to March 2021. Both Nationwide and RICS are forecasting continuing growth in the short term, although some caution remains as to the medium-term outlook as reliefs unwind.

This pattern was reflected in the mortgage market, where the Bank of England reported new approvals of £157.7 billion in the six months ended 31 March 2021, a substantial increase on the £111.7 billion reported for the previous six months. Particularly high volumes were reported in the last quarter of the 2020 calendar year as the transaction backlog from the summer lockdown worked through the system.

Across the mortgage market arrears and possessions reported by UK Finance ('UKF') remain at historically low levels, with the continuing availability of Covid reliefs helping mortgage holders to avoid financial distress. Based on their research, published in May 2021, UKF have concluded that the availability of payment holidays has fulfilled the purpose of enabling borrowers to stay out of arrears through the pandemic.

The private rented sector ('PRS') and the buy-to-let mortgage market

Specialist landlords form the largest part of the Group's target market. Such landlords will typically let out four or more properties and will generally run their portfolio as a business and have a high level of personal day-to-day involvement.

The Group considers that the experience of its customers, their level of involvement and the diversification of their income streams across properties make them less vulnerable to cash flow shocks in the event of a downturn and better able to cope when faced with an adverse economic situation. This proved to be the case through the Covid pandemic where customers engaged quickly to address the issues they faced.

The Group is amongst a small number of specialist lenders addressing this sector, which is underserved by many of the larger lenders and which has seen supply constrained through the pandemic.

New issuance of buy-to-let mortgages followed the trend in the wider mortgage market, responding to the property market as a whole. New advances reported by UKF, at £21.5 billion for the six months ended 31 March 2021, were 31.1% higher than for the previous half year (2020 H2: £16.4 billion). This increase was principally driven by increased levels of advances for house purchase which comprised 38% of the total, compared to 23% in the previous six months. The level of new buy-to-let remortgages remained relatively stable.

In the lettings market RICS, in its March 2021 UK Residential Market Survey, forecast increasing levels of tenant demand, outstripping supply and leading to upward pressure on rents, with an expectation of average increases of 3% over the next twelve months, which will benefit affordability and cash flows for the Group's landlord customers.

Sentiment within the landlord community is positive. Independent research carried out for the Group in the first quarter of the 2021 calendar year suggested that, for the first time in four years, the percentage of landlords intending to increase the size of their portfolio in the next twelve months was greater than the percentage intending to reduce their investment, by 19% against 17% respectively. Amongst larger scale landlords this sentiment was more pronounced, with the number planning expansion at around 30%.

At the same time in the Group's tracking of sentiment amongst mortgage intermediaries for the quarter ended March 2021, 47% of brokers reported demand for buy-to-let mortgages as 'strong' or 'very strong', with only 12% reporting 'weak' or 'very weak' demand.

The UKF analysis of arrears and possessions published in May 2021 also provided analysis of buy-to‑let cases, showing a similar picture to the wider mortgage market, with a significant uptake of payment holidays serving to keep arrears and possessions low, even nine months after these reliefs first became available.

All these factors provide a strong indication of the current strength of the buy-to-let mortgage market and the opportunities for the Group going forward.

Lending activity

The primary mortgage lending activity of the Group continues to be the provision of buy-to-let mortgages to specialist landlord customers. While the Group does provide other product types within the buy-to-let market and beyond, these are largely ancillary to the main thrust of lending. Consequently, the main focus of the division's lending operations through Covid has been in supporting its buy-to-let specialist customers.

The total amounts of the division's lending in the six month period are set out below.

Total lending in the segment declined by only 8.6% compared to the same period in the previous financial year, which was only impacted by Covid to a limited extent. Mortgage lending in the period was 55.2% higher than in the second half of 2020, as the property market began to recover, despite the ongoing Covid-based restrictions.

