Financial Analysis of Sainsbury's Bank: Profit, Losses, and Impairment Allowances, Lecture notes of Accounting

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Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 COMPANY NUMBER: 3279730 Strategic Report 01 Business model 02 Market context 03 Strategy 03 Business review 05 Risk overview 09 Wates Corporate Governance Principles 11 Section 172 13 Non-financial reporting 14 Governance 16 Key performance indicators 18 Financial review Directors’ Report 21 Board of Directors 23 Statement of Directors’ responsibilities Financial Statements 24 Independent auditors’ report to the members of Sainsbury’s Bank plc 31 Income statement 32 Statement of comprehensive income 33 Balance sheet 34 Statement of changes in equity 35 Cash flow statement 36 Notes to the financial statements 86 Alternative performance measures 87 Glossary Financial headlines £(162)m Statutory (loss)/profit before tax (2020: profit £5m) £(36)m Underlying (loss)/profit before tax (2020: profit £33m) 2.4% Net interest margin (underlying) (2020: 2.5%) 1.1% Bad debt asset ratio (2020: 0.7%) 90% Cost : income ratio (underlying) (2020: 75%) 17.6% CET1 Capital Ratio (transitional) (2020: 14.1%) 125% Net Stable Funding Ratio (2020: 110%) Performance, including reference to the above headlines, is explained in the Business review and Financial review sections on pages 3 and 18. The Alternative Performance Measures have been defined and reconciled to the statutory disclosures on page 86. Contents Strategy The Bank is aligned to the Sainsbury’s Group strategic priority to focus on brands that deliver with a customer and profit focus whilst supporting the core food business. We aim to drive value for the Sainsbury’s Group by being an agile, capital and cost-efficient provider of simple, mobile led financial services for Sainsbury’s and Argos customers. We know that when customers take out a Bank product, they become more loyal and go on to spend more in Sainsbury’s and Argos stores. We aim to use the power of Nectar to win customers and grow more valuable market share. — Customer and profit focus — Supporting the core food business Know and serve our customers better, use the power of Nectar Following lower consumer demand and a tightening of credit appetite, our customer numbers have decreased 14%, with the largest reduction seen in Travel Insurance, down 64% year-on-year. Nectar continues to be integral to our strategy and a key differentiator for Sainsbury’s Bank with over 77% of our customers holding a Nectar card and benefiting from Nectar points and rewards across a range of products. We successfully introduced a new Nectar Credit Card offering up to 10,000 Nectar points for customers seeking rewards on spending with our Nectar partners. Nectar related applications are up 318% in the last quarter of FY20/21 compared to the same quarter last year. We have expanded our marketing channels and are driving more direct acquisition (as opposed to via price comparison sites) with total direct sales increasing by 6% and direct digital sales increasing by 72%. Underlying income is 32% lower, driven by a decline in market demand for borrowing products, the closure of our Travel Money business amidst lockdown restrictions across the United Kingdom and changes in consumer spending behaviour whilst in lockdown. This was partly offset by a significant reduction in savings rates following the reduction in the Bank of England Base Rate and lower customer deposits. Business review Reflecting the changing economic environment driven by COVID-19, the Bank has made an underlying loss in the year. We have seen significantly reduced demand across consumer credit, and less activity in our fee-based products, particularly Travel Money and ATMs. We have also made a significant provision in anticipation of future credit losses, largely reflective of predictions for unemployment, partially offset by management actions on funding and costs. In line with guidance at half year, the Bank returned to profit in the second half to deliver underlying operating loss of £36 million for the financial year. Despite challenges from the pandemic, we have delivered great value financial solutions and support for the Sainsbury’s customer whilst improving our digital and operational services. We have maintained a strong Net Promoter Score (NPS) performance for our products and remain in the top quartile for banks. We have accelerated our digitisation journey with 70% of customers receiving paperless statements and over two thirds of our customer base now registered for online banking, with credit cards now over 80%. 03 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report VISION To be the provider of financial services for loyal Sainsbury’s Group customers OBJECTIVE An agile, capital and cost-efficient provider of simple, mobile led financial services PRIORITIES Reshape the balance sheet Strengthen the business Simplify the organisation — Improve margins — Develop AFS proposition — Improve card and insurance momentum — New FS model with Nectar at the core — Run off mortgage book safely Focus on: — Operational resilience — Conduct — Capital efficiency Build core competency in: — Customer experience — Digital — Data and analytics — Credit/Operational risk — Partnerships — Right size the cost base — Rationalise product offering — Review vendor/supplier arrangements — Optimise cross-Group synergies Whilst operating within Risk Appetite ‘Best-in-class’ execution delivered by an outstanding and engaged team FINANCIAL SERVICES METRICS Customer Colleague Financial Safe and Sound Our performance in the year is covered in the Business review below and the Financial review on page 18. In September 2019, the Bank announced its five-year strategy, outlining its key objectives and how the strategy will be delivered. Since the announcement, the market has changed considerably due to the impacts of COVID-19 altering the pathway of achieving our strategic goals. Our balance sheet position has reduced to mitigate against the risks from poorer economic conditions. However, our focus continues to be to rebuild and reshape our balance sheet in a safe and effective manner while simplifying and strengthening the organisation. Our digital strategy in action The Bank has continued to invest in digital tools as well as continuing to build on our data and analytics capability. We are making good progress with our objective of being an agile, capital and cost-efficient provider of simple, mobile led financial services and we have seen an increase in the number of customers using our apps to manage their finances. Our Credit Card app launched in early 2019 and now has 375,000 registered users, with just under half of our active customer base now registered. The app offers a simple and fast way to access account information and view transactions while on the go. Customers have been using it to check their Credit Card balance, credit limit, available spend, and transactions. The latest version of the app went live in early 2021 providing customers with a pending transactions feature, a monthly summary of transactions, the ability to manage direct debits and additional security designed to protect online customers against fraud. In addition, further functionality was added including a credit limit indicator to allow customers to see at a glance if they are close to their limit and Google Pay digital wallet capability for customers wanting to use their handheld device for purchases. These improvements have contributed to fantastic customer feedback and have driven up our ratings on the Apple App Store from 3.6 to 4.8 out of 5. These changes pave the way for exciting future developments to drive more customers onto the app. We have been investing in our Loans and Savings application journey, to speed up and streamline the process for customers. For many customers this will mean no more cumbersome paper trails as they can use their mobile phones to complete our required checks. And they’ll get their accounts set up quicker, and loan funds sooner due to new pre-approval checks. Our Car & Home Insurance digital evolution across acquisition and servicing platforms is well underway. Customers can now pay online, see Nectar offers as part of the sales journey and they can ‘Live Chat’. Our customers are now self-serving more than ever before, with over 60% of Car & Home Insurance customers now requesting service changes online rather than over the phone, an increase of 103% since 2019. In addition, our Insurance app, which launched in January 2019 for Car & Home, was amongst the first of its kind to allow policyholders to manage their Insurance via their smart device. Essentially, it allows customers to make changes to their policy and to see all the information they need in one place, giving them quick and easy access to their policies wherever and whenever they need it, and information about what to do in the event of a claim. Despite a challenging market for Insurance, with the pandemic driving very competitive market pricing, we have remained resilient with Insurance income in line with the prior year. In Car and Home, new business demand was down led by new car registrations and home sales, but this was offset by strong retention growth year on year. In line with our strategic priority to improve Insurance momentum, we have invested this year in our acquisition and servicing platforms which offers improved payment functionality, live chat for new customers and has integrated Nectar into the customer journey. As a result, our Insurance book now holds over a quarter of a million policies. We also launched new Pet Insurance cover and introduced multifactor authentication on our online web portal, minimising information security risks, to provide additional protection for our customers and their pets. In conjunction with buoyant demand as lockdown saw increased numbers of new pet owners, this drove a 96% increase in Pet Insurance new business volumes. The cost agenda continues to be a key priority for the business where we aim to deliver sustainable cost savings as we adapt to changes in the market. Successful cost initiatives delivered in the year include resizing our ATM estate and improving the terms of some of our key supplier contracts. A large component of our costs are colleague costs, around 29%, which have reduced 21%, partly in relation to lower Travel Money colleague costs as staff were redeployed into the stores after Bureaux were closed from April. Colleague costs excluding Travel Money reduced by 10% supported by management action to reduce our colleague headcount as part of our Target Operating Model review. Through action taken to protect the Bank against the economic uncertainty, by tightening credit criteria for new business early in the initial lockdown, and as a result of lower consumer finance demand, our Loans and Credit Card lending balances have reduced 28% and 27% respectively. Our Mortgage retention was lower than market as we diverted investment toward COVID-19 requirements to sustain other segments of the business. Whilst COVID-19 has impacted our strategic aim of reshaping the balance sheet, we are now able to regrow and shape our customer portfolio in the coming years to focus on capital efficient, Nectar-led products with the most connectivity to Sainsbury’s shoppers. Our approach to balance sheet management has promoted a strong capital position to absorb the losses of the pandemic and manage liquidity. The CET1 ratio has increased 3.5% to 17.6%, with the capital released as a result of the contraction in balances more than offsetting the loss made in the year. The LCR has increased 186% to 306% driven by a change in customer behaviour requiring less business outflows and management action to improve the Bank’s funding capacity. Supporting our customers We continued to serve our 1.8 million customers throughout the pandemic through our digital channels and contact centres. Supporting our customers as their needs change has never been more critical. The Bank offered payment holidays across all of its lending products to support customers who were impacted by COVID-19. Over 40,000 payment holidays were granted at a value of £429 million, 93% have returned to normal payment schedules or fully repaid the loan after the expiry of their EPF to date. Our contact centre staff played a critical role in managing the customer experience to ensure each case was treated on an individual basis to ensure the right outcome was achieved. Supporting our colleagues Lockdown began at the beginning of the financial year requiring quick and effective action to maintain operations and to ensure our colleagues are protected during this unprecedented time. We invested in our colleagues by covering expenses for home office set up and made our offices COVID-19 safe with social distancing measures. Travel Money colleagues from closed Bureaux were redeployed into Sainsbury’s supermarkets to support our Sainsbury’s store colleagues when it was needed most. 04 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Delivering value for our shareholders In order to maximise the shareholder value we made six commitments at our Capital Markets day in September 2019 and have summarised the progress to date against each of them below. 1. Stop putting cash into financial services. The Bank has received no capital from the parent this year, and our capital ratios have grown. We have a significant capital surplus and strong liquidity and we remain confident that Financial Services will not require capital injections from the Group. 2. Improve returns. We committed to double underlying profits and reach double digit ROCE within five years. We are still on track to double profit and returns in our Financial Services business within five years, despite the challenges of the current environment. Note this commitment is based on consolidated financial services (including Argos Financial Services) which has a ROCE of (1.4)% (FY20: 6.3%) compared to the Bank stand-alone ROCE (3.9)% (FY20: 2.7%). 3. Financial services to become cash generative. We remain committed to paying dividends to our parent within five years and are taking action against our priorities to enable future cash distributions to the Group. Risk appetite Our risk appetite is set and approved annually by the Board. It provides a clear articulation of the level of risk we are prepared to accept in order to achieve our strategic objectives. It is expressed and embedded through: — A ‘high-level’ Risk Appetite Statement that provides a concise set of key Bank-wide targets and limits, with a balance of current, forward-looking and stress-based metrics for financial and non-financial risks. — ‘Directional’ risk appetite limits for each of the Bank’s key risk types (e.g. retail credit risk, operational risk). These Directional limits are designed to provide early indications of changes in the operating environment and an outlook on whether we remain on-track to meet our ‘high-level’ risk appetite targets. Performance against both the ‘high-level’ risk appetite and ‘Directional’ measures are monitored and reported to our Executive Risk Committee (ERC) on a monthly basis, and at each Board Risk Committee (BRC). Additionally, escalation processes are embedded to notify Senior Executives and Board members of any risk appetite measure operating outside of approved thresholds. 4. Transform the cost base. We committed to reducing the cost to income ratio to c50% within five years. We continue to take action to implement initiatives to drive income growth and reduce costs, including a reduction in colleague headcount of 11% year on year (spot full time equivalent, 9% including contractors). Note this commitment is based on consolidated financial services (including Argos Financial Services) which has a cost to income of 72% (FY20:66%) compared to the Bank stand-alone ratio of 90% (FY20: 75%). 5. Reduce risk profile to the Group. Whilst COVID-19 has delayed our strategic aim of reshaping the balance sheet, we are now able to regrow and shape our customer portfolio in the coming years to focus on capital efficient, Nectar-led products with the most connectivity to Sainsbury’s shoppers. We continue to operate with sufficient capital and liquidity buffers to weather potential significant stress scenarios in the future. 6. Focus on Sainsbury’s customer base. We are working to increase connectivity and value for the Group and continue to work in enhanced cross group workstreams to ensure delivery of this key priority. Our focus is to enhance our digital connectivity with the Group and to provide customers convenient and simple access to financial services as part of their shopping experience. Our risk appetite enables us to make clear and transparent decisions on potential trade-offs between different aspects of our risk profile. In this way, strategic decisions are made in the full context of those factors likely to be of interest to a range of stakeholders. This enables us to understand the Bank’s current and future risk profile, how it supports our strategic objectives and how it supports the best interests of our customers and other stakeholders. Risk policies and behaviours We have identified a set of principal risk types to which we are exposed through our activities (see separate section below). Each risk type is actively managed through a key risk policy and supporting policy standards that clearly articulate the approach and boundaries by which the risks are managed and ensure everyone understands their individual responsibilities. The policies and policy standards set out the expected behaviours and requirements to support effective, agile and consistent decision-making across the Bank. Risk overview Introduction Effective enterprise-wide risk management is a core component of our strategy and operations. We adopt a holistic, end-to-end view of risk, ensuring that the key risks arising from our activities are effectively identified, assessed and controlled. Our objective is to support the strategy of the Bank by thinking broadly about risks and managing them in an appropriate manner relative to the size and complexity of our business. Our approach to enterprise-wide risk management includes the following key steps: Bank Strategy Informed Decisions Risk Strategy and Culture Risk Appetite Risk Policies and Behaviour Evidence of Control Reporting Resilience and Stress Testing Sets a clear understanding of risk and the role we play in managing it. Sets the level of risk we are willing to accept to achieve our strategic goals. Sets requirements to support agile and effective risk management. Identifies key processes and manages risk with effective controls. Ensures that risks are identified, escalated and treated effectively. Designs, tests and enhances resilience to volatility under stress scenarios. Risk strategy and culture Our risk strategy and culture supports our business strategy and ensures it is delivered in a responsible and sustainable manner. This sets a clear, shared understanding of the risks we face and the role each of us plays in managing it. The following key aims and principles underpin our risk strategy and culture: Aims (what) Insightful Customer-Focused Alert Resilient Engaged Principles (how) We identify and manage risk concentrations Good customer outcomes are at the heart of what we do We anticipate market trends, we don’t follow them We fund before we lend and we control before we grow We understand the part we play in identifying and escalating risks 05 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Liquidity, funding and market risks What is it? The risk we are unable to meet our obligations as they fall due or are adversely hit by market rate or price movements. How may it arise? Loss of confidence in the Bank leading to a material outflow of deposits and/ or difficulties in accessing wholesale funding. Sudden changes or volatility in market values. How do we manage the risk? — Risk appetite limits set. — Daily monitoring and reporting of key metrics. — Liquidity and funding targets built into planning process. — Liquidity Contingency Plan for action under stress. — Hedging strategies used to reduce exposures to earnings volatility. — The annual ILAAP determines the adequacy of liquidity and funding resources held. Changes in 2020/21 — Replacement of secured funding facility with a cost effective retained securitisation (Drury Lane) which offers increased flexibility and reduced reliance on BoE facilities. — Review and assessment of negative rates from a hedging and interest rate risk perspective. Conduct and compliance risks What is it? The risk that our culture, behaviour or actions may lead to a failure to comply with regulators, or cause detriment to customers or the markets. How may it arise? Failure to understand the needs of our customers or to provide them with the level of service required at all stages of the customer journey. How do we manage the risk? — Control procedures and processes with clear reporting and escalation procedures. — Independent oversight of the adequacy and effectiveness of issues and events. — Horizon scanning of emerging threats or regulatory changes. — Regular, open engagement with our regulators. — Continuous monitoring of control testing outcomes through PRCA oversight and risk based assurance activity. Changes in 2020/21 — Finalised organisational redesign for the function with key roles now filled. — Enhanced policy oversight model. — Full implementation of SMCR, including Conduct rules, in AFS and Argos Limited. — Enhanced risk reporting. Capital adequacy risk What is it? Holding insufficient capital to absorb losses in normal and stressed conditions or the ineffective use of capital. How may it arise? Changes in economic conditions or regulatory requirements may impact on the level of capital resources required. How do we manage the risk? — Target risk appetite range for level of capital held. — Monitoring of capital position, with triggers in place for escalation. — Capital adequacy target built in to our planning processes. — Projected capital position updated for any strategic or external changes. — The annual ICAAP determines the adequacy of the level and type of capital resources held. Changes in 2020/21 — PS15/20 came into effect on 16 Dec 20 which implemented a shift in regulatory capital requirements from minimum Total Capital Requirements into buffers that can be used in a stress. — The impacts of COVID-19 have been updated including expectation of higher losses. Furthermore stress testing analysis has been undertaken to assess worst case impacts. 