20 September 2023

Sancus Lending Group Limited

("Sancus", the "Company" or "Group")

Interim Results for the six-month period ended 30 June 2023

The Directors are pleased to announce the Company's half-year results for the six months ending 30 June 2023.

HIGHLIGHTS

Rory Mepham, Chief Executive Officer of Sancus Lending Group Limited, commented:

We started 2023 cautiously but with cause for optimism. However the uncertainty in residential real estate markets in the jurisdictions in which we operate, together with the impact of inflation and rising interest rates, has led to a slow down in loan origination in H1 2023 as we became more selective from both a credit and loan pricing perspective.

The refinance and extension of the ZDP share final entitlement to December 2027, and the increase and extension of the Pollen Street Plc facility up to £125m (expiry not before November 2026) at the end of 2022, provide the Company with a more stable base from which to grow when the right opportunities present themselves, in the meantime caution shall prevail. 

Financial Highlights

·      New loan facilities written H1 2023 of £83m (H1 2022: £86m);

·      Group revenue H1 2023 of £5.4m (H1 2022: £4.8m);

·      Group operating loss H1 2023 of £3.8m (H1 2022: loss £2.1m);

·      £3m of ZDP shares held in Treasury were sold to the Group's largest shareholder, Somerston, providing further growth capital;

·      An increase in IFRS 9 provisions H1 2023 of £0.8m (H1 2022: £nil).

Operational Highlights

·      The Company completed its office rationalisation program in H1 2023, and now operates from three locations, Jersey; Dublin and London, to align with its core lending markets and optimise costs.

·      Geographic focus remains unchanged, with three core markets UK, Ireland and Offshore.   Offshore represent 42% of the current loan book, UK 39% and Ireland 19%.  Ireland is the fastest growing market with a 52% increase in loans under management in H1 2023.

·      The Company continues to seek ways to reduce its operational costs. Headcount was further reduced during the period from 39 to 31 FTE.

·      Since onboarding Salesforce software at the end of 2022, significant progress has been made with implementation and use of technology to manage workflows, standardisation of process and controls across the lending life cycle and integration with the Company's propriety loan management system.

·      Focus on maintaining credit discipline has remained.

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CHAIRMAN'S STATEMENT

Introduction

In the last 12 months the Company has made advances in its structural change program, and whilst operational progress is not reflected in the results for the H1 2023, we expect to see benefits in H2 2023 and beyond.  In H1 2023 the Company reported a loss of £3.3m, and the loan book has remained flat since Dec 2022 at £169m, a reflection of robust credit discipline and a cautious approach to loan deployment, particularly in the UK. The cost of Funding has increased and we are now operating in the highest interest rate environment since 2008.  Careful use of Group capital, and draw-down from our funding sources, is paramount to the successful navigation of a very tough market environment, but in spite of these exacting circumstances demand in our chosen markets remains firm and we believe may present opportunities for the Company to grow in the coming period.

Our People

As noted in our FY22 results, we did not expect to increase headcount in 2023, and we took the opportunity to reduce Group headcount further to 31 as at 30 June 2023 (31 December 2022: 39). 

As detailed in the 2022 Annual Report, Tracy Clarke was appointed as Group CFO on 30 March 2023 and Carlton Management Services Limited was appointed to restructure the Group Finance Function.  The migration of the Group Finance Function under Tracy's leadership was completed in Q2 2023.

Capital Raise

A significant milestone at the end of 2022 was the extension of the ZDP final entitlement date from 5 December 2022 to 5 December 2027.  In addition, £3m of ZDP shares held in Treasury were sold to Somerston, the Company's largest shareholder, in April 2023, providing the company with additional growth capital. I thank our ZDP shareholders for their continued support.

Dividend and Shareholders

It is the Board's intention to reinvest surplus resources for growth. As such, the Group does not intend to declare a dividend for the period. The Board intends to revisit this policy at the appropriate time, should the profitability and cash flow profile support the reinstatement of a dividend.

On behalf of the Board, I would like to thank shareholders for their continuing support and patience and for the efforts of the management and employees.

As I noted in the Chairman's statement in the 2022 annual report, we do not underestimate the scale and continuing challenges ahead. I remain of the view that we have the right strategy, systems and personnel to put the business onto a firmer footing and return to profitability and I look forward to reporting more positive developments in the coming period. 

Steve Smith

Chairman

Date: 19 September 2023

CHIEF EXECUTIVE OFFICER'S REVIEW

Overview

In the first half year of 2023 we have taken a number of steps to position the Company on the road to profitability and to simplify the core business of residential development and bridge financing.  We reduced the number of physical office locations from five to three with the sale of Gibraltar and closure of Guernsey during the period. 