Buy-to-let

Buy-to-let lending overall fell by 5.0%, year-on-year, with specialist lending falling only 1.2%, despite the impact of Covid, particularly around the turn of the year. Volumes strengthened towards the end of the period, with the new business pipeline closing at £926.7 million, 17.3% higher than a year earlier (30 September 2020: £868.1 million, 31 March 2020: £789.8 million). Restrictions in lending imposed during the pandemic had all been reversed by the end of the period, with further developments introduced, helping to drive volumes.

Almost all of this pipeline (97.0%) related to specialist business (31 March 2020: 92.9%). With a more promising economic outlook for the UK and for the housing market in particular, prospects for the conversion of pipeline cases to actual loans also look more promising than at 31 March 2020. When coupled with the higher overall pipeline, this is likely to deliver strong volumes going into the second half of the financial year.

Specialist intermediaries are the principal source of the Group's buy-to-let business, and it continues to develop its service proposition to ensure its business partners receive the service levels that they require. Regular research is carried out to monitor satisfaction levels and during the period this showed that 88% were satisfied with the ease of obtaining a response from the Group (2020 H1: 91%, 2020 full year: 91%), delivering a net promoter score at offer stage of +46 (2020 H1: +65, 2020 full year: +56), despite the impact of Covid. This drop is at least partly attributable to a sharp increase in applications ahead of the anticipated end of stamp duty relief and a desire from intermediaries for a particularly rapid response to beat the expected cut-off date.

The Group's relationship with its intermediaries was enhanced by its response to the pandemic, with research in the period finding that 66% of the intermediaries who responded believed that its response to the Covid crisis was better than that of other lenders (2020 H2: 70%).

During the period the business launched a long-term, in-depth, end-to-end transformation programme to restructure processes and enhance systems, increase the effectiveness of the operation and upgrade the offering to customers and intermediaries. This represents a significant commitment of time and resources to the future of the business, with enhancements starting to come online from the 2022 financial year.

The Group understands the potential for climate change to impact its mortgage business and seeks to mitigate risk through careful consideration of the properties on which it will lend. It also continues to develop systems and refine data to allow its overall position to be measured and the behaviour of its security portfolio under climate-related stresses to be better understood.

During the period the Group launched its first range of green buy-to-let mortgages. These market-leading products have a maximum 80% loan-to-value ratio and are restricted to properties with an Energy Performance Certificate ('EPC') rating of C or higher. Green further advance products are also available on a similar basis.

The UK Government has identified the provision of more energy efficient housing as a principal objective in its response to climate change, with EPC levels being set as one of the principal benchmarks to be used. It has announced a target of upgrading as many homes as possible in the PRS to an EPC rating of C or higher. In order to achieve this, there is an expectation that lenders will set minimum quality thresholds, and to advantage customers with more energy efficient properties, as is the case with the Group's green mortgage products.

The Group has also designated EPC grades as a principal metric for evaluating climate change risk in its mortgage book and has continued to develop systems to analyse this data and to ensure that it has reliable and up-to-date information on as much of its book as possible, including legacy cases. It is unfortunate that some public information sources are not currently configured in a way which easily facilitates in-life monitoring and analysis or the targeting of customers in need of support in improving their properties.

The Group's latest analysis identified EPC grades for 87.6% of its mortgage book by value at 31 March 2021 (30 September 2020: 85.1%). Of these 98.0% were graded E or higher (30 September 2020: 98.1%) with 36.8% rated A, B or C (30 September 2020: 37.7%). The slight reductions are principally a result of refining the data, with 39.7% of new originations in the six months having one of the top three grades (90.3% coverage).

The Group also monitors the potential physical risks to security values arising from climate change. This includes the assessment of a property's flood risk as part of the underwriting process. At 31 March 2021 approximately 2.3% by number of properties securing the Group's buy-to-let mortgages in England and Wales were considered to be at medium or high risk of flooding from the sea or rivers, based on data from the Environment Agency (30 September 2020: 2.2%).