08 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Wates Corporate Governance Principles Sainsbury’s Bank plc applies the Wates Corporate Governance Principles for Large Private Companies (available on the Financial Reporting Council website). Principle 1 – Purpose and Leadership Purpose, values and culture The Bank is aligned to the Sainsbury’s Group strategic priority to focus on brands that deliver with a customer and profit focus whilst supporting the core food business. We aim to drive value for the Sainsbury’s Group by being an agile, capital and cost-efficient provider of simple, mobile led financial services for Sainsbury’s and Argos customers. We know that when customers take out a Bank product, they become more loyal and go on to spend more in Sainsbury’s and Argos stores. The strategy and objectives were reviewed and updated by the Board in 2019, including the decision to cease new mortgage originations from September 2019. Supporting this are the Bank’s key priorities between now and 2024: — Re-shape the Bank’s balance sheet — Simplify the organisation — Strengthen the business Underpinning those key priorities, the Bank sets a clear risk appetite to operate within and seeks to deliver best-in-class execution through highly engaged colleagues, working together to deliver its goals. Details of the Bank’s broader purpose in relation to non-financial matters (Environmental, Social, Employee, Human Rights and Modern Slavery, Anti-Corruption/Anti-Bribery) are provided on pages 11 to 13. Strategy The Board of Directors of the Bank is the key governance body, responsible for the overall strategy, performance of the business and management of risk. It delegates responsibility for the day to day running of the business to the Chief Executive and the Executive Management Team through the apportionment of responsibility and delegated authorities. The Board holds overall accountability for the outcomes achieved, decisions made and steering the Company, subject to specific reserved matters which require the consent of J Sainsbury plc. Performance against key metrics is measured and reported to the Board and all colleagues on a regular basis. The metrics link together – as we believe that if we have highly engaged colleagues, who deliver a great service to our customers, this in turn will help us drive increased profitability and lower costs. As a financial services business in a highly regulated environment, we also need to ensure we are operating in a safe and sound way too. Relationship with J Sainsbury plc The Bank is a wholly owned subsidiary of J Sainsbury plc, a listed retailer. J Sainsbury plc currently has one Director on the Bank Board. The J Sainsbury plc appointed Director has equal rights and powers as the other Directors. J Sainsbury plc is not involved in the day-to-day management of the Bank. However, J Sainsbury plc has certain reserved powers and decisions which fall within those powers must be referred to them by the Bank Board for their consent before undertaking. Primarily, these reserved matters relate to significant change in the size and scale of the Bank’s operations, changes in its capital structure including any increases or decreases to capital, significant individual contracts or legal disputes, changes to Directors or officers of the Bank and share schemes. Principle 2 – Board Composition Chair The Bank has a separate Chair (an Independent Non-Executive Director) and Chief Executive (an Executive Director) to ensure that the balance of responsibilities, accountabilities and decision making are effectively maintained. The Chair plays a key role in creating the conditions for overall Board and individual Director effectiveness. Balance and diversity Recruitment on to the Bank Board combines an assessment of both technical capability and competency skills to ensure the optimum blend of individual and aggregate capability having regards to the Bank’s long-term strategic plan. Such recruitment is subject to the approval of the Nominations Committee, the Bank Board, J Sainsbury plc (as the decision falls within reserved matters) and the relevant regulatory bodies (where applicable). Independent Non-Executive Directors bring their experience to bear from across various sectors, notably Financial Services but also from across Retail, Digital and E-Commerce. These are key areas of focus for the Bank and aligned to its strategy. Directors update their skills, knowledge and familiarity with the Bank by meeting senior management, a programme of developmental training (from both internal and external speakers) and by attending appropriate external seminars. There is an induction programme for all new Directors which is tailored to their specific needs and which provides access to all parts of the business. Size and structure The structure of the Bank Board seeks to ensure the right leadership is in place to become an agile, capital and cost-efficient provider of simple, mobile-led financial services to Sainsbury’s and Argos customers. The Bank Board is comprised of an Independent Chair, four other Independent Non-Executive Directors, one Non-Executive Director appointed by J Sainsbury plc and two Executive Directors – the Bank’s Chief Executive Officer and its Chief Financial Officer. A biography for each Board Director can be found on the J Sainsbury plc corporate website: www.about.sainsburys.co. uk/about-us/our-management#sainsburys-bank The Directors have equal voting rights when making decisions, except the Chair, who has a casting vote at the Bank Board. All Directors have access to the advice and services of the Company Secretary and may, if they wish, take professional advice at the Company’s expense. Directors’ duties are exercised through the Board and its sub-committees per the Governance structure on page 14. Each of these is chaired by one of the Independent Non-Executive Directors. Effectiveness The Board last undertook a formal effectiveness review facilitated by an independent external advisor at the end of 2015 with an internally led review undertaken in 2018. The next independent review is scheduled for the first half of the financial year ending 28 February 2022. Principle 3 – Director Responsibilities Accountability Each Board Director has a clear understanding of their accountability and responsibilities via the Individual Accountability Regime which the Bank introduced in early 2016 and which has been regularly updated since then. Whilst Board oversight is always maintained, key decisions are made by the individuals and committees with the most appropriate knowledge and experience. The Board had a programme of eight main meetings in 2020/21 and has nine planned for 2021/22. One of the Board meetings is usually set aside each year for strategic planning with the Executive Committee and key stakeholders from across the Bank, AFS and J Sainsbury plc as appropriate. As part of their annual review, the Bank Chair undertakes a Fit and Proper Assessment and Attestation with each Board Director. The Senior Independent Non-Executive Director undertakes the same for the Bank Chair. Conflicts of interest Any potential conflicts of interest are identified and considered as part of the recruitment process for on-boarding new Directors on to the Bank Board. Where there are any concerns raised, they are considered by the Bank’s Nominations Committee and again at the Board meeting when the recommendation is brought for approval. 09 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Once in situ, should a Director be offered the opportunity to take up a position (Executive or Non-Executive), whilst retaining their role on the Bank Board, they are required to inform the Bank Chair and the Board would then be asked to confirm that no conflicts of interest existed or were perceived to exist before accepting the additional role. Where there are any potential conflicts, appropriate safeguards would be implemented. Committees The Board delegates authority for day-to-day management of the Company to the Chief Executive Officer who exercises this role via the Executive Committee which meets monthly. It is chaired by the Chief Executive and its membership is made up of the: — Chief Executive Officer — Chief Financial Officer — Chief Risk Officer — Conduct & Compliance Director — Chief Operating Officer — Customer Director – Sainsbury’s Bank — Customer Director – Argos Financial Services — HR Director Note: The Bank’s Internal Audit Director is a permanent attendee at every meeting. The Independent Non-Executive Directors are wholly independent in that they have no material business or relationships with the Company that might influence their independence or judgement. In addition, certain governance responsibilities are delegated to other Board Committees (Audit Committee, Board Risk Committee, Remuneration Committee and Nominations Committee). Membership of these committees is entirely made up of Non-Executive Directors of the Bank with members of the Bank’s Executive team and other senior colleagues in attendance. These committees support effective decision making and independent challenge. Integrity of information The Board receives regular and timely information at its meeting on all key aspects of the business supported by a range of Key Performance Indicators (KPIs). The Bank’s various functions prepare and maintain the integrity of this information in accordance with the Bank’s risk management framework. Principle 4 – Opportunity and Risk Opportunity The Board is responsible for the overall strategy and performance of the business and its management of risk. It undertakes a deep-dive review of the Bank’s strategy on at least an annual basis, taking due account of changes in the operating environment and emerging risks and opportunities. This includes a review of long-term strategic opportunities, building upon the Bank’s purpose and advantages from being part of the wider Sainsbury’s Group. Risk The Board Risk Committee (BRC) provides the Board with a forward-looking view to anticipate future risks together with the monitoring and oversight over existing risks within the risk appetite set by the Board. It is responsible for reviewing and reporting its conclusions to the Board on the Bank’s risk appetite and the Bank’s risk management framework. The BRC meets at least five times a year. Responsibilities In line with the provisions of the Senior Manager & Certification Regime (SMCR), the Bank has allocated the Senior Manager Functions and prescribed responsibilities in so far as they apply to Sainsbury’s Bank plc and its AFS subsidiaries. A Management Responsibility Map (MRM) is in place to provide a description of the Bank’s management and governance arrangements including the reporting lines and details of the individuals who are part of those arrangements and their prescribed responsibilities. The MRM is owned by the Board which reviews it at least twice a year. The Bank has embedded a process-centric approach to identifying, measuring and controlling its key risks. It focuses attention on what matters most, those risks that can cause the greatest harm to our customers, reputation or finances. It provides a view on inherent risk, control effectiveness and residual risk assessments. It informs a bi-annual attestation of control effectiveness that is reviewed by the Board. Principle 5 – Remuneration Setting remuneration The Board-level Remuneration Committee (RemCo) recommends to the Board the remuneration strategy for the Executive Directors, Chair, Senior Management and Material Risk Takers. Within this framework, its remuneration policy is aligned to the long-term success of the Company as well as promoting effective risk management and compliance with applicable statutory and regulatory requirements. RemCo also has oversight over appointment and severance terms for relevant employees. Policies A review is carried out annually (with input from external advisors) to ensure that the remuneration policy and practices are industry competitive and in line with the size and complexity of the business and compliant with all applicable legal and regulatory requirements. The policy also sets out the approach which ensures that reward decisions are objective, fair and inclusive. The Directors’ positions and remuneration status are set out in the Directors’ Report (page 21). Delegating remuneration decisions Remuneration decisions are delegated through the divisional heads to agree fair and appropriate distribution of reward based on the principles agreed by RemCo and the performances of individuals across the business. Subsidiary companies The remuneration strategy and policies set by RemCo are fully applied to Argos Financial Services. Principle 6 – Stakeholder Relationships and Engagement External impacts The Board is committed to social responsibility, community engagement and environmental sustainability. These goals are achieved through a combination of activities and commitments, including measures to support the Sainsbury’s Group target to achieve Net Zero emissions from its operations by 2040. Stakeholders The Board promotes good conduct, accountability and transparency with all of the Bank’s key stakeholders (customers, colleagues, investors, suppliers and banking regulators). Key interactions with each stakeholder group are set out in the section 172 statement on page 11. The Board sets a clear ‘tone from the top’ in line with the Bank’s purpose to be the provider of financial services for loyal Sainsbury’s Group customers. Workforce The Bank aims to be a great place to work for all colleagues, enabling them to develop their skills and knowledge to be the best they can be. Colleagues are encouraged to learn from each other, their managers and through structured learning activity that develops behavioural and technical capability. Cornerstones of our approach include investing time in two-way communication between leaders and other colleagues (informing and listening) and up-skilling leaders to be effective communicators and leaders of people. Investors in People (IIP) award accreditation to organisations who invest in training and development. Sainsbury’s has a long-standing relationship with IIP and has been awarded Gold in its last four assessments. The latest assessment which took place in 2019 included the Bank for the first time. Whistleblowing is an important part of protecting the Bank as it creates a safe way for colleagues to raise any concerns and challenge poor practice and/or behaviour. The Bank’s whistleblowing policy sets out how colleagues can report concerns internally, through the Group’s ‘Rightline’ service or through regulators. 10 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Gender pay gap Details of the Bank’s gender pay gap can be found within the Sainsbury’s Group disclosures at https://www.about.sainsburys.co.uk/~/media/ Files/S/Sainsburys/Gender%20Ethnicity%20Pay%20Gap%20 Report%202020.pdf The mean gender pay gap of 36.6% (as at April 2020) has marginally increased from 35.9% in April 2019. The gap is, in part, reflective of the structure of our business whereby in store Travel Money Bureaux colleagues are directly employed rather than filling our positions through a third-party agency. Around 45% of Sainsbury’s Bank colleagues work in these roles on hourly rates of pay and a large proportion of these roles are held by women. In addition to the Travel Money colleague composition, Sainsbury’s Bank still has more men than women in the most senior and higher paid roles and more women in hourly paid positions, further impacting the pay gap. We are continuing to see an improvement in female representation at senior levels since signing up to the Women in Finance Charter (WIF) in 2018. The Charter, which was created by HM Treasury, is designed to support and motivate finance companies to land activity and drive initiatives that, over time, will help address gender imbalance at senior leadership levels. By the end of the 2023/24 financial year we have a target to achieve 40% female representation at senior levels, with an interim target of 35% for the coming 2021/22 financial year. Our most recent WIF submission in September 2020 was 33%, up from 29% in September 2019. Human rights and modern slavery Sainsbury’s Bank has a zero tolerance towards modern slavery and human trafficking. We are committed to acting ethically and with integrity in all of our business relationships. We will work closely with our business partners, suppliers and supply chains to ensure there is no place for modern slavery and human trafficking in any area of our business. We will regularly review our processes and controls to prevent modern slavery and human trafficking. Our policies and procedures support and encourage colleagues to raise concerns relating to modern slavery or the presence of it in our supply chain at the earliest opportunity. Our full Modern Slavery statement is published on the Bank’s website (https://www.sainsburysbank.co.uk/~/media/files/ pdf/modern-slavery-statement.pdf). Anti-corruption/anti-bribery As a financial services provider, the Bank is exposed to the risk of facilitating bribery or aiding corruption through the provision of financial services. This risk is managed through a clear set of policies, procedures and controls which are communicated to colleagues through regular mandatory training modules including Anti-Bribery and Corruption, Anti-Money Laundering, Conduct Rules, Conflicts of Interest and Whistleblowing. The training material is reviewed and updated to reflect changes in legislation or best practice (e.g. tailored senior management training). The Supply Chain Management team regularly monitors suppliers to ensure that processes and controls are in line with the Bank’s required standards. Although not a reserved matter, we kept the J Sainsbury plc Board informed of the intention to issue the transaction. The transaction was also reviewed with our regulator as part of the ILAAP and Corporate Plan ahead of the transaction commencement. Supplier relationships – The Bank has always performed financial health monitoring of our suppliers and since the onset of COVID-19, we have maintained regular dialogue with our key suppliers and ensured we monitor for any supplier showing signs of stress. The majority of the Bank’s suppliers have payment terms of 30 days from date of receipt of invoice, with some being aligned to J Sainsbury’s terms of 45 or 60 days. As a result of our monitoring and our relatively favourable 30 day terms, we decided not to reduce our payment terms across the suppliers, nor did we receive any requests from suppliers to reduce them. Non-financial reporting The Bank has complied with the EU non-financial reporting directive requirements contained in sections 414CA and 414CB of the Companies Act 2006. The below disclosures are intended to help stakeholders understand the Bank’s position on key non-financial matters. Business model The Bank seeks to provide quality financial services to Sainsbury’s and Argos customers at an affordable price. The business model is outlined on page 1 of this Strategic Report. Environmental We are always looking for ways to manage the impact our operations have on our environment and are part of the Sainsbury’s commitment to become a Net Zero operation by 2040. As part of Sainsbury’s, our facilities management approach actively manages, and looks to continuously improve, our waste management and recycling. We use video and telephone conferencing facilities rather than travel to meetings, where possible. Colleagues are encouraged to use public transport and cycle to work, with shower facilities provided at our head office and larger sites. We take time to identify practical ways to reduce the environmental impact of our leaflets and Point of Sale materials in stores. Additionally, we have invested in digital capabilities reflecting the increasingly digital world our customers live in. This investment continues to drive more sustainable banking. For example, our Loans platform affords the Bank the ability to offer e-signatures thus removing the requirement to both generate and send physical Personal Loan documentation. Our Credit Card app also offers the ability to check your balance and get paperless statements, thus reducing the amount of physical paper statements being sent to customers. Social The Sainsbury’s Group Values and Sustainability Plan underpin our approach to what we do, and how. By acting in the best interests of all our stakeholders, we can make a sustainable and positive contribution to our community. Details on our interaction with our communities are outlined on page 11. Our customers Here at Sainsbury’s Bank we recognise that money influences all areas of our customers’ lives. Our approach to our customers is outlined on page 11. Employees We aim to make our Bank a great place to work for all colleagues. Our approach to make our Bank a great place to work is outlined on page 11. 