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OneSavings Bank plc
(the Company)

2016 Annual Report and Accounts

The following regulated information, disseminated pursuant to DTR6.3.5, comprises the 2016 Annual Report and Accounts which was sent to shareholders of OneSavings Bank plc on 31 March 2017.

A copy of the Annual Report and Accounts is available at www.osb.co.uk.

Enquiries:

OneSavings Bank plc
Nickesha Graham-Burrell
Deputy Company Secretary
t: 01634 835 796

Brunswick                                                                       t:  020 7404 5959
Robin Wrench / Simone Selzer

Notes to Editors

About OneSavings Bank plc

OneSavings Bank plc ('OSB') began trading as a bank on 1 February 2011 when the trade and assets of Kent Reliance Building Society were transferred into the business.

OSB is a specialist lending and retail savings group authorised by the Prudential Regulation Authority, part of the Bank of England, and regulated by the Financial Conduct Authority and Prudential Regulation Authority.

OSB focuses on selected sub-sectors of the lending market in which it has established expertise, platforms and capabilities, and where opportunities have been identified for both high returns on a risk-adjusted basis and strong growth.

These include Buy-to-Let/SME (comprising Buy-to-Let, Commercial, Residential development and Funding lines), Residential Mortgages (comprising First charge, Second charge and Funding lines), and Personal Loans.

OSB originates organically through specialist brokers and independent financial advisors.

OSB is predominantly funded by retail savings originated through the established Kent Reliance franchise, which includes a network of branches in the South East of England, as well as online and postal channels.

Diversification of funding is currently provided by securitisation and OSB joined the Funding for Lending Scheme in early 2014 and the Term Funding Scheme in November 2016.

OneSavings Bank plc

ANNUAL REPORT AND ACCOUNTS 2016

OneSavings Bank

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www.osb.co.uk
Reliance House, Sun Pier, Chatham, Kent ME4 4ET
T +44 (0) 1634 848944

ANNUAL REPORT AND ACCOUNTS 2016

SPECIALIST LENDING

PERSONALFLEXIBLEFAIR

Strategic report
Highlights IFC
Who we are 01
At a glance 02
Chief Executive Officer's statement 04
Market review 10
Strategic framework 14
One specialist lender 16
One fair place to save 18
One unique operating model 20
Operating and financial review 22
Key performance indicators 28
Financial review 30
Chief Risk Officer's report 34
Principal risks and uncertainties 42
Viability statement 46
Corporate responsibility report 47
Governance
Board of Directors (biographies) 56
Corporate Governance report 58
Nomination and Governance Committee report 66
Audit Committee report 69
Risk Committee report 75
Annual statement by the Chair of the Remuneration Committee 77
Directors' report: other information 91
Statement of Directors' responsibilities 93
Financial statements
Independent Auditor's Report 94
Statement of Profit or Loss 99
Statement of Other Comprehensive Income 100
Statement of Financial Position 101
Statement of Changes in Equity 102
Statement of Cash Flows 103
Notes to the Financial Statements 104
Glossary 159
Company information 160


PAGE 16

ONE SPECIALIST LENDER

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PAGE 18
ONE FAIR PLACE TO SAVE

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PAGE 20
ONE UNIQUE OPERATING MODEL

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Strategic report

HIGHLIGHTS

GROSS NEW LENDING

+28%
2016: £2.3bn
2015: £1.8bn

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BASIC EPS

+45%
2016: 49.4p
2015: 34.1p

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PROFIT BEFORE TAX

+55%
2016: £163.1m
2015: £105.3m

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FULLY-LOADED COMMON EQUITY TIER 1 RATIO

Strengthened
2016: 13.3%
2015: 11.6%

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NET INTEREST MARGIN

+5bps
2016: 314bps
2015: 309bps

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FULL YEAR DIVIDEND PER SHARE

+21%
2016: 10.5p
2015: 8.7p

NET LOAN BOOK

+16%
2016: £5.9bn
2015: £5.1bn

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UNDERLYING BASIC EPS

+20%
2016: 41.7p
2015: 34.8p

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UNDERLYING PROFIT BEFORE TAX

+29%
2016: £137.0m
2015: £105.9m

32% excluding impact of the new bank corporation tax surcharge

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COST:INCOME RATIO

+1% point
2016: 27%
2015: 26%

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CUSTOMER SATISFACTION (NPS)

+4% points
2016: 59%
2015: 55%

2015

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For more information and definitions, see Key performance indicators on page 2

WHO WE ARE

OneSavings Bank is a specialist lender, primarily focused on carefully selected sub-sectors of the mortgage market.

Its specialist lending is supported by a stable retail savings franchise with 150 years of heritage.

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MIKE FAIREY
NON-EXECUTIVE CHAIRMAN

I am delighted to welcome you to OneSavings Bank plc's Annual Report for 2016.

The Company continued to deliver strong loan book and earnings growth. I am very pleased with the resilience that our business has shown during a year of regulatory and political uncertainty, combined with economic challenge.

We continued to focus on the growth of our core businesses whilst maintaining strong risk management and creating strong shareholder value. We continue to see market demand for our specialist lending capabilities and customer-centric business model, driven by a structural housing market shortage and strong private rental sector.

MIKE FAIREY
Non-Executive Chairman

See Governance section on page 58 for the Chairman's letter to shareholders


AT A GLANCE

OUR BUSINESS

BUY-TO-LET/SME LENDING

  • BUY-TO-LET MORTGAGES
    We lend to limited companies and individuals secured on residential property held for investment purposes.

    Our target market is experienced and professional landlords or high net worth individuals with established and extensive property portfolios.

  • COMMERCIAL MORTGAGES
    We provide loans to limited companies and individuals secured on commercial and semi-commercial properties held for investment purposes or for owner occupation.

  • RESIDENTIAL DEVELOPMENT
    We provide development loans to small and medium sized developers of residential property. Loans are staged, with monitoring surveyors signing off each stage of the development before funds are released.

  • FUNDING LINES
    The Bank provides funding lines (loans) to non-bank finance companies secured against portfolios of financial assets, principally mortgages and leases.

Buy-to-Let/SME 2015 2016
Loans and advances (£bn) 3.1 4.1
Gross new lending (£bn) 1.5 1.9
Average book LTV at 31 December (%) 66 69

For more information go to the Operating and financial review p22

RESIDENTIAL MORTGAGE LENDING

  • FIRST CHARGE
    We provide bespoke loans to individuals, secured by a first charge against their residential home.