The Group continues to refine and develop its use of both internal and external data to manage climate change risk. However, it recognises the important part that the development of reliable and easily accessible information sources by the UK authorities must play in quantifying these exposures. It would therefore welcome any initiatives by the UK Government to enhance national reporting as part of its own response to climate change.

The business is currently working with the Green Finance Institute on a number of industry initiatives to develop standards for mortgage products which would encourage energy and carbon efficiency for the future, and this work continues to inform the development of the Group's own buy-to-let product range.

Other lending

The division's other first and second charge mortgage lending is generally ancillary to the main buy‑to‑let focus and is carefully managed to ensure that only lending with appropriate risks and returns is undertaken, and that such lending provides an appropriate return on the Group's capital.

Lending in the Group's second charge mortgage operation was scaled back in summer 2020 in response to Covid, with people transferred to provide support to other business areas, and lending remaining low in the half year. Completions in the half year were £8.7 million compared to £40.1 million in the first half of 2020, and £13.9 million in the second half of that financial year. The Group took this opportunity to review the long-term strategic potential of second charge lending in light of its capital requirements and the Group's overall risk appetite and announced its withdrawal from this market in May 2021. Pipeline cases will generate a modest level of completions in the second half of the financial year.

The Group's exposure to first charge residential lending is strictly limited, given the yields available in this market at acceptable levels of risk, and a limited demand for products where its specialist approach is cost-effective and adds value. The opportunities for the Group in this area principally relate to complex propositions, which will arise on an opportunistic basis, including lending to the existing professional landlord customer base.

Performance

The outstanding first and second charge mortgage balances in the segment at 31 March 2021 are set out below, analysed by business line.

Balances within the mortgage portfolio have continued to increase steadily. At 31 March 2021 loan balances in the division were 4.3% higher than a year earlier. Within this balance the overall buy-to‑let portfolio had increased 4.7% year-on-year to £10,919.0 million (30 September 2020: £10,583.8 million, 31 March 2020: £10,429.1 million), with post-2010 originated assets now representing 61.4% of the total (31 March 2020: 56.8%).

The annualised redemption rate on buy-to-let mortgage assets remained stable in the six months to 31 March 2021 at 6.8% (2020 H1: 7.8%, 2020 Full Year: 6.6%). While this low level of redemptions may be attributable in some part to the Covid crisis, it maintains a pre-pandemic trend generated by the Group's careful management of its customer base as accounts reach the end of their fixed rate period.

Since March 2020, payment reliefs have been granted to 14,006 of the Group's buy-to-let accounts, with 5,347 of these requiring an extension. At 31 March 2021 only 270 accounts remain on payment relief, representing 0.4% of the book by number.

Arrears on the buy-to-let book remained low and broadly stable in the six months at 0.22%, despite the expiry of payment holiday arrangements (30 September 2020: 0.15%, 31 March 2020: 0.16%). These arrears remain very low compared to performance in the national buy-to-let market, with UKF reporting arrears of 0.54% across the sector at 31 March 2021 (30 September 2020: 0.52%, 31 March 2020: 0.41%).

While the performance metrics of the buy-to-let mortgage portfolio have remained positive throughout the period, the extent to which these have been influenced by UK Government interventions, such as furlough payments and other income supports underpinning tenant rental payments, funding from government-backed loan schemes accessed by landlords and the stamp duty holiday, cannot be established from data available. Therefore, the long-term prospects for the book, once these initiatives begin to be withdrawn remains subject to a significant level of uncertainty.

The Group's approach focusses its underwriting on the credit quality and financial capability of its customers, underpinned by its assessment of the available security. This approach relies on a detailed and thorough assessment of the value and suitability of the property as security and this robust approach to valuation, including the use of a specialist in-house valuation team, provide it with significant security in the face of economic stress.

The loan-to-value coverage in the Group's buy-to-let book, at 64.4% (31 March 2020: 67.7%) provides a considerable buffer in the event of default. The levels of interest cover and stressed affordability in the portfolio suggest that its customers are also well placed to manage Covid-related impacts on their businesses in the longer term.