13 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Board-level governance The Board is the key governance body, holding overall accountability for the decisions made and outcomes achieved by the Bank, subject to specific reserved matters that require the consent of J Sainsbury plc. The Board meets at least eight times a year and is comprised of an Independent Non-Executive Chair, other Independent Non-Executive Directors, Non-Executive Directors from J Sainsbury plc and key Executive members from the Bank. Further details on the Board composition may be found on page 21. Governance The diagram below shows the governance structure in place for Sainsbury’s Bank as at 28 February 2021: There were the following significant changes to our governance structure during the accounting period: — The Customer Conduct Committee and Product and Pricing Committees were merged with the Customer Divisional Risk Committee to form the Divisional Risk & Conduct Committee shown in the diagram below. — The Operational, Conduct and Financial Crime Risk Committee was stood down as its purpose and responsibilities were deemed to be adequately covered elsewhere, outside of this particular committee. The MI and reports that were previously tabled at this committee are now all tabled at the respective Divisional Risk Committees, with a clear line of sight from there into the aggregated report at the Executive Risk Committee, including the divisional and Top Risk profiles. Board Audit Committee Board Risk Committee Remuneration Committee Nominations Committee Divisional Risk Committee Executive Risk Committee Chief Executive Officer Executive Committee Divisional Risk Committee Chief Financial Officer Customer Director – Bank Chief Risk Officer Chief Operating Officer Customer Director – AFS Conduct & Compliance Director HR Director Internal Audit Director Divisional Risk & Conduct Committee Divisional Risk Committee Finance Committee Supply Chain Oversight Committee Asset & Liability Committee Retail Credit Risk Committee Divisional Risk Committee Divisional Risk Committee Data & Digital Working Group 14 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Chief Risk Officer (CRO) Executive Committees: — Executive Risk Committee (ERC). The ERC is responsible for ensuring that the Enterprise Wide Risk Management Framework (EWRMF) is effective in ensuring that risks are adequately and consistently managed within risk appetite. In doing so the ERC ensures that appropriate policies and methodologies are in place to manage the Bank’s Primary Risk types. The ERC meets on a monthly basis. — Retail Credit Risk Committee (RCRC). The RCRC is responsible for monitoring the performance of the retail lending book, ensuring there is an effective credit risk management framework and that the Bank is operating within its credit risk appetite. The RCRC meets on a monthly basis. CFO Executive Committees: — Asset and Liability Committee (ALCo). ALCo is responsible for ensuring the balance sheet of the Bank is managed effectively and within risk appetite. Its main areas of responsibility are market risk, wholesale credit risk, interest rate risk, liquidity & funding risk and capital adequacy. ALCo meets on a monthly basis. — Finance Committee. The role of the committee is to ensure there are effective levels of governance in place across the Bank’s finance function so that significant decisions are fully informed, transparent, recorded and reported and in line with risk appetite and relevant governance structures. The Finance Committee meets on a monthly basis. — Supply Chain Oversight Committee. The role of the committee is to ensure there is an effective bank-wide supply chain performance and risk management framework that manages outsourcing, oversees delivery and makes decisions to ensure the Bank is able to robustly manage and oversee its suppliers. The Supply Chain Committee meets six times a year. Divisional Risk Committees Each division across the Bank has its own Divisional Risk Committee (DRC) chaired by the relevant ExCo member. The role of the DRC is to ensure the effectiveness of the EWRMF within the Division, so that risks are effectively and consistently managed within the overall approved risk appetite. Each DRC provides input on material risks which may affect the Group to the Executive Risk Committee. Pillar 3 report Further information on the risks and controls can be found in the Bank’s Pillar 3 Disclosure Report for the year ended 28 February 2021. This report is published in the investor relations section of the J Sainsbury plc corporate website: https://www.about.sainsburys.co.uk/investors/results- reports-and-presentations#2021. A number of Board functions are delegated to four key sub-committees. The role and scope of authority for each sub-committee is fully outlined in a documented Terms of Reference: — Audit Committee. The Audit Committee’s key responsibility is to advise the Board on the Bank’s financial statements, including systems and controls and related policy issues together with relationships with external auditors. The Audit Committee also reviews and challenges where necessary management’s response to any major External or Internal Audit recommendations. The Committee is also responsible for reviewing and approving the internal audit plan and budget, and for ensuring that the function is adequately resourced. The Audit Committee meets at least four times a year. At least once a year the Audit Committee will meet without Executive Management being present. Additionally, the Audit Committee will meet with the External Auditors and Sainsbury’s Bank Director of Internal Audit. — Nominations Committee. The Nominations Committee is responsible for reviewing the structure, size and composition of the Board. The Committee is also responsible for the succession planning of the Board and the Executive Management Team and for ensuring a formal, rigorous and transparent process for recommending appointments to the Board to the Bank’s shareholders. The Bank recognises the benefits of achieving a diverse Board and Executive Management Team to reflect the environment in which it operates. The Nominations Committee will meet at least once per year, with additional meetings convened as required. — Remuneration Committee. The role of the Remuneration Committee (RemCo) is to determine and agree with the Board the broad policy for remuneration and for compliance with the Remuneration Code (the Code) to the extent that the provisions apply to the Bank. RemCo is responsible for recommending, monitoring and noting the level and structure of remuneration for senior management (categorised as ‘Code Staff’ for the purposes of the Code) and senior risk management and compliance colleagues and it continually reviews and assesses the impact of remuneration policies on the risk profile of the Bank and employee behaviour. RemCo also has oversight over appointment and severance terms for relevant employees. The Remuneration Committee meets at least three times per year. — Board Risk Committee. The Board Risk Committee (BRC) provides the Board with a forward-looking view to anticipate future risks together with the monitoring and oversight over existing risks within the risk appetite set by the Board. It is responsible for reviewing and reporting its conclusions to the Board on the Bank’s risk appetite and the Bank’s risk management framework. The Board Risk Committee meets at least five times a year. Executive-level governance The Board delegates the appropriate responsibility, authority and accountability to the Chief Executive Officer (CEO) to deliver the Bank’s strategy through the appropriate governance committees and the Executive Committee. The CEO chairs the Executive Committee (ExCo) and is supported by a number of other executive-level committees to provide the appropriate checks, balances and transparency on decision making. Each committee has a documented Terms of Reference, with delegated authority to the Chair who is the appropriate identified accountable individual in line with their Statement of Responsibilities under FCA and PRA rules (Senior Manager Regime). CEO Executive Committee: — Executive Committee (ExCo). The role of the Committee is to advise and assist the CEO in overseeing the Bank’s activities, performance and making significant decisions relating to the executive management of the Bank. ExCo meets on a monthly basis. 15 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Financial review The Bank’s performance for the year ended 28 February 2021 and financial position at the end of that period are presented in the income statement and balance sheet. A summarised income statement and balance sheet are presented below: Summary income statement 2021 £m 2020 £m Change % Total income 221 323 (32) Operating expenses (326) (268) 22 Add: items excluded from underlying results1 126 25 404 Underlying operating expenses (200) (243) (18) Impairment losses on financial assets (58) (48) 21 Profit/(Loss) on financial instruments 1 (2) (150) Add: items excluded from underlying results1 – 3 (100) Underlying gains on financial instruments 1 1 – Underlying profit before taxation (36) 33 (209) Statutory profit/(loss) before taxation (162) 5 (3,340) 1 Items of an unusual and infrequent nature that do not relate to the Bank’s underlying performance have been excluded in presenting underlying profit before tax. Statutory loss before tax for the year ended 28 February 2021 was £162 million compared to a profit of £5 million in the prior year. This was driven by a 209% decrease in underlying profit due to the significant impacts of COVID-19 on income and impairments and an increase in non-underlying operating expenses of 404%, predominantly driven by the write down of fixed assets following the review carried out in the year of the Bank’s capitalised assets. Income is 32% lower, with a fall in interest income reflecting a significant contraction in lending balances of 29% due to lower consumer demand, lower retail spend and a tightening of credit appetite for new customers to protect the Bank, partially offset by management action on savings rates to manage the balance sheet. Fee income has dropped markedly due to the closure of Travel Money Bureaux for most of the year, and a decline in ATM income due to lower cash usage, particularly during lockdown. Underlying costs decreased by 18% reflective of lower trading volumes and cost savings being delivered through management actions including reducing FTE, digitising and improving customer journeys and enhanced detection controls reducing fraud costs. Impairment losses increased by 21% which is reflective of prudent provisioning estimates during the current economic climate. Summary balance sheet 2021 £m 2020 £m Change % Loans and advances to customers 4,599 6,511 (29) Cash and cash equivalents 1,028 572 80 Other 1,811 2,319 (22) Total assets 7,438 9,402 (21) Customer deposits 5,128 6,312 (19) Wholesale funds 1,161 1,781 (35) Subordinated debt 179 180 (1) Other 121 129 (6) Total liabilities 6,589 8,402 (22) Net assets 849 1,000 (15) In balance sheet terms, our Loans advances reduced by 28% and our Credit Cards advances by 27% as market demand reduced and management took action to protect the Bank against economic uncertainty. Mortgage balances have steadily reduced throughout the year, with balances ending the year at £1.3 billion. Customer deposits decreased 19% driven by careful management of the customer savings rates (spot rates declined 74 bps from February 2020) following the Bank of England base rate decrease in March 2020. J Sainsbury plc provided no further share capital injections in line with Bank strategy. Net interest income Net interest income summary 2021 £m 2020 £m Change % Interest receivable (underlying) 241 304 (21) Interest payable (81) (115) (30) Net interest income (underlying) 160 189 (15) Net interest margin (underlying) 2.4% 2.5% (0.1) 18 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Summary of funds lent to customers and held as liquid assets 2021 £m 2020 £m Change % Unsecured loans and advances to customers 3,344 4,636 (28) Secured loans and advances to customers 1,255 1,875 (33) Cash, balances with central banks and other demand deposits 968 500 94 Financial investments 587 853 (31) Loans and advances to banks 37 40 (8) 6,191 7,904 (22) Summary of funds raised 2021 £m 2020 £m Change % Customer deposits 5,128 6,312 (19) Other deposits 1,161 1,680 (31) Other borrowed funds – 101 (100) Subordinated debt 179 180 (1) 6,468 8,273 (22) Underlying interest income decreased to £241 million driven by lower customer balances. Mortgage balances reduced by £620 million and represent 27% of total lending as at 28 February 2021. The portfolio continues to run off as customers opt to change mortgage provider. Interest payable decreased by 30% driven by 54 basis points reduction in average blended savings rates and a 12% reduction in average funding balances in line with decreased lending. With the Mortgage book rolling off, overall funding requirements are reducing, some of which has been exacerbated by the temporary fall off in new lending volumes as a result of lockdown restrictions. Net interest margin decreased to 2.4%, driven by lower customer volumes generating lower returns partially offset by decline in interest payable. Fee, commission, and other operating income Fee, commission, and other operating income summary 2021 £m 2020 £m Change % Banking income 41 76 (46) Insurance income 26 26 – Other income 1 2 (50) Total fees and commissions receivable 68 104 (35) Total fees and commissions payable (9) (10) (10) Other operating income 2 40 (95) Net fees, commission, and other operating income 61 134 (54) Banking income decreased by 46% largely driven by a reduction in retail spend and foreign travel driving lower Credit Card fees and lower cash usage during lockdown adversely impacting ATM income. Insurance income remained flat year-on-year despite lockdown restrictions reducing Travel Insurance new business volumes significantly as customers were unable to travel abroad. Car and Home insurance remained resilient with renewals up 11% and 8% respectively. The 95% decline in other operating income was driven by the closure of our Travel Money business following lockdown restrictions across the United Kingdom. Operating expenses and investment Operating expenses summary 2021 £m 2020 £m Change % Underlying staff costs 58 75 (23) Other underlying operating costs 119 137 (13) Depreciation of property, plant and equipment 3 8 (63) Amortisation of intangible assets 20 23 (13) Underlying operating expenses 200 243 (18) Non-underlying operating expenses 126 25 404 Total operating expenses 326 268 22 19 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Underlying operating expenses of £200 million decreased by £43 million year-on-year as they benefited from lower volume related costs and the redeployment of Travel Money colleagues into the stores after Bureaux were closed (the associated costs being recharged to the retailer). This was further supported by: — management action to reduce our colleague headcount as part of our Target Operating Model review; — optimisation of our customer journey and operations; — mitigation of fraud losses; and — successful delivery of cost savings through contract negotiations. Total depreciation and amortisation for the financial year reduced 63% following the impairment of fixed assets at the half year, providing a cost benefit in the second half of the year. Non-underlying costs are largely associated with the impairment of fixed assets following the review carried out in the year of the Bank’s capitalised assets (refer to note 19 for more details). Other non-underlying costs relate to ongoing migration of the Loans Back Book, which is expected to be completed in FY22, and restructuring costs as we continue to reshape our business to remain efficient and cost effective. Summary of fixed assets 2021 £m 2020 £m Change % Intangible assets 155 234 (34) Property, plant and equipment 11 38 (71) 166 272 (39) Intangible assets were £155 million and tangible assets were £11 million, a decrease of £79 million and £27 million respectively since prior year. This was mainly due to an impairment assessment of fixed assets following the impact of COVID-19 on the Bank’s product suite, totalling £105 million. Intangible additions in the year were £23 million as we improve our mobile app to remain digitally focused and enhance our banking platforms by adapting to new regulations and creating operational efficiencies. Tangible additions of £1 million related to improved functionality and security of our ATM estate. Impairment losses on financial assets Impairment losses summary 2021 £m 2020 £m Change % Impairment losses on financial assets 58 48 21 Bad debt asset ratio 1.1% 0.7% 0.4 Impairment losses have increased 21%, whilst the bad debt asset ratio increased from 0.4% to 1.1% mainly to account for the expected future unemployment increases due to COVID-19, partly offset by a lower underlying impairment charge driven by balance sheet contraction. Economic scenarios have been modelled using multiple forward-looking economic scenarios and associated weightings. Judgements are applied to adjust modelled outputs to reflect future economic losses where they are not fully captured or when a financial asset has experienced a significant increase in credit risk. The pandemic has required our business to change and adapt quickly to economic circumstances which have been evolving throughout the financial year. We have offered customer support through payment holidays and increased our investment in Collections and Recoveries to help those who need it. Government action, particularly the furlough scheme, has been key to maintaining lower levels of modelled provisioning by reducing the impacts of lower GDP and higher unemployment. Despite the threat that COVID-19 poses, the Bank is very well capitalised with an increase in CET1 ratio to 17.6%. Additionally, the Bank has substantial excess liquidity with the LCR increasing 186% to 306%. We therefore remain confident that the Bank will not require capital injections from Group, in line with our strategic objective. We are well positioned for recovery with strong capital and liquidity which we can deploy to grow balances and revenues in a safe and controlled manner. By order of the Board Donald McNaughton Company Secretary 28 April 2021 20 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Strategic Report Statement of Directors’ responsibilities The Directors are responsible for preparing the Strategic Report, Directors’ report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of Sainsbury’s Bank plc (‘the Company’) and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to: — select suitable accounting policies in accordance with International Accounting Standard 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently; — present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; — provide additional disclosures when compliance with the specific requirements in international accounting standards in conformity with the requirements of the Companies Act 2006 is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the financial performance; and — state that the Bank has complied with international accounting standards in conformity with the requirements of the Companies Act 2006, subject to any material departures and explained in the financial statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Annual Report and Financial Statements and Pillar 3 disclosures included on the J Sainsbury plc website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. By order of the Board and signed on its behalf by Donald McNaughton Company Secretary 28 April 2021 23 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Directors’ Report Independent auditors’ report to the members of Sainsbury’s Bank plc Opinion We have audited the financial statements of Sainsbury’s Bank plc (“the Bank”) for the year ended 28 February 2021 which comprise the Income Statement, the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, the Cash Flow Statement, and the related notes 1 to 42, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Accounting Standards in conformity with the requirements of the Companies Act 2006. In our opinion, the financial statements: — give a true and fair view of the company’s affairs as at 28 February 2021 and of its loss for the year then ended; — have been properly prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006; and — have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the Bank’s ability to continue to adopt the going concern basis of accounting included: — We performed a walkthrough to confirm our understanding of the Bank’s financial statement close process, which included how Management undertakes their own going concern assessment. We engaged with Management early to ensure all key factors were considered in their assessment; — We obtained an understanding of Management’s rationale for use of the going concern basis of accounting through reviewing their going concern assessment conclusions, which stressed the underlying forecasts and assumptions, and performing inquiries of Management and those charged with governance; — We evaluated Management’s going concern assessment which included reviewing their evaluation of the Bank’s resilience to financial and operational stress on capital and liquidity requirements. The Bank included a number of adverse scenarios in their forecasts in order to incorporate unexpected changes to their forecasted capital and liquidity levels and we have tested the clerical accuracy of these forecasts and assessed the assumptions applied within the forecasts; — We evaluated Management’s assessment by considering viability under different stress scenarios, including the impact of strategic plans and the economic impact of COVID-19; — We have reviewed Management’s reverse stress testing in order to identify what factors would lead to all of the Bank’ capital and liquidity eroding during the going concern period and assessed those factors against the likelihood of occurrence; — We considered the Bank’s operational resilience and its response to the impact COVID-19 has had on its business operations, including the operations of its third-party providers; and — We reviewed the Bank’s going concern disclosures included in the annual report in order to assess that the disclosures were appropriate and in conformity with the reporting standards. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Bank’s ability to continue as a going concern for a period of 12 months from when the financial statements are authorised for issue. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Bank’s ability to continue as a going concern. Overview of our audit approach Key audit matters — Expected credit loss provisions — Revenue recognition – Effective interest rate method — Strategic changes planned or implemented by the Bank, particularly as it relates to the valuation of intangible assets — Reliance on the processes and controls of third-party service providers Materiality — Overall materiality of £3.25 million which represents 1.5% of gross margin (net interest income and net fees and commissions income). An overview of the scope of our audit Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for the Bank. This enables us to form an opinion on the financial statements. We take into account size, risk profile, the organisation of the Bank and effectiveness of controls, including controls and changes in the business environment when assessing the level of work to be performed. All audit work was performed directly by the audit engagement team. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters. Independent Auditors’ Report 24 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Independent Auditors’ Report Risk Our response to the risk Key observations communicated to the Audit Committee Expected Credit Loss Provisions Impairment Provision (2021: £174 million, 2020: £183 million) Note 13 of the Financial Statements (page 45) Customer receivables comprise unsecured personal loans; credit cards; and mortgages. Credit provisions represent Management’s best estimate of impairment and significant judgements and estimates are made in determining the timing and measurement of expected credit loss (‘ECL’). The key judgements and estimates in respect of the timing and measurement of ECL include: (a) Completeness and accuracy of data; (b) The accounting interpretations and modelling assumptions used to build the models that calculate ECL; (c) Input and assumptions used to estimate the impact of the multiple economic scenarios; (d) Allocation of assets to stage 1, 2 or 3 using criteria in accordance with the accounting standard; (e) Completeness and valuation of post model adjustments; and (f) Accuracy and adequacy of the financial statement disclosures. We consider the risk related to the ECL provisions to have increased from the prior year due to the continued economic uncertainty as a result of COVID-19. We performed procedures to assess the design effectiveness of key controls across the processes relevant to the impairment provision calculation, involving specialists to assist us in performing our procedures where appropriate. This included consideration of model governance, data accuracy and completeness, multiple economic scenarios, and the allocation of assets into stages. We performed control testing over the key controls identified to ensure that the controls operated effectively throughout the period. This considered the key elements identified in the previous paragraph. We reviewed the minutes of the model and risk committees where inputs, assumptions, and adjustments to the ECL were discussed and approved. We verified the data used in the ECL calculation on a sample basis. In order to complete this testing, we independently reconciled a sample of data feeding the model from source systems. We considered the assumptions, inputs and formulas used across the entire population of ECL models. This included assessing the appropriateness of model design and the formulas used, considering alternative modelling techniques and recalculating the Probability of Default, Loss Given Default and Exposure at Default for a sample of the models. With the support of our internal modelling specialists, we performed testing over models implemented during the year to validate that they were functioning as intended. We tested the assumptions and inputs used in the ECL models with the support of our internal modelling and economic specialists. In particular, we challenged the correlation and impact of the macroeconomic factors to the ECL and independently recalculated critical components of the ECL. In addition, we assessed the base and alternative economic scenarios, including challenging probability weights and comparing to other scenarios from a variety of external sources, as well as EY internally developed forecasts. We assessed whether forecasted macroeconomic variables used within the models, such as GDP and unemployment, were appropriate by performing a benchmark analysis against the Bank’s peers. We also considered the different weightings applied to the various economic scenarios in our analysis. We challenged the criteria used to allocate an asset to stage 1, 2 and 3 in accordance with IFRS 9 and reviewed assets in stages 1, 2, and 3 to verify that they were allocated to the appropriate stage. This review included consideration of the impact of emergency payment freezes (EPF) on the stage of an account. We have tested that the key data elements (KDEs) relevant to EPFs, namely the entry date and the exit date, have been correctly reflected in the system. We challenged model overlays for appropriateness using our knowledge and experience across the industry. We assessed the appropriateness of the scenarios and calculations used in determining the overlay to be applied in response to the economic uncertainty due to COVID-19. We assessed the adequacy and appropriateness of disclosures for compliance with the accounting standards. We are satisfied that provisions for the impairment of loans and advances to customers were reasonable and recognised in accordance with the applicable reporting framework based on our procedures performed. We recalculated the staging and noted no material differences. We also performed sensitivity analysis on the staging criteria and noted that substantial changes would be needed to the criteria to result in a material difference. The economic uncertainty overlay was within our independently established reasonable range. Our testing of models and model assumptions identified some instances of over and under estimation. We aggregated these differences and were satisfied that the overall estimate recorded was reasonable. 25 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Independent Auditors’ Report Risk Our response to the risk Key observations communicated to the Audit Committee Reliance on the processes and controls of third-party service providers Many of the Bank’s IT systems are hosted by third parties. The Bank receives reports, prepared by independent audit firms, on the effectiveness of the third parties’ control environments. In some instances, deficiencies in the control environment were identified or assurance was unable to be provided by the third party over the design and operating effectiveness of their control environment. There is a risk that there is insufficient oversight of the third-party service providers and where control deficiencies at the third-party are identified, a report is not obtained, or assurance is unable to be obtained over the third-party control environment. These risks are: (a) not mitigated by compensating controls within the Bank’s own control environment; and (b) not appropriately quantified by the Bank. We consider the risk related to the oversight of third-party service providers to have increased in the current year due to a change in the Bank’s ability to rely on the design and operating effectiveness of controls in place at a key third-party service organisation. We performed procedures to obtain an understanding of the processes which are outsourced to third parties and their impact on the financial statements. We made inquiries of Management to understand the process through which the Bank: (i) Monitors control effectiveness at third parties, including any impact on their processes and controls as a result of COVID-19; and (ii) Performs control activities over the completeness and accuracy of data received from third parties. We tested the design and operating effectiveness of Management’s key controls in place over third-party service providers that directly impact financial reporting. For the third-party service provider control reports obtained by the Bank, we obtained and inspected the reports to understand the design and operating effectiveness of the key controls in place. Where control deficiencies were identified or assurance over the control environment was unable to be provided, we assessed the impact on our planned audit procedures and, where necessary, performed incremental procedures in order to obtain reasonable assurance over the impacted account balances. We reviewed the assessment performed by Management over the third-party service provider control reports, including: (i) The mapping of the key controls within the report to the processes in place at the Bank and identification of any complimentary end user controls in place at the Bank; and (ii) Management’s evaluation of any ineffective controls within the control reports. Where reports were not obtained or reports that were obtained were unable to provide reliance over the third-party control environment, we obtained and reviewed Management’s assessment of these observations and the mitigating controls in place at the Bank. We tested the compensating controls where appropriate. Where we were no longer able to rely on controls as a result of the deficiencies identified, we reassessed our planned audit procedures over impacted balances and performed incremental substantive testing procedures in order to obtain reasonable assurance over account balances. We obtained reasonable assurance over the Bank’s processes and controls over the completeness and accuracy of data received from third parties. Where deficiencies were identified at third-party service providers or reports were unable to be obtained, we obtained reasonable assurance over the completeness and accuracy of the impacted account balances through identifying and testing compensating controls in place at the Bank or performing incremental substantive testing procedures. 28 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Independent Auditors’ Report In the prior year, our auditor’s report included a key audit matter in relation to the impact of COVID-19. In the current year, we have incorporated the impact of COVID-19 into our planned audit procedures for the above key audit matters and therefore have not included this as a separate matter in our report. Our application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. Materiality The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. We determined materiality for the Bank to be £3.25 million (2020: £3.5 million), which is 1.5% (2020: 1%) of gross margin (net interest income and net fees and commissions income). The increase in percentage applied to determine our materiality, which is within the acceptable range proposed by our audit methodology, was based on consideration of various factors, including changes in the business environment and the viability of the business. We believe that gross margin provides us with an appropriate basis for materiality as the Bank is a profit-oriented entity but loss making in the current year. Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. On the basis of our risk assessments, together with our assessment of the company’s overall control environment, our judgement was that performance materiality should be established at 50% (2020: 50%) of our planning materiality, namely £1.6 million (2020: £1.75 million). We have set performance materiality at this percentage based on various considerations, including the past history of misstatements, the effectiveness of the control environment and other factors affecting the entity and its financial reporting, which is consistent with our approach in the prior year. Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £0.16 million (2020: £0.175 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. This is consistent with the prior year. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. Other information The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: — the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and — the strategic report and directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: — adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or — the financial statements are not in agreement with the accounting records and returns; or — certain disclosures of directors’ remuneration specified by law are not made; or — we have not received all the information and explanations we require for our audit Responsibilities of directors As explained more fully in the directors’ responsibilities statement set out on page 23, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the Bank and Management. — We obtained an understanding of the legal and regulatory frameworks that are applicable to the Bank and determined that the most significant are the regulations, licence conditions and supervisory requirements of the Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’) and the Companies Act 2006. 29 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Independent Auditors’ Report — We understood how Sainsbury’s Bank plc is complying with those frameworks by making inquiries of Management, internal audit, and those responsible for legal and compliance matters. We also performed a review of regulatory correspondence and reviewed minutes of the Board and Board Risk Committee meetings held. We gained an understanding of the Bank’s approach to governance demonstrated by the Board’s enterprise risk management framework (‘ERMF’) and internal control processes. We also reviewed the Bank’s complaints process and Whistleblowing Policy. — We assessed the susceptibility of the Bank’s financial statements to material misstatement, including how fraud might occur by assessing the controls that the Bank has established to address risks of fraud identified by the Bank, or that otherwise seek to prevent, deter, or detect fraud. We also considered performance and incentive plan targets and their potential to influence Management to manage earnings. — Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures involved inquiries of legal counsel, executive management, internal audit, and performed procedures over the risk of management override of internal control. We also focused our audit procedures on areas identified as higher risk as referred to in the Key Audit Matters section of this report. — The Bank operates in the financial services industry which is a highly regulated environment. As such the Senior Statutory Auditor considered the experience and expertise of the engagement team to ensure that the team had the appropriate competence and capabilities, which included the use of specialists where appropriate. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Other matters we are required to address — Following a recommendation from the Audit Committee, we were appointed by the Bank on 16 August 2017 to audit the financial statements for the year ending 28 February 2018 and subsequent financial periods. — The period of total uninterrupted engagement including previous renewals and reappointments is four years, covering the years ending 28 February 2018 to 28 February 2021. — The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Bank and we remain independent of the Bank in conducting the audit. — The audit opinion is consistent with the additional report to the Audit Committee Use of our report This report is made solely to the Bank’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Bank’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Bank and the Bank’s members as a body, for our audit work, for this report, or for the opinions we have formed. Peter Wallace Senior statutory auditor for and on behalf of Ernst & Young LLP Statutory Auditor Edinburgh 28 April 2021 Notes: 1. The maintenance and integrity of the Sainsbury’s Bank plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 30 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Independent Auditors’ Report Balance sheet As at 28 February 2021 Note 2021 £m 2020 £m Assets Cash, balances with central banks and other demand deposits 15 968 500 Loans and advances to banks1 16 37 40 Derivative financial instruments 17 2 6 Investment securities 18 587 853 Loans and advances to customers 13 4,599 6,511 Investments in subsidiaries 21 325 325 Intangible assets 19 155 234 Property, plant and equipment 20 11 38 Other assets1 22 754 895 Total assets 7,438 9,402 Liabilities Customer accounts 23 5,128 6,312 Other deposits 24 1,161 1,680 Other borrowed funds 25 – 101 Subordinated liabilities 26 179 180 Derivative financial instruments 17 29 35 Other liabilities 27 84 86 Provisions for liabilities and charges 28 8 8 Total liabilities 6,589 8,402 Equity Called up share capital 29 901 901 Retained earnings 30 (55) 98 Other reserves 31 3 1 Total equity 849 1,000 Total equity and liabilities 7,438 9,402 1 Loans and advances to banks were previously presented within other assets. The financial statements on pages 31 to 85 were approved by the Board of Directors on 28 April 2021 and signed on its behalf by: Michael Larkin Director and Chief Financial Officer The accompanying notes on pages 36 to 85 form part of these financial statements. Sainsbury’s Bank plc – Company number 3279730 33 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Financial Statements Statement of changes in equity For the year ended 28 February 2021 Note Called up share capital £m Retained earnings £m Other reserves £m Total equity £m As at 1 March 2020 901 98 1 1,000 Loss for the financial year – (156) – (156) Other comprehensive income: Financial assets fair value movements (FVOCI) 31 – – 2 2 Total comprehensive income – (156) 2 (154) Transactions with owners: Share-based payment (net of tax) – 3 – 3 At 28 February 2021 901 (55) 3 849 Note Called up share capital £m Retained earnings £m Other reserves £m Total equity £m As at 1 March 2019 866 87 (1) 952 Profit for the financial year – 7 – 7 Other comprehensive income: Financial assets fair value movements (FVOCI) 31 – – 2 2 Total comprehensive income – 7 2 9 Transactions with owners: Shares issued in the year 29 35 – – 35 Share-based payment (net of tax) – 4 – 4 At 29 February 2020 901 98 1 1,000 All amounts are attributable to the owners of the Bank. The accompanying notes on pages 36 to 85 form part of these financial statements. 