    Our target market includes high net worth and complex income customers. We are also expert in shared ownership, lending to first-time buyers and key workers buying a property in conjunction with a housing association.

  • SECOND CHARGE
    We provide loans to individuals seeking to raise additional funds secured by a second charge against their residential home.

    We predominantly target good credit quality borrowers.

  • FUNDING LINES
    The Bank provides funding lines to non-bank lenders who operate in high yielding, specialist sub -segments such as residential bridge finance.

Residential 2015 2016
Loans and advances (£bn) 2.0 1.9
Gross new lending (£bn) 0.3 0.4
Average book LTV at 31 December (%) 56 58

For more information go to the Operating and financial review p22

RETAIL SAVINGS

  • ONLINE
    We attract retail savings deposits via the internet.

  • DIRECT
    The direct channel sources savings products via the telephone and post.

  • HIGH STREET BRANCHES
    Our Kent Reliance branded network operates in the South East of England and offers a variety of fixed, notice, easy access and regular savings products, including ISAs.

PERSONAL LOANS

  •        The Bank acquired the performing former Northern Rock consumer loan portfolio from UK Asset Resolution in July 2013.

    This portfolio of high-margin, seasoned loans currently represents the Group's only unsecured lending and is serviced by a third party specialist servicer. Net loan book was £9.1m at 31 December 2016 (2015: £42.1m).

Retail savings balance by channel 2015 2016
Direct 44% 37%
Online 35% 32%
Branches 21% 31%

For more information go to One fair place to save p18

OUR TRADING BRANDS

OneSavings Bank is made up of a family of specialist financial services brands.

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Specialist semi-commercial and commercial mortgage lender providing Buy-to-Let loans, alongside owner-occupied and investor commercial mortgages throughout England and Wales (acquired in August 2012).

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Specialist residential and Buy-to-Let mortgages for its local market since 2005.

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Largest lending business in the Group, offering Buy-to-Let and first charge residential loans.

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Experienced team providing specialist residential development finance to small and medium sized developers with a proven track record (commenced trading in January 2014).

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Specialist residential and Buy-to-Let mortgages for its local market since 2002.

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Kent Reliance is also an established, stable and award-winning savings franchise.

Its strong customer focus delivers high levels of customer satisfaction, resulting in strong customer loyalty and retention.

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Long-standing second charge lender, which offers an award-winning range of specialist secured loans throughout England, Scotland and Wales (acquired in September 2012).

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Based in Bangalore, India, and a wholly-owned subsidiary of OneSavings Bank, OSBI provides primary processing for our Kent Reliance, Jersey and Guernsey brands.

CHIEF EXECUTIVE OFFICER'S STATEMENT

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ANDY GOLDING
CHIEF EXECUTIVE OFFICER

I am delighted to report another strong performance from the OneSavings Bank Group, in a year where we have once again met or exceeded all of our financial objectives set at IPO.

Our clear strategy and unique business model have proven robust and we finish the year with a strong balance sheet, a high quality secured asset portfolio and an excellent reputation for customer service. This continues to position us well going forward.

"We have continued to focus on customer needs and the quality of new lending, leading to an enhanced customer reputation across our lending and savings brands."

CONTINUED STRONG PERFORMANCE

OneSavings Bank ('OSB') continued to grow the loan book through our specialist lending brands during 2016, with 28% growth in organic origination, responding well to the headwinds created by the change in Stamp Duty Land Tax ('SDLT'), the EU referendum result and the signalled individual taxation regime changes.

This growth was achieved without compromising net interest margin as the Group remained focused on delivering our objective of being a leading specialist lender in our chosen markets, supported by a strong retail savings franchise and an efficient and scalable back office function. We have created value by taking a people-centric approach to our business through bespoke, manual underwriting, distribution and customer service, which have collectively driven the performance of our lending and savings brands.

We achieved particularly strong growth in our core Buy-to-Let lending sub-segment as the market became more focused on our professional landlord audience.

We enhanced our core residential segment through selective asset acquisition and I am very pleased that we also increased our capital ratio following the sale of our economic interest in the Rochester Financing No. 1 plc securitisation (the 'Rochester 1 disposal') as well as through our profitable organic origination.

We have grown the commercial side of our Buy -to-Let/SME segment cautiously and we have been prudent in business areas exposed to cyclical uncertainty, such as residential development finance, through increased stress testing measures in these sub-segments.

RESULTS AT A GLANCE

The Group delivered strong profit and loan book growth in 2016.

Underlying pre -tax profit1 increased by 29% to £137.0m (2015: £105.9m) and underlying basic earnings per share1 grew by 20% to 41.7 pence (2015: 34.8 pence). The Group grew its loan book by 16% to £5.9bn in 2016 (2015: £5.1bn), whilst maintaining an appropriate risk return profile. Excluding the Rochester 1 disposal, the loan book grew by 20%.

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This was driven by strong new originations in our core Buy-to-Let/SME segment, which continued to build on our 2015 achievements.

Our high quality residential mortgage segment also continued to perform well.

The balance sheet growth was achieved whilst delivering a strong return on equity of 29% (2015: 32%) or, 32% excluding the impact of the new bank corporation tax surcharge, despite strengthening our fully-loaded common equity tier 1 ('CET1') capital ratio to 13.3% (2015: 11.6%).

The capital ratio increased following the Rochester 1 disposal, whilst also demonstrating the strong organic capital generation capability of the business through profitability.

The Board is recommending a final dividend of 7.6 pence per share.

This gives a total dividend per share for the full year of 10.5 pence in-line with our stated dividend policy.

BEST SPECIALIST LENDER

The increase in gross new origination of 28% to £2.3bn (2015: £1.8bn) demonstrates the strength of our lending franchises in the specialist lending markets we serve.

BEN GRIFFITHS: Aldermore has outgrown upstart status and deserves respect

We continue to differentiate ourselves from the competition by offering well defined propositions in high margin, underserved markets, where we have the experience, as well as the internal and intermediary infrastructure, to successfully develop and service those markets.

Changes to SDLT at the end of the first quarter of 2016 and the signalled changes in the individual taxation regime led to varying levels of mortgage applications and completions in Buy-to-Let throughout the year.