Second charge mortgage arrears increased marginally to 1.00% (31 March 2020: 0.51%, 30 September 2020: 0.62%) as the book continued to season, with performance remaining satisfactory. In the second charge portfolio 525 payment reliefs were granted, of which 281 were extended. At 31 March 2021, 37 of these accounts remain on payment relief, 1.3% of the accounts in that portfolio.

The Group continues to operate a receiver of rent process for buy-to-let assets, which helps to reduce the level of loss incurred by both it and, in turn, its landlord customers. This process gives the Group direct access to the rental flows from the underlying properties, while allowing tenants to stay in their homes. At 31 March 2021, 557 properties were managed by a receiver on the customer's behalf, a year-on-year reduction of 14.0% (31 March 2020: 648 properties). Almost of the current receivership arrangements relate to pre-2010 lending, with cases being resolved on a long-term basis to ensure the best outcome for the Group, its customers and their tenants. There were relatively low numbers of cases entering receivership in the period.

Outlook

While the division's performance was affected by Covid in the half year, the buy-to-let mortgage portfolio continued to grow, and credit quality remained strong. The business enters the second half of the year with a record pipeline and growing momentum and with enhancements to its proposition due to come on stream. At the same time, the combination of increasing transaction volumes, strong tenant demand and rental yields and positive landlord and broker sentiment point to a positive outlook in the Group's target market.

The Mortgage Lending business is well placed to accelerate out of the pandemic and generate high quality assets and returns for the Group, while contributing to the development and renewal of the nation's housing stock.

The Group's Commercial Lending division includes four key specialist business streams lending to, or through, commercial organisations, mostly on a secured basis. This division had been a major source of growth within the Group before the impact of Covid and remains a focus for growth going forward.

The four major strands of the business comprise:

·    SME lending, providing leasing for business assets and unsecured cash flow lending for professional services firms, amongst other products

·    development finance, funding smaller, mostly residential, property development projects

·    structured lending, providing finance for niche non-bank lenders

·    motor finance, focussed on specialist parts of the market

Within these sectors the Group's strategy is to target niches (either product types or customer groups) where its skill sets can be best applied, and its capital effectively deployed to optimise the relationship between growth, risk and return.

In each of its markets the division's competitors are principally small banks and similarly sized lenders. They are markets in which the largest lenders have little presence, creating a credit availability issue for customers and significant opportunities for the Group. The division operates through specialist teams in each business area, with a common focus on credit standards, customer service, asset appraisal and collections and recovery linking the operations strategically.

The SME sector has been the focus of government-mandated support programmes throughout the pandemic including payment reliefs from lenders, VAT deferral schemes and the provision of loans under the Coronavirus Business Interruption Loan Scheme ('CBILS') and the Bounce Back Loan Scheme ('BBLS'). These reliefs have resulted in significant increases in cash balances held in the sector, which makes long-term prospects difficult to gauge.

The Group has provided CBILS and BBLS loans, primarily to existing customers, and has also been accredited to provide loans under the new Recovery Loans Scheme ('RLS') with RLS lending commencing in the second half of the financial year.

During the period the Group has continued to enhance operational functionality in this area, developing technological solutions and investing in systems, particularly focussing on administration systems for SME lending and development finance. These enhancements should provide benefits for both customer service and in the procuration processes, enabling potential customers or the brokers they use to access appropriate finance solutions more easily and efficiently, while providing the Group with the information needed to support increasingly technologically advanced decision-making.

The division continues to develop its approach to green financing, where funding can be deployed in support of more climate conscious business activities, such as supporting local authorities in replacing refuse collection fleets with greener vehicles. Work is also in progress to classify the environmental impacts of lending in accordance with the UK's Green Taxonomy, but involvement with 'brown' industries (those with a high environmental impact) has already been assessed as low.