34 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Financial Statements Cash flow statement For the year ended 28 February 2021 Note 2021 £m 2020 £m (Loss)/profit before taxation (162) 5 Non-cash and other items included in profit before taxation 202 99 Change in operating assets and liabilities1 450 (185) Income taxes repayments 2 2 Cash flows generated from/(used in) operating activities 14 492 (79) Purchase of equipment (1) (3) Purchase of intangibles (23) (34) Cash flows used in investing activities (24) (37) Proceeds from issue of share capital 29 – 35 Interest paid on subordinated liabilities (11) (11) Lease payments (1) – Cash flows (used in)/generated from financing activities (12) 24 Change in cash and cash equivalents 456 (92) Opening cash and cash equivalents 572 664 Closing cash and cash equivalents 1,028 572 For the purposes of the cash flow statements, cash and cash equivalents comprise the following: 2021 £m 2020 £m Cash, balances with central banks and other demand deposits 968 500 Less: mandatory reserve deposit held at central banks (17) (18) 951 482 Loans and advances to banks1 27 40 Investment securities 50 50 1,028 572 1 Cash and cash equivalents presented in the financial statements as at 29 February 2020 has been amended to reflect £40 million of loans to banks due in less than three months that was previously presented within other assets. The accompanying notes on pages 36 to 85 form part of these financial statements. 35 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Financial Statements The increase in Stage 2 assets was triggered by updated macroeconomic forecasts, reflecting a more negative outlook and increasing the volume of customer accounts exhibiting significant increases in credit risk. The granting of payment holidays to customers does not automatically trigger a SICR and these customers were not treated as past due or forborne. However, a customer that has been granted a payment holiday may still migrate to Stage 2 where triggers for SICR are met. Write-off Loans and advances to customers are written off (either partially or in full) when there is no realistic prospect of recovery. This is generally the case when the Bank determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to write-off. Subsequent recoveries of amounts previously written off result in impairment gains recorded in the income statement. Expected lifetime For the purposes of considering the lifetime probability of default, the expected lifetime of a financial asset is the contractual term where this is fixed within the contract, or in the case of revolving products such as credit cards a behavioural life is determined by reference to historic trends. Modified financial assets When the contractual cash flows of a financial asset have been renegotiated or modified and the financial asset was not derecognised, its gross carrying amount is recalculated as the present value of the modified contractual cash flows, discounted at the original effective interest rate with a gain or loss recognised in the income statement. Management overlays In the context of IFRS 9 management overlays are short-term increases or decreases to the ECL at either a customer or portfolio level to account for items that have not been fully reflected in the existing models. Internal governance is in place to regularly monitor management overlays and to reduce the reliance on management overlays through model recalibration or redevelopment, as appropriate. Management overlays applied in estimating the reported ECL at 28 February 2021 are set out in the following table. The table includes adjustments in relation to data and model limitations. It shows the adjustments applicable to the scenario-weighted ECL numbers. As at 28 February 2021 £m As at 29 February 2020 £m Economic adjustment 13 5 PD adjustment 10 – LGD adjustment 7 – Operational overlays (1) 2 Total 29 7 The proportion of management overlay is 17% of the total ECL provision as at 28 February 2021 (2020: 4%). The Economic, LGD and PD adjustments have been included where provision models do not respond appropriately to the impacts of COVID-19. The Economic adjustment is applied where the IFRS 9 models do not respond as expected to the magnitude of the forecast economic shock related to COVID-19. Offline models have been developed with an adjusted economic response to produce a more reasonable ECL that appropriately reacts to severe negative economic forecast. The Economic adjustment was initially increased to £23 million (2020: £5 million), but subsequently £10 million of this overlay requirement was embedded within live production models as they were adjusted to reflect the revised economic forecast. The further PD adjustment is held to account for the uncertainty around both the economic assumptions regarding COVID-19 and the subsequent recovery and the impact that this will have on the Bank’s ECL. The LGD adjustment is applied to the ECL to account for the expectation that LGD will deteriorate due to the nature of COVID-19. Existing LGD models do not adequately respond to significant changes in economic variables. The majority of the Operational overlays relate to model limitations that have been manually corrected whilst a permanent fix is being developed. Macroeconomic scenarios IFRS 9 requires that the measurement of ECL should reflect an unbiased and probability weighted amount that is determined by evaluating a range of forward-looking economic assumptions. The Bank has engaged an external supplier to provide economic forecasts which are subject to review, challenge and approval through the Bank’s governance processes. For the year ended 28 February 2021, the Bank commissioned economic scenarios to take account for the potential ramifications for COVID-19 which include a range of assumptions relating to exit from social restrictions, vaccine roll out and furlough and also includes an additional severe downside economic scenario. The ECL models utilise four scenarios (2020: three scenarios) including a ‘base case’ scenario considered to be the most likely outcome together with an upside, downside and severe downside scenario. The base case has been assigned a probability weighting of 40% with the upside, downside and severe downside scenarios weighted 30%, 25%, 5% respectively (2020: base scenario 40%, upside and downside scenario 30% each). 2. Critical accounting estimates and judgements continued 38 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements Severe downside Downside Upside Base Mar 21 Mar 23Mar 22 Mar 24 Mar 25 20% -10% 0% -5% 5% 10% 15% Gross domestic product Severe downside Downside Upside Base Mar 21 Mar 23Mar 22 Mar 24 Mar 25 10.0% 0.0% 4.0% 2.0% 6.0% 8.0% UK unemployment rate Severe downside Downside Upside Base Mar 21 Mar 23Mar 22 Mar 24 Mar 25 2.5% 0.0% 1.0% 0.5% 1.5% 2.0% Consumer price index Severe downside Downside Upside Base 104% 96% 100% 98% 102% Mar 21 Mar 23Mar 22 Mar 24 Mar 25 Mortgage debt as % of household income The graphs below plot the data for unemployment, GDP, consumer price growth and mortgage debt as a percentage of household income for each of the four scenarios used in our IFRS 9 models: 2. Critical accounting estimates and judgements continued The most material economic variables to the calculation of ECL are unemployment and GDP. Our base case scenario envisages a peak unemployment of 7.2% in Q3 2021 before reverting to the long-term average in 2024 and an initial recovery in GDP with growth of 16% year-on-year at the end of Q2 2021 coinciding with the lifting of lockdown restrictions. The key macroeconomic assumptions included in the ECL calculation have also been summarised in the table below (shown as five-year averages from the reporting date): As at 28 February 2021 Base % Upside % Downside % Severe downside % Unemployment rate 5.2 4.5 6.4 8.2 Consumer price growth 1.8 1.9 1.7 1.6 GDP 3.1 4.0 2.7 2.3 Mortgage debt as a percentage of household income 101.6 100.6 102.0 102.4 Real household disposable income 1.9 2.2 1.7 1.4 Probability weighting 40 30 25 5 Sensitivity analysis Increase/(decrease) on ECL provision under 100% probability weighting £(0.5)m £(9.8)m £9.0m £22.2m Unsecured £(0.5)m £(9.7)m £8.9m £22.1m Secured – £(0.1)m £0.1m £0.1m The sensitivity disclosed above is based on the modelled ECL and the economic adjustment overlay and does not include the further PD, LGD and operational overlays. Severe downside Downside Upside Base Mar 21 Mar 23Mar 22 Mar 24 Mar 25 20% -10% 0% -5% 5% 10% 15% Gross domestic product 39 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements As at 29 February 2020 Base % Upside % Downside % Unemployment rate 3.9 3.9 6.1 Consumer price growth 2.0 1.4 2.4 GDP 1.6 2.1 1.1 Mortgage debt as a percentage of household income 99.3 96.5 103.4 Real household disposable income 1.5 2.2 0.2 Probability weighting 30 40 30 Further explanation of the inputs, assumptions and estimation techniques used at the reporting date in measuring ECLs are set out at note 13. Capitalisation and carrying value of intangible assets Capitalisation of intangible assets involves an assessment as to the appropriateness of costs that meet the qualifying criteria of IAS 38. Intangible assets are assessed to ensure they continue to meet the criteria of IAS 38, and for indicators of impairment, at each balance sheet date or more frequently where required by changes in circumstances. Where impairments are indicated, the carrying values of fixed assets are written down by the amount of the impairment and the charge is recognised in profit or loss in the period in which it occurs. A previously recognised impairment charge on an intangible asset may be reversed in full or in part where a change in circumstances leads to a change in the estimates used to determine its recoverable amount. The carrying value of the asset will only be increased to the carrying value at which it would have been held had the impairment not been recognised. Impairments recognised in the period are disclosed in notes 19 and 20. Effective interest rate In calculating the effective interest rate of a financial instrument the Bank takes into account all amounts that are integral to the yield of a financial instrument as well as incremental transaction costs. In the case of loans and advances to customers significant judgement is applied in estimating the effect of various factors, including future customer transactional and repayment behaviours, on future cash flows. Estimates are based on historical experience from similar product types. Management considers that the most material judgement is the estimated life of Credit Card balances which is a maximum of 60 months (2020: 60 months). To the extent that behavioural life differs by +/- 12 months, the value of loans and advances to customers on the balance sheet would be £7 million (2020: £10 million) higher or £8 million (2020: £11 million) lower respectively. 3. Net interest income Accounting policy Interest income and expense in the income statement is determined using the effective interest rate method. This calculation takes into account all amounts that are integral to the yield as well as incremental transaction costs. The effective interest rate is the rate that discounts the expected future cash flows over the expected life of the financial instrument to the net carrying amount of the financial asset or liability at initial recognition. The effective interest rate of a financial asset is calculated on initial recognition and is applied to the gross carrying amount of the asset. For financial assets that have subsequently become credit-impaired, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset net of any provision for expected credit losses. If the asset is no longer credit impaired, then the calculation of interest income reverts to the gross basis. Interest income calculated using the effective interest method presented in the income statement includes interest on financial assets and financial liabilities measured at amortised cost, at fair value through other comprehensive income and the effective portion of hedge accounting instruments. Interest expense presented in the statement of profit or loss includes financial liabilities measured at amortised cost and the effective portion of hedge accounting instruments. Interest income and expense on other financial assets and financial liabilities at FVPL are presented in fair value (losses) on financial instruments (see note 7). Interest expense on lease liabilities are included within in the below categories as appropriate (see note 33). 2. Critical accounting estimates and judgements continued 40 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 8. Non-underlying items continued During the year the Bank undertook an impairment review of its intangible and tangible assets due to the impact of the COVID-19 pandemic, which resulted in an impairment of £105 million due to the related impacts on customer behaviours. Details of the impairment review are disclosed in note 19. New Bank Programme transition costs principally comprise contractor and service provider costs relating to the migration of data and other services to the Bank’s new infrastructure and operating model. Strategic initiatives represent one-off costs relating to projects – this includes severance costs and related consultancy. 9. Employees The average monthly number of colleagues working on the Bank’s operations during the year is set out below. 2021 Number 2020 Number Full time 987 1,059 Part time 1,071 1,265 2,058 2,324 Full time equivalent 1,568 1,738 Colleague costs are disclosed in administrative expenses in note 6. Average colleague headcount, including contractors, fell 13% over the 12 months to February 2021. Included in average colleague headcount were 740 Travel Money colleagues (2020: nil) who were seconded to the Sainsbury’s retail business, with the related costs being recharged. Further details on recharges is provided in note 40. Colleagues are eligible to join the defined contribution pension arrangements of J Sainsbury plc. These plans are also used where colleagues have been automatically enrolled into a pension. Contributions paid by the Bank are based on grade and the amount that the colleague chooses to pay or whether they have been automatically enrolled. The pension cost recharge for the year (see note 40) represents contributions payable by the Bank and was entirely in relation to the defined contribution schemes. 10. Directors’ emoluments 2021 £m 2020 £m Emoluments 2.0 3.1 Employer contribution to defined contribution pension schemes – – Share-based payments 0.8 1.7 Compensation for loss of office – 0.4 2.8 5.2 Highest paid Director: Emoluments 0.8 0.6 Share-based payments 0.4 0.1 1.2 0.7 The Directors’ positions and remuneration status are set out in the Directors’ report on page 34. The emoluments set out above include those Directors who held office during the year. All Executive Directors were employed and remunerated by the Bank. During the year two Directors (2020: five) received share awards under J Sainsbury plc share incentive schemes reflective of their qualifying services. No Directors (2020: four) exercised share options in the year including the highest paid Director. Further detail of the relevant incentive plans are outlined in note 39. During the year two Directors (2020: five) accrued retirement benefits in respect of qualifying services under defined contribution schemes. No Directors (2020: one) were paid a sum following retirement in the year. Payments were made to independent Non-Executive Directors who served during the year and are included in the above details. There was no recharge to the Bank in respect of emoluments for Non-Executive Directors who were employed by J Sainsbury plc as their emoluments are deemed to be wholly attributable to services to the parent company. Accordingly, the above details include no emoluments in respect of these Non-Executive Directors (also see Directors’ report on page 21). 43 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 11. Profit/(loss) before taxation 2021 £m 2020 £m Profit/(loss) before taxation is stated including the following items of income and (expense): Loss on disposal of intangible assets – (0.4) Loss on disposal of tangible assets (1.6) – Impairment loss (105.5) (5.2) Auditors’ remuneration: Statutory audit of the Bank (0.8) (0.9) Details of the impairment loss are disclosed in note 19. Audit-related assurance services were also performed by the Statutory Auditors during the year in respect of a limited assurance of interim balances. Fees for this work totalled £0.02 million (2020: £nil). 12. Taxation Accounting policy Taxation on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Taxation is determined using tax rates (and laws) enacted or substantively enacted at the balance sheet date. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets and liabilities are offset against each other when there is a legally enforceable right to set-off current taxation assets against current taxation liabilities and it is the intention to settle these on a net basis. 2021 £m 2020 £m UK corporation tax on profit for the year – – Adjustments in respect of prior years – (3) Current tax – (3) Deferred tax charge Origination and reversal of temporary differences (9) – Adjustments in respect of prior years 3 1 Deferred tax (6) 1 Total tax (credit) (6) (2) Differences between profit before tax multiplied by the UK corporation tax rate for the year of 19% and the income tax expense recognised in the income statement are explained below: 2021 £m 2020 £m (Loss)/profit before taxation (162) 5 Tax on ordinary activities at 19% (2020: 19%) (31) 1 Effects: Losses surrendered/(claimed) as group relief for nil consideration 22 (1) Adjustment in respect of prior years 3 (2) Total income tax (credit) recognised in the income statement (6) (2) In the current period, the substantively enacted UK corporation tax rate applicable to the Company from 1 April 2020 was increased from 17% to 19%. The closing deferred tax assets and liabilities have been calculated at 19% and accordingly a rate change adjustment has arisen as the opening deferred tax balance had been calculated taking into account the previously enacted rate of 17%. Since the balance sheet date, it was announced in the UK Government’s Budget on 3 March 2021 that the main UK corporation tax rate will increase to 25% from 1 April 2023. This change has not yet been substantively enacted. As a result, existing temporary differences on which deferred tax has been provided may unwind in periods subject to the 19%/25% rate. The impact of the post balance sheet date change in tax rate is not expected to be material. 44 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 13. Loans and advances to customers Accounting policy Loans and advances are initially recognised at fair value and subsequently held at amortised cost, using the effective interest method, less provision for impairment and recognised on the balance sheet when cash is advanced. The accounting policies for classification and measurement under IFRS are detailed in note 1. ECL impairment model IFRS 9 uses a three stage forward-looking expected credit loss (ECL) approach. IFRS 9 requires the Bank to record an allowance for ECL for all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts. The allowance is calculated by reference to the estimated probability of default (PD), exposure at default (EAD) and loss given default (LGD). The probability of default represents the likelihood of a borrower defaulting either within 12 months from the balance sheet date or within the expected lifetime of the instrument. Exposure at default represents the expected amount due from the borrower at the point of default by reference to exposure at the balance sheet date adjusted for expected future changes including repayments and utilisation of undrawn facilities. Loss given default represents the expected percentage loss at the point of default relative to the EAD. The estimate takes into account utilisation of any expected collections and recoveries strategies, debt sale arrangements and collateral. The three stage model to determine impairment allowance is summarised as follows: — Stage 1 – Impairment allowance on financial assets that have not significantly increased in credit risk since origination, nor are credit impaired, is calculated using the probability that a borrower will default within 12 months from the balance sheet date. Interest income is recognised on the gross carrying value of the financial asset. — Stage 2 – Where a financial asset exhibits a significant increase in credit risk (SICR) but is not yet considered to be credit impaired, the probability of default considered in the impairment allowance is based upon the lifetime probability of the borrower defaulting. Interest income continues to be recognised on the gross carrying value of the financial asset. — Stage 3 – Assets considered to be credit impaired. One or more events has occurred that has resulted in a detrimental impact on the estimated future cash flows of the asset. Stage 3 assets will continue to recognise lifetime expected impairment losses (with a 100% probability of default) and interest income will be recognised on the net carrying amount (i.e. gross amount less impairment allowance). In determining ECL allowances, expected future recoveries are discounted to the reporting date at the original effective interest rate of the relevant instrument. A number of inputs and variables used in the ECL calculation are not defined within IFRS 9 and involve complex modelling and application of judgement as discussed in the remainder of this section. Undrawn commitments Undrawn loan and credit card commitments are commitments under which the Bank is required to provide a loan with pre-specified terms to the customer. Under IFRS 9 these contracts are in scope of the ECL requirements. The Bank is required to estimate the extent to which undrawn commitments and facilities will be utilised by borrowers. The nominal contractual value of these commitments, where the lending agreed to be provided is on market terms, are not recorded in the statement of financial position. The ECLs in relation to undrawn commitments are disclosed in note 34. The impairment allowance in respect of these instruments is included within provisions for liabilities and charges as there is no related asset on balance sheet against which to offset the related impairment allowance. 