Loan book origination in H1 2023 was £83m versus £86m written in H1 2022. Opportunities to lend more have been considered but rejected where the return to risk ratio was considered inappropriate. The Credit team have adjusted their underwriting approach and attitude to risk accordingly, to ensure optimal use of Group capital, strict loan pricing discipline and  particular focus on valuation assessment in the current uncertain environment.  Despite some headwinds the residential lending market continues to present significant opportunity for Alternative Lenders, including Sancus, in all of our three core geographic markets.

Strategic KPIs

The Board are providing an update to the Strategic KPIs set out in the 2022 Annual report:

·      Revenue growth

o  Revenue is up 12% compared to the same period last year, with new loan origination being almost exclusively being priced using variable interest rates.

·      Growing loans under management

o  Loan book / Assets Under Management remains unchanged from 31 December 2022 to 30 June 2023 at £169m.

·      Reducing cost of funding

o  Reducing cost of Funding remains a priority, but also continues to present a challenge in the current macro-economic environment. It is pleasing to report we saw a modest increase in Funding through the Sancus Loan Note program in H1 2023 of £10m, an increase of 50%.

·      Become a capital efficient business

o  The amount of own capital within loans continues to be maintained at a low level, which at 30 June 2023 represented 4.5% of the total loan book, in comparison to 4.2% at 30 June 2022.

·      Increasing operating profits - by increasing gross margin and reducing costs

o  Gross profit margin in H1 2023 was £0.3m, compared to H1 2022, £1.2m.  The reduction is due to the financing cost of £3m additional ZDPs held by shareholders, an increase in the ZDP coupon from 8% to 9% and the run off of the legacy loan book priced at fixed interest rates whilst the cost of Funding those loans has increased.

o  Operating costs are flat compared to the same period last year at £3.3m and are expected to reduce in the H2 2023 due to the effect of Group cost saving initiatives, in particular, reduction in headcount and premises costs.

·      Return on Equity ("ROE")

o  Going forward we plan to become profitable and increase our ROE.  We are also focused on reducing the need for additional capital to participate in Loan funding to support ROE.

·      Ensuring a risk based approach is taken on all decision making

o  We have imbedded institutional credit processes across the Group.  We continue to increase our technology enablement to streamline processes, improve the delivery and format of management information to aid decision making and improve internal controls.

Origination

We have new loan facilities written during the H1 2023 of £83m compared with £86m in H1 2022 and £156m in FY 2022.

Maintaining a high-quality credit process whilst cautiously scaling the quantity of new loans remains a priority. We expect to see ample opportunities to lend in each of our  markets and are confident that our businesses in these jurisdictions are well placed to execute as  suitable opportunities arise. 

Loan Management

Assets Under Management have not changed since the end of 2022 at £169m. With the number of new facilities written, and as we see funds deployed, we expect to be reporting a moderate increase in our loan book by 31 December 2023.

Continued emphasis has been placed on actively managing loans once the initial drawdown has been made. This has been particularly important during a time when various market related pressures such as cost inflation are impacting our borrowers. Active management is helping us to deal with issues before they become problems and we are pleased to report that the percentage of loan book in recovery continues to reduce.

Funding

We continue to concentrate on growing the funding capacity of the business, on improved terms. This is particularly important in the context of the wider economic climate where we are in a significant inflationary environment. Additionally, we are seeking to work with a diversified mix of funders, both private and institutional, to match funders with loans meeting their varied risk and reward criteria. Currently, the Group is reliant on four funding sources:

·      Co-Funders

·      Loan Note program

·      Institutional funders

·      Proprietary capital

Sancus has an institutional funding line from Pollen Street Plc ("Pollen), that is designed to complement our Co-Funder funding base and Sancus Loan Note program. As at 30 June 2023 the total drawn from the Pollen facility was £77.75m (31 December 2022: £67.75m). The Pollen facility continues to be strategic for the business.

The availability, cost and flexibility of funding is key to achieving our growth ambitions and we are reviewing the capital position of the business with a view to ensuring it is best placed to grow funding capacity on market adjusted improved terms. During the first half of 2023 the loan book funded by institutional funding increased by 5% with the majority of the UK and Irish loan book funded by this channel.

Finance & Operations

An emphasis on operational efficiencies within Finance & Operations, driven by technology where possible, is well underway. We continue to drive improvement in relation to Corporate Governance, Compliance & Risk with the implementation of a developed risk management structure to ensure the business is well set for future growth plans.