Lending activity

During the period, lending levels across the majority of the Commercial Lending business lines began to recover from the impact of Covid seen in the second half of 2020. While new business levels outside development finance had not recovered to the levels seen in the first half of the 2020 financial year, volumes in most areas had grown significantly from those seen in the six months ended 30 September 2020. Recovery was slowed by the impact of the second UK lockdown, which saw volumes particularly depressed in January and February 2021, though activity in March 2021 began to strengthen considerably.

The new lending activity in the segment during the period is set out below, analysed by principal business line. As the structured lending business comprises revolving credit facilities, the net movement in the period is shown below.

As a result of this new business, and the amortisation of the existing loan book, the overall Commercial Lending balance declined by 5.2% in the period since the last year end.

SME lending

The SME lending business contributed a solid performance in the face of Covid-related constraints through the first half of the financial year, with certain business lines particularly affected by either reduced economic activity, logistical difficulties in equipment sourcing, payment deferrals reducing the need for finance or the availability of cost-effective CBILS and BBLS funding. Lending strengthened considerably towards the end of the period, with March seeing the highest level of applications since the impact of Covid and momentum building.

Overall, advances fell by 22.5% compared to the six months ended 31 March 2020, which was largely before the impact of Covid was felt. Compared to the six months ended 30 September 2020, however, advances increased by 78.1% as markets began to reopen and business confidence began to increase.

In the division's core asset leasing business volumes reduced by 14.5% to £106.9 million, compared to the comparative period (2020 H1: £125.0 million). This reflects the performance of the asset finance market in general, with the Finance and Leasing Association ('FLA') continuing to report depressed volumes through most of the period. Almost 15% of the Group's new asset leasing business was supported through CBILS, demonstrating the scheme's effectiveness. This level of business represents a significant recovery from the £41.1 million of new lending recorded in the second half of the 2020 financial year, boosted by an increase in confidence and a return to more normal activity levels in the operation's target industries, such as construction. Investment in operating leases has also continued with £4.6 million of assets acquired in the period (2020 H1: £7.2 million, 2020 full year: £12.9 million).

During the period, the Group has continued to advance loans under the UK Government-sponsored British Business Bank's CBILS and BBLS programmes to support SMEs potentially affected by the Covid pandemic. In the six months ended 31 March 2021 £26.3 million was advanced under these schemes (2020 H2: £25.9 million), backed by a government guarantee, of which £14.6 million was asset leasing business. The Group is aware of the widely-reported abuses of these schemes but has not so far been impacted itself. It continues to closely monitor its portfolio for any adverse indications.

After 31 March 2021 no new CBILS or BBLS loan applications can be accepted, but at the closing date the Group had a pipeline of loans which can still be completed in the second half year. The Group has been authorised to participate in the follow-on RLS programme, with products launched in April 2021. As with CBILS lending, RLS loans will have the benefit of an 80% government guarantee (after the proceeds of any business assets are applied for leasing balances), but unlike in CBILS lending customers will be required to meet interest payments from the outset of the loan. The Group expects to use the RLS to provide support to SME customers until 31 December 2021, the currently expected end date of the scheme.

Short-term lending to professional services firms outside the government supported schemes fell by 59.3% to £28.6 million (2020 H1: £70.2 million). This resulted from both the deferral of tax balances, where customers had customarily taken out short term loans to spread the impact, and of the wide availability of cheap CBILS and BBLS lending in the market. The availability of CBILS and BBLS also depressed other unsecured SME lending volumes. However, these are short-term effects and the underlying requirement for finance remains in the longer term.

The Group's programme of investment in the generation of system improvements and efficiency gains in this business continued despite the pandemic, with enhancements to the new lending process rolled out in April, offering improvements to customers and brokers. These included the launch of a new broker portal, providing enhanced functionality to business introducers. This programme will continue through the year enhancing controls, operational agility and the customer experience.