45 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements Secured allowance for impairment losses measured under IFRS 9 Reconciliation of impairment loss allowance and gross carrying amount of secured Loans and advances measured at amortised cost Non-credit-impaired Credit-impaired TotalStage 1 Stage 2 Stage 3 Gross carrying amount £m Loss allowance £m Gross carrying amount £m Loss allowance £m Gross carrying amount £m Loss allowance £m Gross carrying amount £m Loss allowance £m As at 1 March 2020 1,778 (0) 76 (0) 8 (0) 1,862 (0) Transfers of financial assets: To Stage 1 26 – (25) – (1) – – – To Stage 2 (16) – 16 – – – – – To Stage 3 (5) – (1) – 6 – – – Net transfer between stages – – – – – Increases due to originations1 4 – 2 – – – 6 – Decreases due to repayments (598) – (21) – (2) – (621) – Write-offs – – – – – – – – Changes in credit risk2 – – (3) (3) As at 28 February 2021 1,189 (0) 47 (0) 11 (3) 1,247 (3) 1 This also reflects assets which were originated in Stage 1 and subsequently moved to Stage 2 or Stage 3 during the year. 2 Changes in credit risk includes changes to the allowance for credit impairment losses arising from stage transfers and other changes to risk parameters (such as management overlays). Non-credit-impaired Credit-impaired TotalStage 1 Stage 2 Stage 3 Gross carrying amount £m Loss allowance £m Gross carrying amount £m Loss allowance £m Gross carrying amount £m Loss allowance £m Gross carrying amount £m Loss allowance £m As at 1 March 2019 ` 1,267 (0) 169 (0) 5 (0) 1,441 (0) Transfers of financial assets: To Stage 1 116 – (115) – (1) – – – To Stage 2 (18) – 19 – (1) – – – To Stage 3 (4) – (1) – 5 – – – Net transfer between stages – – – – Increases due to originations1 669 – 30 – – – 699 – Decreases due to repayments (252) – (26) – – – (278) – Write-offs – – – – – – – – Changes in credit risk2 – – – – As at 29 February 2020 1,778 (0) 76 (0) 8 (0) 1,862 (0) 1 This also reflects assets which were originated in Stage 1 and subsequently moved to Stage 2 or Stage 3 during the year. 2 Changes in credit risk includes changes to the allowance for credit impairment losses arising from stage transfers and other changes to risk parameters (such as management overlays). 13. Loans and advances to customers continued 48 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 14. Notes to the cash flow statement Accounting policy For the purpose of the cash flow statement cash and cash equivalents comprises cash in hand, deposits at central banks (less mandatory deposits) and deposits with banks with an original maturity of three months or less, together with Treasury Bills and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Reconciliation of profit before taxation to cash flows used in operating activities 2021 £m 2020 £m (Loss)/profit before taxation (162) 5 Non-cash and other items included in profit before taxation Impairment losses on loans and advances 58 48 Depreciation on property, plant and equipment 3 8 Amortisation of intangible assets 20 23 Share-based payment expense 3 4 Impairment, gains, (losses) and disposals 107 5 Interest paid on subordinated liabilities 11 11 202 99 Change in operating assets and liabilities Net decrease/(increase) in loans and advances to customers 1,854 (361) Net decrease in derivative assets 4 2 Net (increase) in loans and advances to other banks greater than 3 months (10) – Net decrease/(increase) in investment securities greater than 3 months 269 (180) Net (decrease)/increase in derivative liabilities (6) 27 Net decrease/(increase) in other assets1 145 (161) Net (decrease)/increase in customer accounts (1,184) 362 Net (decrease)/increase in borrowed funds (621) 134 Net (decrease) in other liabilities including provisions (1) (8) 450 (185) Cash generated from/(used in) operations 490 (81) Income taxes received 2 2 Cash flows generated from/(used in) operating activities 492 (79) 1 £40 million of loans to banks due in less than three months that was previously presented within other assets in the financial statements as at 29 February 2020 have been reclassified to cash and cash equivalents. Operational cash flows from interest Interest paid (109) (110) Interest received 249 288 140 178 Reconciliation of liabilities arising from financing activities 2021 £m 2020 £m Subordinated liabilities: At 1 March 180 176 Issuance of loan notes – – Non-cash movements (1) 4 At 28/29 February 179 180 49 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 2021 £m 2020 £m Lease liabilities: At 1 March 6 6 Lease payments (1) – Lease modifications 1 – Lease interest (1) – At 28/29 February 5 6 Restricted cash balances 2021 £m 2020 £m Bank of England deposit 17 18 17 18 A reserve deposit is held with the Bank of England in accordance with statutory requirements. This deposit is not available for use in day-to-day operations and has been excluded from the cash and cash equivalents balance in the cash flow statement. 15. Cash, balances with central banks and other demand deposits 2021 £m 2020 £m Cash and balances with central banks 937 426 Other demand deposits 31 74 968 500 The balances with central banks are repayable on demand, with the exception of the £17 million (2020: £18 million) reserve deposit pledged to Bank of England as part of its Cash Ratio Deposit scheme (see note 14). There were no significant credit losses expected on cash and other demand deposits. 16. Loans and advances to other banks Accounting policy Loans and advances to other banks, including reverse repurchase agreements, are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method. 2021 £m 2020 £m Reverse repurchase agreements 37 40 Other loans and advances to other banks: On demand – – In 3 months or less 27 40 Between 3 months and 1 year 10 – 37 40 Reverse repurchase agreements have been reclassified to loans and advances to other banks. In the financial statements for the year ended 29 February 2020 £40 million was classified within other assets. 14. Notes to the cash flow statement continued 50 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements The maturity profile and average price/rate of the hedging instruments in fair value hedges of interest rates were as follows: Maturity Less than 1 month 1-3 months 3 months – 1 year 1-5 years More than 5 years As at February 2021 Fair value hedges Nominal amount (£’m) – 328 973 1,441 621 Average fixed interest rate – 0.9% 0.7% 0.6% – As at February 2020 Fair value hedges Nominal amount (£’m) – 270 1,402 2,618 9 Average fixed interest rate – 0.9% 0.7% 0.6% – Foreign currency derivative assets Foreign currency exposure arises from currency holdings within the Bank’s Travel Money business. The Bank also hedges a US-dollar denominated deposit placed with MasterCard. The Bank entered into foreign exchange derivative contracts to hedge foreign currency exposure. Foreign exchange derivative instruments included FX spot, FX forwards and FX swaps. As at 28 February 2021, the Bank reported a FX derivative asset of £1.4 million and a FX derivative liability of £0 million. LIBOR transition to SONIA The Bank has reformed all of its derivative instruments linked to LIBOR that are not due to expire prior to 31 December 2021. Therefore, the Financial Services business does not need to reform any further contracts or rely on appropriate fallback clauses. 18. Investment securities Accounting policy These comprise debt securities and other fixed interest securities, including Treasury and other eligible bills, and are recognised on the date the contract is entered into. Investment securities are measured at amortised cost or FVOCI based on their contractual terms and the business model in which they are held. Impairment of investment securities As with customer lending, impairment of investment securities is determined under IFRS 9 – again using a three stage forward- looking expected credit loss (ECL) approach. IFRS 9 requires the Bank to record an allowance for ECL for all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts. The allowance is calculated by reference to the estimated probability of default (PD), exposure at default (EAD) and loss given default (LGD). 2021 £m 2020 £m Investment securities comprise the following: Equity investments 1 – Gilts – 51 Government backed investment securities 67 86 Covered bonds 126 238 Supranational investment securities 271 319 Asset backed securities 72 109 Commercial paper 50 50 587 853 Of which: Equity investments 1 – Maturing in three months or less 50 50 Maturing between three months and one year 91 84 Maturing between 1 and 5 years 445 719 587 853 Investment securities include £nil (2020: £300 million) pledged as collateral under sale and repurchase agreements or derivative contracts. Investment securities include £205 million of collateral prepositioned with the Bank of England as at 28 February 2021. The fair value movement recognised in the statement of other comprehensive income during the year on investment securities was a profit of £2 million (2020: £2 million ). 17. Derivative financial instruments continued 53 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements Reconciliation of impairment loss allowance and gross carrying amount of investment securities measured at FVOCI Stage 1 Total Gross carrying amount £m Loss allowance £m Gross carrying amount £m Loss allowance £m As at 1 March 2020 853 – 853 – Purchases 558 – 558 – Disposals (824) – (824) – Write-offs – – – – As at 28 February 2021 587 – 587 Stage 1 Total Gross carrying amount £m Loss allowance £m Gross carrying amount £m Loss allowance £m As at 1 March 2019 767 – 767 – Purchases 576 – 576 – Disposals (490) – (490) – Write-offs – – – As at 29 February 2020 853 – 853 – Under IFRS 9, the Bank holds an impairment provision for investment securities of £0.2 million (2020: £0.4 million). 19. Intangible assets Accounting policy Computer software Computer software is carried at cost less accumulated amortisation and any provision for impairment. Externally acquired software and licences are capitalised and amortised on a straight-line basis over their useful economic lives. Costs relating to development of computer software for internal use are capitalised once the recognition criteria of IAS 38 ‘Intangible Assets’ are met. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. When the software is available for its intended use, these costs are amortised on a straight-line basis over their useful economic lives being: — Core banking software – fifteen years — Other software – three to ten years Capitalised development expenditure and purchased software is stated at cost less accumulated amortisation and impairment losses. Such assets are assessed for impairment where there is an indication of impairment or, in the case of assets which are not yet available for use, at least annually. Where impairment exists, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss recognised in the income statement. The amortisation charge for the asset is then adjusted to reflect the asset’s revised carrying amount. Cost includes the purchase price after deducting discounts and rebates, and other directly attributable costs of preparing the asset for its intended use. Subsequent expenditure is only capitalised when it increases the future economic benefits embodied in the specific asset to which it relates. 18. Investment securities continued 54 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 2021 £m 2020 £m Cost At 1 March 287 254 Additions 23 33 As at 28 February 310 287 Accumulated amortisation At 1 March (53) (30) Charge for the year (20) (23) Impairment (82) – As at 28 February (155) (53) Net book value as at 28 February 155 234 Impairment Approach and identification of cash generating units (CGUs) At each reporting date, the Bank reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset, being the higher of its fair value less costs to dispose and its value in use, is estimated in order to determine the extent of the impairment loss. The CGU is deemed to be each respective product or product group that is capable of generating cash flows independent of other products. Non-product assets are reviewed separately as corporate assets for the products that they support. Any impairment loss is recognised in the income statement in the year in which it occurs. Where an impairment loss subsequently reverses due to a change in the original estimate, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, or its original carrying value less notional accumulated depreciation if lower. Identification of a triggering event The COVID-19 pandemic has resulted in changes to customer shopping habits, patterns and sources of finance. Despite this, the Bank has proved resilient through the pandemic, with significant liquidity and capital buffers. However, the changes in customer behaviour have led to a reduction in the Bank’s short-term profitability. This has been deemed an indicator of impairment and a full impairment review was therefore performed with an effective date of 1 June 2020. After recognising the initial impairment arising at that time, there were no further indicators of impairment during the remainder of the financial year. Approach and assumptions The recoverable amounts for CGUs were determined using value in use calculations which were based on the cash flows expected to be generated, derived from the latest budget and forecast data which was reviewed by the Board. Budget and forecast data reflect both past experience and future expectation of market conditions. The key assumptions in the value in use calculation were as follows: Assumption Detail Composition of CGU Property, plant and equipment and intangible assets attributable to each product (or group of products capable of generating independent cash flows). Cash flow years/assumptions Derived from Board approved corporate forecasts for five years and then extrapolated over the remaining useful lives of the assets being tested for impairment. Terminal value No terminal value is applied within the assessment, as cash flows are limited to the period of the remaining useful lives of the assets being tested for impairment. Discount rate A post-tax discount rate representing the Bank’s weighted average cost of capital (WACC), subsequently grossed up to a pre-tax rate of 12.8%. The post-tax WACC has been calculated using a combination of adjusted market analysis and the actual cost of debt on Tier 2 capital instruments. Of the total impairment charge of £105 million, £82 million relates to intangible assets and £23 million relates to property, plant and equipment. Of the above assumptions, the value-in-use calculations are most sensitive to changes in the discount rate and cash flows. The table below set out the key sensitivities performed on the value-in-use models. The sensitivity analysis performed considers the reasonably possible changes in these assumptions, which incorporates increased uncertainty caused by the COVID-19 pandemic. 19. Intangible assets continued 55 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 22. Other assets Accounting policy Other assets, including amounts receivable from Group companies, are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method. 2021 £m 2020 £m Amounts receivable from Group companies (see note 40) 484 558 Funds in course of settlement 125 174 Prepayments and accrued income 36 54 Insurance instalment debtor 26 25 Current tax asset 4 6 Deferred tax asset 7 2 Cash collateral paid 72 76 754 895 Other assets have no fixed maturities but are expected to be realised within 12 months, with the exception of £18 million (2020: £24 million) included in prepayments and accrued income. This represents the present value of a rebate receivable in respect of the build of certain computer software which will be received over a period of time as the related software is utilised, which is expected to be greater than 12 months. See note 35 for further details on the residual contractual maturity of other assets. The deferred tax asset is in respect of temporary differences which will reverse and result in a higher tax charge in future years, as follows: 2021 £m 2020 £m At 1 March 2 3 Movement in deferred tax asset credited to income statement 9 – Movement in deferred tax asset charged to other comprehensive income (1) – Adjustments in respect of prior years (3) (1) At 28 February 7 2 Tax effect of timing differences due to: Other temporary differences 11 12 Accelerated capital allowances (4) (10) 7 2 23. Customer accounts Accounting policy Financial liabilities comprise customer accounts, deposits from banks, subordinated liabilities and other wholesale deposits. All financial liabilities are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method. A financial liability is derecognised from the balance sheet when the Bank has discharged its obligations, the contract is cancelled or it expires. Customer accounts comprise Sterling interest bearing deposits. 2021 £m 2020 £m Repayable: On demand 4,530 5,492 Within 3 months 113 170 Between 3 months and 1 year 281 397 Between 1 and 5 years 204 253 5,128 6,312 58 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 24. Other deposits Accounting policy All financial liabilities are initially recognised at fair value and subsequently measured at amortised cost. Amortised cost is calculated by taking into account any discount or premium on issue of funds, and costs that are an integral part of the EIR. A financial liability is derecognised from the balance sheet when the Bank has discharged its obligations, the contract is cancelled or it expires. Other deposits comprise Sterling wholesale deposits. 2021 £m 2020 £m Repayable: Within 3 months 243 448 Between 3 months and 1 year 918 281 Between 1 and 5 years – 951 1,161 1,680 25. Other borrowed funds Accounting policy Other borrowed funds comprise deemed loans to SPVs arising where assets transferred to the SPVs have not met the derecognition criteria, and subordinated loan capital. These are initially recognised at fair value and subsequently held at amortised cost and the interest payable is recognised in the income statement through interest payable. 2021 £m 2020 £m ‘Failed sale’ liability on securitisation Repayable in less than 1 year – 101 Other borrowed funds – 101 Securitisation The Bank’s Lochside Asset Purchaser personal loans securitisation programme was fully redeemed on 27 May 2020 including the Senior class A note (£101 million as at 29 February 2020). On 11 November 2020, the Bank securitised and sold £725 million of personal loans to a new SPV (Drury Lane Funding 2020-1 plc) as part of a new personal loans securitisation. The SPV issued a £500 million Senior class A note and £225 million Junior class Z note to the Bank. As at 28 February 2021, the Bank held a £500 million Senior class A note and a £121 million class Z. There were no external investors in the loan notes issued by the SPV and as a result the Bank does not recognise a liability for the failed sale and separate asset for the notes held to avoid double counting of the rights and obligations pertaining to the personal loans subject to the securitisation. For further details, see related parties note 40. 26. Subordinated liabilities Accounting policy Subordinated liabilities are initially recognised at fair value and subsequently held at amortised cost. Amortised cost is calculated by taking into account any discount or premium on issue of funds, and costs that are an integral part of the EIR. The interest payable is recognised in the income statement through interest payable. 2021 £m 2020 £m Fixed rate subordinated Tier 2 notes due November 2027 175 175 Accrued interest 2 2 Fair value hedge accounting adjustments 2 3 179 180 The Bank has £175 million of fixed rate reset callable subordinated Tier 2 notes in issuance (29 Feb 2020: £175 million). The notes pay interest on the principal amount at a rate of 6% per annum, payable in equal instalments semi-annually in arrears, until 23 November 2022 at which time the interest rate will reset. The Bank has a call option to redeem these notes on 23 November 2022. 