Completion volumes in our core businesses were strong in the first quarter as we fulfilled heightened demand to accelerate Buy-to-Let mortgage completions ahead of the SDLT changes and then grew again to record levels during the second half.

Application volumes in our core businesses remained strong throughout the year with the run -rate increasing in the second half of 2016. It increased further in the last quarter ahead of the introduction of new underwriting standards for Buy-to-Let at the beginning of 2017.

Leverage our market expertise

This performance demonstrates the sustainable strength of our propositions targeted at professional landlords, particularly our specialist, manual underwriting and our deep relationships with mortgage intermediaries. Professional/ multi-property landlords accounted for 68% of completions for OSB by value during the second half of 2016 (2015: 60%).

A significant proportion of the Buy-to-Let market comes from refinancing.

OSB's Buy-to-Let refinancing percentage was 58% during 2016 despite the high level of purchase activity ahead of the change to SDLT (2015: 58%).

I am pleased that our more cyclical commercial businesses continued to perform strongly. Heritable Development Finance continued to grow and deliver high quality residential development lending, with a preference for forging relationships with those active outside prime central London.

The business continued to gain momentum in spite of new entrants to the market, as customers sought an experienced and knowledgeable lender. After the EU referendum, the number of potential development schemes which can meet our stringent stress tests may reduce, but our high quality relationships have supported loan book growth, with commitments standing at £212m at year end, an increase of £44m for the year.

In addition, we have also grown the provision of secured funding lines to other lenders that operate in certain high yielding, specialist sub-segments, such as residential bridge finance and asset finance.

Total credit approved limits were £330m with total loans outstanding of £122m as at 31 December 2016 (2015: £185m and £126m respectively). During 2016, four new funding lines were added, with a further two credit lines approved and in the documentation process.

We continued to gain recognition amongst mortgage customers and intermediaries, winning multiple awards during the year.

I am particularly pleased that Kent Reliance won the Personal Finance Best Buy-to -Let Mortgage Provider award for the second year running and the What Mortgage Best Specialist Lender award in 2016. This combined with our broker net promoter score ('NPS') of 48% demonstrates the strength and value of our lending customer franchise.

AWARD WINNING SAVINGS

Our stable and award winning retail funding franchise continues to support lending growth, with retail deposits up 11% to £6.0bn (2015: £5.4bn).

Our loan to deposit ratio for 2016 was 90%2, comfortably within our target of less than 100%, delivering on our strategy to be primarily retail funded.

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Nearly 27,000 new savings customers joined the Bank during 2016 and our successful programme of creating long -term savings relationships by offering market competitive rates to all customers, including those with maturing fixed rate bonds and ISAs, continued to deliver a very strong 87% retention rate.

The strength and fairness of our retail savings proposition, coupled with excellent customer service and high retention rates, continues to allow the Bank to raise significant funds without needing to price at the very top of the best buy tables.

RETURN ON EQUITY1
DOWN 3%
29%

1.

32% excluding impact of the new bank corporation tax surcharge

2015: 32%

DIVIDEND PER SHARE
UP 21%
10.5p

2015: 8.7p

We have diversified sources of funding including the government's Funding for Lending Scheme ('FLS') and Term Funding Scheme ('TFS') and we managed liquidity using a mixture of new and retained retail deposits, FLS and TFS.

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In 2016, the Group also extended its savings product proposition to small and medium businesses.

OPERATIONAL EXCELLENCE AND SERVICE IS CORE

As the Group has grown, costs have been controlled in-line with our stated financial objectives, resulting in a broadly stable cost to income ratio of 27% (2015: 26%). During 2016, we continued to invest in risk and compliance functions as regulatory costs increased.

Book Runner

In particular, we continued to invest in the development of models needed both for IFRS 9 and to progress our stated aim of becoming an internal ratings- based approach bank ('IRB'). The Group's IFRS 9 models and first generation IRB models were delivered on schedule in late 2016. We commenced the parallel run for IFRS 9 at the start of 2017 and are well placed to implement the requirements for 2018.

We continue to invest in customer facing and back office infrastructure as previously reported and to accommodate growth in OSBIndia, new premises in Bangalore became operational during the first quarter of 2016.

OSBIndia undertakes a range of primary processing services at a significantly lower cost than an equivalent UK-based operation and with very high quality levels.

I am especially pleased that we achieved this whilst maintaining our focus on customers, borne out by an increase in customer NPS to an outstanding 59% (2015: 55%).

This is also demonstrated by our numerous awards including Kent Reliance being named in the Moneyfacts awards as Best Bank Savings Provider for the second year in succession.

"We continue to gain recognition amongst customers and intermediaries, winning multiple awards during the year."

BUILDING A BUSINESS FOR THE FUTURE

The Group's strength and expertise in manual underwriting has continued to exercise strong diligence over loan and customer assessment, contributing to the Group's loan loss ratio falling to 16bps in the year to 31 December 2016 (2015: 23bps).

We remain particularly pleased with the performance of the front book of mortgages. From more than 29,000 loans totalling £5.9bn of new organic originations since the Bank's creation in February 2011, we only have 91 cases of arrears over three months in duration, with an aggregate balance of £8.6m and an average loan to value ('LTV') of 60%, reflecting the continued strength of the Bank's underwriting and lending criteria.

In June 2016, we implemented a revised mortgage product transfer scheme ('Choices') to encourage greater levels of retention amongst those borrowers reaching the end of their initial product term.

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Under this programme, borrowers are encouraged to engage with their broker to receive advice and select from a bespoke product set. Since the implementation of the scheme there has been a significant increase in the number of borrowers choosing a new product within three months of their initial product ending, driven exclusively by success in switching borrowers who were otherwise remaining on standard variable rate ('SVR') and who, by definition, were therefore in the market for other lenders.

The Bank of England Monetary Policy Committee announced a bank base rate cut of 25bps on 4 August 2016 and signalled that rates could go lower if the economy worsens.

OSB reduced its SVR by the full 25bps effective from 1 September 2016. This reduction had a broadly neutral impact on the Bank's NIM due to rate reductions on administered savings. Since the creation of OSB we have kept control of asset pricing in our core businesses, with the majority of new origination linked to our SVR or in naturally hedged fixed rate products. This control over pricing provides significant protection against rate changes.

