Tesco 2009 Annual Report Download - page 107

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FINANCIAL STATEMENTS
Tesco PLC Annual Report and Financial Statements 2009
To find out more go to
www.tesco.com/annualreport09
Note 23 Financial risk factors continued
Capital risk
The Group’s objectives when managing capital (defined as net debt plus equity) are to safeguard the Group’s ability to continue as a going concern
in order to provide returns to shareholders and benefits for other stakeholders, while maintaining a strong credit rating and headroom whilst optimising
return to shareholders through an appropriate balance of debt and equity funding. The Group manages its capital structure and makes adjustments to
it, in light of changes to economic conditions and the strategic objectives of the Company.
To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, buy back shares and cancel them or issue new
shares. In April 2006, we outlined our plan to release cash from our property assets, via a sequence of property joint ventures and other transactions,
and return significant value to shareholders, either through enhanced dividends or share buy-backs. The target for the value of share buy-backs was
increased from £1.5bn to £3.0bn over a five-year period from April 2007. Whilst we continued with the policy at the beginning of 2008/9, we have
subsequently used the proceeds from property divestment to pay down debt, following the two major acquisitions in the second half (Homever and
Tesco Personal Finance Group Limited). Early in 2008/9 we purchased and cancelled £100m ordinary shares. In the financial year 2009/10 we expect
to continue to use the proceeds from the sale of property to pay down debt.
The policy for debt is to ensure a smooth debt maturity profile with the objective of ensuring continuity of funding. This policy continued during the
current year with bonds redeemed of £524m and new bonds issued totalling £4,901m. The Group borrows centrally and locally, using a variety of capital
market issues and borrowing facilities to meet the requirements of each local business.
Tesco Personal Finance Group Limited (TPF)
Interest rate risk
Interest rate risk arises where assets and liabilities in TPF’s banking activities have different repricing dates. TPF policy seeks to minimise the sensitivity
of net interest income to changes in interest rates. Potential exposures to interest rate movements in the medium to long term are measured and
controlled through position and sensitivity limits. Short-term exposures are measured and controlled in terms of net interest income sensitivity over
12 months to a 1.5% parallel movement in interest rates. Risk is managed through arm’s length cash transactions.
Credit risk
Credit risk is the probability of customers and counterparties failing to meet their obligations to TPF and arises principally from TPF’s lending activities
but also from other transactions involving on and off-balance sheet instruments. Limits have been established for all counterparties based on their
respective credit ratings. The limits and proposed counterparties are reviewed and approved by the Risk Management Committee (RMC) and Board
of TPF.
Internal reporting and oversight of risk assets is principally differentiated by credit ratings. Internal ratings are used to assess the credit quality of
borrowers. Customers are assigned credit ratings, based on various credit grading models that reflect the probability of default.
Liquidity risk
Liquidity risk is managed on a consolidated basis within TPF’s banking activities and adheres to the liquidity requirements set by the Financial Services
Authority (FSA) from time to time. In the UK, the FSA requires TPF to be able to meet its sterling obligations without recourse to the wholesale markets
for a period of at least five business days. To meet regulatory requirements a diversified portfolio of high quality liquid and marketable assets is
maintained. Cash flow commitments and marketable asset holdings are measured and managed on a daily basis. TPF has credit facilities sufficient
to meet all foreseeable outflow requirements as they fall due and its liquidity risk is further mitigated by its well diversified retail deposit base.
Expressed as an annual probability of default, the upper and lower boundaries and the midpoint for each of the asset quality grades are as follows:
Annual probability of default
Minimum Midpoint Maximum S&P
Asset quality grade % % % equivalent
AQ1 0.00 0.10 0.20 AAA to BBB-
AQ2 0.21 0.40 0.60 BB+ to BB
AQ3 0.61 1.05 1.50 BB- to B+
AQ4 1.51 3.25 5.00 B+ to B
AQ5 5.01 52.50 100.00 B and below
Accruing Non- Impairment
AQ1 AQ2 AQ3 AQ4 AQ5 past due accrual provision Total
At 28 February 2009 £m £m £m £m £m £m £m £m £m
Assets:
Other investments 259 – – – – – – – 259
Loans and advances to customers 352 652 828 870 563 82 291 (250) 3,388
Loans and advances to banks
and other financial assets 2,129 – – – – – – – 2,129
2,740 652 828 870 563 82 291 (250) 5,776
Commitment 3,103 1,451 744 305 129 – – – 5,732
Total off balance sheet 3,103 1,451 744 305 129 – – – 5,732