59 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 27. Other liabilities Accounting policy Other liabilities are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method. Specific policies in relation to the measurement of lease liabilities are outlined in note 33. All other liabilities are expected to be settled within three months with the exception of lease liabilities. 2021 £m 2020 £m Customer funds in course of settlement 20 13 Accruals and deferred income 59 67 Lease liabilities 5 6 84 86 28. Provisions for liabilities and charges Accounting policy The Bank recognises a provision if there is a present obligation as a consequence of either a legal or a constructive obligation resulting from a past event. To recognise this it should be probable that an outflow of economic resources, that can be reliably measured, will be required to settle the obligation. Provisions are measured as the discounted expected future cash flows taking account of the risks and uncertainties associated with the specific liability where appropriate. 2021 £m 2020 £m Provision on loan commitments issued 6 8 Customer remediation 2 – 8 8 Provision on loan commitments issued The movement on the provision for loss allowance on loan commitments is set out in note 34. It primarily relates to expected credit losses on credit card commitments. Customer remediation 2021 £m 2020 £m At 1 March – – Charged to the income statement1 7 – Utilised in the year (5) – At 28/29 February 2 – 1 The costs in relation to the customer remediation provision were reimbursed by a third party in accordance with contractual indemnity provisions of the related service agreement. The costs were presented net of the reimbursement resulting in £nil charge in the income statement. 29. Called up share capital Accounting policy Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. 2021 £m 2020 £m 900,750,000 Authorised, allotted, called up and fully paid ordinary shares (£1): At 1 March 901 866 Ordinary shares issued during the financial year – 35 At 28/29 February 901 901 During the year the Bank issued £nil (2020: 35 million) ordinary shares of £1 each at par to J Sainsbury plc. Details of post balance sheet events in relation to share capital are described in note 42. 60 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 33. Leases Accounting policy At inception of a contract, the Bank assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Bank uses the definition of a lease in IFRS 16. The Bank leases office premises. The Bank recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Bank’s incremental borrowing rate. Generally, the Bank uses its incremental borrowing rate as the discount rate. The Bank determines its incremental borrowing rate by analysing its borrowings from various external sources and makes certain adjustments to reflect the terms of the lease and type of asset leased. Lease payments included in the measurement of the lease liability comprise fixed payments. The Bank is not party to any lease arrangements containing variable lease payments that depend on an index or a rate or amounts expected to be payable under a residual value guarantee. Lease payments in an optional renewal period are included where the Bank is reasonably certain to exercise an extension option. Subsequently, the lease liability is adjusted for interest and lease payments. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Bank’s estimate of the amount expected to be payable under the lease arrangements. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Bank presents right-of-use assets in property, plant and equipment (note 20) and lease liabilities in other liabilities (note 27) in the statement of financial position. Short-term leases and leases of low-value assets The Bank has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases, including leases of IT equipment. The Bank recognises the lease payments associated with these leases as an expense on a straight- line basis over the lease term. Right-of-use assets Right-of-use assets relate to leased office premises that are presented within property, plant and equipment (see note 20). Office building £m Balance at 1 March 2019 4 Depreciation charge for the year (1) Balance at 29 February 2020 3 Lease modification 1 Depreciation charge for the year (1) Balance at 28 February 2021 3 The residual contractual maturity of lease liabilities is disclosed in note 35. Amounts recognised in profit or loss 2021 £m 2020 £m Interest on lease liabilities (note 3) (1) (1) Amounts recognised in statement of cash flows 2021 £m 2020 £m Total cash outflow for leases (see note 14) (2) – 63 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 34. Loan commitments Accounting policy Undrawn Loan, Mortgage and Credit Card commitments are commitments under which, over the duration of the commitment, the Bank is required to provide a loan with pre-specified terms to the customer. These contracts are in scope of the ECL requirements and accounting policies in relation to this are detailed in note 13. The nominal contractual value of these commitments, where the lending agreed to be provided is on market terms, are not recorded in the statement of financial position. The contractual amount of the Bank’s off-balance sheet financial instruments that commit it to extend credit to customers is as follows: 2021 £m 2020 £m Commitments to extend credit 64 80 The above table does not include undrawn limits on credit cards. These are not considered a contractual commitment but because in practice the Bank does not expect to withdraw these credit limits from customers, they are within the scope of impairment provisioning in the following table. Reconciliation of impairment loss allowance of loan commitments Non-credit impaired Credit- impaired Total £m Stage 1 £m Stage 2 £m Stage 3 £m As at 1 March 2020 (4) (3) (1) (8) Transfers of financial assets: To Stage 1 – – – – To Stage 2 1 (1) – – To Stage 3 – – – – Net transfer between stages 1 (1) – – New loan commitments originated and increases to existing commitments1 – – – – Loan commitments expired – – – – Changes in credit risk – 2 – 2 As at 28 February 2021 (3) (2) (1) (6) Non-credit impaired Credit- impaired Total £m Stage 1 £m Stage 2 £m Stage 3 £m As at 1 March 2019 (4) (2) (1) (7) Transfers of financial assets: To Stage 1 – – – – To Stage 2 1 (1) – – To Stage 3 – – – – Net transfer between stages 1 (1) – – New loan commitments originated and increases to existing commitments1 – – – – Loan commitments expired 1 – – 1 Changes in credit risk (2) – – (2) As at 29 February 2020 (4) (3) (1) (8) 1 This also reflects commitments which were originated in Stage 1 and subsequently moved to Stage 2 or Stage 3 during the year. The loss allowance on loan commitments are recognised as part of provisions for liabilities (see note 28). 64 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements 35. Risk management The Bank encounters a range of different risks and uncertainties as it undertakes its day-to-day activities and seeks to achieve its strategic objectives. Our approach to risk management and an overview of the primary risk types are described in the Risk overview section on page 5. Further detail on credit and liquidity risk exposures are shown below, with capital adequacy discussed further in note 36. Credit risk Credit risk is central to the Bank’s day to day activities and is managed in line with the Board approved risk appetite as detailed within the Principal risks section (page 7). Key developments over the course of the year were the response to COVID-19 as the pandemic evolved, including supporting the launch of Emergency Payment Freezes and the restart of retail lending. Retail credit risk Retail credit risk is the possibility of losses arising from a retail customer failing to meet their agreed repayment terms as they fall due. Retail Credit utilise automated scorecards to assess the credit worthiness and affordability criteria of new applicants and ongoing behavioural characteristics of existing customers. The outcome from all scorecard models is monitored utilising a set of credit quality metrics to ensure actual performance is in line with agreed expectations. Additional expert underwriting of credit applications is undertaken by a specialist operational team where further consideration is appropriate. The Retail Credit Risk Committee provides portfolio oversight control over credit strategy to maintain lending in line with the Board approved risk appetite, with additional oversight and control provided by the Executive Risk Committee and Board Risk Committee. Internal Audit provide additional assurance by undertaking regular reviews on the adequacy of credit risk policies and procedures. Wholesale and derivative credit risk The Bank’s treasury assets portfolio is held primarily for liquidity management purposes and in the case of derivatives, for the purpose of managing market risk. The treasury assets portfolio is invested in eligible investment securities that qualify for the regulatory Liquidity Coverage Ratio (LCR) and internal Operational Liquidity Pool (OLP). These investments include the Bank of England’s (BoE) reserve account, UK government securities (gilts or Treasury bills), multilateral development bank securities, government guaranteed agency securities, covered bonds and asset backed securities. Limits are established for all counterparty and asset class exposures based on their respective credit quality and market liquidity. Consideration is also given to geographical region and the strength of relevant sovereign credit ratings. Derivatives are subject to the same credit risk control procedures as are applied to other wholesale market instruments and the credit risk arising from mark-to-market derivative valuations is mitigated by daily margin calls, posting cash collateral to cover exposures. Daily monitoring is undertaken by the Bank’s Treasury and Financial Risk teams, including early warning indicators with appropriate triggers for escalation. At 28 February 2021, the maximum credit exposure of the Bank in the event of other parties failing to perform their obligations is equal to the sum of loans and advances to customers, loans and advances to banks, investment securities and credit lines and other commitments to lend. These are set out in notes 13, 16, 18 and 34 respectively. No account is taken of any collateral held and the maximum exposure to loss is considered to be the instrument’s balance sheet carrying amount. The table below shows the maximum exposure to credit risk for the components of the balance sheet, including derivatives. The maximum exposure is shown gross, before the effect of mitigation through the use of collateral agreements. 2021 £m 2020 £m Credit risk exposures relating to on balance sheet items Loans and advances to customers Unsecured 3,344 4,636 Secured 1,255 1,875 Cash and balances with central banks 968 500 Derivative financial instruments 2 6 Loans and advances to other banks1 37 40 Investment securities 587 853 Other assets 744 890 Credit risk exposures relating to off balance sheet items Loan commitments 64 80 Total credit risk exposures 7,001 8,880 1 Reverse repurchase agreements have been presented in the new category ‘Loans and advances to other banks’. In the prior year these were included in other assets, and the comparative figures have been reclassified. 65 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements At 29 February 2020 Unsecured lending Stage 1 £m Stage 2 £m Stage 3 £m Total £m Impaired Less than 3 months, but impaired1 – – 13 13 Over 3 months – – 26 26 Recoveries – – 129 129 Total gross impaired loans – – 168 168 Past due 30 days to 3 months – 10 – 10 Past due less than 30 days – 17 – 17 Not past due 4,225 385 – 4610 Total gross amount due 4,225 412 168 4,805 Impairment Impairment on gross balance (23) (29) (131) (183) Undrawn commitments impairment (4) (3) (1) (8) Total impairment (27) (32) (132) (191) Coverage 0.7% 7.7% 77.8% 4.0% 1 Includes £4 million of loans that would have been past due had their terms not been renegotiated. At 29 February 2020 Secured lending Stage 1 £m Stage 2 £m Stage 3 £m Total £m Impaired Less than 3 months, but impaired1 – – 7 7 Over 3 months – – 1 1 Recoveries – – – – Total gross impaired loans – – 8 8 Past due 30 days to 3 months – – – – Past due less than 30 days – 1 – 1 Not past due 1,778 75 – 1,853 Total gross amount due 1,778 76 8 1,862 Impairment Impairment on gross balance – – – – Undrawn commitments impairment – – – – Total impairment – – – – Coverage 0.0% 0.0% 3.6% 0.02% 1 Includes £3 million of loans that would have been past due had their terms not been renegotiated. Mortgages held over residential properties represent the only collateral held by the Bank for retail exposures. The market value of collateral held for impaired loans and loans past due but not impaired was £26 million (2020: £19 million). The fair value of collateral held against possession cases was £nil (2020: £nil). If a customer falls into arrears, the customer will be held in ‘collections’ where the Bank will work with the customer to try and regularise the position over a period of time. Where the arrears status of a customer deteriorates and there is a failure to respond to correspondence or agree an acceptable repayment proposal, including notice of default, the customer balance will fall into ‘recoveries’. A specialist debt recovery team will take steps to recover the debt, using their expertise to determine the optimum recovery strategy. Collateral The Bank holds collateral against loans and advances to customers in the form of Mortgages over residential property and second charges over business assets, including commercial and residential property. 35. Risk management continued 68 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements Credit quality The Bank defines the following classifications for all credit exposures: High, Satisfactory, Low and Credit impaired. These are segmented by 12 month probability of default (PD) under IFRS 9. Unsecured lending represents credit cards and personal loan lending at 28 February 2021. Secured lending represents mortgage lending. IFRS 9 12 month PD High quality: <=3.02% Satisfactory quality >3.02%; < 11.11% Low quality >= 11.11% Credit impaired 100% Unsecured lending 28 February 2021 Stage 1 £m Stage 2 £m Stage 3 £m Total £m High quality 2,683 161 – 2,844 Satisfactory quality 214 240 – 454 Low quality 6 62 – 68 Credit impaired – – 137 137 Total gross amount due 2,903 463 137 3,503 29 February 2020 Stage 1 £m Stage 2 £m Stage 3 £m Total £m High quality 3,948 112 – 4,060 Satisfactory quality 273 240 – 513 Low quality 4 60 – 64 Credit impaired – – 168 168 Total gross amount due 4,225 412 168 4,805 Secured lending 28 February 2021 Stage 1 £m Stage 2 £m Stage 3 £m Total £m High quality 1,189 45 – 1,234 Satisfactory quality – 2 – 2 Low quality – 0 – 0 Credit impaired – – 11 11 Total gross amount due 1,189 47 11 1,247 29 February 2020 Stage 1 £m Stage 2 £m Stage 3 £m Total £m High quality 1,778 73 – 1,851 Satisfactory quality – 1 – 1 Low quality – 2 – 2 Credit impaired – – 8 8 Total gross amount due 1,778 76 8 1,862 An analysis by loan-to-value (LTV) ratio of the Bank’s residential mortgage lending is presented below. The value of collateral used in determining the LTV ratios has been estimated based upon the last actual valuation, adjusted to take into account subsequent movements in house prices. At 28 February 2021 Stage 1 £m Stage 2 £m Stage 3 £m Total £m Less than 70% 795 37 8 840 70% to 80% 265 7 2 274 80% to 90% 128 3 1 132 90% to 100% 1 0 0 1 Greater than 100% – – – – Total mortgages 1,189 47 11 1,247 35. Risk management continued 69 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements At 29 February 2020 Stage 1 £m Stage 2 £m Stage 3 £m Total £m Less than 70% 1,032 45 6 1,083 70% to 80% 377 12 1 390 80% to 90% 304 16 1 321 90% to 100% 65 3 – 68 Greater than 100% – – – – Total mortgages 1778 76 8 1,862 The following table shows the maximum exposure to credit risk for commitments and balances measured at amortised cost along with the related amounts which are credit impaired at the reporting date: 2021 2020 Maximum exposure to credit risk £m Of which secured by collateral – residential property £m Maximum exposure to credit risk £m Of which secured by collateral – residential property £m Loan commitments 6,422 – 5,596 14 Of which credit impaired 25 – 28 – Financial assets measured at amortised cost – retail lending 4,750 1,247 6,667 1,862 Of which credit impaired 148 11 176 8 Total 11,172 1,247 12,263 1,876 Of which credit impaired 173 11 204 8 Forbearance The Bank provides support to customers who are experiencing financial difficulties. Forbearance is relief granted by a lender to assist customers in financial difficulty, through arrangements which temporarily allow the customer to pay an amount other than the contractual amounts due. These temporary arrangements may be initiated by the customer or the Bank where financial difficulty would prevent repayment within the original terms and conditions of the contract. The main aim of forbearance is to support customers in returning to a position where they are able to meet their contractual obligations. The Bank has adopted the definition of forbearance as published in Regulation EU 2015/227. The Bank reports all accounts meeting this definition, providing for them appropriately. The Bank has well defined forbearance policies and processes. A number of forbearance options are made available to customers. These include, arrangements to repay arrears over a period of time, by making payments above the contractual amount, that ensure the loan is repaid within the original repayment term and short-term concessions, where the borrower is allowed to make reduced repayments (or in exceptional circumstances, no repayments) on a temporary basis to assist with short-term financial hardship. The table below details the values of secured and unsecured advances that are subject to forbearance programmes, in accordance with the European Banking Authority (EBA) definition. 2021 2020 Gross loans and advances subject to forbearance £m Forbearance as a total loans and advances % Forbearance covered by impairment provision % Gross loans and advances subject to forbearance £m Forbearance as a total loans and advances % Forbearance covered by impairment provision % Unsecured 22 0.6 55.3 28 0.6 57.7 Secured 4 0.3 24.6 4 0.2 4.2 Total 26 0.5 50.9 32 0.5 51.7 35. Risk management continued 70 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements Residual contractual maturity analysis At 28 February 2021 Less than 1 month £m 1 to 3 months £m 3 to 12 months £m 1 to 5 years £m Over 5 years £m Total £m Assets Non-derivative assets Loans and advances to customers 1,626 324 669 1,532 1,368 5,519 Cash and balances at central banks 968 – – – – 968 Loans and advances to other banks 27 – 10 – – 37 Investment securities 21 34 102 435 – 592 Other assets 726 – – – – 726 Long-term interest receivable 1 1 5 13 – 20 3,369 359 786 1,980 1,368 7,862 Net derivative asset cash flows – – 1 5 – 6 Total cash inflows 3,369 359 787 1,985 1,368 7,868 Liabilities Non-derivative liabilities Customer accounts 4,561 79 285 207 – 5,132 Other deposits 157 86 920 – – 1,163 Subordinated debt – 5 5 186 – 196 Lease liabilities – – 1 2 2 5 Other liabilities (excluding lease liabilities) 76 – – – – 76 4,794 170 1,211 395 2 6,572 Net derivative liability cash flows 2 3 12 23 0 40 Unrecognised loan commitments 64 – – – – 64 Total cash outflows 4,860 173 1,223 418 2 6,676 Net liquidity (1,491) 186 (436) 1,567 1,366 1,192 At 29 February 2020 Less than 1 month £m 1 to 3 months £m 3 to 12 months £m 1 to 5 years £m Over 5 years £m Total £m Assets Non-derivative assets Loans and advances to customers 2,096 404 876 2,291 2,446 8,113 Cash and balances at central banks 500 – – – – 500 Investment securities 51 6 100 714 – 871 Other assets 919 1 5 20 – 945 3,566 411 981 3,025 2,446 10,429 Net derivative asset cash flows 2 9 16 35 – 62 Total cash inflows 3,568 420 997 3,060 2,446 10,491 Liabilities Non-derivative liabilities Customer accounts 5,530 129 405 260 – 6,324 Other deposits 372 78 289 956 – 1,695 Other borrowed funds 13 20 68 – – 101 Subordinated debt – 5 5 196 – 206 Lease liabilities – – 1 4 – 5 Other liabilities (excluding lease liabilities) 81 – – – – 81 5,996 232 768 1,416 – 8,412 Net derivative liability cash flows 4 7 29 50 2 92 Unrecognised loan commitments 80 – – – – 80 Total cash outflows 6,080 239 797 1,466 2 8,584 Net liquidity (2,512) 181 200 1,594 2,444 1,907 35. Risk management continued 73 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements Asset encumbrance An asset is defined as encumbered if it has been pledged as collateral against a recognised or off balance sheet liability and therefore is no longer available for disposal or as collateral to support liquidity or funding requirements of the Bank. The encumbrance levels of assets and related recognised or off balance sheet liabilities are shown in the following tables: At 28 February 2021 Encumbered £m Unencumbered £m Total £m Loans and advances to customers 1,596 3,003 4,599 Debt securities 27 560 587 Other assets 76 678 754 Cash and balances with central banks 17 951 968 1,716 5,191 6,908 Carrying value of encumbered assets £m Matching liabilities, contingent liabilities or securities lent £m Loans and advances to customers 1,596 1,110 Debt securities 27 – Other assets 76 27 Cash and balances with central banks 17 – 1,716 1,137 At 29 February 2020 Encumbered £m Unencumbered £m Total £m Loans and advances to customers 1,774 4,737 6,511 Debt securities 339 514 853 Other assets 76 859 935 Cash and balances with central banks 18 482 500 2,207 6,592 8,799 Carrying value of encumbered assets £m Matching liabilities, contingent liabilities or securities lent £m Loans and advances to customers 1,774 1,126 Debt securities 339 299 Other assets 76 29 Cash and balances with central banks 18 – 2,207 1,454 The main sources of encumbrance in the Bank relate to margin requirements for derivative transactions and collateral relating to secured funding transactions. Cash collateral is advanced and received as variation margin on derivatives transactions, whilst eligible treasury assets are pledged as collateral for initial margin requirements on derivatives which are centrally cleared. Eligible personal and mortgage loans with applicable haircuts are used as collateral for the bilateral personal loans securitisation facility and the Bank of England’s Term Funding Scheme (TFS) and Indexed Long-term Repo (ILTR). The personal loans and mortgages used to secure the funding are held within Loans and advances to customers. There are assets which would not normally be considered available for encumbrance in the normal course of the Bank’s business including intangible assets, property, plant and equipment, prepayments and accruals and deferred tax assets. These are included within the carrying value of unencumbered assets. 