The Prudential Regulation Authority ('PRA') issued a Supervisory Statement on Buy-to-Let underwriting standards in September 2016, requiring lenders to adopt more stringent affordability assessments from 1 January 2017.

We have always assessed affordability for borrowers through our specialist underwriting model and applied stringent stress tests. This can be seen in our weighted average interest coverage ratio ('ICR') for Buy-to-Let origination during 2016, which increased to 171% from 159% in 2015, demonstrating our cautious approach to the assessment of customer affordability.

We continued our focus on disciplined lending following the EU referendum, using lending criteria together with product targeting to position the business to grow its lower risk, low LTV portfolio.

The weighted average loan to value (LTV) of the mortgage book remained low at 63% at the end of 2016, with an average LTV of 69% on new origination during the year (2015: 69%). We have limited exposure to high value properties, with only 2% of our total loan book secured on properties valued at greater than £2m and with an LTV above 65%.

In its internal capital adequacy assessment process ('ICAAP'), OSB applies a number of severe stress scenarios to its balance sheet including the H2 2016 PRA Stress Scenario, to demonstrate that it can survive a substantial economic downturn while maintaining capital levels above the Board capital risk appetite.

The H2 2016 PRA Stress Scenario contains a severe reduction in house prices of more than 30% over the first two years of the five-year stress period, as well as an increase in unemployment to more than 9% and a significant fall in GDP. OSB's secured balance sheet with low average LTVs and the underlying profitability of its existing loan book allow it to survive such a stress, keeping above regulatory prescribed levels.

STRENGTHENING THE SENIOR MANAGEMENT TEAM

During 2016, we took the opportunity to strengthen the senior management team.

Jason Elphick joined as Group General Counsel and Company Secretary in June 2016 from Santander, where he was Legal Director, Head of UK Banking Legal.

Additionally, Lisa Odendaal joined OSB in April 2016 as Head of Internal Audit and is a member of the Executive Team.

Lisa was previously part of the outsourced Grant Thornton Internal Audit team.

MARKET OUTLOOK

In 2016 we successfully negotiated regulatory uncertainty and economic challenges, and we believe that our specialist manual underwriting capabilities will become increasingly relevant during 2017 as economic uncertainty persists and regulatory changes take hold.

We will maintain a deep understanding of the risks that we can actively manage and price for, and this together with our strong service proposition based on flexibility and speed of turnaround, will underpin the attractiveness of our products to customers.

The SDLT increase for Buy-to-Let purchases introduced in April 2016 has been absorbed by the market with little long-term impact for our target audience of professional landlords.

In 2017 we will see the market adjusting to the new Buy-to-Let underwriting standards which ensure that lenders, inter alia reflect the changes to personal tax on landlords within their affordability assessments.

These changes will reduce yield for some higher rate tax payers. We have seen a clear trend for borrowers to seek to mitigate this by opting to borrow via a limited company during 2016. We saw a continued increase in the proportion of applications from limited companies for our main Buy-to-Let brand, Kent Reliance, from around 40% in December 2015 to 57% in the second half of 2016. The Group has always specialised in lending to limited companies, and given the market trends, this gives us competitive advantage over those lenders without such a capability.

Our manual, bespoke approach to underwriting will give us additional advantages when further market- wide measures to strengthen underwriting standards are to be implemented from September 2017, as we already substantively meet the regulatory requirements for assessment of landlords with four or more mortgaged properties.

We remain committed to being retail funded and the through-the- cycle benefits that this brings, but intend to complement this by taking advantage of the four-year term funding provided through the TFS at Bank of England base rate, as we lend into the 'real economy'.

We have drawn down £301m to date.

The consultation from the Basel Committee on revised standardised risk weights proposed higher risk weights for Buy-to-Let, to be implemented from 2019 at the earliest. This proposed standardised risk weight revision is based on a global calibration, which in OSB's view is not appropriate for the UK Buy-to -Let market.

Additional information is expected in March 2017 updating the Basel Committee proposals.

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As an alternative to the standardised risk weights, OSB is progressing towards IRB and the required models have been built and are being run during 2017 to test their accuracy. OSB is on target and aims to have it in place for residential and Buy-to-Let lending prior to adoption of final rules on standardised risk weights. The PRA published a consultation, "Refining the PRA's Pillar 2A capital framework" in February 2017 to be implemented by 1 January 2018.

The consultation's aim is to ensure that the total amount of capital required is not excessive for firms following the standardised approach for credit risk.

Finally, there is the broader macroeconomic environment, primarily driven by uncertainties following the decision to leave the EU and the intention of the UK Government to trigger Article 50 before the end of March 2017. The UK economy has remained resilient in the face of the uncertainty and we have seen no material change in customer confidence or demand for loans in our core markets.

We will continue to concentrate on our core strengths, and remain confident in the quality of our chosen markets and our business model, and believe we are in a strong position to perform well in each of our key market segments.

Our achievements in 2016 are a testament to the management and staff of OSB and I would like to thank my colleagues for their hard work and commitment throughout the year.

"We are a responsible lender and will continue to manage the business prudently."

LOOKING FORWARD TO 2017

Following the strong performance in 2016, we entered 2017 with a strong pipeline of new business and are currently seeing very strong application levels in our core businesses.

Aldermore Group PLC Annual Financial Report

We expect to deliver net loan book growth in the mid-teens in 2017, whilst keeping NIM and cost to income ratio broadly flat to 2016. We will concentrate on what we have proven we do best; being a people focused business, using our relationships, manual underwriting expertise and secured lending strategy to lend responsibly to customers in underserved markets.

Over the coming year, organic lending, through the Buy -to-Let segment will remain the key driver of loan book growth focused on professional, multi-property landlords.

Additionally, we will continue to evaluate selective inorganic opportunities that provide long-term value and meet our strategic objectives.

We start 2017 with a fully loaded CET1 ratio of 13.3% and a proven organic capital generation capability through profitability. We anticipate maintaining a CET1 ratio at a minimum 12% going forward.

We remain keen to transition the capital stack to an optimum mix which may include Additional Tier 1 Capital ('AT1') when market conditions are right.

Our dividend policy for 2017 remains a pay-out ratio of at least 25% of underlying profit after taxation.

It is too soon to predict the medium to long -term impact of economic, tax and regulatory changes, but I believe that OneSavings Bank is well placed to take advantage of opportunities that arise and we remain capable of generating attractive returns for our shareholders.