With the most recent forecasts from the FLA anticipating a recovery in asset finance lending over the second half of the financial year, the division's new business pipeline strengthening and system developments coming on line, the Group is optimistic for the businesses continuing recovery from the pandemic and its future growth prospects.

Development finance

The Group's activity in the development finance market remained robust throughout the period, although the restrictions imposed as a result of the Covid pandemic meant that many projects progressed more slowly than they might have done in normal times. This has, however created an element of pent-up demand moving into the second half of the financial year with advances, pipeline and enquiries all building through March into the new period. Market sentiment appears positive with developers generally optimistic about the future.

The Group's target customer in this market is a small to medium-sized developer of UK residential property. Projects currently in progress have an average development value of £7.8 million against which the Group has extended average facilities of £4.6 million, giving a substantial level of security cover. These projects are generally focussed on the more liquid parts of the residential market (houses and smaller blocks of flats), avoiding developments with high unit values.

While the business has been historically concentrated in the English Home Counties, with 66.3% of balances at 31 March 2021 (30 September 2020: 67.0%) located in London and the South East, the Group's strategic objective is to lend more widely across the UK. Central London property hot-spots have generally been avoided with less than 6% of the balance located in this area.

The Group has recently expanded its range of offerings to include projects in the £400,000 to £1,000,000 range, widening its potential market to include smaller, growing developers as they expand their businesses as well as expanding options for existing customers. It also reintroduced lending of up to 70% of total development value for the highest quality propositions. Together these will expand the range of projects the business is able to consider.

In order to protect its investments, the Group engages independent monitoring surveyors to review project progress and costs on a regular basis through the build phase of each project. The resilience of the Group's customers through the most recent phase of the Covid pandemic has been impressive with delays minimised and completed projects being taken to market.

During the latter part of the period, the volume of new proposals being received increased steadily, with the increased amount of undrawn approvals at the period end likely to lead to a positive start to the second half of the financial year. Undrawn amounts on live facilities at 31 March 2021 at £402.0 million were 5.5% higher than at the year end (30 September 2020: £380.9 million, 31 March 2020: £343.2 million) while the post-offer pipeline of £207.7 million was 21.2% higher (30 September 2020: £171.5 million).

Throughout the period the business invested in both people and systems, while increasing its national and regional coverage with the recruitment of experienced specialist relationship directors and portfolio managers. These initiatives will support the further growth of the business going forward. With the UK Government setting a target of at least 300,000 new homes completed each year and current building levels some 50,000 less than this, there is a clear need for the Group's customers to address this shortfall with its support.

The performance of the Group's development finance operation through the pandemic has demonstrated the attractiveness of the proposition going forward. The need for new housing in the UK will continue into the future and smaller developers, who may struggle with credit availability, will be called on to supply much of this demand. Sentiment in the market looks positive entering the second half of the financial year and the Group's business model, its investment in systems and people and the developments in its product range mean it is well-placed to support the aspirations of its developer customers going forward and to help support housing provision across the country.

Structured lending

The Group's structured lending exposure has reduced in the period, with one facility terminating and drawings on others reduced as a result of lower levels of business activity due to Covid. No new facilities were completed in the period, but the Group continues to explore further opportunities in this field.

Structured lending facilities generally fund non-bank lenders, of various kinds, and as such facilities are carefully constructed to provide a buffer for the Group in the event of default in the ultimate customer population, with first loss cover of at least 20% for all current cases. The impact of Covid has varied facility by facility, but the Group's experienced account managers have received regular reporting on the performance of security assets and maintained a high level of contact with the Group's customers throughout the crisis in order to safeguard its position.

The Group has a number of well-progressed additional facilities in the pipeline, with an expectation of new drawings in the second half of the year. These include new asset classes, spreading the risk inherent in such lending. The Group continues to actively seek new opportunities in this field, with a particular interest in facilities linked to green initiatives.