35. Risk management continued 74 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements Market risk Market risk is the risk that the value of the Bank’s assets, liabilities, capital and earnings are exposed to the adverse change of the market risk drivers. The Bank’s market risks include Interest Rate Risk in the Banking Book (IRRBB) and Foreign Exchange (FX) risk. The Bank does not have a trading book. Interest rate risk IRRBB arises from interest rate movements which impact present value and timing of future cash flows resulting in changes in the underlying value of a bank’s assets, liabilities and off-balance sheet instruments and hence its economic value. Interest rates movements also affect a bank’s earnings by altering interest-sensitive income and expenses, affecting its net interest income. The main types of interest rate risk faced by the Bank are: Re-pricing gap risk: the risk arising from timing differences in the interest rate changes of bank assets and liabilities (e.g. fixed rate personal loans and instant access savings accounts). Yield curve risk: the risk arising from changes in the slope and shape of the yield curve. Basis risk: risk arising from imperfect correlation between different interest rate indices (e.g. administered rate on savings products and treasury assets linked to LIBOR). Prepayment risk: the risk arising from the timing of customer prepayments which differ from planning and hedging assumptions. Pipeline risk: the risk of a customer drawing down, or not, a product at a rate which is unfavourable for the Bank. Credit spread risk: the risk of adverse effects resulting from a change in credit spreads, arising via the Bank’s treasury assets portfolio. Interest risk exposure is actively managed within limits that are aligned with the Bank’s risk appetite by using financial instruments such as interest rate swaps and by taking into account natural hedges between assets and liabilities with similar re-pricing characteristics. Hedging strategies are implemented and reviewed to ensure the Bank remains within its limits. In order to measure the exposure to interest rate risk the Bank adopts a Capital at Risk (‘CaR’) approach to assess the value sensitivity of the Bank’s capital to movements in interest rates under various interest rates shock scenarios, as well as via an annual earnings at risk metric which measures the sensitivity of the Bank’s earnings to movements in interest rates over a 12 month period. The CaR measure is an aggregate measure of five separate risk components, each being a distinct form of interest rate risk including re-pricing risk, basis risk, prepayment risk, MTM risk and credit spread risk. For interest rate risk measurement, all products are allocated within a re-pricing gap analysis based on their nearest re-pricing date (all non-maturing deposits are assumed to re-price in month one) and where applicable using a customer behavioural repayment profile. As at 28 February 2021 earnings at risk (change in net interest income) for changes in interest rates of +/-100 basis points movements in rates are as follows: 2021 £m 2020 £m +/- 100 basis points (7)/4 (17)/19 The above analysis assumes that interest rates would floor at 0% and would not result in negative rates becoming applicable. Foreign exchange risk The Bank is exposed to FX risk through its holding of cash denominated in foreign currencies, primarily Euro and US Dollar, within its Travel Money Bureaux in J Sainsbury’s stores. The Bank also has exposures in US Dollar for the cash collateral pledged to MasterCard. Foreign exchange risk is currently mitigated through forward rate transactions. However it is noted that during the COVID-19 pandemic Travel Money Bureaux were closed and hence the exposure to foreign exchange risk is reduced. Further details of the hedging arrangements in place at year end are disclosed in note 17. 35. Risk management continued 75 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements The below table provides an analysis of the relevant fair value hierarchy for items recognised at fair value: At 28 February 2021 Level 1 £m Level 2 £m Level 3 £m Total £m Derivatives designated as fair value hedging instruments – – – – Derivatives not in fair value hedging relationships – 2 – 2 Investment securities 586 1 – 587 Total assets 586 3 – 589 Derivatives designated as fair value hedging instruments – 29 – 29 Derivatives not in fair value hedging relationships – – – – Total liabilities – 29 – 29 At 29 February 2020 Level 1 £m Level 2 £m Level 3 £m Total £m Derivatives designated as fair value hedging instruments – 6 – 6 Derivatives not in fair value hedging relationships – – – – Investment securities 853 – – 853 Total assets 853 6 – 859 Derivatives designated as fair value hedging instruments – 35 – 35 Derivatives not in fair value hedging relationships – – – – Total liabilities – 35 – 35 The table on the following page summarises the fair value of financial assets and liabilities that are not presented in the Bank’s balance sheet at fair value. The fair values of financial instruments are based on market prices where available, or are estimated using other valuation techniques. Where they are short term in nature or re-price frequently, fair value approximates to carrying value. The fair value information presented does not represent the fair value of the Bank as a going concern at 28 February 2021 or 29 February 2020. 2021 2020 Carrying value £m Fair value £m Carrying value £m Fair value £m Assets: Loans and advances to customers 4,599 4,576 6,511 6,515 Cash and balances at central banks 968 968 500 500 Loans and advances to other banks 37 37 40 40 Liabilities: Customer accounts 5,128 5,137 6,312 6,319 Other deposits 1,161 1,161 1,680 1,680 Other borrowed funds – – 101 101 Subordinated debt 179 183 180 186 37. Fair value of financial instruments continued 78 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements The carrying value of other assets and other liabilities is a reasonable approximation of fair value. The fair value hierarchy classification adopted by the Bank in respect of assets not presented in the Bank’s balance sheet at fair value is shown in the following table: At 28 February 2021 Level 1 £m Level 2 £m Level 3 £m Total £m Loans and advances to customers – 4,576 – 4,576 Cash and balances at central banks – 968 – 968 Loans and advances to other banks – 37 – 37 Total assets – 5,581 – 5,581 Customer accounts – 5,137 – 5,137 Other deposits – 1,161 – 1,161 Other borrowed funds – – – – Subordinated debt 183 – – 183 Total liabilities 183 6,298 – 6,481 At 29 February 2020 Level 1 £m Level 2 £m Level 3 £m Total £m Loans and advances to customers – 6,515 – 6,515 Cash and balances at central banks – 500 – 500 Loans and advances to other banks – 40 – 40 Total assets – 7,055 – 7,055 Customer accounts – 6,319 – 6,319 Other deposits – 1,680 – 1,680 Other borrowed funds – 101 – 101 Subordinated debt 186 – – 186 Total liabilities 186 8,100 – 8,286 Information on how fair values are calculated for the financial assets and liabilities noted above is explained within the critical accounting estimates section of the accounting policies. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. For fixed interest bearing deposits and other borrowings without quoted market price, valuations are based on discounted cash flows using market interest rates for new lending with similar remaining maturity. The estimated fair value of deposits with no stated maturity is the amount repayable on demand. 38. Parent company The immediate and ultimate parent company and controlling party of the Bank is J Sainsbury plc, which is registered in England. Its registered office is 33 Holborn, London, EC1N 2HT. J Sainsbury plc forms the only group into which the financial statements of the Bank are consolidated. Copies of the parent company’s financial statements may be obtained from www.j-sainsbury.co.uk. 39. Share-based payments Accounting policy The Bank, through schemes operated by its parent company J Sainsbury plc, provides benefits to employees (including Directors) of the Bank in the form of equity-settled and cash-settled share-based payment transactions, whereby employees render services in exchange for shares, rights over shares or the value of those shares in cash terms. For equity-settled share-based payments the fair value of the employee services rendered is determined by reference to the fair value of the shares awarded or options granted, excluding the impact of any non-market vesting conditions. All share options are valued using an option-pricing model (Black-Scholes or Monte Carlo). This fair value is charged to the income statement over the vesting period of the share-based payment scheme with a corresponding increase to equity. Income statement The Bank recognised £2.9 million (2020: £3.6 million) of employee costs (note 6) related to share-based payment transactions made during the financial year. Of these, £nil (2020: £nil) were cash-settled. The parent company, J Sainsbury plc, operates various share-based payment schemes, in which employees of the Bank participate, as set out on the following pages: 37. Fair value of financial instruments continued 79 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements a. Savings Related Share Option Scheme (‘SAYE’) The Group operates a Savings Related Share Option Scheme, which is open to all UK employees with more than three months’ continuous service. This is an approved HMRC Scheme and was established in 1980. Under the SAYE scheme, participants remaining in the Group’s employment at the end of the three-year or five-year savings period are entitled to use their savings to purchase shares in J Sainsbury plc at a stated exercise price. Employees leaving for certain reasons are able to use their savings to purchase shares within six months of their leaving. A reconciliation of Sharesave option movements is shown below: 2021 Number of options million 2021 Weighted average exercise price pence 2020 Number of options million 2020 Weighted average exercise price pence Outstanding at beginning of year 1.2 189 1.1 213 Granted 0.3 161 0.5 161 Forfeited (0.2) 199 (0.3) 228 Exercised (0.2) 185 (0.1) 187 Outstanding at end of year 1.1 179 1.2 189 Exercisable at end of year 0.1 185 0.1 185 Exercisable price range 161 to 260 161 to 260 The weighted average share price of J Sainsbury plc during the period for options exercised over the year was 215 pence (2020: 209 pence). The weighted average remaining contractual life of share options outstanding at 28 February 2021 was 2.6 years (2020: 2.8 years). Options granted during the year were valued using the Black-Scholes option-pricing model. No performance conditions were included in the fair value calculations. The fair value per option granted during the year and the assumptions used in the calculation are as follows: 2021 2020 Share price at grant date (pence) 226 220 Exercise price (pence) 161 161 Expected volatility – 3 year period (%) 29.9 24.5 – 5 year period (%) – 26.9 Option life – 3 year period (years) 3.2 3.2 – 5 year period (years) – 5.2 Expected dividends (expressed as dividend yield %) 5.2 2.9 Risk-free interest rate – 3 year period (%) 0.11 0.9 – 5 year period (%) – 1.3 Fair value per option – 3 year period (pence) 55 53 – 5 year period (pence) – 62 The expected volatility is based on the standard deviation of J Sainsbury plc’s share price for the period immediately prior to the date of grant of award, over the period identical to the vesting period of the award, adjusted for management’s view of future volatility of the share price. b. Long-Term Incentive Plan Under the Long-Term Incentive Plan, shares in J Sainsbury plc are conditionally awarded to the senior managers in the Company. The core awards are calculated as a percentage of the participants’ salaries and scaled according to grades. Performance is measured at the end of the three-year performance period. If the required performance conditions have been met, the awards vest and 50% of the award will be released. Subject to participants remaining in employment for a further year, the balance will then be released one year after the vesting date. Options granted to acquire the award of shares will expire five years from the grant date. Dividends will accrue on the shares that vest in the form of additional shares. The core award can grow by up to four times, dependent on the level of performance. Straight-line vesting will apply if performance falls between two points. Awards are structured as nil cost options. A reconciliation of the number of shares conditionally allocated is shown below: 2021 Million 2020 Million Outstanding at beginning of year 1.4 1.0 Conditionally allocated 0.9 1.0 Forfeited (0.1) (0.1) Exercised (0.7) (0.5) Outstanding at end of year 1.5 1.4 The weighted average remaining contractual life of share options outstanding at 28 February 2021 was 1.4 years (2020: 2.3 years). 39. Share-based payments continued 80 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements Lochside Asset Purchaser No.1 plc The Bank’s personal loans securitisation programme issued via Lochside Asset Purchaser No.1 plc was fully redeemed on 27 May 2020 resulting in full repayment of the Senior class A note, Junior/Subordinated class B note and Reserve note. 2021 £m 2020 £m Transactions during the year Interest paid on ‘failed sale’ liability (1) (4) Servicer fee received – 1 Redemption of Senior ‘A Notes’ (101) (174) Repayment of intercompany loan (6) – Balances at end of year Other assets: Intercompany loan – 6 Payables: ‘Failed sale’ liability – 101 Book value of personal loans for which beneficial interest has transferred to SPV – 182 For additional disclosure on the nature of the ‘failed sale’ liability see note 25. Drury Lane Funding 2020-1 plc On 11 November 2020, the Bank securitised and sold a £725 million pool of personal loans to Drury Lane Funding 2020-1 plc, an SPV controlled by the Bank. The SPV issued a £500 million Senior class A note and a £225 million Junior/Subordinated class Z note to the Bank. The securitised pool of personal loan assets fails the derecognition requirements of IFRS 9 and so the Bank continues to recognise the personal loans on its balance sheet. As at 6 March 2021, the Bank had pledged £621 million of personal loans to the SPV. The relevant personal loans continue to be serviced by the Bank and a servicer fee is receivable from the SPV as a result. 2021 £m 2020 £m Transactions during the year Interest paid (0.1) – Issuance of liquidity reserve 6 – Balances at end of year Other assets: Liquidity reserve 6 – Intercompany asset 25 – Book value of personal loans for which beneficial interest has transferred to SPV 621 – The intercompany asset relates to cash collected on the securitised loans that has been paid across to the SPV. As the Bank retains the risk and rewards of the securitised loans and retains the notes issued by the SPV these cash payments are treated as an intercompany asset. Home Retail Group Card Services Limited The Bank provides funding to Home Retail Group Card Services Limited via an intercompany loan. 2021 £m 2020 £m Transactions during the year Services and loans provided by Sainsbury’s Bank plc: Interest receivable on intercompany loan 16 19 Management services 1 1 Balances at end of year Other assets: Intercompany loan 453 559 40. Related party transactions continued 83 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements The loan to Home Retail Group Card Services Limited has no fixed repayment term but is repayable at the Bank’s request. The loan operates as a revolving facility to fund the store card lending portfolio of Home Retail Group Card Services and the balance fluctuates in line with overall lending on that portfolio. Interest was payable three months in arrears at LIBOR plus a margin of 3% prior to transitioning to the Sterling Overnight Index Average (SONIA) rate from 8 February 2021. Interest remains payable three months in arrears, at SONIA plus a margin rate of 3.085%. b) Transactions with key management personnel For the purposes of IAS 24 ‘Related party disclosures’, key management personnel comprise members of the Sainsbury’s Bank plc Board and the Executive Committee of the Bank, who held office during the year. Remuneration and other compensation 2021 £m 2020 £m Short-term employee benefits 3.9 4.2 Post-employment benefits 0.1 0.1 Termination benefits – 0.4 Share-based payments 2.0 1.8 6.0 6.5 Short-term employee benefits represent salary, bonus and benefits in kind. Post-employment benefits relate to employer’s contributions to money purchase pension schemes operated by J Sainsbury plc. Share-based payments relates to share schemes operated by J Sainsbury plc (see note 39). Product transactions Details of transactions, under terms and conditions available to all colleagues, between the Bank and key management personnel are provided below. For this purpose, key management personnel include Sainsbury’s Bank plc key management personnel and members of their close families. Number of key management personnel Directors £000 Other £000 Mortgages, credit cards and term loans At 28 February 2019 5 7 – Resignations during 2019/20 (3) (6) – Appointments/New accounts during 2019/20 1 – 1 Amounts advanced during the year – 11 28 Amounts repaid during the year – (10) (27) At 29 February 2020 3 2 2 Resignations during 2020/21 (3) (2) (2) Appointments/New accounts during 2020/21 3 2 – Amounts advanced during the year 10 8 Amounts repaid during the year (9) (6) At 28 February 2021 3 3 2 40. Related party transactions continued 84 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements Number of key management personnel Directors £000 Other £000 Savings and deposit accounts At 28 February 2019 6 482 – Resignations during 2019/20 (4) (362) – Appointments/New accounts during 2019/20 3 – 111 Amounts deposited during the year – – 37 Interest paid – 1 1 Amounts withdrawn during the year – (112) – At 29 February 2020 5 9 149 Resignations during 2020/21 (4) – (149) Appointments/New accounts during 2020/21 1 12 – Amounts deposited during the year 18 – Interest paid – – Amounts withdrawn during the year – – At 28 February 2021 2 39 – Based on the Companies Act definition of Loans to Directors, total lending outstanding at 28 February 2021 was £nil (2020: £nil). 41. Capital commitments There are commitments in respect of capital expenditure which have been authorised, but not provided for in the financial statements, for which contracts have been entered into, on: 2021 £m 2020 £m Property, plant and equipment 1 2 Software development 7 5 8 7 42. Post balance sheet events On 23 March 2021 the High Court Of Justice (Business and Property Courts of England and Wales Companies Court) approved a reduction of the ordinary share capital of the Bank from £900,750,000 to £700,750,172.25, having previously been resolved on and effected by a Special Resolution passed at a General Meeting of the Bank held on 23 February 2021. The reduction became effective on 1 April 2021 upon registration of the court order with Companies House and resulted in an equal and opposite increase to retained earnings. 40. Related party transactions continued 85 Sainsbury’s Bank plc Annual Report and Financial Statements for the year ended 28 February 2021 Notes to the financial statements