ANDY GOLDING
Chief Executive Officer
16 March 2017

1.

See Highlights, page 1 for statutory equivalents

2. Excluding the impact of drawdowns under the FLS and TFS

MARKET REVIEW

ECONOMIC OVERVIEW

The defining economic event of 2016 was the EU referendum in June. Whilst prior to the vote there were widespread assumptions of a significant negative impact in the event of a vote to leave, the economy proved itself resilient with GDP growth of 1.8% driven by the manufacturing and service sectors.

Fiscal intervention, including the reduction in base rate and the devaluation of the pound, were important supporting factors. The prospect of a "hard" Brexit has seen the yield curve flatten and the interest rate outlook remains benign, notwithstanding the inflationary pressures that are starting to be seen and which will see real wage inflation stagnate.

The Bank of England has indicated that it will tolerate inflation rising above the 2% target in order to minimise any negative impacts of Brexit on the UK economy.

UK BUY-TO-LET GROSS ADVANCES
2010-2016 £M

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Source: CML Research.

UK HOUSE PRICE INFLATION
2010-2016 %

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Source: ONS, Survey of Mortgage lenders.

THE HOUSING MARKET

Housing transaction volumes were materially distorted in 2016 by the Stamp Duty Land Tax ('SDLT') change on second properties, and the underlying trend has seen a modest reduction in activity, driven by a number of factors.

The most obvious of these was the outcome of the EU referendum, which created uncertainty throughout the second half of the year. This uncertainty undermined consumer confidence, suppressing levels of transactions.

In addition, regulatory and tax changes adversely affected volumes. SDLT increases first applied in 2015 continued to subdue the upper end of the property market and the introduction of a 3% SDLT surcharge in April 2016 on second properties further dampened transaction levels, albeit not before a substantial spike in activity in March.

The stricter affordability assessments that were introduced in the Mortgage Market Review in 2014 have continued to suppress first-time buyers and home movers.

High transaction costs and relatively few properties on the market are also holding back activity.

Nonetheless, first-time buyers have been supported by various government schemes, which have helped the number of first-time buyers on an annual basis increase by 116% since its post-crisis low in mid-2009. It is other home movers, whose activity continues to be subdued since the financial crisis, that are underperforming, with mover numbers up by only 44% since the same period.

Average house prices in the UK increased by 7.2% in 2016 according to Land Registry.1 Growth in the first half of 2016 was reversed in the third quarter as uncertainty followed the EU referendum outcome.

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The fourth quarter however saw recovery with both December and January showing small gains.

THE MORTGAGE MARKET

The Council of Mortgage Lenders ('CML') entered 2016 expecting 7.7% growth in new lending over 2015, to £237bn.2 Changes to SDLT that came into effect from April gave rise to a substantial spike in new lending in March, in particular in Buy-to-Let, and the month saw £26.3bn of lending, compared to an average of £18.7bn in the first half of the year (excluding March).

This contributed to a full year figure of £245.5bn of new lending in 2016, a 10.6% increase on 2015.3

Buy-to-Let lending grew to £40.6bn4 in the year (2015: £37.9bn), an increase of 7%, supported by the SDLT change in April. Despite the spike in purchase activity that this caused, overall the year saw purchase transactions fall to 102,100 (2015: 117,500).

This was entirely offset by an increase in remortgage transactions to 153,000 (2015: 132,300) and marks the beginning of what the CML perceive will be a trend of lower purchase transactions offset by rising remortgage volumes to create growth.

This expectation is driven by the introduction of the changes to personal taxation, which will be phased in from April 2017, coupled with new regulation on Buy-to-Let underwriting and affordability assessment, key elements of which were introduced on 1 January 2017, with further measures to be implemented in September.

THE COMPETITIVE LANDSCAPE

The UK market for lending and savings products is highly concentrated towards the high street banks. It is dominated by five major players, whose strategy is to use current accounts to cross-sell a range of products including savings and investments, mortgages, personal loans and credit cards.

Purpose and values

The high street banks primarily target the traditional, high-volume consumer markets and rely upon economies of scale and process automation. In recent years, high street banks have been subject to heightened and sustained regulatory, political and public scrutiny following several industry issues: the need for state aid during the financial crisis, alleged complicity in LIBOR rate fixing, mis-selling of payment protection insurance and interest rate swaps.

This has facilitated the entry of challenger banks, a term applied to an emerging group of banks seeking to challenge the dominant market share of the high street banks.

These challenger banks also offer current accounts as their core proposition, using them to develop wider customer relationships. Smaller than high street banks and without the negative brand legacy, they develop customer propositions where they have identified areas of competitive advantage such as service, accessibility and product features.

More recent entrants are specialist banks, a group that includes OneSavings Bank.

The specialist banks focus on specific UK lending niches that are underserved and do not offer current accounts. A key feature of these specialist banks is a growing presence in the retail savings sector as they develop a range of funding sources.

We have also seen the emergence of fintech banking propositions.

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These are yet to acquire material traction with UK consumers, however they do attract attention for their innovative use of technology.

ONESAVINGS BANK'S LENDING MARKETS
UK BUY-TO-LET/SPECIALIST SME MARKET
Buy-to-Let

Growth in the private rented housing sector ('PRS') has been consistent since 2000, underpinned by strong tenant demand as a result of social and demographic changes, government policy and the potential difficulties faced by first-time buyers in securing finance.

The major shift seen in residential mortgage lending has been to make affordability assessments stricter, and this has curtailed lending activity, despite mortgage rates at historically low levels.

The PRS now provides accommodation for more than 5.3m households in Great Britain (as at September 2016), nearly 20% of the total.

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Sector growth is expected to continue, increasing to 25% of total households by 2025 (Local Government forecasting). The total value of property in the PRS in Great Britain is £1.3 trillion, driven by house price inflation (HPI) and PRS growth5. At the same time, social housing properties as a percentage of the housing sector have decreased, with renting the only major alternative to home ownership.

The Buy-to-Let mortgage market serving the PRS has increased, with the number of outstanding mortgages rising from 120,300 in 2000 to over 1.8 million in 2016.6 Expansion in the Buy-to-Let market has been criticised for inhibiting growth in the owner-occupied market, particularly for first time buyers.