Sancus has developed, and continues to evolve, its own proprietary loan management system ("LMS") for the administration of loans and customise the use of Salesforce as the Group's CRM tool.  A comprehensive review of the LMS system and our wider Technology strategy was carried out in 2022, and in 2023 we are focussed on implementation of our Technology strategy with good progress being made.

We have seen our headcount reduce in the first H1 2023 as we look for efficiencies and cost control. At 30 June 2023, the Group headcount was 31 (31 December 2022: 39).  We believe the business is well resourced to meet its objectives and are focussing on continuous improvement and development of our people.

ESG

At Sancus, we are committed to taking Environmental, Social and Governance ("ESG") factors seriously. We recognise our responsibility to incorporate sustainability throughout the operations of our business, be custodians of the environment and practice good stewardship of our stakeholders' interests. 

In Q1 2023 we present our first Environmental, Social, and Governance report, marking the start of our journey towards greater transparency and sustainability. The report highlights our progress and achievements in the areas of environmental protection, social responsibility and governance, as well as the challenges and opportunities that we face.

It is essential that we understand what ESG factors are most important to internal and external stakeholders, such that we can continue to improve and evolve in line with our ESG strategy principals and are ready to take appropriate action.

Outlook

Whilst the outlook remains unclear, some of uncertainties present at the end of 2022 have now played out to a greater extent. For example, we have seen a series of rate rises from central banks during H1 and whilst some further incremental increases are possible, we are unlikely to see material further increases. In a world of asset price uncertainty the Company remains optimistic that the residential property market will remains resilient, assisted by the perennial imbalance between supply and demand for housing across our target markets.

A challenging dynamic remains but management have a clear plan to navigate the current market, avoid taking undue risks and be ready to take advantage of the opportunities that such times will inevitably present.

Rory Mepham

Chief Executive Officer

19 September 2023

RISKS, UNCERTAINTIES AND RESPONSIBILITY STATEMENT

Risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remainder of the financial year. These include, but are not limited to, Capital and liquidity risk, Regulatory and compliance risk, Market risk, Credit risk with respect to the loan book (primarily bridging loans and, increasingly, development loans), Operational risk and the execution of Sancus strategy. These risks remain unchanged from December 2022 and are not expected to change in the 6 months to the end of the 2023 financial year. Further details on these risks and uncertainties can be found in the December 2022 Annual Report.

Responsibility statement

The Directors confirm that to the best of their knowledge:

§  The Interim Report has been prepared in accordance with the AIM rules of the London Stock Exchange;

§  This financial information has been prepared in accordance with IAS 34 as adopted by the UK;

§  The interim results include a fair review of the important events during the first half of the financial year and their impact on the financial information as required by DTR 4.2.7R; and

§  The interim results include a fair review of the disclosure of related party transactions as required by DTR 4.2.8R.

Approved and signed on behalf of the Board of Directors

19 September 2023

INDEPENDENT REVIEW REPORT ON INTERIM FINANCIAL INFORMATION

Conclusion

We have been engaged by Sancus Lending Group Limited (the 'Company') to review the condensed set of consolidated financial statements in the Interim Report for the six months ended 30 June 2023 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in shareholders' equity, the condensed consolidated statement of cash flows and related Notes 1 to 19.

We have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of Consolidated Financial Statements.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2023 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the UK and the AIM Rules of the London Stock Exchange.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 2 of the interim condensed consolidated financial statements, the financial statements of the Company are prepared in accordance with IFRSs as adopted by the UK. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with the International Accounting Standard 34, "Interim Financial Reporting", as adopted by the UK.

Conclusions Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis of Conclusion section of this report, nothing has come to our attention to suggest that management have inappropriately adopted the going concern basis of accounting or that management have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with this ISRE, however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of directors

The Interim Report is the responsibility of, and has been approved by, the Directors.  The Directors are responsible for preparing the Interim Report in accordance with the AIM Rules of the London Stock Exchange.

In preparing the half-yearly financial report, 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 review of the financial information

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of consolidated financial statements in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Moore Stephens Audit and Assurance (Jersey) Limited

1 Waverley Place,

Union Street,

St. Helier,

JE4 8SG, Jersey

19 September 2023

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

The accompanying Notes form an integral part of these financial statements.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)

The financial statements were approved by the Board of Directors on 19 September 2023 and were signed on its behalf by:

The accompanying Notes form an integral part of these financial statements.