Motor finance

Within the motor finance market the Group carefully targets its offerings on those specialist propositions which are not addressed by mass-market lenders, including specialist makes and vehicle types, such as light commercial vehicles, motorhomes and caravans. Levels of activity in the automotive market remained subdued in the period, with UK lockdowns impacting the markets for both new and used vehicles after a short-lived recovery in the last quarter of the 2020 financial year.

The Group's advances continued to decline with £28.8 million of completions, down 17.9% from the £35.1 million achieved in the second half of 2020 and far below the £74.8 million achieved in the six months ended 31 March 2020. This performance follows that of the wider motor finance market, with the FLA reporting falling volumes until February 2021, before a recovery beginning to take hold in March. It also reflects the Group's decision to tighten lending criteria and temporarily divert resources from the new business teams in the area to support the wider Group's customer servicing requirements through the pandemic, including the provision of payment reliefs.

Following the relaxation of UK lockdown restrictions, prospects for the second half of the year appear more positive as dealerships open for business, and economic activity in general increases. The Group is renewing its focus on its motor finance business to take advantage of this, with seconded teams returning to their roles in the motor finance new business area.

Performance

The loans within the Commercial Lending division, analysed by product type are set out below.

The size of the Commercial Lending book reduced by 5.8% in the six months, principally as a result of restricted activity in some of the division's business lines through the winter lockdowns and the shorter term nature of some of the segment's products, leading to a more rapid run-off.

Credit quality in the development finance book remained good. Overall project progress remains in line with expectations and no significant impact on the disposal of completed developments has been noted. Accounts are regularly monitored and graded on a case-by-case basis by the Credit Risk function. At 31 March 2021 only two accounts had been identified as at risk of loss, both having been similarly identified at 30 September 2020.

While no Covid-specific credit concerns have been identified to date on individual development finance accounts, the Group recognises the potential impact of the current level of economic uncertainty, including the potential impact of the end of Stamp Duty relief on the property market, and execution risk on its portfolio. The Group continues to monitor these issues closely as they develop. The average loan to gross development value for the portfolio at the period end, a measure of security cover, was 62.4% (30 September 2020: 63.1%, 31 March 2020: 64.7%). This gives the Group a significant credit buffer if any of the projects encounter issues, either as a result of the pandemic or for any other reason.

Arrears in the division's finance leasing portfolios remain stable, even with the cessation of the majority of payment reliefs. Arrears on asset leasing business at 31 March 2021 stood at 0.86% (30 September 2020: 1.75%, 31 March 2020: 0.27%) and with those on the motor finance book at 2.25% (30 September 2020: 1.76%, 31 March 2020: 1.32%).

Since March 2020, payment reliefs have been granted to 3,061 of the division's asset finance customers, however only 333 required an extension. At 31 March 2021 only 54 accounts remain on payment relief, representing 0.7% of the book by number. In the motor finance portfolio 1,918 payment reliefs were granted, of which 376 were extended. At 31 March 2021, 96 accounts remain on payment relief, 0.6% of all accounts by number.

Up to the period end all CBILS and BBLS lending remained in its initial twelve-month period where interest payments were met by the UK Government. Payments from customers will begin to fall due in the second half of the financial year and the Group has appropriate systems, processes and resource in place to deal with any issues as they arise. Any emerging payment behaviours will be kept under close scrutiny.

For structured lending accounts, the Group carefully monitors the performance of the underlying asset pool on a monthly basis, to ensure its security is adequate. Performance in the half year has been in line with expectations, with a number of facilities showing improved metrics and with one facility previously assigned to IFRS 9 Stage 2 returning to Stage 1 and another redeeming at par.

Outlook

The Commercial Lending division has experienced a challenging twelve months, along with the rest of the UK economy. However, looking forward, sentiment in each of its markets is positive and there are signs of recovering activity levels, both for the Group and its markets more generally.

Work to develop the division's products and proposition have continued throughout the pandemic period and the business is well placed to take advantage of the post-Covid recovery with an increased business pipeline and momentum building.