Changes to tax relief, new Buy-to-Let regulation and SDLT are expected to moderate Buy-to-Let market growth, however the PRS is expected to remain a core component of the UK housing supply and the primary issue affecting the owner occupied market remains the lack of available stock and insufficient new build starts, as was recognised in the Housing White Paper in February 2017.

The prospect of changes to personal taxation have seen an increase in the number of landlords seeking to borrow via a limited company entity.

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With most of the larger lenders in the sector not offering a limited company proposition, this has led to a shift towards those lenders who do. With one specialist broker suggesting that 69% of purchase applications in the fourth quarter of 2016 were from limited companies, the inability of the market leaders to meet this demand will have a positive outcome for the pool of smaller lenders who do and marks a shift in the sector.

Moreover, following the implementation of the Prudential Regulation Authority's ('PRA') revised rules on Buy-to-Let underwriting, many lenders who lend to the limited company market offer criteria that allow for greater levels of borrowing than would be available to individual borrowers.

OSB is a respected lender within the specialist Buy-to-Let sector and is experienced in dealing with limited company lending.

Therefore whilst the succession of changes, both actual and planned, that have impacted the market will undoubtedly dampen demand as a whole, we believe that this dampening will be more acute at the amateur end of the market, where borrowers own a small number of properties in their personal name. Professional landlords will increasingly grow their portfolios using limited companies.

COMMERCIAL

The UK commercial property market saw investment demand increase in the second half of 2016 following the EU referendum, with the trend positive.

The Royal Institute of Chartered Surveyors7 have noted an increase in demand from foreign investors, potentially attributable to favourable currency movements. Whilst investor demand has grown in all sectors, growth in the retail sector was weakest, with demand notably higher in the office and industrial sectors.

Market sentiment is positive, particularly outside of London.

Research from Savills8 showed commercial property investment decline by 28% in 2016 to £51.4bn however this figure is above the ten year average of £45.9bn, the fourth quarter growth in 2016 at 39% was stronger than in 2015 (25%), driven by overseas investment. The UK is seen as an attractive investment opportunity given the deeper political uncertainties in Europe and there is a degree of optimism in respect of capital values, helped by business confidence levels being greater than the consumer equivalent.

The lending market is dominated by the high street banks.

Opportunity exists for specialist lenders whose manual underwriting approach, and willingness to engage in a dialogue to ensure robust understanding of customer requirements can provide a service differential.

RESIDENTIAL DEVELOPMENT

The UK has experienced a long-term upward trend in real house prices, creating affordability problems as demand for housing continues to outstrip both supply and real wage growth.

Furthermore, turnover in the second-hand housing market is subdued.

The Housing White Paper published in February 20179, refers to a "broken housing market" and identified that "not enough homes are being built" and thus prioritised initiatives that will seek to address this. Notable among the initiatives announced in the White Paper were a raft of measures to encourage smaller builders to build more homes, through an improved planning framework.

They also expressed a desire that lenders should "back developers.in building more homes". The White Paper represents a holistic assessment of the UK's housing needs, and it is encouraging to note the emphasis placed on supporting the small and medium sized developers who form our core audience for development finance.

SPECIALIST RESIDENTIAL LENDING

The high street banks typically rely on a heavily automated, scorecard-driven approach to lending, as this provides a cost-effective means of servicing a high volume of residential mortgage loans.

This is not an effective model for the specialist market, where OneSavings Bank's manual underwriting and individual case assessment model is more appropriate. Customers with complex asset or income structures and those seeking shared ownership mortgages are ill-served by the commoditised and inflexible decision processes of mainstream lenders.

Whilst MMR has been in place for some time, its consequences are still visible in the form of reduced home mover levels, as recognised by the CML.

The market share of the top six lenders continues to decline, as specialist and challengers grow market share.

SECOND CHARGE LENDING

The second charge market saw an estimated £874m of gross new lending in 2016 (2015: £844m).

OneSavings Bank targets good credit quality mortgage borrowers who wish to extend their borrowing, but do not want to change their existing mortgage arrangements. Borrowers are typically seeking to fund a major purchase, undertake home improvements or consolidate and reschedule other consumer debt without refinancing their existing first charge mortgage, as it often carries a low interest rate.

The market experienced significant change in March 2016 when market regulation was taken over by the Financial Conduct Authority.

Most notably, as a result of this, affordability assessment now mirrors the practice seen in first charge lending and is aligned with the MMR.

Whilst the gross lending figures represent year on year growth of 3.6%, this can be attributed wholly to business volumes prior to the change. The first quarter saw 29% growth year on year as business was written in advance of the rule changes.

The remainder of the year saw a small reduction in overall lending with the market settling at around £70m of new lending per month.

FUNDING LINES

There are a number of successful non-bank or alternative providers of finance to retail and SME customers in the UK. These businesses are funded through a variety of means including wholesale finance provided by banks, high net worth investors and market based/peer-to-peer finance. OSB is an active provider of secured funding lines to the non-bank finance market, to date focusing on short-term real estate finance, leasing and development finance.

Through these activities the Bank has achieved senior secured exposure at attractive returns to asset classes that it knows well.

This market services a broad range of business sectors and its overall size is thus difficult to quantify. OSB sees a regular flow of opportunities, adopts a very selective approach and has a strong pipeline of new business.

1.

Icdr regulations for ipo

Land Registry, UK House Price Index, 14 February 2017

2. CML, Market Review, December 2016

3. CML, New Mortgage by purpose of loan, ML1 UK, 1 March 2017

4. CML, New and Outstanding Buy-to-Let new mortgages, MM17, 7 February 2017

5.

Savills.co.uk, UK News 18 January 2016

6. See footnote 4

7. RICS UK Commercial Property Market Survey Q4 2016, 26 January 2017

8. Savills, Market in Minutes UK Commercial, 21 February 2017

9. House of Commons Library briefing paper number 06416, 15 June 2016

STRATEGIC FRAMEWORK

Our strategic objective

To be a leading specialist lender in our chosen sub-sectors, supported by a strong retail savings franchise.

PRIORITIESOUR GOALS2016 PROGRESSLOOKING FORWARDKEY RISKSKPI
BE A LEADING SPECIALIST LENDER IN OUR CHOSEN MARKETS Grow profitable loan origination in key markets
  •   Deliver strong end-to-end propositions in target markets

  •   Develop our more cyclical businesses

  •   Deliver incremental non-organic business

  •   Invest in highly responsive, customer-focused culture

  •   Innovate to secure sustainable long term market leadership

  •   BTL origination up 27% to £1,959m and residential origination up 14% to £382m

  •   Residential mortgage portfolio acquisitions for £181m

  •   Four new secured funding lines added

  •   Received multiple awards including Best Specialist Lender and Best Buy-to-Let Mortgage Provider

  •   Focus on organic growth in underserved sub-sectors

  •   Identify new market sub-sectors with high returns on a risk-adjusted basis

  •   Market conditions affecting long term demand

  •   Increased regulatory pressure

  •   Continued political uncertainty

  •   New specialist lenders entering the market

LOAN BOOK GROWTH £BN

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RETAIN FOCUS ON BESPOKE AND RESPONSIVE UNDERWRITING High quality decisions protecting the business
  •   Skilled manual underwriting with 100% of cases manually underwritten

  •   Deliver a high quality differentiated service supported by highly responsive decision making

  •   Clear decisions recognised by intermediaries for their quality and fairness - a critical friend

  •   Integrated underwriting across all brands

  •   More than 29,000 loans totalling £5.9bn originated since the Bank's creation in 2011 with only 91 cases of arrears over 3 months, with an aggregate balance of £8.6m and an average LTV of 60%

  •   Transactional Credit Committee met 101 times to assist with more complex or larger new mortgage applications

  •   Continue training and coaching to further strengthen the underwriting expertise of our team

  •   Maintain focus on consistent decision making outcomes

  •   Find ways to be even more responsive to intermediaries and borrowers whilst remaining a critical friend

  •   Changing regulation for underwriting

  •   More complex underwriting requirements

  •   Recruitment of experienced staff

LOAN LOSS RATIO %

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FURTHER DEEPEN RELATIONSHIPS AND REPUTATION FOR DELIVERY WITH INTERMEDIARIES Increase partner reach in response to demand
  •   Provide access to specialist products developed by listening to intermediary partners

  •   Be accessible and available to intermediaries

  •   One distribution model across all brands

  •   Gain intermediary recognition for delivering long-term sustainable proposition

  •   Deliver bespoke solutions to meet intermediary and customer needs

  •   Four new fully supported key partners

  •   Introduced Choices, our broker-led customer retention programme

  •   Restructured relationship team to increase levels of engagement

  •   Attended c.130 intermediary events across our target geographies

  •   Enhanced marketing and brand support for intermediaries

  •   Published report with Ernst & Young LLP to help Buy-to-Let property owners understand and deal with changes to UK tax relief on finance costs

  •   Develop enhanced intermediary education programme

  •   Continue to deliver direct relationships with high quality intermediaries

  •   Deliver deeper relationships with more of our target intermediaries

  •   Deliver best in class service performance as we grow and enter new market sub-sectors

  •   Loss of key broker relationships

  •   Competition reducing pricing below OSB's risk-adjusted return appetite

  •   More complex underwriting requirements slowing the process

GROSS NEW LENDING £BN

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MAINTAIN AND BUILD UPON 150 YEAR HERITAGE IN SAVINGS Stable, high quality funding platform
  •   Be primarily funded through attracting and retaining a loyal retail savings customer base

  •   Provide access to our service for customers through their channel of choice

  •   Ensure liquidity requirements are met through the economic cycle

  •   Deliver a proposition offering transparent, straightforward savings products, providing long term value combined with excellent service levels

  •   Gained c.27k new savings customers

  •   Achieved 87% customer retention

  •   Received multiple awards for savings products including Best Bank Savings Provider, Best Cash ISA Provider and many more

  •   Loan to deposit ratio of 90%

  •   Launched new Corporate Deposit proposition

  •   Enhance service proposition by investing in technology for digital transformation

  •   Continue to invest in and diversify distribution channels from branches to digital

  •   Broaden savings propositions further to include wider savings needs

  •   Increased competition for retail funds

  •   NS&I/Government intervention in market

  •   Increased customer expectation for technology compared to difficulty and cost of delivery

CUSTOMER NPS %

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LEVERAGE UNIQUE AND COST EFFICIENT OPERATING MODEL Best in class customer service
  •   Make customer service at the heart of everything that we do

  •   Extend activity in OSBIndia developing high-quality areas of excellence

  •   Create structure delivering solutions using cross company expertise

  •   Deliver cost efficiencies through excellent process design and management

  •   Investments in training and process development contributed to enhanced customer NPS of 59%

  •   Increased OSBI headcount by 31% to 276

  •   Provided support from OSBIndia to new functions including, Finance, Marketing and digital transformation

  •   Extend measurement by benchmarking to best in class

  •   Introduce robotics technology and improve workflows to further enhance service in primary servicing

  •   Increase change capacity through enhanced end-to-end project management capability

  •   Difficulty in continuous service improvement as OSB grows

  •   Global economic uncertainty increasing costs in India

  •   Increasing complexity from compliance with changing regulation

COST: INCOME RATIO %

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ONE SPECIALIST LENDER

We focus on specialist mortgage lending to consumers, entrepreneurs and SMEs in sub-sectors of the UK market where we have identified opportunities for high returns on a risk-adjusted basis and where we can take a leading position.

GROSS NEW ORGANIC LENDING
IN 2016

£2.3bn
2015: £1.8bn

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Our confident and friendly staff communicate and deal with each customer on an individual basis.

Sub-sector market specialisation

We focus on specialist mortgage lending to consumers, entrepreneurs and SMEs in sub-sectors of the UK market where we have identified opportunities for risk-adjusted high returns and strong growth, and where we can take a leading position:

·       private rented Buy-to-Let sector;

·       commercial and semi-commercial;

·       residential development finance;

·       bespoke specialist residential lending;

·       second charge residential lending; and

·       shared ownership.

OSB also provides funding lines to other lenders, secured against pools of loan collateral providing indirect access to certain high-yielding, specialist sub-segments, such as residential bridge finance and leasing.

As at the end of 2016, the Group had total loans outstanding of £122m (2015: £126m).

We continue to identify opportunities where we can use our strengths to take leading sub-sector positions, adding value to the Group and maximising our use of capital.

Intermediary relationships

We build long-term partnerships with a panel of selected specialist mortgage intermediaries that are leaders in their sub-sectors, making it easier for them to serve borrowers by providing swift decision making.