The Idem Capital segment contains the Group's acquired loan portfolios, together with its pre-2010 legacy consumer accounts. These include mostly second charge and unsecured consumer loans.

When considering portfolios for acquisition the Group currently focusses on those specialist loan portfolios which can augment the organic origination activities of the Group.

This model is essentially opportunistic and the flow of appropriate opportunities to the market is sporadic. The Group carefully considers the capital requirements for any potential acquisition, particularly where asset types offered require relatively large amounts of capital to be held. It also evaluates the potential for conduct risk issues to arise in portfolios which may contain more vulnerable customers. The Group will only pursue transactions where its wider capabilities in specialist administration and funding can provide a real benefit and where the projected return is attractive in comparison to the other opportunities for the deployment of its capital.

The Idem Capital back book includes consumer lending portfolios where customers may have historically rescheduled their debt repayments and its processes aim to generate fair outcomes for all customers, recognising any vulnerabilities. This aim has formed a principal focus in the Group's response to Covid in respect of such customers.

The division's success rests on understanding assets, strong analytics, advanced servicing capabilities and the efficient use of funding.

New business

Although the UK loan portfolio market remained active in the period, the impact of Covid significantly reduced activity levels, and complicated the pricing and execution of potential deals, discouraging vendors from coming to market. This was particularly the case for the more complex opportunities in which the Group would ordinarily be interested.

During the period, no portfolio acquisitions were completed (2020 H1: none) although the division considered a limited number of reviews of opportunities that were ultimately not progressed.

The main focus of the business throughout the six month period was the careful management of its existing books and ensuring that appropriate processes and systems remained in place to address the impact of the Covid outbreak on its customers, particularly those who are vulnerable or who have developed vulnerabilities as a result of the ongoing pandemic.

Performance

The values of the loan balances in the segment are set out below, analysed by business line.

With no portfolios acquired in the period, balances in the division's loan books have continued to decline in the period as customers pay down their accounts. 120 month Estimated Remaining Collections on the segment's acquired consumer assets, which measures forecast undiscounted receipts, reduced to £260.1 million at 31 March 2021 from £324.6 million a year earlier, as the portfolios amortised.

Payment performance in the segment remained steady, with no further significant impacts from the ongoing Covid lockdowns.

Arrears on the segment's secured lending business continued to move marginally higher, in line with recent performance at 20.2% (30 September 2020: 18.8%, 31 March 2020: 18.0%). This is an inevitable result of the structure of these portfolios, which include accounts which were making full payments in the period but may have missed payments in the past, and where fully up-to-date accounts are more likely to redeem.

Over the course of the pandemic, payment reliefs were granted to 1,356 of the division's second charge customers, with 744 of these extended. At 31 March 2021 only 62 accounts remain on payment relief, representing only 0.6% of the book. In the motor finance portfolio 697 payment reliefs were granted, of which 177 were extended. At 31 March 2021, 33 accounts remain on payment relief, 0.7% of the total number.

None of the individual Idem Capital purchased loan portfolios were considered as underperforming in the period. The Group monitors actual cash receipts from acquired portfolios against those forecast in the evaluation which informed the purchase price. Up to 31 March 2021, such collections were 110.0% of those forecast to that point (30 September 2020: 109.8%, 31 March 2020: 109.1%), demonstrating the stability in cash flow from these portfolios.

The Group continues to invest in systems and people to ensure that these loans are serviced efficiently and effectively, and that appropriate customer outcomes are achieved, particularly for vulnerable customers.

Outlook

The Group will continue to consider portfolio acquisitions where these enhance its overall positioning, provide attractive returns and represent a productive use of capital. There is no requirement for the business to chase volumes and the Group is prepared to wait for appropriate opportunities to arise.

In the meantime, the division will continue to focus on its commitment to providing appropriate outcomes for its existing customers as it has done throughout the Covid pandemic and ensuring any vulnerability issues are carefully addressed.