We provide access to specialist products and underwriting through our coordinated multi-brand approach and focus on listening and working with partners to develop new opportunities and bespoke solutions.

We deepen our relationships with these intermediaries and conservatively expand the panel with whom we work.

We develop marketing and education campaigns, combined with dedicated marketing support leading to an intermediary NPS of 48% in 2016.

Inorganic growth

The Group is focused on organic origination as its core growth strategy.

ONE Savings Bank PLC : Annual Financial Report

In addition, OSB has diversified into new lending markets through business acquisitions, including SME/Commercial and second charge residential mortgages.

In 2016, OSB completed the purchase of portfolios of UK first and second charge residential mortgages for £181m.

OSB will continue to actively consider inorganic opportunities as they arise to complement the core organic origination strategy.

Bespoke underwriting

We adopt an expertise-based, manual approach to underwriting in each market sub-sector, specifically geared to each individual customer.

We do not use automated or scorecard-based processes for underwriting new loans.

We differentiate our service proposition by responding quickly and flexibly to requests with direct access to decision makers, and provide a service differential for more complex situations.

We leverage the expertise of our highly-skilled underwriting team to enhance the experience of our partners. Our Transactional Credit Committee met 101 times in 2016 to assess more complex or larger new mortgage applications.

What we will do

We will continue to develop existing and new manual underwriting skills, through a training and coaching programme, ensuring that OSB staff have up-to-date skills and can continue to deliver a high-quality differentiated service.

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A RELATIONSHIP BUILT ON RESPECT

MARC CALLAGHAN
BUSINESS DEVELOPMENT MANAGER

"It takes a long time to build trust and a moment to lose it."

My role revolves around people and building relationships.

I have spent my whole career getting to know brokers and listening to what is important to them. It is all about helping them to help their clients, offering certainty and treating them properly.

Of course honesty and integrity are crucial, and that means doing the small things right, being available and responding to people swiftly but I aim to go beyond that.

Using my expertise I can act as a consultant, helping my brokers put a proposal together to ensure it can meet the needs of OSB and their client. Sometimes that means not being afraid to say no early in the process, even suggesting a more suitable lender where a case does not meet our risk appetite.

It makes a difference to me that I can present larger and more complex cases to the Bank's Transactional Credit Committee.

Useful links

I see the decision making process first hand and what will make an application successful. This helps me stand out to my brokers and makes OSB their lender of choice.

ONE FAIR PLACE TO SAVE

We deliver straightforward products that meet customers' needs for cash savings. We offer good and consistent value to attract and retain a loyal customer base.

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We offer long term value for money products without the use of short term bonus rates.

Stable funding platform

We focus on delivering a proposition to attract and retain a loyal customer base, providing a stable funding platform for OneSavings Bank to grow its loan book.

Our proven retail savings performance ensures secure long-term funding.

We continued to manage long-term relationships across all channels throughout 2016, offering a mixture of market competitive rates including maturing fixed rate bonds and ISAs. Where we target customer retention we achieve more than 80%. We have diversified our funding using the Bank of England Funding for Lending Scheme and the new Term Funding Scheme.

We attracted nearly 27,000 new savings customers in 2016.

The average balance of our savings customers is £30,134. We also extended our savings proposition to small and medium businesses.

Transparent savings products

We deliver straightforward products that meet customer needs for cash savings. We offer good and consistent value, without having to price at the top of the best buy tables. We do not offer new customer-only products, and new customers are not offered better rates than those for existing customers. In 2016, we were recognised by Moneyfacts as the Best Bank Savings Provider and Best No Notice Account Provider, both for the second year running and Best Cash ISA Provider for the fourth year running.

Customer-focused philosophy

By maintaining our strong customer-centric approach we are rewarded with a loyal customer base that recognises long-term good value.

We reward our people based on the quality of service they provide to customers, further protecting our retail savings franchise.

We measure customer satisfaction and net promoter score ('NPS') through regular customer surveys using independent experts. These measures are aligned to our business strategy.

We measure customer satisfaction in several ways: NPS assesses customer advocacy - the likelihood of a customer recommending us to someone else.

Our customer NPS increased to 59% across the year.

We will continue to invest in enhancing our service in 2017, based on using technology and modern practices to support the brand traits customers have told us they prefer - heritage, trustworthy and traditional. We will also use our real-time customer feedback capability to identify and act on ideas for new products and service improvements.

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IMPROVED SERVICE WITH THE SAME HEART

JENNY LONGBOTTOM
BRANCH OPERATIONS MANAGER

"Great customer service starts with common sense and remembering what you want from a bank."

It's amazing how the little things are often the most irritating.

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It's often like that in my job. I am responsible for making it easier for our customers to do business with us in our branches and to ensure we deliver the best service possible. The most important thing we do is listen.

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I listen to customers both through formal surveys and also by being in the branches, often working behind the counter helping to gain insights into what we can still do better.

What makes us really different is our personal and individual approach to everything we do. We are flexible and not afraid to push the boundaries and find new ways to deliver the service our customers expect from us.

ONE UNIQUE OPERATING MODEL

We work to an overarching risk appetite and single Group lending policy spanning all our brands and deliver our services with the aim of providing excellent customer experience.

We put customers' needs first.

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Simple and easy to do business with.

Integrated multi-brand approach

We capitalise on our cross-company expertise, operating under a common operational framework that supports our key lending brands. Distribution, sales and risk processes operate under a simple, coordinated management structure giving us the ability to present our multiple lending brands with great efficiency.

We work to an overarching risk appetite and a single Group lending policy spanning all our brands and borrowing customers, using our experience in specialist lending to enhance policy.

Challenger banks explained

We ensure that risks are modelled and the comprehensive risk pricing model reflects latest market conditions and forecasts. This modelling ensures all product pricing goes through the same rigorous analysis, according to core principles set by our Group Pricing Committee, comprised of senior management.

We will further develop the coordination and commonality of approach for our lending brands and customer and risk supporting operations in 2017 to maximise the expertise and goodwill we have built up in those customer-facing brands.

Cost-efficient operations

We aim to ensure our administrative functions, based in our wholly-owned subsidiary OSBIndia, support the strategic intent of delivering excellent customer experience.

We drive continuous customer-focused improvement through our flexible and cost-effective operating platform, putting customer needs first.